Economy: As globalisation spread

Unable to believe what he saw on one of the slides, Prime Minister Manmohan Singh had the presentation being made to him at 7 Race Course Road one afternoon in July 2007, put on pause. He removed his glasses and placed it on the desk in front of him and picked up a pencil. The economist and former professor, then, himself recalculated on the margins of his printed copy, the statistic on the paused slide. The result was no different.

The statistic that startled Singh is the ratio of the capital brought in and sent out of the country to the GDP. A measure for the degree of globalisation achieved by an economy, the number stood at 110 per cent for 2006-07 for the Indian economy. Singh’s disbelief stemmed from the big leap in the figure over the last decade-and-a-half—the ratio was barely 40 per cent when as the Finance Minister, he had opened up the Indian economy in the 1990s.

It’s hard to find out if the latest data trickling in on the sudden plumetting of industrial output and export growths is again stirring a sense of disbelief in Singh—once again in charge of the finance portfolio after 13 years. Even if the PM realised the inevitability of reversals in the growth rates, did he believe they could come in so soon and so sharp?

To be sure, Prime Minister isn’t the only one to have been surprised by the extent of globalisation. Most individuals and institutions— including companies and regulators— didn’t fathom the extent to which their economic fortunes and actions have got intertwined with that of the global economy. Ask every investor who lost his money in stock or stock-related investments when FIIs started pulling out. Ask companies who lost crores in dollar hedging. Ask exporters whose consignments are being cancelled just as they are ready for dispatch. The impact of globalisation— positive and negative—permeates deep.

To be fair, few can correctly predict the length and breadth of the global economic crisis— or prepare enough to deal with it. But India has been simply smug, misreading the disruptive power of global forces. “I’ve dealt with three crises during the last 18 months since I moved in to the Finance Ministry last July,” says Singh’s Chief Economic Advisor Arvind Virmani. All three—the reversal of the deluge of dollar inflows into the capital markets since January this year, the global commodity price shock in April-May and the freeze in the financial markets during September-October—originated outside India and left no section of society untouched. And yet, Budget 2008 barely declared an intention to deal with the impact when it came home. Even as foreign investors were furiously yanking out dollars from Dalal Street, collapsing the Sensex to less than half of its January 2008-high, the Government was brandishing the economy’s strong fundamentals.

Economists have trimmed, and then, retrimmed forecasts for India’s growth, but the belief on Raisina Hill is that the Indian economy is relatively closed and strong enough to escape unscathed.

But, despite the less-than-full convertibility of its capital account, however, life and business in India stand more exposed to global happenings than ever. Middle class home makers got a taste of this earlier this year when prices of subsidised cooking gas shot up. The fortunes of even small businesses are intertwined with the ups and downs of global trade and finance.

Artisans in Surat, for instance, are dealing in a dozen currencies, buying raw gems from obscure corners of the earth and selling polished ones around the world. By one estimate, India’s trade openness ratio has trebled from 0.15 to 0.45 in the last three decades. “Our ability to cope with external shocks hasn’t kept pace with the growth,” says Subir Gokarn, Chief Economist, Standard & Poor’s Asia Pacific.

Eighteen years ago, in 1991, Singh had opened up the economy. As the adolescent economy steps into adulthood, it is time to get a realistic grasp of the openness.