What direction for India’s economy?

India’s current economic woes are a temporary blip and can be overcome with appropriate policy initiatives as the country’s economic fundamentals remain strong, the former head of the country’s central bank has told NUS Business School.

Dr Duvvuri Subbarao, former Governor of the Reserve Bank of India, added that he did not think India faced a repeat of its 1991 balance of payments crisis, when the country was forced to seek a rescue from the IMF, because its economy is now much more integrated with the rest of the world.

Subbarao, who stood down from his post at the RBI in September, told Think Business he was confident that India would return to strong growth after general elections next year with a new central government having the mandate to carry out the necessary reforms to give a new direction to the economy.

To believe that India will get into a 1991 type of crisis is very, very, far-fetched

Dr Duvvuri Subbarao
Fmr Governor, Reserve Bank of India

In an interview with Think Business, he pointed out that not too long ago India was touted as an economic powerhouse and before the global financial crisis five years ago, it was looked upon as the next miracle economy.

“The single most important cause of the downturn is the decline in investment. Investment was going on at a rapid pace before the crisis and was raising the production capacity in the country,” Dr Subbarao said.

However, since the financial crisis net investment – both foreign and domestic – has declined, resulting in an economic slowdown. Asked who or what is to blame, he singled out two main factors: governance issues and the country’s strained infrastructure.

“India is one of the few economies in the world with supply constraining the economy and the biggest supply constraint is the infrastructure,” Dr Subbarao said.

‘More resilient’

gdp2India’s annual GDP growth 1999-2013 (Source: World Bank)Admitting that India is currently facing balance of payments constraints, he rejected suggestions that this could develop into a crisis similar in scale to 1991.

“Today, India is far more integrated with the world than it was in 1991,” he said. “Our exchange rate is largely market driven, our financial markets are much deeper and more resilient, our reserves are much stronger – therefore to believe that India will get into a 1991 type of crisis is very, very, far-fetched”.

While infrastructure and governance were difficult problems, they are not impossible to fix, which is necessary to revive confidence in investors, both domestic and foreign.

“India has the enormous capacity and the political will to do it,” Dr Subbarao said.

Asked if India’s economic growth had led to greater income inequality, the former central bank chief said that it had not been appreciated in India and abroad that there has been improvement in the income of the country’s low earners.

“The brighter side is that the low income groups are now seeing growth in their incomes as India grows.”

‘India has to learn’

indiagate280India’s rapid growth rates in the early 2000s had led some analysts to label the country as an emerging Asian powerhouse alongside China.

However, while the Chinese economy has managed to maintain growth momentum, India’s has stumbled. Dr Subbarao said it was “disappointing” that India had not yet lived up to expectations, but that India’s long-term growth drivers were still strong.

“China delivers on its commitments and that is what India has to learn,” he said. “The important thing for investment to take off, is to inspire confidence and deliver on commitments.”

Asked about the huge slide in the value of the Indian currency in recent months, he said that since India has been running a current account deficit, some depreciation in the value of the rupee was inevitable.

“How much I don’t know. Maybe the depreciation in the rupee’s value has overshot. But some depreciation was inevitable,” he said.

“The rupee has to depreciate as a self correcting measure. That correction is happening. But such a sharp depreciation in a short time is quite destabilising and disruptive. In my view it is better to allow the rupee rate to adjust over time.”

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