Why is India not expected to hurt as badly as many others by the global downturn? Many feel it is because India is less globally integrated than most other emerging market economies. India?s trade is around 45% of its GDP. This is a much lower share than China?s trade which is around 71% of its GDP. But at its current trade-GDP ratio, India is not really a closed economy. Adding invisibles, the ratio increases to almost 50%. Inadequate global links cannot justify India?s relatively better prospects.
Is it because India has large unutilised resources that can be harnessed for increasing output and aggregate demand? Actual outputs of large economies are usually less than potential outputs due to unutilised resources. This is true of China, India, the rest of the BRIC (as well as other large emerging markets). But unutilised resources cannot automatically spur domestic activity and stimulate recovery. The latter depends on abilities of host economies to engineer turnarounds. These, in turn, require institutions and systems to play vital roles. Despite moving to market-based economic systems, India still lags behind in critical institutional reforms.
Why is it then that all available forecasts agree on India growing by at least 5%? Given the circumstances, a 5% growth is impressive. Two key factors are expected to drive economic momentum in India in addition to the stimulus already injected. The first of these is the general elections. The second is India?s trade with China.
Elections are the biggest stimulus that the economy could have asked for. Several numbers are doing rounds regarding costs of elections. Going by the expenses for the last elections and adding a price deflator, the forthcoming elections, by conservative estimates, should cost around $2 billion. These include both official and unofficial expenses. Official expenses are borne by the Election Commission for conducting elections. These cover costs of logistics and security. Unofficial, or more correctly unrecorded costs, pertain to expenses incurred by candidates on campaigns. Aggregating over 542 constituencies, total campaign costs will be sizeable.
Election expenses are broad-based and income-inducing. Unlike specific sectoral and programme-based outlays, electoral expenses have larger scope. These are spread across the length and breadth of the country and impact both rural and urban areas. A considerable part of the expenses are on transport and communications. Big chunks of the unemployed youth also get engaged, albeit briefly, as parties and candidates mobilise manpower for campaigns. Services, particularly in the informal sector, get strong impetus. At the same time, disposable incomes for some segments also go up courtesy new earning opportunities.
If elections are the ?home-grown? short-term stimulus, then trade with China is a longer shot in the arm. China has displaced the US as India?s largest merchandise trade partner. Bilateral trade with China accounts for almost a tenth of India?s total goods trade. China is India?s second largest source of imports. For Chinese manufacturers, India is likely to emerge as a major export market in the near term. Two-fifths of Chinese exports move to European and North American markets, while another one-third are consumed by mature Asian economies (Japan, Korea and Hong Kong). With all these economies facing severe contractions, it is imperative for China to focus on other markets. India fits the bill well in this regard.
On the other hand, Indian exporters will also focus on the Chinese market as a possible alternative to Western markets. The current trade pattern between the two countries points to presence of considerable complementarities. These can be effectively exploited for obtaining mutual benefits.
India?s trade and economic prospects appear relatively stable not because it is less globalised. It is because the Indian economy has avoided excessive dependence on European and American markets.
?The author is a visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views