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  Economy passes a master health check

Business papers today headlined this news: the GDP growth was near 6% for the six months ending Sep,02. While agricultural growth predictably, fell from 3.3% to 2.5% [-for the corresponding period last year], industrial production rose to 5.15% from 2.6% and services to 7.5% from 5.5%. The latter two took up the slack in the farms.

Actually the straws of good news have been flying thick and fast if you had only noticed. Potential foreign investors beat India with the China-stick in the hope of cracking open its economy wider and faster. This may have its uses but it’s no good at all for Indians to slump their shoulders.

A measure of China’s success is said to be the Foreign Direct Investment [FDI] it attracts. Pundits now aver that --with its reputation for under-valuing itself firmly intact-- India’s FDI may in fact be more than twice that it declares: $8 billion and China’s, only $20 billion. That’s a big gap you may say, but not when China’s growth is FDI-driven and India’s is ‘knowledge’-driven. China is going to need ever increasing inflows of capital to offset rising costs and reducing margins. India is going to gain because knowledge-work like software and bio-research fetch greater margins.[ Read a related article.] That is, with India’s competitiveness improving faster than China’s, the gap in FDI is not formidable

The World Economic Forum [WEF] on Nov 12, 02 confirmed India’s edge. In the just published Global Competitiveness Report 2002-03, India jumped 8 places [57 to 48] and China 6 places [39 to 33]. Yes, China is ahead but India is closing the gap faster. Let us pause a moment here to take this in:  writing in BusinessLine [Dec 27,02] Devendra Mishra quotes renowned Marxist historian Eric Hobsbawm as saying: “In some ways, India has an extremely promising future principally because it has an asset that China does not have - a degree of true originality in the fields of technology and intellectual research which for historical reasons is not easy to find in the Far East. In a modern society based on technology, intellectual originality has enormous potential but India’s difficulty is that the state is considerably weak in its structure, administrative ability and political system. But economically and culturally, I think India has a brilliant future, more than other countries in the Far East...”. WEF is quantifying this perception.

India’s ‘weak state’ has in fact, stewarded the shift to an open economy rather well. By a calibrated process, the change has been managed with as little strife as possible. People below $1/day poverty is today 26% [-from 55% in 1973]. Growth rates in Maharashtra and Gujarat were close to 10%, making them ‘tiger’-states. Double digit inflation has fallen and hovers around 3% and the rate of decline in poverty is accelerating [More here].

In many ways the confidence of an economy is indicated by what is called Capital Account Convertibility [CAC]. Imagine it as an economic nirvana devoid of all controls on cross border movement of capital. In 1997 the Reserve Bank appointed a committee to prepare a road-map to attain this. The committee suggested that four targets be first attained: 1- an inflation rate of 3 to 5%, 2- bad debts with the banks not exceeding 5% of their total deposits, 3- foreign currency reserves to cover six month’s imports and an year’s debt obligations and 4- a fiscal deficit at 3.5% of the GDP. In just five years the first and third conditions have been more than met and the second well under control with a firm direction set by a new law . The fourth condition is however another story: the fiscal deficit is near 10%, getting worse and there seems no hope in the horizon. But CAC is not the issue here. India may choose to sail with restraint even when in sight of the promised land.

The point is that foreign exchange reserves is a runaway success. In fact an over-achievement that has spawned a furious debate akin to the one on food reserves: how to manage the hoard and make it work it work for the ‘people’. The ordinary Indian is today permitted to spend $10,000 abroad, annually—a far cry from a decade ago when an Indian tourist with $500 in his pocket, elicited the contempt reserved for the scrounger. In that decade, India’s forex reserves has raced from $1 billion to $70 billion - and growing. The Indian rupee is defying gravity and actually rising strongly against the dollar - at last count Rs.48. Which make exports [-which are rising too!] from India pricey. In a circumstance rather unusual for India, the RBI is in fact trying to ‘weaken’ the rupee. On Dec 21,02 the RBI was more or less saying, “go spend the dollars”. Corporates may acquire companies abroad with practically no limit, banks may invest any amount overseas, expensive debts may be pre-paid...very, novel times indeed.

In the meantime efforts by the government to get out of businesses --ie “disinvestment"-- may seem to be sputtering but --in the great Indian tradition-- it’s a case of giving the opponents enough time to exhaust themselves. Time is measured differently in India.

All this may have come as a surprise to those that don’t track the economy—and those disposed to gloom and doom. In a world given to stagnation --or even recession-- India’s performance is an indication of its inherent strengths. Goes to show that even as you form an image of India based on news of riots, terrorism, drought, mal-administration and nuclear threat, India’s millions hasn’t stoppedworking. And that is what ‘economy’ is all about.

Finally, even as this article is being written comes an insight from Dr.Prasenjit Basu. Known for his even headed, positive outlook on India, Basu—speaking at CII’s Partnership Summit 2003, currently on at Hyderabad-- put things in perspective: the much moaned growth rate of 5.5% is “one of the highest ever recorded by a democracy.”