Strategic Asia 2009-10: Economic Meltdown and Geopolitical Stability

India: Rising Through the Slowdown

executive summary Thischapterexaminesboththeimpactoftheglobalfinancialcrisisandeconomic slowdown on India’s economy and the consequent geopolitical implications. main argument: Since the early 1990s India has sought to reenter the global economy through a strategy of gradual and graduated economic liberalization combined with risk-averse prudential regulation in the banking and financial sector. These reforms helped limit India’s exposure to the recent financial crises and the subsequent global economic slowdown. With a 7% growth rate likely for 2009, India’s major economic vulnerabilities remain internal—weak public finances and inadequate investment in social and economic infrastructure, which are problems that will need to be addressed if India is to continue its rise as a free-market democracy. policy implications: • India’s improved economic performance in recent years had encouraged thecountrytobecomemoregloballyandregionallyintegrated.Thisprocess is unlikely to be reversed by the current global economic slowdown, given the economic and strategic benefits India has derived so far. • By pursuing policies in Asia that are supportive of India’s economic rise, the U.S. will strengthen the foundations of open societies and plural and secular democracies in the developing world. India India: Rising Through the Slowdown Sanjaya Baru Though Wall Street investors call India an emerging market, India’s economists view the country as a re-emerging and a globally reintegrating economy.1 This reintegration began in the wake of a balance of payments crisis in 1990–91 and was influenced by the dynamics of the collapse of the Soviet Union and the end of the Cold War.2 These geopolitical developments left their imprint on India’s economic choices in the 1990s, and India’s consequent economic rise has since shaped the geopolitics of Asia. Commending his new economic policies to the Indian Parliament in July 1991, India’s finance minister of the day, Manmohan Singh, drew attention to the likely strategic consequences of India’s economic rise when he claimed: This budget constitutes a vital component of a comprehensive vision, a well thought out strategy and an effective action programme designed to get India moving once again…Victor Hugo had once said “no power on Earth can stop an idea whose time has come.” I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea.3 India’s more recent growth acceleration since the early 1990s has followed a shift in the macroeconomic policy framework, with greater 1 T.N. Srinivasan and Suresh D. Tendulkar, Reintegrating India with the World Economy (New Delhi: Oxford University Press, 2003). 2 ForastrategicperspectiveonIndia’seconomicreforms,seeSanjayaBaru,TheStrategicConsequences of India’s Economic Performance (New Delhi: Academic Foundation, 2006). 3 Manmohan Singh, “Budget 1991–92 Speech” (speech delivered at Lok Sabha [House of the People], New Delhi, July 24, 1991), http://indiabudget.nic.in/bspeech/bs199192.pdf. Sanjaya Baru is a Consulting Senior Fellow at the International Institute for Strategic Studies in London. He can be reached at . The author would like to thank K. Subrahmanyam, Y. Venugopal Reddy, and two anonymous referees for comments on an earlier draft. 200 • Strategic Asia 2009–10 external and internal economic liberalization. This chapter argues that the fiscal, investment, trade, industrial, financial, and banking sector reforms thatIndiahasundertakensince1991aspartofthisre-emergencehavehelped the country weather the impact of both the Asian financial crisis in the late 1990s and the economic sanctions imposed on India after its nuclear tests of 1998. Yet though the U.S. subprime loan crisis and the “trans-Atlantic” financial crisis of 2008 did not have any impact on the Indian financial and banking sector, the consequent global economic recession has had the effect of slowing down India’s growth rate. Given that India’s re-emergence and grand strategy as a rising power have been predicated on economic reintegration into the global economy and the revitalization of the Indian economy, the current “great recession” is bound to have significant strategic and geopolitical implications for India. These will be influenced by the manner in which the United States and China are affected by, and respond to, the crisis. With a new government in office bearing a decisive mandate, New Delhi is expected to settle down to the business of regaining India’s growth momentum. India and the United States have the opportunity to be partners in shaping the post-crisis world. How the Obama administration views and accommodates India’s rise will in turn shape India’s grand strategy and approach to...