Business | Features
India's big gamble on growth
India needs a second wave of social and economic reforms to ensure the success of a strategy that combines high public spending and loose monetary policy
- By James Lamont, Financial Times
- Published: 00:00 February 9, 2010
- Image Credit: Illustration: Ramachandra Babu/Gulf News
- This month's national budget will be a crucial test of ambitions for the 'bullock cart' to travel at greater speeds for longer.
Staring out of his panoramic office window over New Delhi's leafy Lodhi Gardens, S.K. Roongta has reason to be pleased. The mills and mines of the state-controlled company that he heads have just produced a doubling in net profits for the latest quarter and the industry veteran senses better times ahead.
The optimism projected by the chairman of the Steel Authority of India (SAIL) is based on India's powerful domestic market and a hunger for making things out of steel, such as bridges and electricity grids. Public spending on infrastructure and rising automotive sales have spurred domestic consumption of metals.
In what is the world's fastest growing large economy after China, industrial production as a whole has been running at double the rate of a year earlier. Steel demand grew 13 per cent last year. "Demand is primarily driven by the domestic market," says Roongta. "Incomes are rising and so is demand across different sectors. We see growth not just for the coming quarters but on a sustained business for many, many years."
SAIL is one of a number of India's more inward-looking companies whose performance shows Asia's third largest economy is one of the great escape artists of the global economic downturn. Hero Honda, the motorcycle manufacturer, Bharti Airtel, the largest mobile telephone network, and Marico, a maker of personal care products, have all sidestepped the downturn.
Even information technology outsourcing, dependent on business from the US and Europe, appears to have emerged with a bigger global footprint than it had before.
Macroeconomic policy has played an important part. India's economy is taking a big gamble on growth. Rising inflation and the largest fiscal deficit for 20 years are being risked by the government of Prime Minister Manmohan Singh to power the economy to double-digit growth.
The effort has won global applause. Robert Zoellick, World Bank president, says India has played "a helpful role" in leading Asia's recovery.
India is now identified alongside China as one of a few poles of growth worldwide. But unlike China, it has an economy driven mainly by demand from its 1.2 billion people rather than exports. As US consumers reduce borrowings and rebuild savings, India has emerged as a source of demand with higher spending on infrastructure, measures for its rural population and a growing middle class.
Resilience
Still, the word most commonly used to describe India's economic performance over the past 18 months is resilience. Singh, who also calls his country "a slow-moving elephant", uses it frequently to describe 2009 growth in gross domestic product of 6.7 per cent and a bigger rise expected for this year. So does Finance Minister Pranab Mukherjee.
The word has also caught on among foreign investors. At the World Economic Forum in Davos, advertising posters hailed ‘Resilient India' an echo of ‘Incredible India', the country's high-profile international tourism campaign.
Singh, himself a development economist, says a combination of sound democratic and economic fundamentals pulled India through the crisis. Some of his ministers are bolder, applauding "capitalist fundamentals" words once considered political heresy in a country that is still nominally a socialist republic.
Export sectors such as diamond polishing, pharmaceuticals and textiles suffered sharp declines. But with exports providing less than 20 per cent of GDP, "we were hurt but we weren't hurt that much in aggregate terms", says Shankar Acharya, an honorary professor at the Indian Council for Research on International Economic Relations.
"It was individuals and sectors that were hurt. We were growing at 9 per cent and that came down to 6-6.5 per cent."
For 2010, the Reserve Bank of India, the central bank, is forecasting economic growth of 7.5 per cent. The finance ministry tops this with 7.7 per cent. Foreign capital flows, which drained away at the end of 2008, have returned as confidence rises. The clock has been reset to where India was 18 months ago, when business leaders talked of growth to match that of China.
A strategy combining high public spending, loose monetary policy and administrative reform is carrying the economy towards a potential double-digit percentage growth. According to Kaushik Basu, the government's chief economic adviser, administrative reforms "along with the high savings and investment rate of 38 per cent will be sufficient to enable India to reach the 10 per cent growth rate mark within a few years".
Three-fold development
Many remember the so-called ‘Hindu rate of growth' of about 3 per cent with which India was saddled for decades. So the country's ability to withstand the latest external shocks, albeit with a fiscal deficit of 6.8 per cent, has impressed. The reasons are threefold.
First, domestic demand, primed by a fiscal stimulus directed at the rural economy, remained strong. The Congress party-led government pre-empted the downturn by introducing stimulus measures earlier in 2008 as part of its quasi-populist policies. These included pay rises for civil servants, and subsidies and job guarantees for the rural economy.
Second, a heavy layer of financial regulation frequently slated for hampering growth and globalisation prospects provided protection. The largely state-owned banking sector had been prevented from using exotic financial instruments. The temptation to keep these in place is strong.
Third, the crisis was met with a confident policy response, in which the Reserve Bank supplied liquidity and the finance ministry provided a fiscal stimulus.
Will the government now seize the opportunity to translate resilience into reform to take the economy to a higher level of performance? Economists and foreign investors argue that to sustain high growth rates, India requires a second wave of reform to follow financial overhauls accomplished by Singh, when he was finance minister, in 1991.
Then, he ushered out the ‘licence Raj' with its stifling tiers of bureaucratic permissions and regulations. Now, economists say, the country has to progress from low-cost and low-value service provision to higher value manufacturing and services.
One priority is labour reform to help India overcome what Acharya calls an "abysmally low" number of good factory jobs.
"What troubles me is, having reached a plateau of growth, whether we are doing enough aspirationally and in terms of policy to take us to the next level of double-digit growth," says N.K. Singh, a former finance secretary and member of the Rajya Sabha, or upper house of parliament. "It requires a whole host of policy and governance measures."
Jagdish Bhagwati, of Columbia University in New York, warns of the cost of delaying reforms in areas such as health care, education and poverty reduction. "If we had had the [1991] changes earlier we would have had a very different outcome," says Bhagwati.
But there were worries about exposing the economy to the world. "People feared that integrating with the international economy would lead to destruction of the domestic economy."
The window for reform may be small. Two highly respected economists the 77-year-old Singh and Montek Singh Ahluwalia, his close aide and deputy chairman of the planning commission are driving policy.
The finance ministry is proceeding with the sale of small stakes in state-owned companies such as NTPC, the power company. Yet in other areas there is little momentum.
The liberalisation of the pensions and insurance industries has stalled. The auction of third-generation spectrum for mobile telecommunications services has suffered repeated delays. Retuning the tax system has run into difficulties, while road-building targets are seen as over-ambitious unless bigger incentives are provided.
Education, health, infrastructure and agriculture are the prime minister's top priorities. He also wants to develop long-term debt markets and futures markets as well as strong insurance and pension sectors.
Others argue that India's rising economic status grates not only with cumbersome regulation but also with a social deficit in which 300 million people live on $1 a day. "It's difficult to take a front seat [in the global economy] when most of our citizens feel we are driving a bullock cart," says Swaminathan Aiyar, an economist.
This month's national budget will be a crucial test of ambitions for the ‘bullock cart' to travel at greater speeds for longer. But as the February 26 announcement by Mukherjee approaches, sights are lowering. Business leaders are urging the finance minister to tread with caution. Their immediate goal is to have stimulus measures prolonged and borrowing costs kept low, in spite of rising inflation and worries about public debt.
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