Openness and Growth in the Indian Economy

Abstract

Soumyen Sikdar attempts to understand the contribution of external liberalization to post-reform growth performance. Current account openness has reduced the cost of importing intermediate inputs and technical knowledge. The services sector, helped by the telecom revolution, has efficiently exploited the burgeoning global demand for business process services. The demand pull effect has been much weaker for manufacturing, due to persistent domestic inefficiency and serious infrastructural deficiencies in addition to Chinese competition. Agriculture also continues to be hamstrung by supply side constraints in which decline in public investment has played a crucial role. There is a movement up the value ladder in exports, and import composition too has changed for the better, though much scope for improvement remains. There is evidence of total factor productivity growth, particularly in services. But foreign direct investment has failed to effect any major supply side change and foreign portfolio investment (FPI) has failed to bring down the cost of capital significantly or to stimulate stock markets adequately. The need to counter exchange rate volatility due to global risks driven volatility in FPI forced the RBI to take measures that impacted growth adversely. These risks are continuing as we wait for monetary policy to normalize in the major countries. A fact that greatly redounds to the credit of our regulatory framework is that despite its considerable openness the Indian economy could escape the global financial crisis relatively unscathed due to quick and appropriate policy response on many fronts.