Fears of global economic collapse have subsided: Montek

India's Deputy Chairman of Planning Commission Montek Singh Ahluwalia addressing a gathering at the Indian Consulate in New York. (Pic Gunjesh Desai)

NEW YORK: Fears of a panic collapse of the global economy have subsided and the United States should be able to see positive growth in the second half of this calendar year, according to Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Govt of India.

"Most people globally are certainly more optimistic today than they were three months ago, although not so optimistic about returning to growth rates that existed before 2008," he said.

Ahluwalia was addressing a gathering of representatives of the financial world at the Indian Consulate in New York last week where he laid out India's growth prospects vis-a-vis the global economic crisis. "In our own conclusions we surmise that fears of the panic collapse globally have subsided and our own expectation is that in the second half of this current calendar year the US will go back to a positive growth range from negative growth rage. The year as a whole might remain in the negative growth range but by year 2010, it will get back into positive growth range," he said.

"The world is going through a major shock with the elimination of demand from the industrialized world," he said. "That is impacting India also, in the sense that the export growth is much poorer than it has been for the last four years. But to some extent India is less affected than many other countries simply because its growth strategy did not depend as much as it did for others on the growth of exports."

In the context of Indian banks surviving the global financial crisis when major banks in the West have collapsed, Ahluwalia said Indian banking sector has always been a regulated system and therefore did not suffer. "Being cautious has helped," he said. However, as the West is now seeking to set regulatory systems in place, Ahluwalia said India is watching closely for development on the regulatory front in the US and Europe. "We are a part of the G20 countries and therefore are looking for lessons to see what we can learn from the experiences in the West."

Like in other countries, Ahluwalia said, India too was trying to replace a lot of export demand by trying to step up domestic investment demand. "In India we obviously suffer an infrastructure deficit, and for inclusive growth we need to have a huge thrust on infrastructure development not just in high end urban areas but also rural areas."

Infrastructure investment in India, however, was interrupted by the global financial crisis, he added.

India, Ahluwalia said, would see -- what many might perceive as optimistic -- a 7% growth rate this financial year and hopefully get back to 8.5% to 9% growth rate in the next two years. "I think it is possible because if you had an economy that was largely dependant on international demand then it would have been a constraint. But we believe, returning to 8.5 to 9 percent from the supply side perspective is entirely feasible. There has been no interruption on the supply side factors and I think we have a strong domestic investment capability."

Ahluwalia added that even if India did not have high export growth, its ability, with likely foreign inflows, to finance a modest balance of payments deficit (say 2.5 percent of GDP), would be quite good. "In the last 3-4 years the capital that flowed into India was much more than India needed," he said. "What it led to was tremendous build up in foreign reserves. So even if the inflows are low for a year or two, the gap can be accommodated within the reserves that the country has."

Ahluwalia reiterated that the real constraints on India's growth are not export demands, but in keeping the supply side and domestic investments going.

The second mandate of the people of India to the UPA-led government was being interpreted as an endorsement of the basic strategy of inclusive growth which has been followed in the last five years with great success. And therefore, for that inclusive growth to continue, Ahluwalia said, "We are also trying to stimulate agriculture, and areas of health and education. A systemic change, however, will take at least 10 years, he said candidly.

In conclusion, Ahluwalia said that India was still an attractive destination for foreign investments and that there was enough dynamism in the Indian private sector to see the kind of growth rates it expects to see.

Economy not dependant on monsoon

Later responding exclusively to queries from India Post, Ahluwalia said India no longer was as dependant on the monsoons as it used to be. "Agriculture is definitely dependant on the monsoon, but agriculture is less than 20 percent of the GDP. So the impact of the monsoon on the economy is via agriculture. There are a lot of people involved in agriculture and that's important, but I think over the years the economy on the whole is becoming less dependant on the monsoon. We have had bad monsoons before and we are able to take them in our stride. The degree of dependence on monsoon is much less than it was 20-30 years ago."

On the delays in infrastructure development despite its dire need - specifically with reference to the newly opened Bandra-Worli Sealink in Mumbai, which took almost 10 years to complete - Ahluwalia said, "The Bandra-Worli Sealink was hopelessly delayed for a long time, I agree. These are some of the implementation problems of the past and I just hope that in future we would have learnt from this experience and they won't be repeated."

A lot of such new ideas have been around for only the last 5-6 years, he said. "We are beginning with a new five-year period and I agree that the test of what we do is in how we perform on infrastructure in this period."

India Post News Service