Why India's Economy Fares Better Than Others

Steve Inskeep talks with Arvind Subramanian of the Peterson Institute for International Economics about how India and China are faring in this global recession. Both countries are significantly less affected than the U.S. and Europe — especially India. Its relatively slow pace of reform has protected its citizens from really feeling the pinch.

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LINDA WERTHEIMER, host:

This is MORNING EDITION from NPR News. I'm Linda Wertheimer.

STEVE INSKEEP, host:

And I'm Steve Inskeep. India may be home to many American back offices and call centers. But that giant country has failed to fully connect itself to the global economy. If you're Indian that's a failure you can be very happy about right now.

We're joined this morning by Arvind Subramanian, an economist with the Peterson Institute here in Washington, D.C. He's also worked for the International Monetary Fund. He's just back from India.

Welcome to the program.

Mr. ARVIND SUBRAMANIAN (Economist, Peterson Institute): Thanks for having me, Steve.

INSKEEP: So how's the economy there?

Mr. SUBRAMANIAN: It's doing less badly than, say, the U.S. You know, India was growing at about nine percent for five years.

INSKEEP: Which is huge.

Mr. SUBRAMANIAN: Which is huge. And now that's come down to a mere 7 percent. And next year it's forecast to go down to about five-and-a-half, six percent.

INSKEEP: Well, how could you have a situation where India's economy is still growing even as America's shrinks, as Europe is in trouble, as Japan is trouble, other places are shrinking?

Mr. SUBRAMANIAN: One simple answer, of course, is that as you mentioned in the beginning India is not as connected with the global economy as many other countries, including China. For example, India exports about 21 percent of its GDP. The figure for China is something like almost 50 percent of GDP. So when the world economy tanks, China is, in the first instance, affected more than India is.

But that's not to say that India's not affected. In the slums of Bombay, for example, you know, "Slumdog Millionaire," has been in the news.

INSKEEP: Um-hum.

Mr. SUBRAMANIAN: In the slums of Bombay, the price of scrap plastic water bottles has collapsed because the world economy has collapsed.

INSKEEP: People are buying less bottled water. There's less demand for recycling the plastic.

Mr. SUBRAMANIAN: Exactly. Yeah. So just to make the point that India's not completely insulated. But it's true that, you know, it's affected less. And another good illustration of that, Steve, is the following. Because India's insulated, and because agriculture is even more insulated from the rest of the world, 50 percent of Indians - at least 50 percent - live directly or indirectly off agriculture. It turns out that agriculture's not doing so badly.

INSKEEP: Just so I understand what you mean by agriculture being insulated. Most food that Indians eat is grown relatively locally?

Mr. SUBRAMANIAN: Yeah. India grows its - most of its food locally. The rural sector is not doing too badly.

INSKEEP: Hmm. And what about finance? Are Indian banks connected to, bought by, owned by Western banks the way that so many other country's banks are?

Mr. SUBRAMANIAN: Well, it turned out that, you know, most of the Indian banking system is owned by the government. And only one bank, a private bank, was exposed to some of these toxic assets like in the United States. And that's a relatively small bank. So that when the crisis hit the Indian banking system, again, was relatively more insulated and relatively less affected.

INSKEEP: How does India's experience compare to China, another huge economy that has very much opened up to the world?

Mr. SUBRAMANIAN: Yeah. The big difference between India and China is that the Chinese authorities have been able to respond to it in a very effective fashion. Just like the U.S., they've embarked on a huge fiscal stimulus. They're building more infrastructure, they're spending more on the health system, because the government finances are in a good position. Not…

INSKEEP: They hadn't been doing huge deficit spending the way the United States had been during good times.

Mr. SUBRAMANIAN: No. And their households weren't indebted. In China, for example, 90 percent of people buy cars cash down, a mortgage is 50 percent down, you know. So they don't have this borrowing culture.

India has not been able to do that, because its public debt situation is much worse.

INSKEEP: So India's lucky that its economy has not gotten too bad.

Mr. SUBRAMANIAN: Exactly, because its ability to respond is not as much as that of China. I mean, some people call the Chinese response the gold standard in terms of how to respond to a crisis.

INSKEEP: Or at least the cash standard or something.

Mr. SUBRAMANIAN: Or the cash standard. Exactly. Yeah.

(Soundbite of laughter)

Mr. SUBRAMANIAN: Gold is - well gold is doing well.

INSKEEP: Is the economic crisis and India's relative insulation from it changing people's opinions about globalization there?

Mr. SUBRAMANIAN: Well, yeah, that's, I think, the big question that's going to be debated once, you know, the crisis subsides. One side is going to say - look, when we grew at nine percent, it's because a lot of foreign money came in. The other side is going to say, well, is that enough to have to put up with the downturn? And certainly, I think, there's going to be a re-evaluation of globalization. But the one point I would emphasize is that, India is not going to go back on opening up its markets in any serious way.

INSKEEP: Arvind Subramanian of the Peterson Institute here in Washington DC, thanks very much.

Mr. SUBRAMANIAN: Thanks for having me Steve.

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