Indian economy receives steepest downgrade of years: Bloomberg

Indian economy receives steepest downgrade of years: Bloomberg
NEW DELHI - Malaysia and Hong Kong "are proving to be the biggest growth surprises in Asia" this year while India received the steepest downgrade among major economies in the Asian Development Bank's latest outlook, Bloomberg News reported recently.

India 's economic growth lost steam in the fiscal first quarter, sinking to a three-year low of 5.7 percent year-on-year. Analysts generally attributed the slowdown to temporary shocks such as demonetization and the introduction of a goods and services tax, but an increasing number of gloomy predictions for the Indian economy remind us that the long-term factors behind the stalling growth deserve attention.

In an environment of economic volatility caused by structural reforms, high real lending rates charged by India 's commercial banks are giving domestic companies trouble in expanding capacity, which in turn is increasing pressure on the Indian economy and sending it into a downward spiral. According to the India-based Economic Times, the country's manufacturing growth in the first quarter of the current fiscal year - which started in April - plummeted to 1.2 percent from 10.7 percent a year earlier. 

In stark contrast to these weak internal conditions, foreign direct investment (FDI) into India grew by 37 percent year-on-year in the fiscal first quarter. 

This scenario was at one time quite common in China, which relied heavily on FDI during the early stages of its own industrialization. China's economic take-off would have been an unrealized dream if the country had not undertaken reform and opening-up in the 1980s to create a favorable business environment for transnational enterprises. China's accession to the WTO in 2001 marked another milestone in the nation's opening-up, ushering the country into a new era of economic growth.

To some extent, India is taking the opposite approach by resorting to trade protectionism to protect domestic companies from external competition. For instance, the country holds a negative attitude toward the Regional Comprehensive Economic Partnership, which is a proposed free trade agreement involving India 's major trade partners in the Asia-Pacific region. Protectionism could create obstacles to making India an export-oriented economy. There is almost no modern precedent in Asia that a country with a closed economy has achieved economic success.

India has failed to fully explore the potential of FDI growth, and this has increased economic volatility at just the time when internally driven economic growth has been temporarily blunted by domestic reforms. India should learn from China's experience in opening-up and move forward boldly. Although such moves may trigger strong resistance by vested interest groups in India and increase the difficulty of reforms, this is a process that India has to go through as it makes itself an export-oriented economy.

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