“India will withstand this better than industrialized countries, but it will be hit badly enough” in the event of another global recession, said Kaushik Basu, chief economic adviser in the Finance Ministry. “This time we may be on weaker foundations.”
India’s main stock index has fallen more than 15 percent this year, making it one of the worst-performing markets in the world. A further slide in global markets would only accentuate that trend, making it harder for companies to raise the capital they need for investment.
Falling global demand could also depress foreign direct investment and dampen a recent boom in Indian exports.
“It is a backhanded compliment to India’s integration into the world economy that today we have to worry about a global recession in a way that we didn’t 10 or 15 years ago,” Basu said.
But Basu and some private-sector economists argue that all is far from lost, even if the global economic outlook worsens.
Not only do Indian authorities have more room to ease monetary and fiscal policy than their Western counterparts but the fundamental drivers of the Indian economy remain intact: the entrepreneurship of its people, its rapidly expanding middle class, its high savings rate and the new vibrancy of its export sector.
“In the short term, there would be no escaping the pain of any double dip,” said Dharmakirti Joshi, chief economist of local credit ratings agency CRISIL. “But in the long term, growth trends are very different in advanced countries from those in economies like India.”
Some economists said that India’s current problems are largely of its own making and that its longer-term salvation will also be found at home.
A steady tightening of monetary policy in India in the face of rising inflation has depressed growth and investment without achieving its aim of reining in prices, while the absence of significant economic reforms for many years has blocked off many avenues for growth.
“The fault, dear Brutus, is not in our stars but in ourselves,” said Surjit Bhalla, chairman of Oxus Investments, quoting Shakespeare.
Bhalla said his calculations showed that the Indian economy grew by just 6.5 percent on an annualized basis between March and June, a rate that remains respectable — even enviable — from a global perspective, but feels like a recession here.
Only a few months ago, policymakers were talking excitedly of double-digit economic growth just over the horizon, a target that seems hopelessly out of reach now.
The prime minister’s economic advisory council issued a report this week revising its forecast growth rate down from 9 percent to 8.2 percent, and it warned that the government needed to act fast on long-delayed economic reforms to regain momentum.
Ironically, though, a global slowdown could help do what India’s central bank has failed to achieve — taking some of the steam out of inflationary pressures by depressing global oil and other commodity prices and allowing the central bank some room to ease monetary policy.
Hope is also stirring that the government could finally restart the economic reform process, after years of prioritizing investment in social welfare programs in the name of “inclusive” growth.
In 2008, the financial crisis was seen by many people here as an indictment of the Western economic model and a reason India should not rush to liberalize further.
Basu admitted that another global economic crisis in 2011 could reignite that debate, but he noted that India’s leaders are convinced of the need for further reform. He is “quite hopeful” of progress, he added.
Bhalla is, if anything, even more optimistic, arguing that Prime Minister Manmohan Singh realizes he can no longer rest on the laurels of his achievements as finance minister in 1991, when he set the stage for two decades of impressive growth by liberalizing the economy.
“I think the government and Manmohan Singh have got the message, that their legacy is negative now, that what they did in 1991 has been swamped,” said Bhalla, arguing that a series of reforms are likely to be introduced in the second half of this year.
While none of them are likely to be radical, he said, the shift in policy direction will be “distinct.”