Thursday, July 31, 2014
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The Emerging-Market Growth Engine

NEW DELHI – The key role of emerging and developing countries – including India, China, and Brazil – in sustaining world economic growth was brought into sharp focus during the recent global crisis, and has been well documented. This trend is likely to continue in 2011 and beyond.

Indeed, the IMF expects that emerging and developing economies will grow by 6% in 2010 and 6.3% in 2011. Emerging-market economies have not only cushioned the global impact of the recent crisis, but have also helped industrialized countries reverse the recessionary trend of 2008-2009. But recovery remains fragile in the developed world, with unemployment remaining at crisis levels.

But, while emerging economies are proving to be drivers of global demand, the right mix of government initiatives and policies is still required to ensure that they continue to provide the impetus for faster world economic recovery in the short term and be the engines of sustainable growth in the medium and long term. There is also a strong need for supporting long-term capital flows to emerging economies to stimulate investment further, particularly in their infrastructure sectors, thereby injecting much-needed additional demand into the global economy.

In this regard, another important development is the increasing number of emerging-market middle-class consumers, their growing purchasing power, and thus their potential impact on global demand. According to one estimate, middle-class consumers in a dozen emerging economies today wield annual purchasing power totaling approximately $6.9 trillion.

Indeed, projections from McKinsey & Company suggest that the purchasing power of this rising middle class in emerging markets may rise to $20 trillion over the next decade – twice the current level of consumption in the United States. The four biggest emerging economies – Brazil, Russia, India, and China (the BRICs) – are large producers and consumers of goods and services, and will also be important in shaping the pace, direction, and sustainability of global economic growth.

Let me turn to India specifically. In the five years preceding the 2008-2009 crisis, the Indian economy grew at an average rate of nearly 9% annually. During the crisis, annual growth slowed, but only to 6.7%, reflecting the economy’s inherent resilience. The growth rate subsequently recovered to 7.4% in 2009-2010, and we expect 9% growth by 2011-12.

The strength of the Indian economy is underpinned by a high saving rate and robust investment. The government’s prompt action to counter the crisis – fiscal stimulus, growth packages, and monetary easing – proved effective. A sound financial and banking system with limited exposure to global markets, together with the importance of domestic consumption in sustaining demand, has also helped. But what distinguishes India from other emerging economies, in particular China and the Southeast Asian countries, is that domestic demand, rather than exports, is the primary driver of growth.

A return to high growth rates globally will require a broader revival of demand. Needless to say, this will occur only gradually, particularly in the developed countries. Thus, India’s high growth rates will have to remain dependent on strong domestic demand. In order to meet this challenge, we are focusing on investments in infrastructure sectors such as power, telecommunications, roads, ports, and airports.

While the public sector will continue to play an important role, given the massive investment required, substantial private investment – including foreign investment – would be needed to address India’s huge “infrastructure deficit” and the financing gap that accompanies it. A strategy of private-public partnership has been adopted to address the infrastructure challenge. At the same time, we need to invest in our human capital, supporting the development and upgrading of the workforce’s skills and capacity for innovation.

At its summit in Seoul in November, the G-20 firmly placed development at the core of its agenda. Indian Prime Minister Manmohan Singh, underlining the importance of infrastructure investment, made the following proposal, which several leaders endorsed: “Recycling surplus savings into investment in developing countries will not only address the immediate demand imbalance, it will also help to address developmental imbalances. In other words, we should leverage imbalances of one kind to redress imbalances of the other kind.”

As we head into the second decade of the century, innovative ideas like using global savings or surpluses to finance infrastructure in emerging and developing countries should be pursued seriously. Doing so would not only sustain the growth momentum of these economies, but would contribute to global recovery by generating much-needed additional demand in the developed countries.

While the emerging economies’ global role will inevitably grow in the coming years, this shift will need to be anchored in a cooperative partnership with the developed world. As for India, our resilient democratic values, ability to manage diversity, and strong economic fundamentals underpin our country’s current global posture.

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