Resilient India defies downward trend
By Matt Wade | smh.com.au | 22 September
As factories across the world slashed production and laid-off workers during the dark months that followed the demise of Lehman Brothers a year ago, one major economy bucked the trend.
India's industrial production grew modestly despite the global financial gloom between October 2008 and February 2009. Meanwhile activity in most other countries plunged. Japan's industrial production dropped by a sickening 30 per cent in the same period and Germany's by about 17 per cent.
India's economic resilience has been a bright spot on the mostly bleak global economic landscape. The Reserve Bank of Australia recently revised up its forecast for global growth largely because of the economic performance of India and China.
While India's economy has pulled back from the runaway 9.3 per cent growth of 2007, it is still expected to expand by about 6 per cent this year. A poor monsoon season could subdue growth a little, but many local economists are predicting the Indian economy will surge back to about 8 per cent growth next year.
There has been a lot of attention on how Chinese demand has helped keep the Australian economy afloat. But India has helped too. Solid demand from both China and India, for example, drove a June quarter rise in coal exports, Australia's biggest export earner.
India's growing importance as a destination for Australian resources was underscored last month when Indian firm Petronet LNG signed a $20.5-billion gas deal with Australia's ExxonMobil, the first long-term gas contract between the two nations.
Under the agreement, 1.5 million tonnes of liquefied natural gas will be shipped to India annually from the Gorgon project in Western Australia for 20 years. India has been Australia's fastest growing major trading partner over the past five years and is now Australia's fourth largest export market.
Australian trade officials hope a long-running feasibility study for an Australia-India free trade agreement will be finished this year and lay the foundations for further trade growth. Austrade's chief economist, Tim Harcourt, says more than 2100 Australian businesses trade with India and exporters are looking to New Delhi, Mumbai, Chennai, Bangalore and the like for growth opportunities.
"China and India now account for nearly a quarter of Australia's exports and there's a growing proportion of two-way investment," he says. "In short, the big picture shows that Australia will be hugging the panda and riding the elephant for some time yet."
Optimism about India's economic outlook has been reflected in a sharemarket turnaround. India's Sensex was hit hard late last year when global markets went into a funk. But as it became apparent that India had survived the crisis relatively unscathed, money came flooding back.
Politics provided an additional fillip when the incumbent national government, led by the centre-left Congress party, won a convincing victory in May. Investors greeted the result with enthusiasm.
The Indian sharemarket has risen by about 60 per cent since the start of the year. "The global downturn did not affect India to the same extent as many other countries – for us it has just caused a slowdown," says R. Venkatesan, a senior fellow at the Indian Council of Applied Economic Research.
"This is because India overall is not as integrated into the world economy as most other economies in Asia." This relative isolation is reflected in India's exports, which accounted for only 15 per cent of gross domestic product in 2008, compared with more than 30 per cent in China.
The nature of the banking sector added another layer of insulation. Most of India's banks are still publicly owned and adopt very conservative investment strategies.
India's financial sector had little exposure to the toxic assets that caused so much trouble on international financial markets. As a result India did not face the systemic shock to its financial system experienced in other parts of the world.
Another unexpected positive has come from the remittances sent home by the large Indian diaspora. An expected slump in this lucrative source of foreign exchange did not materialise.
Economist Swaminathan S. Anklesaria Aiyar wrote in the Times of India that remittances from overseas Indians hit a record a record $46.4 billion in 2008-09, up from $43.5 billion the previous year. Swaminathan estimates the 2008-09 flow was worth 4 per cent of GDP.
Some jobs have been lost, especially in businesses exposed to global markets. India's airline industry has been hit particularly hard – according to some estimates it lost about $US2 billion ($2.31 billion) last financial year.
India's merchandise exports have also fallen sharply but its increasingly important services exports – like computer services and business processing – have held up better than many expected.
Authorities were prompt in providing stimulus in the form of government spending and lower interest rates to offset the negative impact on industry sectors exposed to the global slump.
Now India's economic guardians face the challenge of unwinding this stimulus to prevent an inflationary spiral as the economic growth gathers pace. Since 1991 India has embarked on a fitful program of economic reform often criticised for being too slow.
However, there is a strong view in India that the gradual pace of change was justified by India's resilience in the face of global financial crisis.
"We have always followed a process of gradual reform and given the country's profile you can hardly do anything else," says Indranil Sen Gupta, chief economist of DSP Merrill Lynch in India. "That approach seems to have been vindicated."
First published by Smh.com.au on September 22 2009
Visit smh.com.au for the latest news updated throughout the day
