Can India Grow: Challenges, Opportunities, and the Way Forward

By Nageswaran, V. Anantha; Natarajan, Gulzar | Carnegie Endowment for International Peace - Reports, November 16, 2016 | Go to article overview

Can India Grow: Challenges, Opportunities, and the Way Forward


Nageswaran, V. Anantha, Natarajan, Gulzar, Carnegie Endowment for International Peace - Reports


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INTRODUCTION

FOR A LITTLE MORE THAN THREE DECADES AFTER INDIA GAINED INDEPENDENCE IN 1947, its growth narrative and growth potential were circumscribed by the logic of self-sufficiency, import substitution, and protection. Internally, the focus was on the gradual development of capacity in the public and private investment sectors.

Those policies, however, eventually reached the limits of their usefulness, and their harmful effects became too obvious to be ignored. Indian industry had become woefully uncompetitive. Agricultural production had begun to stagnate, and the economic growth rate was stuck at around 3.5 percent on average. The next two decades, starting with the 1980s, saw a hesitant liberalization as the pendulum swung in the other direction. These two decades were also marked by excess borrowing, a balance of payments crisis that pushed the country into near bankruptcy, and a banking crisis, all occurring in the late 1980s to early 1990s.

In the third phase, which commenced in the 1990s under then prime minister P. V. Narasimha Rao and his finance minister (and future prime minister), Manmohan Singh, and accelerated after 2000 under then prime minister Atal Bihari Vajpayee, the mantra was high growth and financial liberalization. The latter chiefly meant opening India's capital markets to foreign investors. Deregulation of markets and a reduction in import tariffs, combined with making the economy more market-oriented, would, it was expected, produce high economic growth. As long as the government balanced the budget and kept the country open to the free flow of goods and capital, the thinking went, economic growth would be inevitable.

In the new millennium, particularly in the decade since 2004, this belief in the inevitability of high economic growth gave rise to overly optimistic projections of returns from infrastructure projects, which spawned highly unrealistic bidding supported by heavy bank lending. When the expected growth failed to materialize, bank and corporate balance sheets became bloated, unable to move forward and thus unable to move the economy forward. Companies became overleveraged and burdened with wasteful investment. They became unwilling to invest further. Banks, especially government-owned institutions, were saddled with nonperforming assets.

Unsurprisingly, high growth expectations are likely to result in a long period of subpar growth, and India's depressed economic picture continued. Though many commentators hoped that the installation of a new government in New Delhi under Prime Minister Narendra Modi in the summer of 2014 would return the economy to a course of near double-digit growth, those expectations have been frustrated. Persistent weakness in underlying economic indicators and the lack of a sustainable recovery to levels experienced before the 2008-2009 global recession have given rise to disappointment. Businesses and opinion makers have become impatient at the lack of "big bang" reforms that would return India to a strong growth path. But such expectations, anchored in part in the memory of Chinas long period of double-digit growth and in part in India's own brief interlude of similar growth in 2003-2007, fail to take into consideration the powerful domestic and external structural and cyclical growth impediments India faces.

The global background picture of the past quarter century provides context for India's growth expectations and its current uncertain return to a growth path. The world economy experienced stable and high growth for an unprecedented twenty-five years up to 2007, before the global financial crisis intervened. Nowhere were its benefits more evident than in East and Southeast Asia. Apart from domestic enabling conditions, the long period of regional economic growth benefited from a happy confluence of benign external conditions, including favorable geopolitical dynamics (the United States provided geopolitical stability, which also relieved regional economies of defense spending); the high noon of globalization, facilitated by a sharp fall in tariffs; the unbundling of global manufacturing supply chains; the rapid emergence of trade-facilitating technologies, such as containerization and new information and communication technologies; a receptive consumer market in North America and Europe; the availability of abundant cheap global capital; and so on. …

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