Western Economic Crisis Creates Opportunity for India

Published on May 16, 2009

The financial crisis in the West may create a huge economic opportunity for emerging markets such as India, said Raghuram Rajan, Eric J. Gleacher Distinguished Professor of Finance and special advisor to the prime minister of India. “For many years to come, industrial economies will be hampered by slow demand growth stemming from the crisis,” Rajan said.

Rajan delivered the closing keynote address at the India Leadership Summit, sponsored by the student-led South Asia Business Group, at Harper Center on May 16. The daylong event featured six panels and four keynotes, including an address from Ambassador Ashok Kumar Attri, consul general of India.

As the world rebalances, demand will have to shift to emerging markets, Rajan said. “There will be a huge need for services, marketing, research and development — all of the things that increase the value added in the emerging markets,” he said.

Three important forces playing out in India today are rising inequality, demographics, and the labor force, Rajan said. Inequality is increasing between the rich and poor, urban and rural areas, states, and various communities. The rise of inequality is important because inequality is a source of conflict and breeds opposition to economic reforms, Rajan said.

India stands at a turning point when its dependency ratio the young and old who do not work versus those typically in the labor force — will fall for a number of years. As a result, India’s economy will receive a population dividend, but only if it creates jobs, Rajan said.

“If you can’t create jobs, those very same young people who would be gainfully employed are instead on the streets,” he said. “That becomes a curse, because unemployed youth tend to be dynamite and create revolution. India has to be very aware of that and create growth and jobs.”

Progress on the horizon

India has two strengths — democracy and an increasing willingness to rely market forces — that can break the cycle of corruption and inefficiency in its government and economy, Rajan said. Four general things India can do to facilitate these changes are:

• Reduce discretion in providing government services. For example, when rail travel became computerized, competition reduced corruption, particularly bribes to get seats.

• Decentralize the process wherever government intervention is needed. “If local government got more of a share of revenue, and had authority over the local administration, They would have a better ability to deliver public goods and services,” he said.

• Give money directly to the poor using newly available technologies. “Let people decide how they want to spend their money,” Rajan said. “That would empower people directly and you wouldn’t need the help of politicians to secure public services like healthcare.”

• Create a stronger safety net for people who lose their jobs.

India is the fifth largest retail destination in the world, with $500 billion annually representing 12 percent of its GDP, said Navneet Kappor, ’02, vice president of Target India. Consumer retail markets are expected to grow four times by 2025 and to reach $1.3 trillion by 2018, Kappor said.

However, organized retail represents just 5 percent of those projections, he said. “That tells you how big the opportunity is and why it’s such an attractive market for a Wal-Mart or Target,” Kappor said. “One of the reasons there are no big box retailers is the regulatory situation in India. Foreign direct investment in retail is not what it needs to be to allow some of these retailers to come in.”

Although it has not opened stores in India, Target is succeeding there by utilizing its headquarters extension model, he said. “It’s a subtle but important difference between how Target operates and how many other companies operate in India,” Kappor said. “It has to do with the culture, leadership engagement, commitment, and sponsorship we have.”

The South Asia Business Group invited Kappor to speak because he is an alumnus who returned to India to help a U.S. multinational corporation set up shop there, said Bidur Gupta, a first-year student. “It was very interesting to hear about the challenges of developing a company of scale in India,” Gupta said. “Many of our members would like to work with American firms, see what their innovation strategy is, and try to take them back to India with us.”

                                                                                                                    — Phil Rockrohr