Daily Times

Talk to anyone in South Asia and the only explanation one hears for economic woes is ‘corruption’. More recently, in the event of the Indian elections, many of my friends in India blame their economic woes on corruption in the system and on the ruling party. Although corruption has its own drag on the economy, the troubles of the Indian economy have very little to do with corruption. The world in which we live is more interconnected than we think and India’s economic troubles are a direct result of the 2008 financial crisis, and of how global capital works.
First, let us understand the reasons behind Indian urban dismay. The Indian economy did remarkably well in the 1990s and most part of the 2000s. The country had a growth rate of around eight percent and the economy entered the 10 largest economies in the world. Not only that, the prosperity let India develop a middle class of over 300 million. The rapid rise of the Indian economy made many compare India with China. Some even started debating who, among China and India, would take the top spot of economic superpower.
Things have changed in recent years. The Indian economy has hit a roadblock. Growth rates are back to around five percent. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) have curtailed, and multinationals are revising their India plans. Unemployment is on the rise and the job market is not as lucrative for highly skilled, educated youth as it used to be. To add to these miseries, the perception gap between India and China is widening in the latter’s favour. Indians and economists are out looking for an explanation, and consensus is emerging around corruption and bad governance. That is what the biggest problem for India is: stereotyping and over-simplification.
The comparison of India with China was misplaced to begin with. The problems with the Indian economy were always there and were only hidden by the massive flow of capital that had flooded the global economy in the 1990s and 2000s. So what happened with the Indian economy? After sticking to a protectionist economic regime, in 1991, India embarked on liberalisation of its economy. Luckily for India, liberalisation coincided with Greenspan’s (effectively) zero interest rate policy in which the federal reserve of the US kept interest rates very low to encourage consumer-driven economic growth. To remain competitive, other major central banks in the developed world also embarked on low interest rate policies, thus enabling ample supply of capital (credit) not only in the US market but also in all developed economies.
The ample supply of credit in the US first led to increased investment activity in the developed world. The bulk of it comprised increased consumer spending, which led to asset price bubbles that the world witnessed in 2008. Then credit started moving to the markets outside the developed world to what is commonly known as the emerging markets. First it moved to markets that are second world. So a lot of money flocked into the economies of South East Asia, China, etc. And it kept spreading. The zero interest rate regime of Greenspan was like a goldmine with unlimited gold supply. So the credit kept flowing and investors kept borrowing cheaper in the developed world and kept looking for opportunities both at home and abroad to invest.
Since credit was not drying up, investors looked beyond the second world markets and moved to the third world; for an investor India remains the first choice in the third world for its demographics and market size. So India started drawing huge amounts of investment. The economy rolled, middle class jobs soared and India was ‘shining’. And then came the 2008 financial crisis that led to a credit squeeze across the globe. With shortage of capital, investors naturally move to mature opportunities. Thus the inflows for China have not declined as much as they have for India, for other third world economies, and even for reckless consumer credit in the west. It is this credit squeeze that is making the urban educated irritated and worried — much the same way as some envy the Musharraf era’s progress, constructed on the credit bubble that too did go away post-2008.
India has potential but it, on fundamentals, is not China. The quality of human resource, the efficiency in factor production, snowball infrastructure improvement, a more innovation-driven industrial sector, a strong global export footprint, etc, are all traits that India lacks compared to China and will come to her only with time. All these factors are linked to the social evolution of a society and governance usually contributes very little to them.
So, when the music has stopped, Indians can either get stuck in the blame game or realise the deficiencies they have in production efficiency. A good starting point, moving forward, will be realising that the India-China comparison, at this stage, was misplaced to begin with. By 1990, China was ready to take advantage of the biggest credit-led consumer spending spree; most others were lagging far behind.

The writer is a freelance columnist and may be contacted at aalimalik@gmail.com