Give up the ostrich act

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: reduces the probability of India suffering contagion effects. This was a widespread sentiment in the late 1990s, when India remained largely but not entirely unaffected by the Asian crisis that brought Asian tigers like Thailand, Indonesia, South Korea and Malaysia to grief. It is again being asserted that having withstood pressure to liberalise the financial sector has stood India in good stead, as the country’s financial sector remains overtly unaffected by the subprime crisis. This may well be true. But then, banks and the financial sector in general in other Asian economies (like China, Korea and Japan), which have liberalised financial regulations far more than we have, have also largely stayed unaffected. But unlike these other Asian economies, we have not had the benefits that come from a more open and better regulated financial sector that can mediate larger volumes of capital flows more efficiently, thereby both accelerating investment and ensuring its greater spread across various credit segments. There have always been trade-offs between development thrusts which, on one hand, have high growth with greater variance that lasts over short periods, and those, on the other, which result in low growth and virtually no variance.

The former is exemplified by South Korea and Taiwan, which have sped to OECD per capita income levels, while India is just at $900. China seems to be on the same track. Moreover, these sustained rapid growth rates, achieved by greater integration of the economy with global markets and trends, have also resulted in greater poverty reduction.

Therefore, instead of defending our relative lack of integration with the global economy, we would do far better to take substantive steps to move in that direction. The RBI should put up milestones towards the objectives set out in the roadmap it announced two years ago. At the present rate, the financial sector will remain largely unchanged by the end of March 2009, by which time the roadmap was supposed to have been implemented. This does not mean that indigenous banks will collapse, but it will imply that the RBI exercises its autonomy to press public sector banks to speed up the consolidation process and gain exposure to global market forces that should sharpen their skills and grant them larger opportunities.