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The Importance of India

Bush deserves credit for boosting relations with New Delhi.

11:00 PM, Jan 14, 2009 • By DUNCAN CURRIE
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To be sure, the U.S. and Indian governments will not always be in harmony. Bose says that India probably took a more "strident" position than necessary in the Doha round of global trade talks, which collapsed in late July after a fierce debate over agricultural policy. He adds that Indian officials are worried about Barack Obama's commitment to free trade, given his repeated criticism of "companies that ship jobs overseas." American officials, meanwhile, are concerned about India's relatively warm relations with Iran. But Panagariya says the Iran issue will not prove a major hindrance to U.S.-India collaboration. After all, India is very friendly with Israel. "You don't hear a peep out of the Israelis about India's Iran policy," says Cohen.

As for Pakistan, it has always bedeviled U.S.-India relations. Now the war in Afghanistan is complicating things even more. In the aftermath of the recent terrorist attacks in Mumbai, "India and the United States are likely to come closer," says Bose, provided the Americans use their leverage with Pakistan and pressure Islamabad to reform its army, clean up its intelligence services, and clamp down on militant groups. Despite all the saber-rattling, Bose expects that New Delhi will stay focused on its international ambitions and act prudently.

"India wants to play a role on the global stage," he says. Right now, however, with a national election due by May, the South Asian giant is experiencing severe economic turmoil. The worldwide downturn has taken a harsh toll on India and disrupted its lengthy run of 9 percent annual GDP growth. World Bank economist Sadiq Ahmed reckons that the Indian growth rate will dip below 7 percent in the 2008-2009 fiscal year and below 6 percent in the 2009-2010 fiscal year. "Job losses are going to be enormous due to the global slowdown," Indian commerce ministry spokesman Rajiv Jain recently told Bloomberg News. Meanwhile, the Indian financial industry has been rocked by news of a massive fraud scandal at outsourcing giant Satyam.

Painful as they are, India's economic troubles should not be overblown. "It's not a disaster scenario by any means," says Ahmed, who thinks that Indian policymakers have thus far done "a very good job" in responding to the slump. He notes that inflation has fallen sharply, interest rates have returned to normal levels, and the domestic liquidity situation has stabilized. India is benefiting from its high savings rate. "We are not expecting a prolonged downturn," says Ahmed.

Whatever its current woes, India has remarkable potential. Its middle class is still dwarfed by that of China, but it will balloon over the next few decades. A May 2007 McKinsey Global Institute study estimated that between 2005 and 2025, average real household disposable income in India will nearly triple, the Indian middle class will swell from roughly 50 million people to around 583 million, and the country's consumer market will grow from the 12th largest in the world to the fifth largest.

Goldman Sachs reckons that India could have a larger economy than the United States by 2050. As Goldman economists Jim O'Neill and Tushar Poddar observed in a June 2008 paper, the United Nations has projected that India's population will increase by around 310 million between 2000 and 2020. "India will in effect create the equivalent of another U.S.," wrote O'Neill and Poddar, "and for those of working age between 2000 and 2020, India will create the equivalent of the combined working population of France, Germany, Italy, and the U.K. We estimate another 140 million people will migrate to Indian cities by 2020."

India's long-term progress is stunning. The 2007 McKinsey study pointed out that, "in effect, there are 431 million fewer poor people in India today than there would have been if poverty had remained at its 1985 rate." There is no question that "India's economic reforms, and the increased growth that has resulted, have been the most successful anti-poverty program in the country's history."

Long a bastion of socialism, India flirted with economic liberalization during the 1980s, under the leadership of Rajiv Gandhi, who served as prime minister from 1984 to 1989 (and was assassinated in 1991). But the reform process didn't begin for real until 1991, when India was facing an economic crisis. As Robyn Meredith of Forbes magazine writes in her 2007 book, The Elephant and the Dragon, some 110 million Indians "had been thrown into poverty in just the preceding two years," and "330 million people, or two of every five Indians, lived below the poverty line." Inflation had surged to 17 percent, and the country "was flat broke."