India

• Author: Hélène Poirson
• Pages: 6-8

Page 6

India's recent economic performance has been impressive. Growth has averaged 8½ percent over the last three years, placing it among the world's fastest-growing economies. In contrast to much of Asia, growth has been led by domestic demand. Services and industry are driving the economy and have been growing at annual rates of 10 percent and 9 percent, respectively. Growth has been supported by an increase in investment and savings of 11 percentage points of GDP since 1998/99. From the supply side, India has experienced a surge in productivity, reminiscent of the 1980s, that Rodrik and Subramanian (2005) attributed to an "attitudinal shift in government" and India's distance from its income-possibility frontier. The poverty rate has dropped from 26 percent in 1999-2000 to less than 22 percent in 2004-05.

Such success has elicited speculation among investors, academics, and policymakers on what the rise of India and China as economic powerhouses means for the world. Tseng and Cowen (2005) present an overview of research on the policy and institutional lessons to be learned from each country's unique development path. More recently, Aziz, Dunaway, and Prasad (2006) focus on India and China's financial sector and other pro-growth reforms, drawing lessons on how the two giants can support and learn from each other. A recent IMF book, India Goes Global: Its Expanding Role in the World Economy (Purfield and Schiff, eds., 2006) summarizes IMF research conducted during 2004-06 on the macroeconomic aspects of India's emergence on the global stage.

India's growth acceleration has coincided with a marked opening of its economy. More liberalized trade policies since 1991 have boosted export competitiveness. In addition, services exports-largely information technology (IT)-have boomed, thanks to the opening up to the private sector and foreign investment (Fernandez and Gupta, 2006). Trade liberalization appears to have reduced wage inequality by boosting the unskilled wage premium (Mishra and Kumar, 2005). As India gains market share in Asia, it is becoming a regional growth engine (Schiff, 2006; Lim, 2006). India is also reaping the benefits of higher foreign direct investment (FDI), which has increased in net terms from $0.1 billion in 1991/92 to $5.6 billion in 2005-06 and an estimated $11 billion in 2006-07. Sustained competitiveness, however, will require enhanced infrastructure, lower tariffs, and an improved business climate; the exchange rate is not an obvious bar, since there is no evidence that the rupee is misaligned at present (Purfield, 2006b). A related finding by Jain-Chandra (2006) is that difficulties of doing business, rather than the FDI regime (which is not overly restrictive by international standards), are limiting India's FDI potential.

China's World Trade Organization (WTO) accession and the recent lifting of quotas on textiles and clothing have made competitive challenges more pressing for India. Cerra, Rivera, and...