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21 July 2003

The right way and the Indian way

Who has written off poor-country debts and now lends to the IMF? Salil Tripathi on an economic mirac

By Salil Tripathi

The next country to rush to the International Monetary Fund to get out of financial crisis may find that India is part of its lifeline. You read that right: India. In May and June, India became a lender to the IMF, contributing £180m to a reserve fund used to bail out countries in a mess. India also wrote off £12.5m that seven Heavily Indebted Poor Countries – Mozambique, Tanzania, Zambia, Guyana, Nicaragua, Ghana and Uganda – owed India.

India’s generosity arises out of its burgeoning foreign reserves, which have grown to $78bn (up from almost zero in 1991 and $20bn in 1995), making its hoard the seventh-largest in the world. It paid off the last of its dues to the IMF in 2000, since when long-term debt has remained relatively stable, around $90bn. The Indian economy is expected to grow at 5 per cent per year in the foreseeable future, though the IMF believes 8 per cent growth is achievable. This is four times what the economist Raj Krishna once called the “Hindu” growth rate of 2 per cent, which characterised the stagnant India of the 1960s and 1970s, when it produced little and traded less.

India’s turnaround, from being the poster-child of relief agencies to an IMF creditor, is remarkable. In 1991 India was so broke it had enough money to pay for only two weeks’ imports. The oil price hike after Iraq’s invasion of Kuwait left a deep hole in Indian finances, and the disappearance of the east-ern bloc left India without a once captive export market.

Those were the days when Indian bureaucrats loved saying no to business. In 1978 IBM and Coca-Cola left India in frustration; in the mid-1980s India made Pepsi wait almost three years before it could operate. Indian businesses could neither grow domestically nor compete abroad. In 1991 the economy stalled, and India pledged its gold reserves to the Bank of England. Hat in hand, it went to the IMF.

That crisis changed Indian thinking. The then prime minister, Narasimha Rao, said: “Decisions are easy when no options are left.” India allowed foreign investors to take majority stakes in India, the stock market could accept money from abroad, exporters were freed from red tape and imports were liberalised.

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Twelve years later, the reforms are largely successful. Globophiles such as Daniel Yergin and Jagdish Bhagwati will argue that India needs to do more; globophobes such as Walden Bello and Vandana Shiva fear that India has already gone too far. India has succeeded by shunning extremes and striking the middle path. As the Indian joke says, there are three ways out of any problem: the right way, the wrong way and the Indian way.

And what was that Indian way? Unlike Russia, India did not plunge without a parachute. Unlike China, it was not flooded with foreign investment. Unlike Argentina, it did not stake everything on a currency policy it could not sustain. Instead, it created internal consensus about the need for reforms. It selectively opened its economy, making it easier for physical and financial investors, but hard for speculators. Not the Washington consensus, certainly; but not an anti-globalisation manifesto either. By liberalising faster, India could have prospered more with greater inequality, something its democracy would not tolerate; by closing the economy, it would have stagnated, depending on handouts, with its poor getting poorer, a future it did not deserve.

In this gradualist approach, some sectors have boomed, such as software, pharmaceuticals, biotechnology and engineering. The consulting firm Deloitte Touche Tohmatsu predicts two million new jobs in services by 2010, as multinationals move their back offices to India. As prosperity has increased, the middle class has grown, demanding better products and travelling the world.

Has this been at the cost of cultural degradation, as the anti-globalisers warn? In spite of satellite TV, India doesn’t really change: teenagers worship Aishwarya Rai and Sachin Tendulkar, not Britney Spears or Michael Jordan; McDonald’s has set up shop, but Indians still prefer samosas.

To be sure, it isn’t all rosy. India still has the world’s largest population living in absolute poverty. It still wastes resources in industries the government has no business running; and it needs to invest much more in primary education.

But in the first decade after integrating its economy with the globalised world, it has lifted more people out of poverty than at any time in its history. More Indians can aspire to a better future than at almost any other time. And today, India is able to use some of its new wealth to help the less fortunate.

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