Ten reasons why India would grow almost as strongly as it has done in the past many years
Let’s demolish some myths and finally bury some shibboleths while talking about the Indian economy. And let’s do that with unadulterated facts; not prejudice and perceptions. The most pernicious one is the one related to that fancy term called ‘de-coupling’. Last fall, when the meltdown started in Wall Street, many in India insisted that we will not be affected because we are not really all that integrated with the global economy. And now, we have the same set of people saying that we are quite integrated after all; and we will feel the pain. That is utter nonsense as historical data bear out. Even during the old glory days of crony socialism, when the Indian economy was inward looking, global economic shocks always adversely affected India.
In 1967, when Europe and America were hit by a crisis of confidence, the Indian economy literally tanked. In 1973, after the oil shock roiled the global economy, GDP growth rate collapsed in India. In 1979, after the second oil shock, GDP growth rate collapsed all over again and India went to IMF for a bailout. When the global economy was entering a mini recession in 1990, the Indian economy again collapsed and the powers that be again went hat in hand to IMF. GDP growth rates in India tumbled yet again after the East Asian financial crisis of 1997. The ‘dot-com’ bust across the world in 2001 again led to growth rates crashing in India. So let’s stop fooling ourselves with this ‘de-coupling’ nonsense. The Indian economy will definitely be affected during the ongoing crisis. We can’t wish away bad news.
And yet, there are very strong reasons why the Indian economy will be the most successful one when it comes to riding out the current storm. And there is little doubt that it will be the first economy to emerge stronger with a more solid foundation of sustained growth. Surprised with such a statement when all you get is hysterically bad news from media vehicles? Don’t be. Here are the ‘fact’ based reasons why:
FDI: China habitually gets more than $150 billion in foreign direct investments every year. As a percentage of GDP, it hovers between 7% to 10%. In sharp contrast, Indian policy makers start whooping with joy when FDI crosses $20 billion. Not to mention that FDI has almost never exceeded even 0.5% of GDP. Now, we all know that foreign investments will dry up. But since most of India’s GDP growth has been driven by domestic investment, we will be the least adversely affected. Let’s say FDI inflow declines by a whopping 50% or about $10 billion. That works out to one-tenth of one percent of GDP. Do your own maths!
EXPORTS: There are horror stories floating around of how hundreds of thousands of jobs are being lost because exports are slowing down and declining. A recent government survey says that half a million jobs were lost in the last quarter of 2008 because of contracting exports. Half a million jobs gone is bad news indeed. But compare that with an admission by the Chinese government (A government that is loathe to admit anything!) that 20 million jobs were lost in the same period and you suddenly get a fresh perspective on where India stands compared to other nations. Also remember, exports from India still hover around 15% of GDP, one of the lowest figures among major economies in the world.
CONSUMPTION: The Indian economy resembles that of the United States in many unique ways. One of the most striking similarities is that related to consumption. Consumption accounts for just about 35% of GDP in China while it constitutes about 65% of GDP in India. One reason why GDP growth in China kept racing ahead of India was huge increase in investments year after year while consumption expenditure can really grow at more modest levels. When bad times come, consumption might stagnate in India while investment is bound to plunge in China. No wonder, the Indian GDP growth rate will moderate from about 9% to about 7% in 2008-09 while it is poised to crash from 13% to 6% in China. Slow and steady is often better!
Let’s demolish some myths and finally bury some shibboleths while talking about the Indian economy. And let’s do that with unadulterated facts; not prejudice and perceptions. The most pernicious one is the one related to that fancy term called ‘de-coupling’. Last fall, when the meltdown started in Wall Street, many in India insisted that we will not be affected because we are not really all that integrated with the global economy. And now, we have the same set of people saying that we are quite integrated after all; and we will feel the pain. That is utter nonsense as historical data bear out. Even during the old glory days of crony socialism, when the Indian economy was inward looking, global economic shocks always adversely affected India.
In 1967, when Europe and America were hit by a crisis of confidence, the Indian economy literally tanked. In 1973, after the oil shock roiled the global economy, GDP growth rate collapsed in India. In 1979, after the second oil shock, GDP growth rate collapsed all over again and India went to IMF for a bailout. When the global economy was entering a mini recession in 1990, the Indian economy again collapsed and the powers that be again went hat in hand to IMF. GDP growth rates in India tumbled yet again after the East Asian financial crisis of 1997. The ‘dot-com’ bust across the world in 2001 again led to growth rates crashing in India. So let’s stop fooling ourselves with this ‘de-coupling’ nonsense. The Indian economy will definitely be affected during the ongoing crisis. We can’t wish away bad news.
And yet, there are very strong reasons why the Indian economy will be the most successful one when it comes to riding out the current storm. And there is little doubt that it will be the first economy to emerge stronger with a more solid foundation of sustained growth. Surprised with such a statement when all you get is hysterically bad news from media vehicles? Don’t be. Here are the ‘fact’ based reasons why:
FDI: China habitually gets more than $150 billion in foreign direct investments every year. As a percentage of GDP, it hovers between 7% to 10%. In sharp contrast, Indian policy makers start whooping with joy when FDI crosses $20 billion. Not to mention that FDI has almost never exceeded even 0.5% of GDP. Now, we all know that foreign investments will dry up. But since most of India’s GDP growth has been driven by domestic investment, we will be the least adversely affected. Let’s say FDI inflow declines by a whopping 50% or about $10 billion. That works out to one-tenth of one percent of GDP. Do your own maths!
EXPORTS: There are horror stories floating around of how hundreds of thousands of jobs are being lost because exports are slowing down and declining. A recent government survey says that half a million jobs were lost in the last quarter of 2008 because of contracting exports. Half a million jobs gone is bad news indeed. But compare that with an admission by the Chinese government (A government that is loathe to admit anything!) that 20 million jobs were lost in the same period and you suddenly get a fresh perspective on where India stands compared to other nations. Also remember, exports from India still hover around 15% of GDP, one of the lowest figures among major economies in the world.
CONSUMPTION: The Indian economy resembles that of the United States in many unique ways. One of the most striking similarities is that related to consumption. Consumption accounts for just about 35% of GDP in China while it constitutes about 65% of GDP in India. One reason why GDP growth in China kept racing ahead of India was huge increase in investments year after year while consumption expenditure can really grow at more modest levels. When bad times come, consumption might stagnate in India while investment is bound to plunge in China. No wonder, the Indian GDP growth rate will moderate from about 9% to about 7% in 2008-09 while it is poised to crash from 13% to 6% in China. Slow and steady is often better!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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