Give up the ostrich act

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: Back from the somewhat sombre and not the usual ebullient atmosphere at Davos, the finance minister will find that the general mood back home, though not as disturbed, is not as cheery as some of our delegates made it out to be to in their soundbytes at the Swiss ski resort. Most of them made out that the Indian economy will remain largely unaffected by the ongoing turmoil in global financial markets and a likely US recession. This was unnecessary. They could not have been serious, given the crazy rollercoaster ride that the Sensex had last week, largely in response to external factors. Moreover, India’s external sector transactions (total merchandise trade and invisibles) already account for more than 50% of GDP. There is sufficient empirical evidence to establish beyond reasonable doubt that India’s economic performance is (directly) related to global economic changes and (inversely) to differentials in the real cost of capital in global and domestic markets.

Then why assert that India will remain unaffected by its external environment? If this party line—as it seemed—was adopted to sustain the “India story” and attract more foreign capital, it was no less unnecessary. Especially since we don’t seem to be able to absorb even the current level of capital inflows, as reflected in the burgeoning reserves and continued upward pressure on the rupee.

I would instead have used the soundbytes to project the need for and India’s commitment to structural reforms that will increase the economy’s absorptive capacity, improve the investment climate for FDI by reducing uncertainties faced by foreign investors in dealing with procedures and labour market conditions, and improve the delivery of public goods and services—without which inclusive growth will remain all but electoral rhetoric. The need of the hour is not to magnify the India hype, but to focus attention on measures to raise the economy’s potential growth rate. In this context, I wonder if it will be a good idea for India to skip the next Davos meet and instead spend the three days on a national convention on deepening reforms and improving the delivery of public goods and services.