Managing healthy economic growth

BY VINAYSHIL GAUTAM

With volatile capital inflows and manpower mobility trend impacting international finance, India's economy must move beyond resilience and show real strength to counter repercussions

The Indian economy is known to have certain degrees of resilience and this has been proven time and again, especially during the South-East Asian economic crisis and the more recent global meltdown. This is understandable because from the micro level to the macro level, India has an entire range of different typologies of economies. In essence, it means two things: For one, that nothing can happen which will affect all segments negatively. And second, whatever happens there will be some segment of the Indian economy which would be capable of responding to it and coping with it in a manner to make up for the deficit in other segments.
The average rate of national growth of nine per cent per annum during the period of 2002-08 was remarkable. But the economic crisis of 2009 interrupted that pattern. Now again, India's projected growth rate for 2010-11 is pegged at upward of eight per cent. A look at the export sector may help to clarify some ideas.
The export sector suffered an unduly long descalation in growth during the recent economic crisis.
It started around August 2008 and continued for almost 14 months.
Again, the export scenario took a positive turn from October 2009.
However, this may have been an arithmetic rise, which showed the graph heading north because the growth in the previous year was low. What is good news is that the positive trend has been maintained for last several months.
Although the overall growth in the export sector for the financial year 2009-10 was negative but there was a palpable positive trend.
Experts believe that the trend is likely to continue during the financial year 2010-11, which means the export target of $200 billion projected by the Government looks achievable.

Indeed, calculations of international growth get affected because different countries follow different financial years. So it is best to stick to the calendar year as the unit of reference.
Interestingly, all the BRIC countries, save India, have registered positive growth for the year ending December 31, 2009. Thus, it shows that the resilience is not unique to India but other economies also have their absorptive capacity. In the case of India, what really declined was the ser vices export. And if this goes down then, inward remittances drop.

There are other dimensions of international finance where manpower mobility trend has become relevant. With demographic changes becoming a reality worldwide, its repercussions can be felt in international finance. For instance, if there is a loss of jobs in West Asia then Indian economy will get affected. There may be some debate on the percentage of impact but there will be impact for sure. Earlier, West Asia had its supply of labour from India, Pakistan and Bangladesh. Now, there is a great draw from African and East European countries.
While Ghana and Sudan are in the lead, Albania and Romania are gradually gaining ground. Should this market dry up for Indians, the impact would be significant despite the fact that jobs are in the lower category.

Volatile capital flows have been a major issue during the crisis and continue to be so though the crisis is ebbing. Global deleveraging was bound to impact emerging market and economies because during the crisis EMEs witnessed a reversal of capital flow. However, now that the trend has reversed many emerging market economies are once again experiencing net inflows in a positive direction. It has resulted in excess liquidity availability.
This liquidity is still in the system and there is a continued prevalence of low interest rate in many countries. Interestingly, a new phenomenon has emerged encouraging people to park their money in countries other than their own, where it works best for them. Indeed, if the Indian economy shows real strength and moves beyond resilience, it may emerge as the centre to which people from other parts of the world would gravitate when faced with economic crisis.

Yes, excess inflows have their own problems but the systematic imbalance over differentiated markets will continue to be a major factor enhancing the impact of turbulence. In order to cope with that Indian economy will require true health. The future can be only as strong as the inner vitality of the body politic.
If that can be ensured, it is growth indeed and managing it will need a script and diligence that we have yet to arrive at.

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