In a slumping global economy, India is one of the few places doing nearly everything right

Last week the International Monetary Fund (IMF) released its semi-annual World Economic Outlook forecast, and India was described as one of the “bright spots” in a global economy buffeted by shocks ranging from the Ukraine war to increasing Sino-American trade barriers.

Not only does India have one of the fastest-growing major economies anywhere, but inflation is declining, and healthy fundamentals have positioned it for even stronger growth next year. This is all the more extraordinary given that in a few months’ time the country is projected to become the largest in the world by population.

The contrast with South Asia’s other major economies could not be more stark. Sri Lanka is still painfully clawing its way back after economic collapse; Pakistan’s economy is struggling; and Bangladesh, although still rapidly growing, has experienced significant disruption and a loss of public confidence.

India is exposed to many of the same risks as the rest of South Asia — namely, rising oil and food import bills, and a wider slowdown in the global economy. So what explains its much greater resilience, and what lessons can its neighbours draw?

The short answer is that India has been paying serious attention to energy security, export diversification, bank regulation and tax reform, through good times and bad, for some time now. For example, although the official rhetoric has focused on climate change, India’s first priority has been energy security. Painful memories of the economic shocks caused by the series of wars and revolutions in the Middle East between 1973 and 1991 made a deep impression that has not yet been forgotten.

India began serious work to encourage a transition away from oil and gas towards renewables back in 2008 under Dr Manmohan Singh, and the government of Narendra Modi has continued to double down. As a result, the country now has the fourth-largest installed wind power capacity in the world. It has simultaneously expanded its thermal power plants fed by carbon-intensive, but domestically mined coal. The result is that India was far less vulnerable than its neighbours to rising energy prices, and the cascading issues of diminishing foreign exchange reserves and skyrocketing inflation.

This pursuit of energy independence echoes the emergence of India’s absolute determination to end its dependence on foreign aid, whether it was food grains or capital. These dependencies, and the underlying structural problems, began to manifest by the early 1950s, but It was only by the mid-1960s that ending a dependence on external charity became an overriding political and financial priority. India achieved food security by the mid 1970s thanks to the Green Revolution, but financial independence took longer. New Delhi drew its last IMF loan in 1991, when it found itself caught between the Gulf War and the collapse of the USSR. This commitment to ending over-dependency on aid and volatile global markets has had the side effect of building significant resilience in the face of the unplanned external shocks that have come since.

Although growing feelings of national pride and self-confidence certainly played an important part in making hard choices on the often painful path towards stability, the increased reliance on the market has helped ensure that the government maintained strong fundamentals. The 1991 crisis sharply accelerated India’s shift from a state-dominated, planned economy towards a market-oriented social democracy. By 2000, thanks to these post-crisis economic reforms India was no longer in need of economic aid. However, unlike staple foods and energy, India has not attempted to avoid the global market.

Instead, like any other creditworthy government it has increasingly turned to the market to meet its needs for short term liquidity and long-term investment capital. As a result the country’s large corporate sector, its technocrats and the political leadership from both major national parties can largely agree that they have to keep spending within reasonable limits, expand foreign exchange reserves, contain inflation and ensure that the banking system is solvent. In other words, the conditions to sustain high growth.

However, populist pressures and excessive kickbacks strained this partnership in Dr Singh’s second term (2009-14), and played a part in the decisive tilt of India’s powerful corporate sector towards Mr Modi and his Bharatiya Janata Party. The knowledge that the market’s support cannot be taken for granted has provided a powerful incentive for the BJP to continue not just with good economic governance, but real innovation.

The Modi government’s Aadhar biometric identification and Jan Dhan financial inclusion programmes have given millions of unbanked Indians access to the financial system, enlarging the formal economy and online services. Meanwhile, the streamlining and increasing digitisation of India’s tax system has reduced taxes, while robustly increasing revenue streams for the government.

In contrast, Pakistan’s still-emerging corporate sector was badly crippled in the 1970s by a far more sweeping set of nationalisation and bureaucratisation under the left-leaning populist Zulfiqar Ali Bhutto. The Zia dictatorship only selectively reversed some of these actions, favouring a select few with endless exemptions and sweetheart deals in exchange for their support.

This enduring lack of transparency and consistency in economic governance favours a kind of crony capitalism that leaves the state coffers empty and stifles investment in entrepreneurship. Imran Khan’s promise to overturn this state of affairs has fired up large portions of the Pakistani public; unfortunately, the record shows that his party has built itself around exactly the same class of politicians-cum-businessmen as the other established parties that he condemns. There seems little likelihood under these circumstances that Pakistan will actually break out of the seemingly endless cycles of crisis, bailout and superficial reform.

Bangladesh on the other hand offers much greater hope. Sheikh Hasina’s government appears to have finally embraced long-standing advice to reform and regulate its banking sector, to improve tax collection and embrace renewable energy. And what is more, she appears to have public support to do so.

But Sri Lanka’s example is in many ways perhaps the most illuminating of all; its economic history since independence has alternated between stability and growth on the one hand, and highly self-destructive populism on the other. The economy has now returned to growth, but significant resistance to reform remains, and the possibility of the Rajapaksas, or similar forces cannot be ruled out. All of this despite Sri Lanka having some of South Asia’s best indicators on literacy, infant mortality, lifespan and other social indicators.

In short, the South Asian experience shows that governance matters more than natural resources or human capital. Neither India’s continued growth nor the struggles of its neighbours are foreordained or inevitable. Sustainable growth requires an enduring partnership between politicians and markets made by economic actors who recognise that they benefit from transparency and competition.

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