India's 'elephant dance' got disrupted by the global financial crisis and needs to be rejigged if the country is to regain growth momentum, said the central bank governor D Subbarao in his P N Haksar Memorial speech in Chandigarh late last month. In a thinly-veiled attempt to quell fears that our pre-crisis growth was only a flash in the pan, he pointed out it would not be quite correct to compare the Indian elephant with the Asian tiger economies or the Chinese dragon. Why? 'Because the elephant is a strong animal with enormous potential, though given to a lumbering pace.' The argument, presumably, is that when you're competing in the marathon rather than a sprint event, a temporary loss of momentum should not be a cause for worry. Reassuring words, and when they come from the governor of the central bank who is not known to be given to hyperbole, there is reason to be reassured. Except that when you read on to find out just what the governor lays out as his blueprint for a return to the Sardar rate of growth of 9%-plus, rather than the lacklustre Hindu rate of growth of 3-4%, it is hard to shake off a nagging - and growing - sense of doubt. Subbarao's blueprint is not very different from the suggestions that have been featured as part of this paper's recently-concluded Agenda for Renewal series. But it includes two new action points that have largely been ignored in most other discussions to date: managing globalisation and managing macroeconomic stability. The RBI Governor lists them as two distinct items coming in at No. 8 and 9 in his list of 10. The reality, however, is that they are closely linked, raising the bar on any attempt to rejig the elephant's dance. Take the first: managing globalisation. The reason the 2008 crisis has hit us much harder than the Asian crisis of the late 1990s - even though that was much closer home - is because India's integration with the world has deepened significantly since the 1990s. External trade, i.e., the value of our exports and imports, now accounts for 41% of GDP compared to 20% in 1998-99. This in itself is not an undesirable development. Greater openness is closely linked to higher growth. But a notable feature of our greater integration, compared to China's, is that financial integration has been much faster than real integration. Twoway capital flows now account for 112% compared to 44% on the eve of the Asian crisis. Unfortunately, capital flows, especially portfolio flows that account for a major share of such flows in our case, are far more fickle than trade flows. This has grave implications for our exchange rate, as evident from the recent movement of the rupee. It was not so long ago that everyone believed the rupee would move only one way. In early 2008, when the rupee appreciated to Rs 40 to a dollar, a very wellrespected voice in the forex market predicted an exchange rate of Rs 38 to a dollar within the next five years! Today, with the rupee hovering dangerously close to Rs 52 to a dollar and no sign of an end to the crisis in the eurozone or a sharp pickup in US economic activity, it will take a brave man to repeat that kind of prediction.
ET
