The Hindu Business Line : `Further reforms, key to India's role in global economy'

The pace of the country's integration with the global economy has been slow, but the question of integration has somewhat been answered by India's global corporate presence, which can further improve by more reforms. DR ANDREW FRERIS, CHIEF ECONOMIST, ASIA-PACIFIC, BNP PARIBAS.

MR ANDREW FRERIS

Where does India stand in the global economy, the rather impressive growth it has achieved in recent years notwithstanding? Has it reached the level of integration that it needs with the global economy so as to further its own growth?

As of now, its impact on the world economy is very limited and, to some extent, vice versa, according to Dr Andrew Freris, Chief Economist and Head of Credit Research, Asia Pacific, of BNP Paribas.

He says the pace of the country's integration with the global economy has been slow what with its economic reforms moving in a low trajectory. However, these are issues of politics that have to be decided through the democratic process, he told Business Line recently.

But the question of integration has somewhat been answered by India's global corporate presence. The continuous expansion of Indian corporates in the world as also the global presence of an Indian entrepreneurial class have, to some degree, made good for the present limited integration of the economy with global trade and finance, he says.

Advantage India

Dr Freris expects a rapid deceleration in the growth of the US economy in 2007. The economies of the European Union and Japan are also set to slow down next year. In that context, India's weak links with the G3 trade and finance flows may appear an advantage. However, there has been no historic example of an industrialised economy that was not integrated with global trade and finance, he adds.

He is of the opinion that India's GDP growth, which now averages 7.5-8.5 per cent, can easily go up to 10-12 per cent provided there is further economic deregulation and release of resources from agriculture.

He emphasises the importance of imports for the country. Import penetration also sharpens the country's domestic competitiveness.

Against this, the country's current account deficit, reflecting trade deficit, is encouraging as growth of imports, at this juncture, is more important than exports.

As for reforms, the progress has been slow-paced in the area of financial de-regulation, including the lifting of capital controls. In a larger context, this is an important component of the reforms process considering the interest of international investors in Indian assets.

Despite the rapid progress it has achieved, the importance of China is somewhat exaggerated.

In the case of India, it accounts for an insignificant component of global GDP in comparison with the size of its population. Again in the matter of exports, while the rapid increase in the share of China is impressive, its share is still below 10 per cent. For India, the share has remained static, at least for now.

India, more open

The Indian economy has become more open during the last three years driving its export-GDP ratio in tandem. Yet, the ratio is still the lowest in Asia. Dr Freris feels that a rising import-GDP ratio will be a strong indicator of growth in exports, simply because there cannot be exports without imports.

Looking at the profile of India's exports, it may be seen that it is that of a typically developing economy with the stress on labour intensive products. Sectors such as gems and jewellery that have a good share in the export basket have relatively small value addition considering the large import content in them.

Balanced mixture

Nevertheless, the structure of the country's exports is changing towards a more balanced mixture with the role of textiles declining and that of metals rising, although the share of gem and jewellery has remained constant.

On the other hand, India's main import item has been oil with little change over the years. The opening up of the economy will lead to import of more capital goods and not just consumer goods.

Dr Freris says that a market of one billion people is effectively irrelevant if there is no `bilateral' access to it by way of free flow of imports and exports of goods, services and assets. Also, the per capita income is so low as to limit the volume and value of the market.