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A file photo of the Bombay Stock Exchange. India is better placed to deal with any global storms. Photo: Mint
A file photo of the Bombay Stock Exchange. India is better placed to deal with any global storms. Photo: Mint

Can India lean against the global economic storm?

The prospect of global economic instability has once again cast its long shadow over India. What lies ahead?

Mumbai: It is well known that the domestic macro situation looks far more benign than it did two years ago, when India found itself in such exalted company as Turkey, Brazil, Indonesia and South Africa: the fragile five.

The rupee was one of the currencies that faced the maximum battering, in the weeks after the US first hinted that it would exit its policy of extraordinary monetary expansion through quantitative easing.

Much has happened since then. Inflation has receded. The current account deficit has been whittled. The fiscal situation is far better. In other words, the three most significant measures of underlying economic imbalances are no longer flashing red.

India is thus better placed to deal with any global storms. But that does not mean it will not be affected at all. An economy integrated with the rest of the world does not have such privileges: it benefits from a growing global market but also tends to import global economic troubles.

The financial markets have already been rocked by growing signs of economic troubles in China. Not even the most bullish fund manager can now avoid punctuating his pitch about how India looks attractive in the long run, with worries that the next few months could be rocky.

But it is not just a matter of financial prices alone—equities, bonds and currencies. What eventually matters is the impact on the real economy. India is in the midst of a fragile economic recovery right now. Will it be at risk if global economic conditions worsen? A look at the data on global economic growth and Indian economic growth over the past 35 years throws up some interesting insights.

First, the unrealistic belief that India is in some way decoupled from the rest of the world has thankfully not been given air this time around, as it was in the first half of 2008. Most people would today accept that India is affected by what happens elsewhere. The data bears this out. Indian growth and global growth have broadly moved in the same direction, with a positive linear correlation coefficient of 0.433.

The usual disclaimer applies: this correlation does not mean there is causation.

Second, there have been individual years when the Indian economy has not been in sync with the global economy. This is especially true when there have been sharp changes in the momentum of global growth.

India could hardly take any advantage of the splendid global recovery in 1984. The collapse in Indian growth was far sharper than the global slowdown in 1991,thanks to the domestic economic crisis.

The Indian economy actually accelerated in 1998 even as global growth was pulled down by the prolonged after-effects of the Asian financial crisis of the previous year. The sharp economic recovery after 2009 clearly outpaced sluggish global recovery.

Third, there have been only four instances in the past 35 years when India has grown more slowly than the overall global economy: 1984, 1991, 1997 and 2000. The general rule has been that India has been growing faster than the global economy, which is, of course, not very surprising for a country that is catching up. The average growth differential has been 2.6 percentage points.

These are very rough numbers that do not take into account such nuances as droughts or global commodity prices or domestic policy tangles. So, it is the broad lessons that are more important: India is rarely unaffected by the global economic storms, it still tends to outpace the global economy as a whole and a lot depends on local nuances, such as the performance of the monsoon or domestic policy responses.

Global economic history tells us another thing: there are some economies that manage to maintain their economic momentum even when the rest of the world is slowing down. South Korea did it in the 1970s. China did it in more recent decades. These are rare examples. The big question is whether India can similarly lean against the global wind.

Past experience across the world shows that this is tough, but not impossible.

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