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The President of Brazil, Luiz Inácio Lula da Silva (2nd from left at back row), the President of Russia, Dmitry A. Medvedev, the Prime Minister of India, Manmohan Singh and the President of China, Hu Jintao at the signing ceremony of the 2nd BRIC Summit, in Brasilia, Brazil on April 15, 2010.
India sailed through the Great Crisis of 2008-09 without barely skipping a beat. But celebration may be premature.
As the aftershocks in Southern Europe suggest, the post-crisis world is likely to remain a very treacherous place for some time to come. Although India has one of Asia's most balanced-- and therefore, resilient-- macro structures, it can ill afford to ignore ever-present stresses and strains in the external environment. For India, the crisis and its aftermath should be viewed as a wake-up call--a time to sharpen its focus on the challenges and opportunities shaping its development journey.
Veteran economist Stephen Roach, the chairman of Morgan Stanley Asia, who is retaining a part-time role in Asia after joining the faculty of Yale University on July 1st, said in a newspaper article to coincide with a conference in India earlier this month, that while the Indian economy has better balance than others in Developing Asia - - namely, a greater portion going to private consumption and services and less to exports and investment - - India is hardly immune to shocks elsewhere in the world. He acknowledged that the export share of the Indian economy was only 24% in 2008 - - far short of the 45% norm for Developing Asia as a whole. However, India’s 2008 export share was more than double the 0.8% level in 1998. At the margin, the delta (i.e., change) in India’s export share - - rather than its level - - is what drives economic growth.
Roach said there is little wonder that on the heels of a crisis-induced collapse in global trade, growth in Indian industrial production plunged from about 13% in early 2007 to around “zero” in early 2009.
The economist said the good news is that even with sharp recessions in Greece, Portugal, and Spain - - likely outcomes in response to EU - - and IMF-imposed fiscal consolidation in all three countries - - shortfalls in pan-European economic growth are likely to fall well short of the severe crisis-induced contraction that occurred in late 2008-09. The bad news is that even with recent significant shifts in the mix of India’s external demand, Europe remains its largest export market. On balance, the ongoing repercussions of Europe’s sovereign debt crisis could well be an important headwind buffeting the Indian economy for the next several years.
He said lingering post-crisis aftershocks make it all the more critical for India to redouble its efforts on other aspects of its development strategy. Key in that regard will be to sustain the recent improvement in domestic saving. India’s gross domestic saving rose to 36.4% of GDP in FY2008 - - up sharply from the subpar readings in the low 20s that had prevailed since the early 1990s and a major support to India’s recent increases in investment spending on both infrastructure and manufacturing capacity. However, on the heels of a sharp crisis-related increase in the government budget deficit, the domestic saving rate fell back to 32.5% in FY2009 - - a downturn that must be reversed if India is stay the course of investment-led growth.
Dr. Roach warns that like most major economies, India is having a hard time restoring its policy settings to pre-crisis norms. Despite the impressive post-crisis rebound of the Indian economy - - underscored by a sharp 8.6% y-o-y increase in real GDP growth just reported for the quarter ending March 2010 - - the Reserve Bank of India has unwound only 50 basis points of the 425 bp (4.25%) easing that was implemented during the crisis.
