India in 2011: What’s Next?

The external sector may also be a challenge. Capital inflows have contributed to rupee appreciation,making it harder for

India to export. India has not followed the ‘East Asian model’ (exploited to the extreme by China) of keeping the exchange rate low to stimulate exports of manufactured goods and to soak up labour from low productivity agriculture and other rural pursuits. Theoretically,this is not the only possible approach to development,and not even the best one in theory,but it has worked. India has to create the conditions to use foreign capital effectively,as well as make domestic consumption an engine of growth (as was at least partly the case for Japan). This is where structural reforms that improve manufacturing productivity and industrial dynamism are sorely needed.

Governance in India has always been a half-full-half-empty glass. India does poorly by many international measures,but better than a host of developing nations that have been robbed and cheated by their rulers. The coming year,following months of revelations of corruption across the board,even infecting the media,may be pivotal for Indian governance. While the national government has struggled with this problem,some state-level leaders have shown that good governance wins votes (and ultimately growth will ensure the politicians get their share of the cake as well). India’s politics went from initial paternalism to rampant populism. Perhaps now the country’s politics will become socially productive,responding to an electorate that has now experienced all the possibilities.

The theme of learning by doing,relevant for politics,is important for all aspects of India’s economy in 2011. There was a time when nothing was tried,so there could be no learning,or only one path was followed,so no comparisons could be made. Now states benchmark against each other,or have it done for them by eager analysts. Indian businesses have been learning rapidly,given the chance to try out new products,processes and markets. This year could be one for India to take innovation seriously,whether in delivery of public services such as health or education,or in developing new sources of energy,or in growing more and better food for the masses of malnourished citizens. Twenty years of experience with reforms should help policymakers understand what works.

Economic growth makes everything more possible,but life is much more than material things. The last few years have seen India’s culture,ancient and modern,spread around the world. Food and fashion,movies and music,ideas and images,all seem to burst out of India in riotous profusion. In 2011,one can expect even more of the same. In the past,India was a place of promise,exotic but doomed to be poor. It has managed to shake off the mantle of failure,pursuing material success without losing its creative energy. This eclectic creativity will serve it well in the coming years.

The new year will also see India take its creativity and contradictions more firmly on to the world stage. India will be on the UN Security Council,and will continue as an active member of the G20. It has the opportunity to shape debates on global risk management,climate change,financial stability and paths to sustainable development—from its unique position as a large,emerging economy that is also a pluralistic society and vibrant democracy. It will be a busy year for India’s policymakers and its people.

The author is professor of economics,University of California,Santa Cruz