India in The Global Economy – by Lord Meghnad Desai on 8th December from 2 pm – 3 pm

On 8th December 2015, Lord Meghnad Desai visited the academy to give a talk on the importance of India’s integration into the global economy.  Lord Desai began the talk by briefly explaining the history of trade integration and how post-WWII, countries adopted conservative stances towards both trade and capital flows, leading to the erection of trade barriers as well as restrictions on capital mobility. Despite such reservations, an archipelago of economies came together and signed the General Agreement on Tariffs and Trade (GATT) in favour of trade liberalisation, a landmark event that changed the course of economic policymaking.

As country attitudes to international trade shifted, numerous developing economies came to use  trade as a strategy for development. Small countries, particularly the South-East Asian economies like Taiwan, Korea, and Singapore, with limited domestic markets, followed export-oriented growth models successfully. On the other hand, large countries like India and Brazil were export pessimists, and relied on import substitution. Since the 1970s at least, capital mobility also increased significantly, and particularly in the 1990s, developing countries experienced large inflows of private capital from developed countries. Alongside these developments, the GATT was replaced by a new agreement that was institutionalized in the form of the World Trade Organisation (WTO), and now included developed as well as developing economies.

Given this backdrop, it would now be interesting to analyse India’s integration with the world economy. India’s trade policy deviated from the usual trend of manufacturing exports, and instead chose to go down the path of services exports. India did this much before any other economy due to a surge in the development of technology and outsourcing during that period. This is one the reasons why the current government has launched the “Make in India” initiative since it provides a platform for catering to manufactures globally.

The domestic policy is restricted by the external sector because the external sector is very dynamic. Therefore, India has to be smarter and policymakers need to factor in the importance of external shocks, which affect capital flows greatly. In terms of capital mobility, India has partially liberalised its capital account, and this is a good thing because India is in great need of foreign capital. However, India also needs to care about the type of capital inflow. Currently, it appears to prefer Foreign Institutional Investments (FIIs) over Foreign Direct Investment (FDI), even though the former flows are more unstable.

One of the causes of the recent surge in capital inflows to India is that the western countries have not been able to increase demand for investments even at near-zero interest rates. But in order to continue to attract capital, India has to minimise exchange rate risk. India will have to judiciously manage its exchange rate also because Indian corporations have borrowed abroad in large amounts, and there is a danger that a sudden depreciation of the rupee will have adverse valuation implications for this debt.

In sum, the global economy is fairly open and this gives India several opportunities to attract investment. However, India is learning to be an open economy, and a complete integration of domestic policy with the global policy is still awaited. Lord Desai ended the talk by discussing the Paris Climate Change Conference, and mentioned that it would be difficult to reach a consensus since the players involved in the talk have different preferences. In a way, this is not surprising, given what we know from the academic literature on the impossibility of deducing a social welfare function from a proper aggregation of individual preferences.



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Date(s) - 08/12/2015
2:00 pm - 3:00 pm

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