Defending India's Growth

As India worries about instability among its neighbors, defense spending will likely rise in the year ahead. Because approximately 20% of India's expenditures already go to defense, there is a risk that the government's budget deficits may hit unmanageable levels, threatening the hard won growth of the last decade.

Even before America and its allies began their bombing campaign against Afghanistan's terrorist infrastructure, India's expenditures on defense were rising fast. In the fiscal year ending in March 2002 the government budgeted 731.4 billion rupees (US$15.2) for defense, up 12% from the previous fiscal year. Coming atop an already bloated government deficit, India's government now faces hard choices if it is to maintain its reputation for economic reform.

Early in the 1990s, India moved away from the dozy statist system bequeathed by Nehru by adopting market-friendly policies. These reforms put the economy on a higher growth trajectory, with average real GDP growth hitting 6% over the last decade, compared to under 4% average annual growth in previous decades. Inflation remained in single digits throughout the 1990s and, despite mushrooming fiscal deficits, economic growth became more stable.

The global technology boom helped here, as India created its own ``new economy'' that had a big impact on the structure of India's exports. High tech exports surged from 16% annual growth in 1995-96 to 53.5% in 2000-01. Still, as in so many other countries, high tech was no magic bullet. Old-fashioned infrastructure bottlenecks lingered, cramping private sector expansion.