India: From BRICS to Fragile ‘n’ (and Back!)

India has covered a long distance in what seems like a short time. Once proudly reckoned as one of the BRICS countries, it is now making frequent headlines in the international financial press as one of the financially fragile countries (fragile 5, fragile 8, edgy eight etc.). Like many other emerging markets in the world, India is feeling the pinch of the global liquidity retrenchment and rebalancing on its exchange rate and capital flows.  Several observers have rationalized the investors’ behavior on account of the hard data on the Indian economy: growth has decelerated (from 8.9 % two years ago to 4.5 percent in fiscal year 2013), current account deficit is reigning high, inflation remains stubbornly high, and savings and investment rates have been falling. And all of this is happening amidst an upcoming national election, when elections anywhere invariably are associated with political and economic uncertainty.

What would it take for India to regain its place in a more revered acronym soon, rather than a less flattering fragile ‘n’ ensemble?

The answer, to some extent, was to be found in a timely talk organized by the World Bank  on Feb 6, 2013, to discuss the latest book by Prof. Jagdish Bhagwati and Prof. Arvind Panagriya, both at Columbia University, “Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries." In a packed seminar  room and a packed over flow room, the talk was chaired by Mahmoud Mohieldin, President’s Special Envoy; the book’s main messages were presented by Prof.  Panagariya and discussed by Martin Rama, Chief Economist, South Asia Region, and Varun Gauri, Co-Director, World Development Report, 2015.

Some of the main findings of the book on which there was little contention in the room were that growth has been unequivocally good for the Indian population cutting across caste, religion and geographical lines. Arvind assured the audience that the growth engines of the Indian economy can be revved up if a slew of reforms are carried out in earnest. The list that he provided is not new but is worth producing here—flexible labor markets (which were also emphasized in the Government of India’s annual publication on the Indian Economy, Economic survey 2013), land reforms, infrastructure, urban development, privatization, and higher education. He reiterated that faster growth is likely to produce a win-win outcome for everybody. It would generate employment opportunities across the skill spectrum, as well as generate public revenue for social spending on activities such as education, health and infrastructure. Better education and health outcomes in turn would fuel the engine further (a point also emphasized by Martin).

Well the list is long, but I wanted to add financial sector reforms as well to this list, which Martin did add during his discussion. Incidentally this is also an area on which the energetic governor of the Reserve Bank of India, Raghuram Rajan, is already moving fast, so one might just as well leave it out.

One returned from the seminar feeling anxious: the list of reforms indeed is daunting by its sheer size, though not unfamiliar to the Indian policy makers. They have done it before but will they have the political muster to do it again. I hope they do in order to fulfill the aspirations of better life for its 1.3 billion people; to become the beacon of growth and development to other democratic developing countries; and, last but not the least to move India back to a more venerated acronym.