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Thursday, April 19, 2007
Resources: http://www.economywatch.com/indianeconomy/india-and-global-economy.html
India and global economy
If we look at the Indian experience since independence, we find that export pessimism permeated the policy stance throughout the early decades of our planning. Import substitution was the principal instrument of trade policy and was regarded in the early years as not only the correct strategy but also inevitable in a continental economy like India. The gulf crisis and its impact on India provided several lessons for us, and one of them was that a relatively closed economy does not provide immunity from a foreign exchange crisis. Incidentally, India excelled in managing the crisis and emerged as one of the very few countries in the world, amongst both the developed and the developing, to have never defaulted on its external obligations. In the aftermath of the Gulf crisis, policy actions were initiated as part of the overall macroeconomic management well coordinated to simultaneously achieve stabilization and structural change. External sector policies designed to progressively open up the Indian economy formed an integral part of the strategy for structural reforms. In this context, improvement in exports, both merchandise and invisibles were recommended. Suggestions were made regarding modulation of import demand on the basis of the availability of current receipts to ensure a level of current account deficit consistent with normal capital flows. Further, Indian policy makers took up measures to enhance non-debt creating flows to limit the debt service burden. A switch over to market-determined exchange rate; building up the foreign exchange reserves to avoid liquidity crises and elimination of the dependence on short-term debt were some of the most important changes that were suggested. It is evident that these changes in the external sector policies of the 1990s, paid rich dividends in terms of growth and resilience to a series of external and domestic shocks. In the 21st century, there has been a dramatic shift in India's approach to external sector management in tune with the changing circumstances. First, with the emergence of marginal current account surplus, the sustainability of India's current account deficit may not be a problem though the deficit on her trade account persists and has been increasing. Second, the main contributors to the positive outcome in India's current account are workers' remittances and export of software, both being a result of process of global integration. Third, the exchange rate regime as well as external debt management has served India well, especially the avoidance of sovereign debt through commercial borrowings. The new policy regime helped India withstand several global crises while maintaining a respectable growth. Fourth, the management of capital account has acquired the primary focus rather than the current account. Fifth, a judicious integration with the global trade regime has imparted some competitive efficiency and confidence to the domestic industry and perhaps, even to commercial agriculture though to a limited extent. Finally, it has become evident that the management of the external sector is closely linked to the domestic sector and the major thrust of Indian public policy is now on managing the integration. In brief, India has moved from managing external sector to implementing an optimal integration of domestic and external sectors, and the global economy.
Reflection:
Since independence, India went on the right way to develop herself-open to the world trade. In the early decades, export permission permeated the policy stance in India and it has successfully overcome the Gulf crisis. While in recent decades, India tried to manage external sectors and even implement an optimal integration of both domestic and external sectors. Progress of India has been very impressive because it chose to participate in global trade and tried hard to manage its economy to suit the global trade. The basic wise economic policy it has implemented was the main reason for its fast developing economy.
India’s experience proved that integration into the world economy would help countries to promote economic growth and development, especially developing countries. Many developing countries, include India which have opened their economies in recent years, have experienced faster growth and more poverty reduction. As a group, Developing countries have become more and more important in world trade today, they now account for one third of world trade. Many developing countries have substantially increased their exports of manufactures and services relative to traditional commodity exports and the trade between developing countries has grown very quickly, with 40 percent of their exports now going to other developing countries. From these, we can see that policies make an economy open to the rest of the world are needed for sustained economic growth. No country in recent decades has achieved economic success without opening to the world.
Minyun _Economic Expert
Globalised @ 2:10 PM
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