India's growth challenges

India's tourist promotion slogan is 'Incredible India!' and there's a lot about that country that's pretty incredible.

But three stories over the past week caught my attention. They show three (very) different sides of India's incredible, but very complicated, growth story.

Here's the first story that caught my attention:

The International Monetary Fund's July update to its April 2010 World Economic Outlook projects 9.4% growth for India in 2010, slackening to a still-impressive 8.4 per cent for 2011. (India's bearish finance minister, Pranab Mukherjee, has played it cooler, sticking to a projection of 8.5 for 2010). So, it's now clear that growth is back on track.

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What a difference a year makes: As the global crisis unfolded in 2008, many in India argued that the economy was safely 'decoupled' from global trends because India didn't depend heavily on foreign demand for exports - and because its relatively closed financial sector had little exposure to toxic assets. And yet India was hurt by the crisis: Exports collapsed, capital left the country, and corporate India lost access to many sources of overseas financing. The government adopted a fiscal stimulus in December 2008 that included heavy capital and infrastructure spending. Still, Indian growth slowed from 9% in 2007-08 to 6.7% in 2008-09.

The government's top priority, then, has been to return India to a path of rapid and sustained growth of 9%. And in that sense, the recent news has cheered many in New Delhi - even Mukherjee.

This means debate will increasingly shift to the challenges to growth, not least inflation, rather than India's growth rate per se. And no wonder: Inflation isn't just an economic issue in India; it's politically explosive because it touches consumer prices, particularly the prices of foodstuffs, oils, and cooking fuels, in a country with a large population of poor voters. And inflation is a growing challenge; inflation figures are now over 10% and food inflation is higher still.

Here's the second story that caught my eye:

Last week, India adopted a new symbol for its currency, the rupee-akin to symbols for the dollar, euro, pound and yen. This is the work of a country with ambitions to translate its economic success into greater global clout, including by deploying the symbols of global clout. In fact, the value of the rupee has lagged.

The return to rapid growth almost certainly will reinvigorate debates about India's global aspirations. India has become more of a player in global markets. Indian companies have listed in London, for instance. And there are some stable sources of capital flows, whatever is happening in the global economy, including remittances from workers overseas and capital inflows from non-resident Indians abroad. And then there was the curious case of India's gold buy from the IMF in 2009. It boosted gold prices by as much as 2.2% but, ultimately, just didn't signal very much because other Asian central banks did not follow suit.

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