Business Today: Editorial

A Virtuous Insularity?

Conventional logic would dictate that for an economy to thrive, it must be integrated with those around it. For, the more you sell, the higher is the production of goods and services in the economy. Indeed, India has been told repeatedly that it must open up its markets to foreign companies, and thus demonstrate its commitment to globalisation. But here's a perverse thought: could India's relative insularity actually be a boon in disguise?

Going by the way economies elsewhere are reacting to the September 11 attacks on the US and last fortnight's retaliation by the super power, it does seem so. Sure, the GDP is trudging at 6 per cent or so. But please note that grow it does. Fine, we may have been let down by the promised 250 million middle class consumers, but still the market at home is huge and growing. Yes, exports are critical to earn foreign exchange and establish the industry's long-term competitiveness in global markets. But India is not overly dependent on its customers abroad, since exports account for less than 10 per cent of the GDP. Need another example of an even more insular nation that's turning into an economic powerhouse? Look east-to China.

Don't forget that some of the reasons for the meltdown in Mexico had to do with that country rapidly deregulating its economy and industries. Foreign investments, especially into the stockmarkets, poured in, and the Mexican peso strengthened versus the US dollar, hurting exports and pushing wholesale prices up. To make matters worse, its current account deficit soared relative to its GDP. While export growth averaged nearly 9 per cent year on year between 1989 and 1993, the current account deficit was clipping at almost 32 per cent. An economy running up higher foreign debts and lower debt servicing capability was a disaster waiting to happen. And when the institutional investors fled along with their dollars, the camel broke its back.

In contrast, India has chosen to open up its economy gradually. A particularly notable act of wisdom-born of the 1991 payment crisis-was the decision to delay convertibility on the capital account. That has kept foreign exchange from evaporating from our reserves, and the rupee from crashing. India's corporates, unlike those in countries like Korea and Thailand, did not borrow blindly from overseas markets. Hence, a crisis like the one which undid huge corporations such as Daewoo, did not strike any of India's corporations.

That said, let us clarify that dark insularity is not what this country needs. Rather, it is capitalist pragmatism that we need. For example, we could do with billions of more dollars in foreign direct investment-the kind of investment that stays and grows. We need that in infrastructure, hi-technology, manufacturing and even services. And it's a bogey to say that we don't need foreign potato chips. After all, who is the beneficiary of the investment? Surely, the Indian consumer and the worker, as much as the foreign investor.

Our finance minister is wont to rationalising the soft-pedalling of reforms. He does so at his own peril. For, the price that the economy has had to pay for shutting itself to the world outside post independence is there for all to see. Industry is labouring under unviable capacities, poor production practices, and bloated workforce. The bureaucracy, despite its de-teething in the recent past, continues to pervade all aspects of the economy. The worst fallout of a strong babudom is, of course, the institutionalisation of corruption. Transparency in public life is something we must make part of our current economic reforms.

Again, if Sinha mistakes insularity for immunity, he will do so at a huge cost to the nation. For, there's much to be gained by integrating with better and bigger economies. Nobody can deny that India is better placed today than it was, say, 10 years ago. Why? Because we opened up. The international companies operating out of India are sharing not only their capital, but more importantly their knowledge capital. As the stake of foreign companies in the local economy goes up, their incentive for ensuring that India does well both politically and economically will be higher. Globalisation may seem painful at first, but in the end it does lead to prosperity. The trick, however, is knowing what to globalise and what not to.

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