The growing international chorus about India being the next big thing in the global economy highlights the wrong issues as the country’s achievements, and misses the underlying transformation in India’s economic management.
India is no more the fastest-growing large economy. Saudi Arabia is with 8.7 per cent growth in 2022, followed by Vietnam at 8 per cent. In the first quarter of 2023, the Philippines bettered India, at 6.4 per cent.
While these are much smaller economies than India’s, Saudi Arabia is a trillion-dollar economy and the other two are larger than regional players like Bangladesh, Pakistan, Iran, Egypt, and South Africa.
Nor is India the primary beneficiary in the “China Plus One” scenario; Vietnam is.
In fact, since India is not well integrated with the East Asian economies, and is not part of the Regional Comprehensive Economic Partnership (RCEP), it is not as well positioned in this context as countries like Thailand, Malaysia, and Indonesia (the “Tiger Cubs”).
As for exports to the West, Vietnam is now level with China when it comes to apparel supplies to the US. To be sure, India is an important emerging player and has the unique endowment of a much larger market than the others, but it still is in a pack with the Cubs. It needs to do more to be a clear numero uno in the growth rankings.
India’s real success from a long-term perspective is its sharply improved macro-economic management. The wholesale price inflation rate had dropped from an average of 9 per cent in the 1970s to 8 per cent in the 1980s, then to 6-plus per cent for a couple of decades, and now less than 4 per cent in the last decade. It is a similar story with the consumer price inflation rate, which has dropped to less than 6 per cent in the last decade from 7.5 per cent in the previous two decades.
Why inflation rates have dropped substantially in an era of much higher fiscal deficits (Centre and states combined) is something that economists need to explain.
Perhaps the difference is that, post-1991 reforms, money is no longer automatically printed to finance Central deficits. Instead, governments borrow from the financial market, which has gained in depth, and also breadth by becoming less bank-centric. That too is an achievement.
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On the external front, the improvement has been equally significant. The 1990s marked the end to decades of dollar scarcity. The overall balance of payments (BoP, for current and capital accounts combined) delivered a surplus of $52 billion during 1992-2002.
This quadrupled to $212 billion in the next decade, and has ballooned to $354 billion in the latest (2012-22) decade. What is more, the contribution of aid and foreign borrowings has dipped sharply. The cumulative result shows in the Reserve Bank’s foreign exchange reserves.
Note that this is despite a growing deficit in merchandise trade — an annual average of $150 billion in the latest decade, compared to a relatively tiny $11 billion in 1992-2002 for an admittedly smaller economy. In relation to GDP, the merchandise trade deficit is now 5-6 per cent, much higher than in previous decades. But this has been mostly neutralised by the growing surplus in services exports. The icing on the cake has come from burgeoning foreign investment (about $950 billion in the last three decades).
This turnaround has delivered a more stable currency. While the rupee has continued to lose ground against the dollar, the rate of depreciation dropped from an annual average of 5.5 per cent in the period between the 1966 devaluation and the “reform devaluations” of 1991-93, to an annual average drop of 3 per cent post-reform. It has since improved further to 2.4 per cent in the last two decades.
The significance of these systemic changes over the decades is that the economy and currency are now more stable, and therefore possibly the politics too. What remains to be achieved is a rapid-growth trajectory which, despite sustained hype, has so far not matched the record of a succession of East Asian economies since the mid-twentieth century. Why that is so needs introspection, not bluster.
By special arrangement with Business Standard.
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