INDIA BOUNCING BACK

By M H Ahssan

The Indian Economy Has The Potential To Prove Sceptics Wrong But The Template of Development Has To Change

Familiarity with the English language has proved to be a great social and economic asset for India. But it brings with it an excessive dependence on western thinking. Trans-Atlantic concerns about an economic downturn in 2009 have found a louder echo in India than is warranted by India’s own performance and prospect. Lesson One: Don’t let the yearend gloom in New York and London get you down. 2009 could yet be a good year for India.

It is possible, however, that prolonged political uncertainty could hurt the economy. That is what the terrorists and their sponsors count on. If political parties get into campaign mode from now till May 2009, that would delay focused action on the economy even with the best of efforts of the Prime Minister. An early election in 2009 would be good for the economy.

It is obvious that one of the primary targets of the terrorists who attacked Mumbai in November was the Indian economy. Indeed, the economy, and confidence in it, have been targeted by terrorists for sometime now. No wonder their targets have been Mumbai, Bangalore, Hyderabad and Delhi.

Caught between the global (western) gloom and doom on the economic front, and the despair engendered by terrorists, most commentators on the Indian economy have preferred to be downbeat about the prospects for 2009. Since expectations have a way of being fulfilled, India may yet see a slowing down that is not fully warranted by its internal potential.

It is in response to such sentiments that the Government and the central bank took a series of fiscal and monetary steps in December 2008 to boost domestic economic activity and confidence. These measures have downside risks, but policymakers have decided to take those risks to alter sentiment and boost the economy.

The Indian economy has the potential to bounce back and prove its sceptics wrong. The fundamentals of the economy are stronger than is often recognized by commentators. India’s recent growth acceleration has been based on a sustained rise in the gross capital formation and gross savings rates. With the investment and savings rates inching towards the East Asian average, the Indian economy should be able to maintain a growth rate closer to 8% and above in the medium term.

Don’t expect the funds that have flown out of the stock market to return very quickly. And that is a good thing too. The Mumbai sensex had become too externally dependent. Moderating that is not such a bad development. The focus of public attention must shift to the real economy. India needs growth in its core sectors, especially manufacturing, construction and agriculture.

The slowdown in the export-based sectors, especially in services, will of course have to be balanced both by increased foreign direct investment and remittance inflows, apart from higher growth of domestic manufacturing. The National Strategy on Manufacturing and the recent policy paper on manufacturing sector strategy, unveiled by the National Manufacturing Competitiveness Commission, bring a much needed focus back to the industrial sector. 2009 has to be the year of manufacturing revival in India.

If India can sustain 8% growth, with an average of 8% inflation, in 2009, it can deal more confidently with the world in 2010. It is unlikely that India will return to the low inflation regime of the past few years. Rather, in the near term we should expect that we will remain along the long-term average inflation rate of 8.0%. This is not an entirely undesirable situation if farmers can benefit from better prices. They will then sustain a more robust performance of the domestic economy.

India’s strategy will of course have to be based on the assumption that the trans-Atlantic economies are unlikely to be a source of growth for India, and domestic demand will have to sustain growth. This is absolutely essential, both to meet domestic livelihood expectations and take advantage of external opportunities.

Externally, China will continue to pose a challenge, especially in manufacturing. Equally, India will be under pressure to stay the course on external liberalization both within the multilateral and regional framework.

If India can stabilize itself in 2009, it will emerge stronger in 2010 and after. 2008 was the year of the global power shift. For India, 2009 would be the year in which the template of development could change. The locus of the global economy is shifting eastwards and Asia is emerging as an engine of growth. India has the potential to be an engine of future global growth. When that opportunity is ceased, India too will benefit from the global power shift.

To ensure this outcome, India will have to continue to invest in education and skillbuilding, in rural development and agriculture and in making the infrastructure and manufacturing sectors globally competitive. That is the challenge before us as we enter a New Year.