Home ›› 25 Apr 2023 ›› Editorial
Last week the International Monetary Fund (IMF) released its semi-annual World Economic Outlook forecast, and India was described as one of the “bright spots” in a global economy buffeted by shocks ranging from the Ukraine war to increasing Sino-American trade barriers.
Not only does India have one of the fastest-growing major economies anywhere, but inflation is declining, and healthy fundamentals have positioned it for even stronger growth next year. This is all the more extraordinary given that in a few months’ time the country is projected to become the largest in the world by population.
The contrast with South Asia’s other major economies could not be more stark. Sri Lanka is still painfully clawing its way back after economic collapse; Pakistan’s economy is struggling; and Bangladesh, although still rapidly growing, has experi-enced significant disruption and a loss of public confidence.
India is exposed to many of the same risks as the rest of South Asia — namely, rising oil and food import bills, and a wider slowdown in the global economy. So what explains its much greater resilience, and what lessons can its neighbours draw?
The short answer is that India has been paying serious attention to energy security, export diversification, bank regulation and tax reform, through good times and bad, for some time now. For example, although the official rhetoric has focused on climate change, India’s first priority has been energy security. Painful memories of the economic shocks caused by the series of wars and revolutions in the Middle East between 1973 and 1991 made a deep impression that has not yet been forgotten.
India began serious work to encourage a transition away from oil and gas towards renewables back in 2008 under Dr Manmohan Singh, and the government of Narendra Modi has continued to double down. As a result, the country now has the fourth-largest installed wind power capacity in the world. It has simultaneously expanded its thermal power plants fed by carbon-intensive, but domestically mined coal. The result is that India was far less vulnerable than its neighbours to ris-ing energy prices, and the cascading issues of diminishing foreign exchange reserves and skyrocketing inflation.
This pursuit of energy independence echoes the emergence of India’s absolute determination to end its dependence on foreign aid, whether it was food grains or capital. These dependencies, and the underlying structural problems, began to manifest by the early 1950s, but It was only by the mid-1960s that ending a dependence on external charity became an overriding political and financial priority. India achieved food security by the mid 1970s thanks to the Green Revolution, but financial independence took longer. New Delhi drew its last IMF loan in 1991, when it found itself caught between the Gulf War and the collapse of the USSR. This commitment to ending over-dependency on aid and volatile global markets has had the side effect of building significant resilience in the face of the unplanned external shocks that have come since.
Although growing feelings of national pride and self-confidence certainly played an important part in making hard choices on the often painful path towards stability, the increased reliance on the market has helped ensure that the government maintained strong fundamentals. The 1991 crisis sharply accelerated India’s shift from a state-dominated, planned econo-my towards a market-oriented social democracy. By 2000, thanks to these post-crisis economic reforms India was no long-er in need of economic aid. However, unlike staple foods and energy, India has not attempted to avoid the global market.
Instead, like any other creditworthy government it has increasingly turned to the market to meet its needs for short term liquidity and long-term investment capital. As a result the country’s large corporate sector, its technocrats and the political leadership from both major national parties can largely agree that they have to keep spending within reasonable limits, ex-pand foreign exchange reserves, contain inflation and ensure that the banking system is solvent. In other words, the condi-tions to sustain high growth.
However, populist pressures and excessive kickbacks strained this partnership in Dr Singh’s second term (2009-14), and played a part in the decisive tilt of India’s powerful corporate sector towards Mr Modi and his Bharatiya Janata Party. The knowledge that the market’s support cannot be taken for granted has provided a powerful incentive for the BJP to continue not just with good economic governance, but real innovation.
The National
