The global financial crisis had threatened to turn the clock back on a globalising India. Instead, the hands of time have advanced and the country’s impact has increased.
Second only to China as a fast-growing large economy, unlike that export-driven giant, India emerged relatively “unscathed” by the global economic downturn, in the words of the Asian Development Bank.
If economists were surprised when the country raced away from what had been resignedly called “the Hindu rate of growth” of about 3 per cent to reach highs of 9 per cent in the mid-2000s, they have been even more impressed in past months by India’s ability to withstand falling exports and external financial shocks.
The country’s economic policymakers have received international praise for their response to the crisis. In recent weeks, projections for a speedy recovery have grown more optimistic.
Manmohan Singh, the prime minister and the man responsible for opening up the economy in the early 1990s, speaks of a return to 9-10 per cent growth in a “couple of years”. His finance minister, Pranab Mukherjee, forecasts 7.7 per cent this year, a fiscal stimulus-fuelled rise from 6.7 per cent last year.
“Underlying our system is an inherent political and economic resilience that gives our country and its institutions great strength and buoyancy,” Mr Singh reflects. “During the year gone by, the world faced an unprecedented economic and financial crisis. But the Indian economy weathered it quite well. We were affected, but not so much as many other countries.”
This was just as well. The 77-year-old Mr Singh warns that “the impatience of youth” – in a country where 70 per cent of the 1.2bn population is under 35 – will increasingly determine India’s future. He has prudently chosen education, health, infrastructure and agriculture as the top priorities after winning a second term in office last year.
He is simultaneously pushing forward the country’s interlinkages, striking free trade deals with Asean and South Korea, and negotiating another with the EU.
The resilience of the economy rests on a huge domestic market, and, unlike many Asian counterparts, a limited reliance on exports, which are less than 20 per cent of gross domestic product. While domestic demand was largely uninterrupted by the financial crisis, export sectors, such as diamond cutting and polishing, pharmaceuticals and textiles, suffered precipitous declines and are only now recovering.
Foreign capital flows and valuations on Sensex, the benchmark index on the Bombay Stock Exchange, bounced back rather quicker as investors seek returns from one of the brightest poles of economic activity.
Mergers and acquisitions activity is also set to rise. Cash-rich companies are weighing purchases in recession hit Europe, the US and other emerging markets.
A fast-growing economy, albeit with a strong internal motor, will hasten globalisation. The industrial sector is expanding at a double-digit rate, services, 55 per cent of GDP, are not far behind. Only agriculture, dented by a poor monsoon and representing 20 per cent of GDP, lags.
But there are still plenty of obstacles in the way of an open economy. “A racing car with the handbrake on,” is how one visiting politician describes the drag of over-regulation, red tape, vested interests and decrepit infrastructure.
Lee Kuan Yew, Singapore’s former prime minister, identifies failure to follow China’s focus on infrastructure as one of the biggest handicaps to India’s global integration.
The confident mood across Asia has led many international business leaders to comment on the stark contrast between the ambitions of large developing economies and the more introspective, punishing mood in the west.
Robert Zoellick, president of the World Bank, is one. “We all look to India now as a rising global economic power and in our interconnected world it has played a helpful role over the tough moments of the past year, not just during the discussions of the G20, but also in how it has steered [its] recovery,” says the former US Trade Representative, who once locked horns with India in trade talks.
International partners are beating a path to the door, lured by the promise of a drive towards manufacturing to add to the momentum achieved by a globalised services industry.
“In the caricature of the global economy,” says Lord Mandelson, the UK’s secretary for business. “China makes it, America buys it, India provides the after sales customer service and Britain does the structured finance.” That formulation is changing.
“India stands at a critical point in its transformation,” he says. “A young population is eager for change and the freedom to realise this global ambition. If India’s initial growth was driven by low-cost and low-value service provision, the next wave will be tied to rising value-added technology-driven manufacturing and services.”
This next wave has already arrived. The IT outsourcing sector – the likes of Tata Consultancy Services (TCS), Wipro and Infosys – and automotive industry – including Hero Honda, Bharat Forge and Tata Motors – are innovating and adopting technologies to create a global “footprint”.
N Chandrasekaran, the chief executive of TCS, says the downturn in the west has opened up greater opportunities in IT outsourcing and business processing.
But he lays emphasis on developing new capabilities, products and business models to remain relevant to clients and move into new countries. “When offshoring itself was first proposed, no one believed it was a business model,” he recalls.
The confidence in the growing economy has permeated other areas too. Over the past year, India has sought to play a greater leadership role in multilateral forums debating trade, climate change and reforming the global financial architecture.
Next month’s national budget will be a test of whether the Congress party-led government can make the most of the post-crisis period and a strong victory in last year's polls, by embarking on structural reform.
Business groups are lobbying for liberalisation of the defence, retail and financial services sectors, labour market reform and state disinvestments to help sustain growth projections.
The Reserve Bank of India, the central bank, meanwhile, is renewing efforts to broaden financial inclusion, and reach out to the unbanked masses.
In the shorter term, rebuilding foreign exchange reserves, allowing the rupee to appreciate to help cool inflation, while maintaining a partially open capital account are the priorities.
Some believe that the country’s economic fortitude is derived from its isolation and a protective shield of regulation, forged over decades of socialist policies and entrenched local business interests.
But the benefits of a greater share of world trade, remittance flows close to $50bn a year and the appeal of foreign capital inflows are shaping policy.
“India was less affected by the crisis than the rest of the world, not because it was isolated but because its capitalist fundamentals are strong,” argues Shashi Tharoor, the minister of state for external affairs and former United Nations official. “India will not return to the economics of nationalism which equated political independence with economic self-sufficiency.”
The embrace of the outside world, however, will be anything but rushed. On this, Mr Singh has the last word: “It is probably true that we are a slow-moving elephant but it is equally true that with each step forward we leave behind a deep imprint. There is a price that we pay in trying to carry all sections of our people along ... It is perhaps a price worth paying.”
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