The reforms implemented in India in the wake of the balance of payments crisis in 1990-91 were crucial in setting us on the path of higher growth. Two decades later, although we are not faced with a crisis, we are poised again at economic crossroads. Robert Frost’s (1874-1963) writings include a poem titled “The Road Not Taken” which is oft-remembered for the lines “Two roads diverged in a wood, and I — I took the one less travelled by, and that has made all the difference”. However, on major economic issues should India go down less traversed roads? This article reviews Indian economic indicators and suggests that it is high time to make a concerted effort to implement the next round of reforms.
In overall terms, savings and investment remain high and the World Bank’s projected growth rate for India for 2011-12 remains respectable at 7.5 per cent. However, inflation refuses to moderate and revenue expenditure has been increasing as a percentage of central government expenditure. In the first six months of 2011-12, central government revenues have not kept pace with projections. Further, current account balances are projected to worsen even though exports have been sharply up in the last few months. Short-term external debt, with residual maturity of one year or less, was 43.3 per cent of total external debt as of end June 2011.
As per available indications, G7 countries will take at least a decade to reduce their private and sovereign debt levels and the consequences will include slow to stuttering growth. Plus, there may by disruptive developments in Europe. Consequently, Indian growth may be inhibited by a deterioration in our domestic finances, potential reduction in exports and difficulties in rolling over short-term loans, accessing trade credit and commercial borrowings. On balance, while we should be innovative and break free from the “dreary desert sand of dead habit” (apologies to Tagore) we may ignore the development experience of countries around the world over the last two centuries at our own peril. Indeed, there would be a heavy opportunity cost if we were to not reform faster.
The Indian Planning Commission has identified “Twelve Strategy Challenges” for the future. These encompass the all too familiar calls for: (a) improved access to safe drinking water, basic health care and primary education; (b) sustained growth in agriculture and improvement in rural living conditions; (c) higher investment in infrastructure; (d) upgrading of skills to enable faster generation of employment; (e) managing urbanisation and the environment and so on.
The crucially important factor in implementing reforms is to act on inter-dependent reforms simultaneously. For example, land acquisition legislation and infrastructure development are inter-linked and hence the latter cannot proceed without the former. Similarly, adequate health and education facilities cannot be provided without surface transport access. In the least developed districts in Bihar and Assam it has been noted that the factor that is most highly correlated to improvements in social indicators is better roads. Additionally, fiscal reforms are joined at the hip to rational pricing of fossil fuels, fertilisers and food and other subsidies.
On a related note, an ADB study titled Asia 2050: Realizing the Asian Century, which was released in August, 2011 provides the same well-known reminders of the steps Asian countries need to take to maintain the relatively high growth rates achieved over the last ten years. For instance, this study warns against the “middle income trap” into which Latin American countries such as Argentina and Brazil were prone to fall in the past. Specifically, the warning is that middle income Asian countries may not be able to make the required “timely transition from resource driven growth, with low cost labour and capital to productivity-driven growth”.
| ECONOMIC INDICATORS: TAPERING GROWTH | ||||||
| 2006-07 | 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 (proj) | |
| GDP growth# | 9.6 | 9.3 | 6.8 | 8.0 | 8.5 | 7.5 |
| Industry# | 12.2 | 9.7 | 4.4 | 8.0 | 7.9 | 7.5 |
| Services# | 10.1 | 10.3 | 10.1 | 10.1 | 9.4 | 8.6 |
| Agriculture# | 4.2 | 5.8 | -0.1 | 0.4 | 6.6 | 3.0 |
| Savings# | 37.0 | 39.8 | 35.4 | 37.0 | 37.5 | 38.5 |
| Investment# | 35.7 | 38.1 | 34.5 | 36.5 | 34.8 | 35.9 |
| Current account# | -1.0 | -1.3 | -2.3 | -2.8 | -2.6 | -3.0 |
| Net FDI@ | 7.7 | 15.9 | 19.8 | 18.8 | 7.1 | 27.0 |
| Net FII@ | 7.1 | 27.4 | -14.0 | 32.4 | 30.3 | 21.0 |
| Remittances@ | 29.8 | 41.7 | 44.6 | 52.1 | 53.4 | 13.2* |
| Goods trade@ | -61.8 | -91.5 | -119.5 | -118.4 | -130.5 | -35.4* |
| External debt@ | 172.4 | 224.4 | 224.5 | 261.0 | 306.5 | 316.9* |
| Reserves@ | 199.2 | 309.7 | 252.0 | 279.1 | 304.8 | 299.4* |
| Net IIP@ | -- | -- | -89.6* | -158.4 | -219.4 | -233.6* |
| #% of GDP; @US$billion; *June 2009 or June 2011 Net IIP (International Investments Position): Stock of foreign assets less external liabilities Sources: World Bank: India Economic Update September 2011, CSO and RBI | ||||||
The ADB study also flags the obvious need for the financial sector to be developed to carry out its intermediation role efficiently. In India, even as we widen and deepen financial inclusion we should be acutely conscious that there are inherent limits to the economic benefits that stem from the use of sophisticated derivatives or asset backed securities. Namely, the tail should not wag the dog and the financial sector should be restricted to raising capital for the real sectors.
The ADB report does not address the cross-continental risks to which Asian countries are presently exposed i.e., how to remain proactively open to globalisation and yet guard against the risks emanating from Europe and the US. If Asia continues to grow, Europe and the US will face relative decline and such transformations have lead to fractious exchange rate and trade disputes in the past. On October 18, 2011 Mervyn King, Governor, Bank of England, remarked that: “Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone.”
In the evolution of any country there are critically important inflection points and we are at one right now. Indian GDP as a fraction of global output, in purchasing power parity terms, is around six per cent and our population is about 17 per cent of that of the world. Clearly, we need a sense of urgency and commonality of purpose to better align these two percentages. To sum up, we cannot defy economic logic even as we figure out solutions that work best in the Indian context.
The author is India’s Ambassador to the EU, Belgium and Luxembourg. Views expressed are strictly personal
