Monday, November 11, 2013

Where is India headed?

After comprehensive trade reforms from the 1990s, and two decades of rapid East Asian-style growth, the IMF now forecasts that India’s growth will fall to 3.5 per cent this current fiscal year. Even if it is closer to the 5.5 per cent growth rate that senior government advisers insist, that will be a dismal outcome, well below the economy’s growth potential.

Should weak growth persist, the dynamic of Indian demography — and the prospect of a huge growth in the workforce over the coming decades — will turn the promise of higher incomes for India’s growing population to dust.

There is now a real worry that India’s reform agenda has stalled and lost direction.

Consider the recently enacted National Food Security Act. As Rajiv Kumar explains this week this Act, with its sole focus on food grain and cereal availability, may well end up hurting the poor because it discourages diversification in the agricultural sector and aggravates the country’s shortage of proteins, dairy, fruits and vegetables. In addition, it will raise grain prices in the longer term and place a staggering fiscal burden (amounting to 1.5 per cent of GDP at the bare minimum and more probably 2.4 per cent of GDP) on the country. As Kumar observes, this is a deeply flawed Act that‘has the potential to wreck the country’s fiscal balance, slow down the economy, and lead to severe distortions in both the production and marketing of agricultural output’. Yet, in an election year, it had remarkable bipartisan support.

In recent times there has been lotus-land-like reliance on financing deficits via access to cheap QE-fuelled international capital supplies and neglect of growth-promoting domestic reforms — a strategy which is at best risky and at worst disastrous when the global markets are fragile as they are now. Without domestic and international growth-promoting reform, restoration of India’s high growth trajectory is unlikely. Short-term measures to alleviate the current account deficit or reduce pressures on the rupee do not address the core problems that face the Indian economy. What India requires now, rather, is wholesale micro-economic reform and a public finance makeover — and it is needed urgently as high profile corruption scandals associated with major public projects and enterprises have dramatically slowed the implementation of desperately required infrastructure investments.

As its performance slides compared to that of its neighbours in East Asia, now is the time to define a clear way forward on India’s development and regional ambitions. If India is truly going to be able to fulfil its destiny in the Asian century and not simply end up an also-ran, it needs to remobilise political will behind a substantial national economic reform agenda and redefine a complementary international economic diplomacy that is heavily focused on its neighbourhood.
The economics are driving India closer to Asia. The opportunities are already reflected in the surge in trade and investment relations with China (now India’s biggest trading partner), South Korea, Japan and Southeast Asia. Bilateral trade with China has risen to over US$70 billion, with both sides setting an ambitious target of scaling it up to $100 billion by 2015. But, although growth of trade and investment shares with the other Asian economies is now the most dynamic feature of India’s external economic engagement, all the analysis suggests that its potential remains vastly underdeveloped, compared with the highly developed trade, investment and production networks in East Asia.

Why is India’s integration into Asian trade and production yet to realise its real potential?
Despite the trade and foreign investment reforms of the past, India’s trade regime and investment environment remain relatively closed. This is reflected in the impact of border and behind-the-border barriers to trade on realising trade potential. One measure shows that India’s actual exports are only 44 per cent of its potential exports. This compares with a similar figure of 57 per cent for China. India’s labour market restrictions, burdens on the participation of foreign investors in developing an export-oriented base in manufacturing, and poor infrastructure prevent growth-promoting integration into the Asian and international economy.

The good news is that the geo-economic shifts already under way and India’s geo-political commitment to a model of international relations that is open, pluralistic and non-interventionist, provides a good basis for building productive economic ties with East Asia, including China. This is important — as the India-Pakistan contra-case makes abundantly clear — because good political relations are helpful to strong economic relations, and good economic relations in turn can drive better political relations.

In this context, Sourabh Gupta’s lead essay this week reviews the achievements of Prime Minister Singh’s visit to China on 23-24 October.‘It is a measure of the repair, stabilisation and forward progress in Sino–Indian relations’, says Gupta, ‘that the two sides were once again able to discuss boundary-related business at a bilateral leaders’ summit. A Border Defence Cooperation agreement was signed by the two leaders, adding incremental innovations to an already rich menu of boundary dispute management protocols’. While there is much work still to do in sorting out the border issue, Gupta says, a push to formulate a mutually acceptable resolution seems likely to emerge.

An Indian relationship with China that is in good repair will be critical to India’s confidence building a national reform agenda for growth around deeper integration into the regional and international economy.Peter Drysdale is Editor of the East Asia Forum.

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