August 7, 2010 ☼ diplomacy ☼ Foreign Affairs ☼ foreign policy ☼ geo-economics ☼ governance ☼ growth ☼ India ☼ macro-economic policy ☼ Pakistan ☼ Public Policy
This is an archived blog post from The Acorn.
At a talk I gave recently, one person asked if the numerous crises in India’s immediate neighbourhood limit India’s growth. This was some time after Prime Minister Manmohan Singh, at a press conference in May, asserted that “India would be unable to realise its full economic potential if it couldn’t reduce tensions with its neighbours, especially Pakistan”.
“Not at the moment, and not for the foreseeable future” I replied, “because the biggest bottlenecks to sustainable economic growth are domestic.” Only after the most important reforms—creating a national common market, unshackling agriculture, liberalising labour laws and fixing the education system—run their course might the situation in the neighbourhood begin to matter.
In a recent paper demographics and India’s labour force, Tushar Poddar and Pragyan Deb of Goldman Sachs estimate that they see the Indian economy growing at a base rate of 8% per annum. With the required reforms, the growth rate will increase to 9%. With wrong policies, there is a risk that the growth rate will fall to 6.5%. [See recent articles by Niranjan Rajadhyaksha & V Anantha Nageswaran for a discussion on sustaining high growth rates].
The neighbourhood doesn’t register much in these assessments. In fact, Dr Singh himself concedes as much. “A number of inherent strengths in the country’s economy,” he said this month “can contribute to rapid growth in the future and they should be harnessed to push up economic growth to double digits.” In other words, Dr Singh the economist contradicts Dr Singh the geopolitical strategist.
The prime minister’s concession underlines the simple fact the most brazen of Pakistan’s skulduggeries are but a pimple on the posterior of the India economy. You don’t need to have grand “composite dialogues” with Pakistan’s impotent politicians to sustain India’s economic growth.
On the contrary, the question for India’s neighbours is whether or not they want to benefit from India’s growth process? It’s their decision. Sri Lanka and now Bangladesh appear to have embarked on trajectories that make the most out of opportunities provided by both India and China. Pakistan—perhaps because its unaccountable elite are buttressed by liberal Western aid—is unconcerned with improving the lot of its own people. That is its own problem. This does not mean it is not in India’s interests to improve trade with its crisis-ridden neighbour. It only means that it won’t hurt the Indian economy much if it doesn’t happen.
Once the Indian economy exhausts all the potential from the necessary next wave of reforms the condition of the neighbourhood might begin to impose constraints on its further growth. That point is at least two decades away. And it is by no means certain that it’ll matter even then, for it is possible that the neighbourhood will matter even less.
The Sonia Gandhi-led Congress Party is equivocal (okay, very unwilling) on using its political capital to carry out the reforms that are necessary for sustainable double-digit growth. Dr Singh is committed to losing his political capital on pursuing talks with Pakistan that are unnecessary for that purpose. Don’t be fooled.
From the archives: The Reagan Parallel, June 2004
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