Optimism is in short supply – why India’s economy might win the sprint, but lose the marathon


JThere was a time when well-meaning observers of a struggling Indian economy said they were short-term pessimists about the country, but long-term optimists. Now there may be an unexpected reversal of this view. Many people have become short-term optimists but long-term pessimists. One could argue that if we take care of a series of short terms, the long term will take care of itself. But consider the argument.

The Indian economy is clearly an overperformer at the moment. It is the fastest growing major economy (as it was briefly once before) at a difficult time when the Japanese and British economies are shrinking, as was the US economy until last quarter, and the eurozone is flat as a chapati.

India also has lower inflation than major western economies. And on the trade front, India happens to have a lower current account deficit than either the US or the UK. For good measure, the rupee weakened less against the dollar than other major currencies. So the story goes beyond growth; in terms of economic stability too, India is doing better than the other major economies, which must be a first.

China, accustomed to putting India in the shadows, has lost momentum. Its growth is expected to be half that of India and it is plagued by structural problems, particularly in the financial sector. India knows from experience how long it takes to repair a damaged balance sheet.

Japan, on the other hand, is another kind of outlier, with low inflation and a long-term current account surplus; but it lacks dynamism.

It goes without saying that India is at a different level of development from all these countries, with a much lower per capita income. But looking to the near-term future, economic growth could be double the global average, even as the Reserve Bank focuses on reducing inflation, and capital inflows more foreign exchange reserves are more than sufficient to meet the current account. deficit.

These contrast with the specter of recession, which looms over major Western economies, as the UK’s record of a decade of missteps has left it with falling living standards and painful options, so that Chinese growth rates could fall below the world average, and America is hampered by its politics.

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DOmically, a busy government is constantly at work with new initiatives, a determined use of incentives to create a manufacturing hub, and unprecedented investments in transport and telecommunications infrastructure. Complement this focused effort with its performance on the international stage: the deft package of responses to the Ukrainian crisis, its steadily upping game to fight climate change, and an influential role at this week’s G-20 summit.

So you get the impression of a country that knows what it’s doing, unlike some wealthier countries.

So why is it that, for many observers, optimism about the present does not extend much beyond the visible horizon? It comes down to familiar issues, the most important being a hard-to-solve structural unemployment problem that carries with it the roots of social unrest. Added to this is the poor state of education and health care, as well as nutritional deficits that manifest themselves in severe stunting and wasting among children – the workforce of tomorrow.

It is unnecessary to elucidate that with such drag factors a country cannot expect to maintain or improve its rate of ascent. There is also a third set of problems, related to the limited range of systemic safeguards that exist to block pilot error.

The long-term pessimism of observers concerned about these issues is dismissed by those who align themselves with the government’s political and social goals. The latter remain extremely convinced that this is India’s decade because the factors influencing the current recovery are not ephemeral, and therefore that the status of “upper middle income” (per capita income of more than $4,000, up from $2,400 currently) is within reach.

But it’s also true that the system controls need to be tweaked differently to achieve better balance and acceleration than before. Without this, systemic drag will increase and turbulence beyond visual range is to be expected.

By special arrangement with Business Standard

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