How India survived the financial crisis

AS the world economy begins to recover, Indians are looking back with particular satisfaction at how they coped with the recent crisis.
Despite an unprecedented global recession, India remained the second fastest growing economy in the world.
Whereas most countries suffered negative growth in at least one quarter over the last two years, India’s GDP grew by more than 6% throughout this period – and by 7.9% in the last quarter of last year.
India’s achievement is all the more striking given that the Pakistani terrorist attacks on Mumbai – India’s financial nerve centre and commercial capital – in late November 2008 came in the midst of the crisis.
The terrorists dented the worldwide image of India as an emerging economic giant, a success story of the era of globalisation, and a magnet for investors and tourists.
Indeed, in late 2008, foreign investors did withdraw US$12 billion from India’s stock markets. However, India’s resilience in the face of adversity, and its mature restraint in the face of violent provocation, encouraged investors to return.
Foreign direct investment totalled US$27.3 billion in 2008-09, despite the global financial crisis, and reached US$1 billion in just one week in May last year.
India’s ability to stave off the economic gales was helped by the fact that it is much less dependent than most countries on global flows of trade and capital.
India relies on external trade for about 20% of its GDP (the figure for China is roughly double).
The country’s large and robust internal market accounts for the rest. Indians continued producing goods and services for other Indians, and that kept the economy humming.
Though India’s merchandise exports did register declines of about 30%, its exports of services continued to do well throughout the crisis.
Indians abroad stayed loyal to India: remittances from overseas Indians remained robust, reaching US$46.4 billion in 2008-09, the bulk of which came from the mainly blue-collar Indian expatriate community in the Gulf countries.
India’s generally conservative financial system played a vital role, too.
Its banks and financial institutions were not tempted to buy the mortgage-supported securities and credit-default swaps that ruined several Western financial institutions.
Among the drivers of growth, domestic capital formation retained much of its momentum from preceding years.
Moreover, India’s government adopted a pro-active fiscal policy, rolling out two rounds of stimulus packages.
The authorities pursued pro-growth policies, including lower interest rates, expanded credit, and a reduction in excise duties.
There are still challenges ahead. Reform is pursued hesitantly by a coalition government constantly wary of voters’ reactions.
A decision to de-regulate petrol and diesel prices has sparked massive street protests and stoked fears of rampant inflation.
Privatisation of India’s bloated public sector (from massive coal and steel enterprises to the loss-making national carrier Air India) has been slow to get off the ground.
And, of course, the persistent complaints of corruption and bureaucratic red tape have not faded with liberalisation.
The country’s infrastructure remains woeful, as any visitor flying into an Indian airport notices.
Power shortages are frequent.
Some 40% of the population still lives below a poverty line drawn just this side of the funeral pyre.
Yet all these problems are being dealt with by a confident prime minister Manmohan Singh, who has steered the ship of state through some particularly treacherous waters. – Project Syndicate

*Shashi Tharoor, a former Indian minister of state for external affairs and UN under secretary-general, is a member of India’s parliament and the author of several books, most recently Nehru: The invention of India (in German).