In the economic heyday of the past few years, India was a paragon of prosperity in the new era of globalisation.
India’s long-term potential was even thought by many to be greater than China’s. But global recession has muffled a lot of that talk. Have recent events changed India’s outlook?
India has certainly not dodged the global downturn. Export activity plunged into the red on a year-to-year basis last fall, and by March was down 30 per cent on 2008 levels. Imports have fallen in tandem, keeping the trade balance in check, but export weakness has weighed on manufacturing and production of electricity. Inflation concerns are ebbing, with wholesale prices now flat compared with year-ago levels – a sign of weakened domestic demand. Recent growth in GDP tells the tale. Year-to-year growth slowed sharply from 7.6 per cent to just 5.3 per cent in the fourth quarter of 2008, enough to suggest that India tasted recession in tandem with the rest of the world.
Unlike many other nations, India has limited public policy capacity to further stimulate its way out of recession. Public finances were not in great shape heading into the downturn, and as a result, India’s stimulus package ranks among the smallest in the world at 0.4 per cent of GDP. Moreover, the Reserve Bank of India has been reluctant to loosen the monetary reins.
Although wholesale prices are tame, recent consumer price growth has remained at a stubbornly-high 9.6 per cent. As a result, EDC Economics expects that India’s economy will grow by just 3.5 per cent in 2009, after averaging 8.7 per cent in the 2004-2008 period. That’s a big shock to the system – will India recover?
Analysis of Indian economic fundamentals suggests a resounding ‘yes’. Population growth together with sustained investment effort and high productivity gains indicate that India has the capacity to grow in excess of 6 per cent annually well into the future. In addition, India’s current excess capacity suggests that growth in the 7-8 per cent range is sustainable in a protracted ‘catch-up’ period, a pace that perhaps makes India the key economy to watch among large emerging markets.
This growth won’t happen automatically. India faces regulatory hurdles, skilled labour shortages and inadequate infrastructure. Recession has bought some badly-needed time on all three fronts. Regulation will remain a hot issue, while skilled labour is viewed as a more temporary problem.
But infrastructure likely remains the greatest area of opportunity. What was in essence a pre-recession stimulus package, the Indian government had designated substantial funds – into the hundreds of billions in USD – to the nation’s infrastructure. Telecommunications and international airports have been vastly improved, and attention is now shifting to electric power, ‘green’ issues and internal transportation. India is looking outwardly for capacity and technology on these fronts.
Canada has a growing presence in India. Exports have risen 30 per cent annually in the past 4 years, bringing two-way trade to $4.5 billion in 2008. At the same time, direct investment in India has surged, rising 13 per cent annually to $801 million in 2008. This, plus a proven global infrastructure record, suggests that Canada is well placed to help India achieve its future infrastructure goals.
The bottom line? India’s economy has hit a painful speed bump, but one that buys it time to create further capacity to grow. And Canada is well-positioned to help on the infrastructure front.