he convulsions in the international financial markets led many to expect that the cause of economic reform in an increasingly globalized India would suffer a decisive setback. “See, we were right in opposing all this liberalization,” one revanchist told me, stressing that it was India’s intrusive regulatory system that had saved it from a worse fate. Communist politicians formerly allied to Prime Minister Manmohan Singh even argued that it was their obstructionism that saved India from deregulating itself into disaster.
Their exultation was premature. In the short term, the reformers were indeed pushed on the defensive by the crisis. The Indian stock markets dropped, foreign investors pulled out, and trade fell.
But the country recovered quickly. In part that’s because it is much less dependent than most on global trade and capital. India relies on external trade for about 20 percent of its GDP versus 75 percent in China; India’s large and robust internal market accounts for the rest. Indians continued producing goods and services for other Indians, and that kept the economy humming. So did domestic investors, who also kept most of the money at home. Remittances from overseas Indians remained robust, reaching $46.4 billion in 2008–09. And soon foreign investors returned. When the crisis began in September 2008, they had withdrawn $12 billion from our stock markets, but they are now flooding back: foreign direct investment reached $27.3 billion in 2008–09 and hit a rate of $1 billion per week in May 2009.
Sure, India’s generally conservative financial system helped. Our banks and financial institutions were not tempted to buy the exotic—and toxic—financial instruments that ruined several Western institutions. But precisely be-cause our system held up so well, there has been no rush to reregulate.
India’s achievement is all the more striking when you remember the terrorist attacks on Mumbai in late November2008. Those terrorists struck at India’s financial nerve center and commercial capital, a city emblematic of the country’s energetic thrust into the 21st century. They sought to destroy the image of India as an emerging economic gi-ant and an increasing magnet for investors and tourists, to make India seem insecure and vulnerable, a soft state bedeviled by enemies who could wound it with impunity. Yet once again India proved resilient and restrained in response. And the country was rewarded: despite all the setbacks, its GDP growth rate hit 6.7 percent in 2008–09.
Government policy has also helped. India rolled out two rounds of fiscal stimulus. Its financial authorities have pushed for lower interest rates, expanded credit, and reduced excise duties, all of which have boosted growth. And now there are signs that the crisis is already bottoming out: industrial production has either stabilized or is expanding, India’s trade is picking up, and financial markets are thriving.
So the cause of economic liberalization remains safe in India. Indeed, it is proceeding, led by a confident Prime Minister Singh, who knows he has steered the ship of state through some particularly treacherous waters. India has recently concluded free-trade agreements with ASEAN and South Korea, and similar arrangements are being negotiated with other East Asian countries. India is also eyeing other ways to integrate with its neighbors.
As for the reactionaries who hoped to return India to the era of over-regulation, they’ve been silenced. India was less affected by the crisis than the rest of the world, not because it was isolated but because its capitalist fundamentals are strong. In the last 15 years, India has pulled more people out of poverty than in the previous 45. The country has prospered, and despite population growth, per capita income has in-creased faster than ever before. The financial crisis, far from prompting us to retreat, is being used to safeguard these gains and to build on them. India will not return to the economics of nationalism, which equated political independence with economic self-sufficiency and so relegated us to chronic poverty and mediocrity. Instead of retreating from the world, India is advancing with more confidence than ever.
Name of Source: Newsweek