Reflections on the Indian Economy 2023

T. C. A. Ranganathan - Former Chairman, EXIM Bank of India

India, post liberalisation, has been one of the fastest growing economies in the world. While the global GDP growth from 1991 to 2021 was 2.9% per annum, India’s GDP growth touched almost 6%. Though slower than China (9.2%), India has grown much faster than the advanced economies as also other BRICS countries, namely, Brazil (2.3%), Russia (1%), and South Africa (2.1%). As a result, it is now the fifth largest economy in the world and will soon, in a few short years, become the third largest economy, overtaking both Japan and Germany. This growth has been fueled by several factors. Some visible ones include a large and growing population, an expanding middle class, a long-established entrepreneurial class and an active manufacturing base. The less visible but equally important ones include the existence of a previously under-appreciated comparative advantage in language, IT and other technical related skills in an otherwise tiny urbanity created by its ever -increasing integration into the global economy. This enabled India to become the “Office of the World” apart from attaining an increasingly visible standing in a variety of technical fields like software development and also silently created an extensive diaspora which is currently remitting back around US $100 billion annual savings, per annum.

Interestingly, this amount is much larger than the more assiduously cultivated Capital Market inflows and similar, if not higher, than the total combined annual lending/investment budget of the Global Multilateral agencies. As a consequence, our ability to sustain sizable trade deficits has increased. Our trade dependency has accordingly been going up, compelled by higher import dependency rather than export capability though we have achieved notable successes in some niche areas. Our Trade to GDP ratio, which is indicative of our vulnerability to global forces, was 15.51% in 1990 but stood at 43.68% by 2021 and looks set to rise further. In contrast, though the EU/UK have higher trade dependency, it is better balanced. The U.S. trade to GDP ratio is around 23% while China reports around 37%.

"India has grown much faster than the advanced economies as also other BRICS countries, namely, Brazil (2.3%), Russia (1%), and South Africa (2.1%)."

We, therefore, need to recognise the importance of the global environment in our country’s economic results. The fall of the Berlin wall in the closing months of the eighties had created the foundations for a unipolar world. Trade blocs and restrictions started disappearing and were replaced by the WTO governed global trading order. Unfolding alongside was the Internet Revolution fueled by the then ongoing rapid technological progress summarized by Moore’s Law which predicted that computation power would double every 18 months. Likewise, was the ongoing revolution in Logistics represented by the arrival of Jumbo -sized long distance air transport and Cape-sized ocean-going vessels which disrupted the age-old correlation between cost and distance and replaced it with volumes. Jointly, these forces unleashed a fresh wave of globalization as firms of Advanced Economies started shifting/ outsourcing to low-cost geographies to improve profitability. As a result, remarkable macroeconomics were experienced in the opening decades of the current century with output growth in the EMEs rising from 3.8% during 1989/98 to 6.4%in 1999/2008, even as Advanced Economies continued to grow steadily at around 2.7%. In 1990, the combined share of EMEs in Global GDP was 20% at market exchange rates and 30.7% in PPP terms. By 2013, these share ratios were 39.3/50.9%. This was accompanied by sharply reduced inflation (from 3.3 to 1.7% in the same period in the AEs, from 9.7 to 3.1% in Asia and from 134 to 7% in the hyper inflationary EMEs of the western hemisphere). Rapid globalisation then seemed to be working and the newly unchained Indian economy had ridden this growth wave, better than most peers, notwithstanding the policy impediments left behind as remnants of a centrally planned economy, on account of our earlier overlooked skill sets mentioned earlier.

However, setbacks started getting experienced with the onset of the Global Financial Crisis (2007/09) which devastated not only global markets but also the earlier seemingly successful nations, such as Spain, Portugal, Greece, Iceland and Ireland. Concurrently, questions regarding the benefits of increasing Globalisation and the uncritical support to ever higher economic growth at the cost of planetary well being started emerging in the Advanced Economies. Unsettled conditions resulting in the Global Commodity Prices crash of 2015 further strained the globalisation fabric. Just as the global order was recovering from these shocks, the Sino-US trade war was triggered by an increasingly manifest challenge to the now long standing unipolarity. The upturns and downturns in India’s growth achievement have followed these global twists and turns though the usually debated domestic issues of the last decade have also played their own role in de-stabilising our growth dynamics.

"India is likely to experience not only new growth avenues by getting an opportunity to offer an alternative destination to global manufacturers but also extensive turbulence in its currently, often neglected, traditional success areas. Economic warfare is likely to become the norm in a low growth environment."

India is likely to experience not only new growth avenues by getting an opportunity to offer an alternative destination to global manufacturers but also extensive turbulence in its currently, often neglected, traditional success areas. Economic warfare is likely to become the norm in a low growth environment. Policies such as Quality Control, Environmental Sustainability and Migration Management may start getting used to create entry barriers in various markets. This could create a less transparent geopolitical environment. We could start witnessing growth divergence between rich and poor countries.

The strategy most desirable to adopt in this environment would be one that recognises these threats and corrects internal inefficiencies/deficiencies while concurrently strengthening our traditional strengths and also creating fresh comparative advantages. This would need an approach which specifically tries to unveil hidden weaknesses/fault lines to compel proactivity in seemingly ‘good to go’ environments and also bench mark Indian reality against global standards of quality and normality while continuing with the existing infrastructure development thrust.

(Exclusive to NatStrat)