Recoupling redux

It is kind of funny how during every boom period, theories propounding “things are different this time” gain currency only to be unceremoniously dumped soon after. During the dotcom frenzy years, the time-honoured principles of valuation were given the short shrift before reality and rude shock came walking in through the door. Predictably then, last year, when the world economy was on an unprecedented bull run of more than four years, a new theory gained ground—decoupling of the new world economic engines from what had been its main driving force for many years—the US economy. Now, of course, as the unravelling credit crisis is proving, the US remains the bulwark of the global economy. Naturally, it is now a re-coupling story all over again. Well, at over $13 trillion (Rs 520 lakh crore), the US economy dwarfs the new emerging drivers such as China (over $2 trillion or Rs 80 lakh crore) and India (around $1 trillion or Rs 40 lakh crore). Its health has implications for everyone, including India. Economies such as China that are heavily dependent on exports to the US are certainly at much more risk than India. In India, the exports to GDP ratio is at 13.9 per cent.

However, exports form an important part of the economy as millions of jobs are involved. The US recession makes a strong case for diversification of the export basket in terms of geographies. And the IT companies, among the more influential exporters, have, indeed, started doing so. However, this probably is no solution for several other exporting sectors that are saddled with the high costs of doing business in India.

Power and transport costs are clear examples that severely reduce our competitiveness vis-à-vis our export competitors. Here, the main takeaway is that India can decouple from the US but not without setting its own house in order and removing its own internal constraints. And there are many—infrastructure, a sub-optimal agri-economy and talent scarcity in a country where millions look for jobs. Resolving these issues will also give the India Inc. a powerful growth impetus at home in terms of a billion-plus-strong domestic consumption class. Inclusive growth is, thus, not just a politically correct mantra; it is an imperative of the times we live in. If we are able to pull off the feat of having growth genuinely trickle down to the lowest levels of the pyramid (or diamond, as the case may be), then surely if not in this decade then in the following one, India will definitely become the driving force that it ought to be given its demographics.