CAMBRIDGE: India may the most important unheralded story of the world economy in coming years. Though India's one billion people constitute nothing less than one-sixth of humanity, and notwithstanding the fact that India is the world's largest democracy, India remains off the radar screen for most observers of the world economy. This may change soon, for India is on the move. If it remains on course with economic reforms, India will be one of the fastest growing economies in the world in the next few years, and will become one of the premier locations for foreign investment. India's global political influence is likely to rise in conjunction with economic success, benefiting both the cause of democracy as well as the global economy.
India's low profile is easy to understand. Upon independence half a century ago, India's first Prime Minister, Jawaharlal Nehru, set India on a course of protectionism and socialism – two of the most self-defeating economic strategies of modern times. To a country that had struggled for decades against British imperialism, however, neither capitalism nor openness to foreign investors seemed a prudent course. While India made important advances – in science, agricultural technology, and democratic institutions – the economy remained below its potential for decades. Only when India chose a course of market reforms in the mid-1980s did the outlook improve. With a decisive turn towards open trade and market liberalization in 1991, India finally broke free of the shackles of a failed economic strategy.
During the 1990s, India found its footing as a market economy integrating with the world. Because of its poverty, its complexity, and its vastness (even national elections have to be held over the course of several weeks, to accommodate hundreds of millions of voters), the uptake of market reforms has been gradual, but also remarkably resilient to shocks. The old centralized political structure built around Nehru's Congress Party collapsed in the mid-1990s, giving way to a succession of weak multi-party governments. But the remarkable underlying truth is that each new government endorsed the direction of globalization and market reforms, so much so that the basic reform direction is now a national consensus of virtually every major party.
Today's government won a strong mandate in last autumn's elections, giving it several years to deepen and widen reform. With this political mandate, India stands the chance of a dramatic breakthrough to rapid growth. Several things are now working in India's direction: