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India’s financial crisis a drag on region
Publication Date : 04-09-2013
After many years of galloping growth rates, India is grinding to a halt, and countries in the region may soon feel the impact.
India is in the news and for all the wrong reasons. With the rupee collapsing, the current account deficit exploding and corporate debt set to melt down (trimming its contribution to Forbes billionaires’ list), China’s strategic challenger looks set to drag the rest of Asia-Pacific into a prolonged economic crisis.
After many years of galloping GDP growth rates, India is grinding to a halt. Growth in 2012 was 6.3 per cent – this year it will be lucky if it can get above 3 per cent.
For a proud nation with a US$4.684 trillion economy, its own nuclear bomb and a navy equipped with both aircraft carriers and submarines, this is a massive loss of face and, indeed, opportunity.
India may well go down in the annals of contemporary economic history as being the trigger of the 2013 financial crisis – much as the South Koreans and Thais were the forerunners of the 1998 meltdown.
So what went wrong in India? Wasn’t the subcontinent’s giant supposed to be a great developmental success story and what are the lessons for us in Malaysia?
According to a pair of extremely high-profile economists, Jean Dreze and Nobel Prize winner Amartya Sen, whose book An Uncertain Glory: India and its Contradictions was launched earlier this year, India allowed its public sector, especially healthcare and education, to wither. This failure of governance and execution compounded deeply-rooted iniquities at the heart of its complex – a caste-driven society.
And with a general election slated for next year, there’s little doubt that a floundering Congress-led administration under Manmohan Singh will once again fail to tackle one of the world’s most inefficient and corrupt bureaucracies.
So, with the precipice fast approaching, it would be wise for Malaysian readers to acknowledge that India will not suddenly rebound and we will all be tainted by association. Moreover when the fear sweeps the markets, the contagion often ends up being far worse than anything crafted by Hollywood’s merchants of doom.
To be fair, India’s track record has been stellar if you’re middle-class and above.
Opportunities have abounded, despite the odd infrastructural glitch such as the July 2012 power blackout across Northern India (at the height of the summer heat).
However, for those at the bottom of the social scale, life has been less enthralling.
Take, for instance, the Indian government’s meagre spending on healthcare – only 1.2 per cent of GDP alongside China’s 2.7 per cent and Latin America’s 3.8 per cent. Converted into absolute expenditure (at PPP terms), India has been spending $39 per capita whilst China has spent $203 per capita.
To put things into perspective, Malaysia spends 4.8 per cent of its GDP on healthcare or about $400 per capita. Indonesia spends 2.7 per cent of its GDP and $100 per capita.
Understandably, India has reaped a bitter harvest from this shocking under-investment, achieving Quality of Life indices that pale in comparison even with neighbouring Bangladesh. This is despite Bangladesh having a GDP per capita of $747 compared to India’s $3,557.
But it’s the weaker sections of society that have been the most imperilled: women, tribal people and the lower castes. Indeed, female empowerment in Muslim Bangladesh far surpasses anything in India.
However, the story isn’t uniformly bad. India is a vast nation and there are differences in the various indices between the country’s North and West (sub-Saharan African bad) and its South (generally good). So, if one is to subscribe to the Sen/Dreze formulation, India’s failure is primarily a failure of governance with more public money being spent on notoriously corrupt fertiliser subsidies rather than healthcare and education.
We cannot underestimate the cost of this neglect to invest in its people: not only due to higher crime and squalor, but also in terms of lost opportunities via better human capital.
As a result of this terrible under-investment in their own people, India’s “demographic boom” may well be worthless as its burgeoning youth population of some 430 million won’t be adequately educated, employed and/or fed.
Of course, the two men’s thesis hasn’t been uniformly accepted. Free-market thinkers like Columbia University’s Jagdish Bhagwati have taken issue with their prescriptions, seeing rather the need for less state intervention and greater private sector participation. The ensuing debate between the two prominent thinkers has been sharp and acrimonious, reflecting the underlying sense of unease.
Ultimately, the correct policy path for India probably lies midway between the two positions, but for now, we can be sure that little will be done to improve the lot of India’s hundreds of millions of poor.
Dreze and Sen have also criticised India’s free market and much-lauded democracy, arguing that neither has helped address its fundamental inequalities.
Look across the Himalayas to China, however, whose authoritarian system has brought it great wealth, but also the same inequalities and social dislocations and things don’t seem that rosy either.
Where should developing economies go then? Perhaps this is the great paradox of modern capitalism: that nothing countries do will ever be right in the long run and that periodic market scares, if not an outright collapse are only to be expected!
Only then will governments be forced to reassess and change their policies. So as emerging markets ready themselves for the impending squalls, we in Malaysia should also be sharpening our policy “tools” and readying ourselves to address the many failings in our policy “tool-box”.