India's Goldilocks Globalization.(International)

Byline: Arvind Subramanian; Subramanian is a senior fellow at The Peterson Institute for International Economics.

The Congress Party's big win in the recent Indian election was a double surprise. Recent Indian politics have featured a strong strain of anti-incumbency, and the global financial crisis has spelled trouble at the polls for many other governments worldwide. True, before the trouble hit, India had enjoyed five years of the fastest economic growth in its history, reaching 9 percent--almost the same pace as China. But the global crisis could easily have erased all the happy memories. Yet that didn't happen, and for one big reason: India has not been a gung-ho globalizer.

The crisis that began in the United States spread abroad through two channels: finance and trade. Countries that sucked in a lot of foreign capital--like those in Eastern Europe--suffered huge disruptions to their exchange rates, asset prices and financial systems when this capital fled to safety. Meanwhile, countries that relied heavily on exports--like Singapore, Taiwan and China--also suffered when foreign demand collapsed.

India managed to avoid both extremes. That's because it followed a strategy that can be called "Goldilocks globalization," relying neither too much on foreign finance nor too much on exports. On the financial side, unlike the Eastern European countries that ran a current-account deficit of more than 10 percent of GDP, India kept its own at about 2 to 3 percent of GDP. India also cannily insured itself against turmoil by building a healthy cushion of foreign-exchange reserves: about $315 billion worth, among the highest in the world. As a result, when the crisis hit, India was able to provide dollars to investors that were selling rupee assets and demanding dollars in return. This reassured investors, leading many to keep their money in India.

On the trade side, India's exports of goods and services never accounted for more than about 20 percent of its economy, compared with about 45 percent for China and up to 100 percent elsewhere in Asia. Thus when foreign demand for products collapsed, this hurt India far less. Indeed, between March 2008 and March 2009, India managed to grow at 6.7 percent, well above the rate of most industrial countries.