Tiger economy slowing but still roaring along, relatively speaking

What's with India's economy?

Yes, the world's second most populous country is feeling many familiar effects of the global financial crisis —  job losses, plunging stock markets, shrinking credit. But for the most part there is still a Cinderella quality to the Indian economy that makes Slumdog Millionare look like more than just a Bollywood fairytale.

The latest statistics still peg economic growth at 7.1 per cent, a rate to make most other countries go green with envy.

Announcing their predictions for the closing months of the current fiscal year, economists in New Delhi acknowledge that their country is feeling some pain.

Growth may still be high by U.S. and Canadian standards, but it's down by more than two per cent when compared to the white-hot levels of recent years.

Tourism, textiles and the crucial information technology sectors are all suffering as demand from Western countries dries up. Foreign investment is withering badly too. But Bollywood is thriving as the stuff of dreams continues to sell even in hard times.

What's more, Indians are still spending and the country's banks seem stable compared to their counterparts in richer countries.

Part of the explanation is that people in India love to save money, says Ryerson University business professor, Murtaza Haider, giving the country real strength in times of crisis.

"Most Indians typically spend their entire lives saving for a house even if it takes them 20 years to do that. Seldom do they take loans [just] to finance their lifestyle. So by default, India is much more prepared to deal with this crisis," says Haider.

That means that domestic demand doesn't slump as abruptly as it has in the United States, Europe or Canada, where many retail chains are slashing jobs and reducing inventories because credit-starved buyers are staying away in droves.

Says Haider, ""A lot of what India produces is for domestic consumption given the large home-based market. So it kind of hedges the slow down."

Not just that, Indians use their savings in troubled times as a kind of informal social safety net. That too fuels consumer demand and can ease some of the worst effects of the downturn.

Closed economy early on

Those frugal habits probably developed during India's first forty-five years of independent existence, when public sector companies and the government dominated the economy.

Imports were tightly restricted and self-sufficiency was the mantra of Indian economic planners.

It paid off in the 1960s when the country put to rest a painful legacy of frequent famines by growing enough wheat and rice to feed the entire population — the so-called Green Revolution.

But in the 1980s and early 1990s, years of big government, corruption and low economic growth pushed the country to the brink of financial collapse.

That forced an otherwise left-of-centre government to relax public sector control of the economy and introduce free market reforms.

Since then, India has developed a robust business sector dominated by computing, outsourcing of office services and pharmaceuticals. Manufacturing, including cars and textiles, has also soared. A growing middle class — by some estimates 250 million strong — is demanding schools, public transport and improvements in long-moribund government services.  

Along with China, this has been one of the most striking social and economic transformations the world  has ever seen.

More growth needed for jobs

Even the current global slowdown doesn't seem that serious, and Indian politicians, preparing for general elections later this spring, have been telling potential voters that the country's main challenges are national security and terrorism, in the wake of the Mumbai attacks in November.

Not that the economic picture can be called rosy, not by contemporary Indian standards.

Home to about a third of the world's most seriously poor people, India needs to grow far more than it will this year if its steadily climbing number of young people are to have jobs.

"Around 7 per cent growth isn't good enough for India," says Duncan Campbell of the International Labour Organization, "India needs 10 per cent growth each year just to increase employment by one per cent."  

The move away from the countryside to cities and white collar work has left agriculture — once the country's economic mainstay — in the deep doldrums.

Rural poverty has been starkly highlighted in recent years by a horrible wave of suicides by indebted farmers who were attempting to wipe their family's financial slate clean by swallowing fatal doses of pesticides.

"India's political leadership — and the nation's elite — have badly let down the country's dispossessed and wretched.," says Tarun Tejpal editor of the New Delhi-based weekly newsmagazine, Tehelka, "If you care to look, India today is heartbreak hotel, where infants die like flies and equal opportunity is a cruel mirage."

Yet some believe the economic crisis presents a moment of rare opportunity, a chance to address poverty and give the country badly-needed development in infrastructure and services.

"At best it can be said that India lives in the modern world with 14th-century infrastructure," says Haider of Ryerson. "This is the time for the government to kick in massive investments and create jobs."

India desperately needs good roads, airports, and seaports, even sanitation projects, given that less than a third of  homes have a toilet.

Opportunity in adversity

At the same time, the country's public finances are in a bad way. Budget deficits are running nearly one and half times higher than predicted, and tax collection is expected to sag badly as the global crisis bites deeper into private sector finances.

The answer, according Kaushik Basu, professor of economics at Cornell University in New York, is more, not less, economic reform, more encouragement of business and entrepreneurialism of the sort that started the country moving in the 1990s.

In a country where 63.3 per cent of the population is between the ages of 15 and 64 years, "India needs to craft policies to encourage the private sector to expand and use more labour," Basu says.

India, China and other developing countries may well emerge from the global meltdown stronger and more dominant than their Western counterparts, cementing a trend that was well underway before the recession struck.

"We moving from a Western-dominated world into an Asian-dominated one," says Robin Griffiths of the British investment firm, Cazenove Capital. "And at that margin, that's where the growth is, even now."