We’ve been shaking our own hands and patting ourselves on the back and loudly congratulating ourselves for having missed the worst of the crisis gripping the world economy. Sure, we’re slowing down quite a bit, but being the world’s second or third fastest growing economy is no joke in these trying times, especially when it’s the difference between losing your job and keeping it.
So, were we right after all in suspecting that the peddlers of free market economics and deregulation and opening up the economy were bringing us not frankincense and myrrh, but snake oil? Were we really the angels who wisely refused to tread where fools had rushed ahead?
We must have done something right. Economists and equity strategists now say that our insularity is actually a big factor in our favour, cushioning us while the exporting countries of East Asia feel the pain. Our big domestic market is now seen as a huge positive. Who would have thought that our rural masses would have emerged as the unlikely heroes of the day, blithely continuing to consume while their city cousins panicked.
Our banks are largely free from toxic assets, perhaps thanks to former Reserve Bank of India governor Y.V. Reddy’s stubborn resistance towards fancy new products and ideas. Our nationalized banks can be instructed to lend, enabling them to function as extended arms of the government. That’s a dubious blessing, at best, but it does allow them to help the government at a time when the massive fiscal deficit severely limits its ability to prime the fiscal pump.
The large share of services in the Indian economy is also helping, as the latest gross domestic product (GDP) numbers point out.
While industry is down in the dumps, even slipping into negative territory, services have so far held up surprisingly well.
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What’s surprising is that many of these features are unique to the Indian economy. China, for example, couldn’t be more different. They’re the manufacturers to the world, while our economy depends more on services. They’re great exporters, as can be seen from the “Made in China” labels on hundreds of thousands of products in Western and indeed in Indian supermarkets. And what’s interesting is that all the Asian countries, even developed ones such as Japan and South Korea, have all had a manufacturing-led, export-oriented model of growth.
It made eminent sense to sell your goods, not for a pittance in your own impoverished markets, but to the wealthy nations of the West, which would also allow you to get the hard currency needed for your imports. That’s why another difference between India and these countries is that they all have trade surpluses, while we have a large trade deficit.
What’s more, China and the other countries of East Asia are being exhorted these days to develop their internal markets. With people in the Western countries losing jobs and with banks wary of lending, the debt-fuelled consumption that was the driving force during the last boom is a thing of the past.
So what do the exporting nations do? Stimulate consumption at home, of course. China and other surplus economies such as Germany must save less and consume more, they should stop producing for exports and instead produce for a domestic market—that is the new mantra. That will lower their surpluses, the mirror image of which will be a reduction in the US current account deficit and the world economy will be rebalanced. The strange thing is that the experts seem to be recommending that China become a bit more like India. Minus the warts, of course, nobody would want to put Indian infrastructure as a role model.
So, is there an Indian model of development then that we could say has stood us in good stead during this crisis? The ingredients of such a model would be consumption rather than investment, a large public sector presence in banking, services rather than manufacturing, a domestic market rather than manufacturing for exports and a democracy that prevents rapid change.
The problem is, this so-called Indian model is completely fortuitous. It has developed on its own, without anybody planning for it and a lot of it is just the outcome of our habit of muddling through and compromising between a plethora of interest groups pushing and pulling in different directions. Also, much of our vaunted success is escaping the downside of the debt-fuelled global system because we didn’t get much of the upside in the first place.
In the midst of all this self-congratulation, we need to remind ourselves that China has had far greater success in pulling its masses out of poverty than we have. They’ve also been far more adept at getting foreign investment into infrastructure, so that when the markets turn, the money doesn’t automatically flow out. India, on the other hand, saw much of the money go into portfolio flows.
In fact, it could be argued that the 9% or so GDP growth in the last few years was an aberration, the result of the spillover of global liquidity into India and it had nothing to do with the so-called Indian development model. And perhaps the biggest problem with the new mantra of development through domestic demand being touted to the world is this: all the countries that make up the Asian miracle did so by following an economic model based on export-led growth.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org