South Asia rides on India’s coat-tails

Last week, the United Nations (UN) put out its report World Economic Situation and Prospects 2012. Besides its grim summation of global economic prospects in the immediate future, the UN made a significant observation: South Asia’s economic growth in 2011 was dragged down by a slowing Indian economy. This coat-tail effect of associating with India’s growing economic prowess opens up a never-before opportunity.

While at the global level, India only possesses the potential to play a similar role, the transition in South Asia as the region’s economic behemoth is absolute. If one narrows this down to the subcontinent, then the impact would be even greater. In the last decade, the Indian economy has surged forward like never before. It is not that the other economies in the subcontinent did not grow—India just grew much, much faster. The impact is obvious.

The World Development Indicators published by the World Bank reveal that India nearly doubled from a size of $460 billion in 2000 to $834 billion in 2005, and then more than doubled in the next five years to $1.72 trillion in 2010. This is amazing. The Indian economy has grown nearly fourfold in the last decade.

As a result, the share of the other economies relative to that of the Indian economy shrank. The size of Pakistan, the second largest economy in the subcontinent, relative to the Indian economy shrank from little less than one-fifth in 2000 to about one-tenth in 2010; similarly for Bangladesh, the third largest economy, its size shrank from one-tenth to about one-twentieth in the decade.

Not surprisingly, as reported in Mint on 19 January, the UN concluded that real gross domestic product (GDP) growth in South Asia is estimated to have slowed to 6.5% last year from 7.2% in 2010, consistent with the sharp deceleration in India’s growth rate to 7.6% from the level of 9%.

The political economy of this development is of enormous import. It has served up a never-before opportunity to India to assume a constructive leadership role in the region. While it would be tempting to do some chest-thumping, it would be disastrous —and end up scaring the neighbours, just like countries in South-East Asia have now begun to fear the Chinese bear hug. India’s pacifist approach—a tremendous record of never having started a war of its own accord—together with the room created by the surge in its economy, has enormous potential for diplomatic leverage.

To a large extent, the impact has already begun to see its fallout: the recent turnaround in the bilateral relationship with Bangladesh; Pakistan agreeing to extend, after holding out for years, the most favoured nation (MFN) status to India, and the gradual warming of relations with Myanmar and Sri Lanka.

The economic linkages already exist—some covertly though. Here one is not referring to smuggling activity across South Asia’s borders. Because of the estranged relationship between India and Pakistan, the two countries are unable to officially show the extent of their economic links. Sotto voce, people in government will tell you that the bulk of the trade that flows through the United Arab Emirates (UAE) and Singapore is actually destined for Pakistan; there is also this peculiar practice of ripping of “Made in India” labels and replacing them with “Made in UAE” to make it politically acceptable.

It is not surprising then that the UAE and Singapore are among India’s top five export destinations. According to the latest data available with the commerce ministry, at the end of October, UAE ranks first (accounting for $20 billion of exports) and Singapore third ($10 billion). Together, these two countries account for a little under one-fifth of India’s total exports in the April-October period of 2011-12. The softening of diplomatic links will allow both countries to bring these deals above board—not only will it save costs, but also enhance the volume of trade.

And, money always talks. So clearly, there is an opportunity waiting to be tapped. The trick is how to go about it. One is not even sure if this government, so distracted with its share of firefighting to survive politically, has the ability to make good the opportunity.

That apart, India has to ready itself to pay the price of being in such a pole position in the neighbourhood. This is already manifesting itself in immigration, mostly illegal, into the country. At present, the regime has not been prepared to deal with the influx of immigrants. Even if the other economies are pulled up by the bootstraps as it were by India, the pull factor will continue to operate.

It is a delicate situation yet again. India, despite its economic size, is still struggling to deal with basic development issues such as malnutrition—with nearly one in two children in the 0-5 age group suffering from it. Its social indicators are, in fact, worse off than its neighbours. So feeding its own is of greater priority than more desperate neighbours. It is, like the diplomatic opportunity, an issue that has to be addressed.

Living in denial will only result in a missed opportunity, both for India and now the entire subcontinent.