India must actively make it up to global investors,not suspect Western policy intent
Exactly a decade ago,Bimal Jalan famously declared in his farewell interview as governor of the Reserve Bank of India (Financial Express,August 18,2003): there is no longer an external constraint to (Indias) growth. A decade later,talk of an external constraint to growth has resurfaced. To an extent,it is the consequence of the trans-Atlantic financial crisis and the global economic slowdown,but it is also a manifestation of internal problems.
Jalans 2003 declaration was doubly significant. First,because it ended half-a-century of worrying about an external payments gap. Fed by export pessimism and the natural resistance to foreign capital of a newly independent post-colonial nation,Indias plans always assumed there would be an external constraint to growth. Second,this enduring fear of policymakers was reinforced by the economic crisis of 1991,the Asian financial crisis of 1997-98 and the post Pokhran-II economic sanctions.
By 2003,India had overcome all these challenges. As global confidence in the Indian economys growth prospects grew,so did Indias foreign exchange reserves. A modest surplus had been registered on the current account and external debt was at record lows. Jalan was pleased to draw attention to this happy fact as he left Mumbais Mint Road.
The return to power of the 1991 economic policy dream team further boosted global confidence in India and Indias confidence in itself. The robustness of Indias external economic profile in the mid-2000s encouraged Prime Minister Manmohan Singh to go a step further and proclaim a new principle of Indian foreign policy. He told the India Today Conclave in February 2005,I submit to you for your consideration the idea that the global environment has never been more conducive for Indias economic development than it is today. The world wants India to do well… our real challenges are at home.
This optimism has given way to a new pessimism in policymaking circles and the political class about the global environment. A variety of factors seem to have contributed to this. First,the UPAs success in dealing with the immediate aftermath of the trans-Atlantic financial crisis and the global economic slowdown in the 2008-10 period may have injected an element of hubris among policymakers about Indias economic resilience.
Those who imagined the Indian economy to be insulated from global uncertainties assumed they could pursue reckless policies at home without being hurt. It took time for the UPA,especially the ministry of finance,to understand the likely impact of the trans-Atlantic financial crisis and economic slowdown on investor sentiment and the need to take pro-active measures to insulate India.
While the commerce ministry was busy celebrating the newly discovered south-south trade flows and hoping these would sustain Indias exports even after the trans-Atlantic economies had slowed down and started turning protectionist,the ministry of finance began mistreating foreign investors,assuming Indias attractions were adequate compensation and that no market was equally attractive.
Consider the nature of the angry debate in India on foreign direct investment in multibrand retail. Everyone assumed that the moment the government opened the doors to FDI,it would flood in. When the doors were finally opened,not even a trickle flowed in. The policy steps taken in 2009-12 and the debate itself had sapped global confidence in India.
To make matters worse,the waywardness of economic policymaking and weak management of key infrastructure sectors in 2009-12 induced a virtual investment famine and,worse,capital flight from India.
Adding to these domestic factors were global trends,including the rising threat of protectionism and regionalism in global trade. The defensive response of crisis-ridden trans-Atlantic economies to globalisation and global economic governance contributed to an exaggerated reading at home of the motives of Western policy. Indias policymakers,who worry today about the harmful impact of Ben Bernankes monetary tightening on the rupee and Indias balance of payments,worried two years ago about his quantitative easing (QE1 and QE2). We worried when the US dollar was becoming cheaper and we worry when it is becoming dearer.
There is no doubt that the external economic environment in 2013 is less hospitable than it was a decade ago. However,the mistake many in New Delhi made was to confuse difficulty with hostility. When other countries began taking actions to protect their own economic prospects in a difficult global environment,it was assumed these were aimed at specifically hurting India. Maybe some of these measures were aimed at slowing China down. India suffered collateral damage but our response was too weak to prevent it,more so to overcome it.
Trans-Atlantic strategic and economic policy may well be hurting India. But one response to it would be to imagine that it is intended to hurt India and become resentful,another response would be to ensure that it does not,in fact,do so. The latter would call for pro-active measures aimed at winning over investors and securing markets. Strategic autonomy is not secured by merely asserting ones independence,it is secured by creating mutually beneficial inter-dependencies.
It would seem that this is precisely what Union Finance Minister P. Chidambaram has been trying to do. In times of crisis,finance ministers double up as foreign ministers,encashing IOUs and enticing investors. How successful they are would depend on how much support they get at home. Chidambarams attempts to bring in investment from a wide range of capital surplus countries can turn the tide for India,provided appropriate policy support is available on the economic,political and foreign policy fronts.
But taking appropriate measures requires greater self-confidence within the policymaking leadership. If the narrative is that the world is out to hurt India and any gesture to the world is an act of surrender,no government would be able to act. But if the narrative is that in a competitive and challenging global environment,India must take steps to win over investors and secure markets,it would be easier to sell policies aimed at creating a global environment conducive to Indias economic development the objective of Indian foreign policy. It is still not too late for the government to change the narrative.
The writer is director for geo-economics and strategy,International Institute for Strategic Studies,and honorary senior fellow,Centre for Policy Research,New Delhi