With a focus on accelerating growth

The view from the centres of global capitalism is unsettling and so is the outlook. Structural imbalances and long-term difficulties ? principally the current account and budget deficit in the US, one running above, and the other just below, 5% of GDP and the apparent exhaustion in the euro-zone as it struggles to absorb the former Eastern Europe, while at the same time keep its social contract largely unaltered. Unresolved political tensions in West Asia seem to have much life (or rather death) left in them, and the threat of terrorism is as yet alive and kicking. Multilateral forums stretching from the UN to others look careworn. Many of the verities, that were unquestioned as the last century wound down, now look distinctly questionable. The economic and political landscape has changed quite dramatically as the 21st century continues to come into its own.

The centre of gravity of the world economic order is inexorably shifting, somewhat to the east and somewhat in ways that are very unclear. It is hardly surprising that financial markets have been so choppy, as asset managers have switched currencies and asset classes in an effort to stay ahead of the pack. If one thing is certain about the year ahead and perhaps the next several years too, it is that financial markets will be subject to greater, perhaps much greater, volatility than they have been in the recent past. In comparison, exports and imports ? both of merchandise and services ? are likely to be more stable, guided as they will be purely by changes in competitiveness and global demand.

Economic growth is most certainly going to be fairly steady in most countries and trade volumes will be responding to the higher incomes that result. Marketshare will ? barring intervention in a few odd cases ? be solely determined by the ability to beat the competition. The end of the quota system in textiles will mean that the $15 billion textile and apparel export business that accounts for one-quarter of India?s total merchandise exports will have the opportunity to grow dramatically if it is to be competitive, which on the whole it seems to be in most segments. Compe-titiveness will drive other big chunks of our export portfolio: gems and jewellery (20%), chemicals (18%), metals (11%) and engineering products (10%). India?s current world marketshares are small, so significant expansion is possible. Service sector exports too seem advantageously positioned.

Higher world export shares will enable manufacturing to grow faster and by financing higher levels of imports ? of energy, intermediates and capital goods ? will keep the external payments front robust. But that is not the big prize: it is the domestic market that is. As the country?s per capita income rises, so will the demand for manufactured consumer goods ? and that growth in the not-too-distant future will be explosive. It has already begun to happen in China ? a four-fold increase in car sales since 2000, making China the fourth-largest national car market in the world. So, too it will happen in India and when it does, domestic business will have to be capable of servicing and profiting from this enhanced market. Becoming internationally competitive will not only give them the edge in tomorrow?s much larger (and open) home market, but it will also in the process of getting there, make for a more rapid expansion in the scale and composition of the domestic market: by making for more jobs, more investment, and providing additional fillip to growth. So, any heritage policy that holds back India?s manufacturing businesses from becoming world class producers are doing a disservice several times over. What is required on the policy front in order to unleash entrepreneurial abilities of the country?s manufacturing businesses is fairly well-known: from getting in physical infrastructure, to harmonised taxes, to smoother procedures when they interface with agencies of government, to employment-friendly regulations and able financial markets that allocate capital for expansion.

However, on the financial side, there is less clarity. Some things as basic pre-requisites are clear: a banking system that has strong risk management systems and balance sheets capable of absorbing fluctuations on most parameters. Capital markets that readily clear and are able to absorb shocks in an orderly fashion. Relative price stability and trend inflation that is more-or-less in line with what other members of the global community live with. Finally, government finances that are far less dependent on debt than at present, such that expanding financing needs of a growing economy can be met mostly from domestic savings. In practice, the most difficult thing to manage ? at least in this country ? will be public finance. That is because the public finance outcome is so closely inter-twined with the political and social life of this country and because for so long we have collectively perpetuated the idea that government has latitude for action that is disproportionately larger than its revenue resources. While both prudence and better quality of expenditure in public finances will surely be pursued and with some success, the possibility of slippage on this front being high, demands that the nature of expectation with regard to the rest must be absolutely stringent.

The test of robustness, therefore, in regard of our financial system cannot be one that is benchmarked to the standards of the closing years of the last century, but to far more exacting requirements. The seas of global finance are going to be far rougher than they have been and for the country to successfully weather it and deliver a better future to our citizens, systems and institutions at home need to be reinforced. Not by trying to find refuge in yesterday?s isolation, but by coupling wider integration with greater efficiency and sounder financial practices.

The author is economic advisor to ICRA