The Case for India

Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.

Indeed, despite its shortcomings, India’s GDP will probably grow by 5-5.5% this year – not great, but certainly not bad for what is likely to be a low point in economic performance. The monsoon has been good and will spur consumption, especially in rural areas, which are already growing strongly, owing to improvements in road transport and communications connectivity.

The banking sector has undoubtedly experienced an increase in bad loans; but this has often resulted from delays in investment projects that are otherwise viable. As these projects come onstream, they will generate the revenue needed to repay loans. In the meantime, India’s banks have enough capital to absorb losses.

Likewise, India’s public finances are stronger than they are in most emerging-market countries, let alone emerging-market countries in crisis. India’s overall public debt/GDP ratio has been on a declining trend, from 73.2% in 2006-07 to 66% in 2012-13 (and the central government’s debt/GDP ratio is only 46%). Moreover, the debt is denominated in rupees and has an average maturity of more than nine years.

India’s external debt burden is even more favorable, at only 21.2% of GDP (much of it owed by the private sector), while short-term external debt is only 5.2% of GDP. India’s foreign-exchange reserves stand at $278 billion (about 15% of GDP), enough to finance the entire current-account deficit for several years.

That said, India can do better – much better. The path to a more open, competitive, efficient, and humane economy will surely be bumpy in the years to come. But, in the short term, there is much low-hanging fruit to be plucked. Stripping out both the euphoria and the despair from what is said about India – and from what we Indians say about ourselves – will probably bring us closer to the truth.

Raghuram Rajan became Governor of the Reserve Bank of India on September 4. This commentary was written before he took office.

Copyright: Project Syndicate, 2013.

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