Economic Highlights

New Delhi, 11 November 2009

World Eyes India

KEY TO GLOBAL RECOVERY

By Shivaji Sarkar

India has emerged as one of the most resilient economies. Whether it would be able to lead the world or not has been rocking the discussions at India Economic Summit. There are some positives and some negatives in the process.

The world is looking up to India for more than one reason. Despite its close trade, business and to a large extent financial – rupee-rouble alliance, the country did not succumb to the pressures created by the fall of the Soviet Union. In 1997-98, it withstood the pressures of the South-East Asian crisis with equal élan. The 2008 Lehman Brother scandal-led global recession did not hit it gravely.

The economy of the country may not be as large as that of the US or many European countries, but what surprises the international experts is its capacity to insulate against odds that hit and often devastate major economies such as those of the Soviet Union or the US.

India’s mixed  economy – government-owned socialist ideology dictated public sector and capitalist ideology based private sector – has emerged as the greatest strength. If one dithers even a bit, the other comes to the rescue of the system. The government is not actively involved in the day-to-day functioning of industries or business but it acts as an effective benign intervener or regulator.

The World Economic Forum associate director Michele Petochi on his approach to Global Redesign Initiative says, “The challenge is to have a compelling approach to complex problems”. This is where India is expected to give cue to the world’s complex economic system.

It has also emerged as a country that generates credible statistics unlike that of China. In the latest edition of the London-based Legatum Institute’s Prosperity Index, India is beating China. The Index processing data for 104 countries puts India at the 45^th rank and China at 75^th rank. Last year, India was a lowly 70^th and China 54^th. The index is now broad-based to include how citizens in a country feel about personal freedom, institutional maturity and mutual trust. The parameter for India is increasing.

So would India be able to come up again with the same kind of resilience in the latest IMF-predicted mother of all meltdowns in emerging markets, a crash that would make the 2008 one look like a pigmy?

In such a situation Prime Minister’s announcement to withdraw stimulus package next year would be a help or hindrance also needs to be debated. But if the Reserve Bank of India is to be believed, the earlier the package is withdrawn it would be wise and good news for the economy. Some economists say that autonomous institutions like the RBI have helped the country take the right decisions and create the necessary resilience. If banks did not collapse in the wake of the Lehman scandal, the credit goes to the RBI and its allied organizations like SEBI, NABARD, and NHB.

Apparently, there is synchronization in politics and economics. It is not always that the government listens to the RBI, which decides on financial and economic considerations. The government acts on broader parameters taking the people’s aspirations into account. This has pushed India below China in the Eurasia Group compiled Global Political Index. The index gives credit to tough political decisions, which a monolithic China can and India cannot.

But this alone is not the impediment. India has not been found to be very competitive. It has been placed 49^th out of 133 countries in the World Economic Forum’s Global Competitiveness Index 2009-10. The country lags behind in infrastructure, health, primary education and galloping inflation and fiscal situation prevents the government from making the much needed investment. Planning Commission Deputy Chairman Montek Singh Ahluwalia in his presentation has mentioned infrastructure as the most important constraint.

The index says that bureaucracy, over-regulation and corruption still affect the functioning of Indian markets. And by global standards, the diffusion of information and communication technologies remains very low. Union Minister for Roads and Highways Kamal Nath accepted it in a different way saying, “We had our decade of information technology, now let’s have our decade of infrastructure”. The lag is admitted and nobody opposed the index.

The economic recovery is positive with occasional industrial and services sector indices improving as it happened in figures of August, the government tries to show. But the overall trend has yet to mark the recovery as the quarterly results of 2000 companies reveals. It is a pointer that shows that demand growth is still a few quarters away and the current growth only reflects the impact of government’s stimulus packages. The sectors that were direct beneficiaries of the fiscal stimulus  -- automobiles, metals and tyres –are witnessing a volume growth whereas others continue to lag. Overall, there is no sign of a demand growth that can put the country back on growth trajectory firmly.

Net sales of most companies declined in the September analysis and are termed as the slowest quarter the corporate in this country has witnessed in the past several years. The agriculture and allied industries sector too has fallen back. The fall in agriculture production is to lead to a negative contribution of 1.5 per cent to GDP growth. The external sector is also not contributing to the growth. The exports continue to drop to by 13.8 per cent in September this year over the drop of 34.2 per cent registered in April – 48 per cent total fall.

According to the RBI, the inflation, which is to peak in March 2010 to 6.5 per cent, might further aggravate demand growth issues and may make industrial products expensive. The strengthening rupee against the dollar sends mixed signals – positive for importers and negative for exporters. 

Still hopes revolve around India. Rajat Nag, economist at the Asian Development Bank; Kalpana Morparia, chief executive officer of JP Morgan India; Raghuram Rajan, Professor, University of Chicago; Shumeet Banerji, CEO, Booz and Co and Lars H Thunnel, CEO of International Finance Corporation exuded hope on India’s long-term prospects. The underlining issue is ‘if only India corrects many of the impediments, including food security’.

The hopes also veer round Asian consumers to create the next robust recovery. Management guru CK Prahlad feels that India has the potential given the manpower of 200 million young educated people, 500 million skilled workers and the ability to generate over 10 per cent of the world trade in next 15 years. Indeed, there is hope. Reality may be different but the economy –not growth – is always fuelled by hopes. India is at least able to generate that. --INFA

 (Copyright, India News and Feature Alliance)