Thoughtful Indian observers are well aware that the principal obstacles to rapid economic development are internal, not external. Among obvious constraints are failures of governance, including wasteful spending on subsidies at all levels of government, a dire record on the provision of education and health to the bulk of the population, rigid labour laws, inadequate infrastructure and costly restrictions on efficient use of land. Much of this is laid out in an excellent collection of essays by Shankar Acharya, former chief economic adviser to the government of India. Yet such failings are also opportunities. Given how well India has performed despite these disadvantages, consider how well it might do without them.

The biggest danger from a further global shock would be indirect, not direct. It would come via backsliding on reforms. I can see two threats.

The first and least important would be a consequence of global responses. So far, however, the regulatory response, at least in finance, seems unlikely to damage India. The Indian financial system would, for example, be no worse for adopting the emerging global norms, and probably better. A bigger threat would come from imitating external protectionism. But so far, nothing too serious has occurred in that area, though the risks certainly exist.

The second and far greater threat would be undiscriminating embrace by Indians of the “capitalism-in-crisis meme”. In the same way, it might be remembered, one of the worst consequences of the 1930s Great Depression was the embrace of anti-trade and anti-market policies in much of the developing world after the second world war. It would be a catastrophe if any such response occurred, when “reform and opening up”, as the Chinese call it, has begun to work so well, even in India.

via Crisis must not change India’s course – FT.com.

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