Mention China at almost any meeting and you will trigger lively reactions, both optimistic and pessimistic. Try Brazil and you will also receive a keen response and different views, though the country’s emphasis on inclusive growth is fairly consistent and well understood. Shift the conversation to India, however, and enthusiasm visibly declines, especially recently. This matters: the Indian economy, perhaps more so than other emerging markets, will determine political and economic developments in its region and around the world. India ranks high among nations where restoring a high rate of economic growth can make a big difference to reducing poverty. According to data from the World Bank, a third of India’s population live on less than $1.25 a day, the internationally recognised poverty line. More than two-thirds live on less than $2 a day. India is estimated to have a third of the world’s poor.
India is also an important country for anyone worried about the detrimental role of money in politics. There has been a sharp increase in the number of millionaires that serve as parliamentarians. And if you care about the orderly rebalancing of the global economy, India’s middle classes will probably play a vital role in the shift of emerging economies to more of a consumption model.
Then there are the regional dimensions. India is essential to the stability of a neighbourhood that includes other nuclear powers (China and Pakistan) and a failed state trying to recover (Afghanistan).
Despite all this, the west seems to be paying too little attention to what has been going on in the Indian economy. Growth has slowed significantly. The fiscal deficit is sizeable. Internal political conflicts are increasing. India has all but stopped climbing the World Bank’s rankings of countries by ease of doing business – despite being far down the list to begin with.
Think of it this way. India operates what might be called a highly leveraged growth model. Government deficits are relatively high but manageable provided gross domestic product growth is about 8-9 per cent. Policy errors that lead to slower growth mean rapid adjustments are required to avoid a downward spiral.
We suspect that there are four main reasons for the failure of India to register in the west.
First, there is a lot else going on in the global economy, such as Europe’s debt crisis, America’s fiscal cliff and the risk of a hard landing for China. Second, India is hard to analyse, with regional governments adding an extra layer of complexity. Third, the country’s malaise is hidden behind the global success of its privately owned multinational companies. Finally, India’s “disruptive” impact on international production patterns and trade has been largely limited to services; it is yet to be anywhere near as influential as China.
These are all understandable reasons for the limited attention that India is receiving. But they are not good ones given the implications.
India is yet to move beyond first-generation structural reforms to its economy. By moving from state- managed controls to more market-based ones, it created a surge in economic growth and a rapid expansion of the private sector. However, the second generation of reforms, which typically follow as countries become richer, has yet to arrive. These reforms sustain growth by encouraging much more productive microeconomic behaviours.
For India, reducing the scope and scale of corruption is one such necessary reform. It serves to divert resources in a highly distorted and inefficient manner. More broadly, structural budgetary weakness impedes growth, fiscal sustainability and acceptable distributions of income and wealth.
India is not the first economy to face these issues, nor will it be the last. Yet the consequences of a protracted slowdown would be much more pronounced. The last thing today’s fragile global economy needs is another source of systemic risk.
It is not too late for the country to change course and find the path of higher growth and financial stability. Indeed, recent policy mistakes are being addressed with the return of Palaniappan Chidambaram, the experienced finance minister, who has begun his third term in this office, and with the able support of Raghuram Rajan, a respected academic from the University of Chicago, as chief economist.
Their efforts will need to be translated into decisive action by the ruling coalition, a return to legislative business, reforms by parliament and a major effort to rein in corruption. But if it takes too long for this to happen, many western governments, companies and investors will wake up to an unpleasant surprise. The impact will be felt well beyond India’s borders.
The writers are respectively the chief executive of Pimco and a Nobel laureate in economics
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