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Reasons to Be Optimistic About India’s Economy

Authors: Jagdish N. Bhagwati, and Arvind Panagariya, Professor, Indian Economics, Columbia University
June 5, 2012
Financial Times


Sir, In India, cricket fans know that the Indian team tends to collapse after a mere one or two wickets have fallen. The same phenomenon seems to afflict observers of India's economy. After a decline by 2 percentage points in the last three quarters, ending March 31, they are in panic and predict continued decline ("Economists cut India growth forecast", FT.com, May 26), some even suggesting that the "I" from Brics should now stand for Indonesia. But they could not be more wrong.

The growth rate has indeed fallen from 8.4 per cent in (fiscal year) 2010-11 to 6.5 per cent in 2011-12. But the decline is to be explained by two essentially short-term factors. Thirteen consecutive rises in the interest rate have come from India's central bank, the Reserve Bank of India, the latest as recently as October 2011.

Moreover, there is a policy paralysis, which began with the environment minister denying clearance to many projects nationwide. More importantly, this was reinforced by virtually every central ministry freezing up prudentially in response to an outbreak of corruption scandals.

The RBI has now begun to ease up. Moreover, there is good reason to believe that the paralysis will thaw: the recent electoral reverses of the Congress party are already prompting some members publicly to disown their earlier opposition to key reforms, such as in the retail sector.

The anti-corruption demonstrators in India also welcome more, not fewer, reforms since they recognise that the corruption stems from lack of extension of market-oriented reforms to new areas such as telecoms.

Perhaps the main reason to be optimistic on India is that virtually all the reforms introduced under prime ministers Narasimha Rao and Atal Behari Vajpayee, which raised the growth rate to 8-9 per cent, remain in place: policy paralysis has not meant policy reversals. Besides, the savings rate remains above 30 per cent of gross domestic product; and the earlier reforms-led productivity rise should continue to assure gains from these savings.

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