India and the Global Slowdown

Updated on Feb 16, 2008 11:25 PM IST
The Government should invest in a big way in infrastructure and human capital development, writes Kaushik Basu.
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None | ByKaushik Basu

A GLOBAL economic slowdown now seems close to a certainty. Beginning with the housing crisis, the United States economy has been heading into a recession, with the employment situation turning gloomier than ever over the last month. The United States being the global engine, the IMF has lowered its forecast of global growth this year from 4.9 per cent to 4.1per cent.

This inevitably raises the question of how India will fare through such a widespread slowdown.

The optimistic line comes from the ‘decoupling’ school, which points out that, unlike the European economies, which are completely interlocked with the US, India is capable of decoupling itself. This is countered by the ‘recouplers’, who argue that, since India’s links with the US are no longer through a thin line of trade alone, but through massive interactions in the services sector and large financial flows, India should brace itself for a sharp comedown from the 9 per cent annual growth that it got used to in recent years.

As if these quasi-pornographic terms were not enough to conduct this debate, another group has pointed to the fact that much will depend on our ability to steer a ménage à trois, involving the United States, China and India.

There is some merit to all of these but none has a monopoly on it. There is no doubt that India is today much more integrated with the world. Even as recently as 1997 the huge East Asian crisis went lightly over us because our international exposure was still small. That is no longer the case. From the movement of skilled personnel, through the flow of money into our bourses to the large foreign exchange holdings, India is today a globalised economy.

Our links are especially deep with the United States. Over 15 per cent of India’s exports end up in the US. No other country comes close to this. Two-thirds of India’s software exports go to the US. Of all professional visas given out by the US, around half go to Indians. A slowdown of the American economy will be felt — let there be no doubt about that.

But there are redeeming features. India’s trade with Japan is not negligible; and the Japanese economy has shown buoyancy after years of doing badly. More important than that are India’s growing economic links with China. The two nations had a trade target of $20 billion dollars by 2008. The target was met by 2006. The target has now been raised to $60 billion dollars by 2010. This should provide some cushion against a global slowdown.

The ménage à trois perspective has gained strength because the US is increasingly viewing India as a ‘third pole’, after itself and China. The 2006 Quadrennial Defence Review Report of the U.S. government talks with concern about China’s growing military might, and remarks on how India could be a “a key strategic partner” for the U.S. in the Asia Pacific region.

The multiple global links and the rise to global prominence are sources of resilience for our country. But we have another strength; this lies in our weakness. For all the recent boom, India is still a nation performing way below its capacity. Our bureaucracy continues to be sluggish. Thanks to high illiteracy, we have an unconscionable waste of grey matter. Because of poor infrastructure, our manufacturing sector has not been able to perform anywhere near its capacity.

If the global situation gets worse, India must use that as reason to unleash these languishing resources. Government should invest in a big way in infrastructure and human capital development. Just as the global crisis of 1991 enabled us to reform our economy and became a blessing in disguise, maybe we can ride the next global downturn by undertaking the next round of long overdue reforms.

(Kaushik Basu holds the C. Marks Chair and is Director of the Center for Analytic Economics at Cornell University).

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