Feeling Like a Trillion Dollars
by Pramit Pal Chaudhuri
Originally presented on washingtonpost.com's Think Tank Town, May 4, 2007
Last week India became the 12th country in the world to have an economy worth a trillion dollars. It was a purely symbolic accomplishment. However, the manner in which India reached this figure neatly caught both the opportunity and the obstacles of its present economy.
India's economy touched the trillion dollar mark on April 25 according to a calculation by Credit Suisse, thanks to a sudden surge in the value of the rupee against the dollar. The economy was already within hailing distance of the 10-digit figure following two successive years of over nine percent growth, but the rupee's rise pushed it past the mark.
If the growth figures are the sunny side of the economy, the rise of the rupee is the darkening edge. The Indian currency rose suddenly as an indirect consequence of New Delhi's attempts to beat down inflation.
The consumer price index touched eight percent in March, a politically unpalatable figure in a country with as many poor as India. The Reserve Bank of India, the country's central bank, recently responded by hiking interest rates in an effort to temper consumption. It also allowed the rupee to appreciate, as a JP Morgan analysis concluded, in large part to avoid intervening to keep the currency down, as that would increase the money supply and, therefore, add to the inflation rate.
The rupee has now risen over 13 per cent against the dollar since last summer. Since the beginning of March this year it has been the fastest appreciating Asian currency. This may be helping ease rising consumer prices at home, but it is coming at a cost. One of the most immediate costs is a slump in exports as Indian goods are priced out of the international market.
It has the look of a near-textbook example of an economy trading growth against inflation.
The Indian economy has reached an impasse. There is now general consensus that if it attempts to grow beyond 8.5 per cent a year, it runs a high risk of contracting inflationary flu. This forces government to force-feed medication to curb economic growth.
"Feeling like a trillion dollars" isn't what it used to be.
But being a trillion-dollar economy does mean that a country has the resources to try and upgrade its economic motors.
India has already initiated the policies needed to rebuild the bottleneck most evident to any visitor to the country: its crumbling infrastructure.
New Delhi has put together risk-sharing financial packages to give the private sector a helping hand in setting up the new ports, roads, and power plants India desperately needs. A Standard and Poor's analyst has described the package for roads as "among the most advanced in the world."
The Indian government says it has already lined up $350 billion for infrastructure investment for the next five years. Private investors are prepared to jump in with more, once they see the new policies withstand the test of implementation.
Significantly, though domestic consumption remains the primary driver of India's economic growth, investment is only a nose behind. Investment rose to nearly 34% of gross domestic product last year—a sign that the country is building the capacity for higher rates of non-inflationary growth.
India hopes to get the sort of sustained infrastructure boom that Japan saw in the 1960s and China saw in the 1980s. This would pull the economy into a higher sustainable growth rate, from the present 8.5 per cent to the government's own goal of 10 percent per year. Jonathan Anderson, chief Asian economist for UBS, has argued that the Indian story of the next five years will be similar to how the ugly duckling of 1990 China became the economic highflier of today.
This transformation will take time, sound follow-through on policies, and some luck. The Indian economy could be stuck in the region of one trillion dollars for a year or two.
After that, it could leave the number behind faster than anyone would have believed possible for a raucous, billion-person democracy.
Besides its own government policies, India will be helped by a revelation from India's 1991 economic liberalization policy: the coming-of-age of its private sector. Corporate India has been partially powered by the domestic stock market, whose $940 billion market capitalization last week indicated it is about to sail past its own trillion dollar milestone in the very near future.
Credit Suisse's report said that eight of the previous 10 economies to pass a trillion dollars saw their stock markets rally for a full year afterwards. While the figure doesn't change the fundamentals of an economy, the bank said, it does seem to boost investor confidence.
Keeping in the spirit of things, an Indian government expert committee on making Mumbai an international financial center calculated last week that the roughly 20 million-strong Indian diaspora had amassed a wealth of, you guessed it—one trillion dollars.
Pramit Pal Chaudhuri is a Bernard Schwartz Fellow at the Asia Society and foreign editor of the Hindustan Times, New Delhi.