ALMOST everybody in business and politics says the government really must do something to revive the flagging economy. Industrial and export growth are floundering. Bank credit to industry is not taking off despite interest cuts.
Few businessmen want to invest, and lenders are reluctant to lend to even those few. Neither businessmen nor lenders have confidence in the ability of Indian goods to compete with Chinese ones.
Various people have expressed strong views on what the government can do to revive the flagging economy. Some Keynesians want a strong fiscal stimulus, through a major public investment programme.
Others believe that slashing the real interest rate is the answer. Still others talk of the need for structural reforms, in urban property laws, labour laws, and much else.
I see some merit in all these proposals, yet none looks sufficient to revive the economy, for two reasons. First, most prescriptions implicitly ignore or take little account of the global recession, and assume that the problem is basically domestic and can be solved by domestic measures.
No doubt we have many domestic problems, but the overwhelming reason for the slowdown is the global recession, and the government can do very little about that. Second, most prescriptions ignore the deteriorating quality of governance, which cripples economic performance and cannot be improved in a hurry.
Yet I think the gloom and doom is being overdone, that India’s current performance is actually pretty good in a global recession. India is an elephant that can neither accelerate nor slow down as much as nimbler neighbours.
It is certainly not an Asian tiger. Yet it is currently outperforming all the Asian tigers (see accompanying table). That has rarely happened in the last fifty years.
India’s GDP growth in the second quarter is now estimated at an annualised rate of just 4.4 per cent, barely half the 8 to 9 per cent the government desires. Industrial growth in August has decelerated to just 1.8 per cent.
That sounds dismal. Yet if you compare India’s industrial and GDP growth with that of other Asian countries, it becomes evident that India is doing relatively well. Its performance is second only to that of China. The global recession has slowed even China’s growth significantly -— a falling tide lowers all boats.
The data come from The Economist, and are not strictly comparable across countries, yet are good enough to convey the overall picture.
Many former superstars of Asia are suffering near-stagnation or even negative growth rates. Singapore’s industrial output has registered a massive decline of 21.4 per cent in August, and its GDP has fallen 5.6 per cent in the third quarter.
It did not suffer such a severe downturn even in the Asian financial crisis of 1997-99. Taiwan is also reeling, with negative industrial growth of 14 per cent. Malaysia’s industrial growth is minus 7.3 per cent, and South Korea’s is minus 4.7 per cent. India looks pretty good in comparison.
Japan, the dominant economy in the region and second-largest in the world, is in the doldrums too. Its GDP performance in the last quarter was minus 3.2 per cent. In many past recessions like 1990-91 and 1979-82, Japan’s economy rolled on like a juggernaut even the economies of Europe and America sank.
That kept the world economy and the Asian economy buoyant. Alas, Japan has stagnated for a decade, has lost all confidence in itself, and is the worst performer in the OECD. Not since the Great Depression has there been such a slump simultaneously in all the major world economies.
The impact has been greatest on Asian economies, and the four tigers have seen their exports drop by 20 to 30 per cent. They have suffered from the downturn in their two top customers, the United States of America and Japan.
Having based their miraculous growth on labour-intensive goods in the 1960s and 1970s, they graduated to high-tech goods -— notably semiconductors, memory chips and computer components —- in the 1990s. The technology slump has now left them in dire straits. They cannot return to low-wage industries, nor can they immediately diversify into other areas.
Besides, for decades they took advantage of the rapid growth of neighbouring Japan, sharing its prosperity. They are now sharing its stagnation.
The other successful Asian economies -— sometimes called mini-tigers or cubs -— have been hit by not just the recession but a more long-term problem: the rise of China. Indian businessmen are not alone in feeling they cannot compete with China.
That feeling is shared by businessmen in the length and breadth of Asia. After the Asian financial crisis of 1997, all countries in the region devalued relative to the Chinese yuan. Despite that, China continues to beat them comfortably in all labour-intensive lines of production, and increasingly in goods with higher technological levels.
The Asian countries that compete most directly with China are Indonesia, Thailand and Malaysia. All three are now in deep trouble.
In sum, we have both good news and bad news. The good news is that, despite its slowdown, India continues to be one of the fastest-growing economies in the world.
The bad news is that India cannot hope to kick-start its way out of problems rooted in global phenomena like the recession and rise of China as a super-manufacturer.
What can India do in such circumstances? It needs to abandon quick-fix solutions, and focus on various long-term reforms which will improve its competitiveness once the recession is over.
Much needs to be done in overhauling infrastructure (especially power), judicial and administrative processes, labour laws, and much else. These reforms will yield no immediate dividends, yet they are vital for improving long-term health.