## India—A Hub for Globalization

_IMF News, January 7, 2005_

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## Bibliographic details
- Published: January 7, 2005

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### Overview and central question
- Speech by Raghuram Rajan, Economic Counsellor and Director of the Research Department, International Monetary Fund, at the Pravasi Bharati Divas Conference, New Delhi, India, January 7, 2005.
- Central question posed: "Is India really ready to play a central role in the global economy?" — reframed as whether India has the collective "mindset" to be a hub for globalization.

### Mindset, national spirit, and openness
- A national "atma vishwas" (self confidence) can drive intolerance for laziness, corruption, and poor quality, and motivate sacrifice for future gains.
- Such a mindset encourages:
  - Willingness to open to the world and use the cheapest resources wherever produced.
  - Hiring the best people regardless of origin and facing the fiercest competition.
- Examples of Indian firms and projects demonstrating outward orientation:
  - Expansion of the group headed by Ratan Tata as an Indian multinational.
  - Heymath (Chennai) providing math homework help and lesson plans internationally, using consultants from Cambridge University and IIT Madras.
  - New Delhi Metro built "to world standards and on time."

### Key statistics on openness and trade
- India score on the IMF's trade restrictiveness index: 8.
- India's GDP accounted for 1.6 percent of world GDP in 2003.
- India's trade accounted for only .94 percent of world trade (estimate based on 178 countries and World Economic Outlook data for 2003).
- Anti-dumping activity, 1995–2003:
  - India initiated 379 cases (15.69%) of a total 2416.
  - United States: 329 cases (13.6%).
  - European Union: 274 cases (11.3%).

### Factors keeping India relatively closed
- Political incentives:
  - Politicians find non-voters (foreigners) convenient targets for discrimination.
  - Strong constituencies (e.g., farmers and agricultural workers, non-owner agricultural labor) oppose competition.
  - Many politicians are rich, from rural backgrounds, and older—aligning with constituencies resistant to competition.
- Entrepreneurial confidence and financial underdevelopment:
  - Protectionism historically made beneficiaries lazy and inefficient and reduced incentives to fix distortions (e.g., high cost of finance under the License Permit Raj).
  - Entrepreneurs more likely to oppose liberalization when financial systems are relatively underdeveloped.
- Cultural and demographic patterns:
  - World Values Survey: Indians and Chinese are amongst the most pro-competition on average, but within India poorer and older cohorts tend to oppose competition.

### Drivers enabling greater openness
- Demonstration effects:
  - Firms such as Infosys, TCS, and Wipro showed Indian firms can compete globally and earn large profits.
  - Bajaj Auto: "sells over a million motorcycles and expects to export 160,000 units this year."
- Creeping liberalization:
  - Crisis-initiated reforms that gain momentum and force competition on the rest of the economy.
- Human capital and youth:
  - Younger, better-educated cohorts entering the workforce and parliament increase tolerance for competition.

### Policy recommendations to build constituencies for openness
- Three key steps for an enlightened government:
  - Expand access to, and improve the quality of, education.
  - Improve access to finance.
  - Create more ownership and infrastructure in rural areas.
- Government role:
  - Focus on enabling functions: setting standards, ensuring supervisory, legal, and regulatory infrastructure, and encouraging competitive private-sector provision.
  - Avoid discredited methods: e.g., pouring money into education without addressing teacher incentives and parental involvement; mandating wider lending by public sector banks without improving incentives and systems for credit evaluation and loan recovery.
- Fiscal consolidation:
  - Reducing the large fiscal deficit is a key precondition for policies such as capital account convertibility and effective monetary policy tools.
- Flexibility and market entry/exit:
  - Build flexibility into the economy to react to change quickly.
  - Reduce petty bureaucratic barriers to entry, introduce more flexible labor laws, and develop a better and more rapidly enforced bankruptcy code.
- Social insurance and safety nets:
  - Create explicit safety nets—unemployment insurance, pension schemes, and health care—targeted at individual workers to cushion those who cannot adapt.
  - Avoid designs that kill work incentives or expand beyond fiscal capacity.
- Phased and time-bound reforms:
  - Use time-bound phasing-in of competition and phasing-out of protections/subsidies to increase acceptance versus shock treatment.

### Attracting foreign investors: principles beyond tax breaks
- Avoid short-term inducements:
  - Tax breaks and financial guarantees are addictive, create constituencies for continuation, and often discriminate against domestic firms.
- Treat foreign investors like domestic investors and address shared concerns:
  - Policy certainty: avoid policies hatched in isolation; encourage open debate and small-scale experiments or initial rollout phases allowing adjustments.
  - Transparency and fairness in decision making: where discretion exists, decision processes should be seen as fair.
  - Strengthen regulatory and supervisory independence: staff with attractively remunerated professionals rather than bureaucrats of proven loyalty.
- Regional diplomacy:
  - Use India's size and strength to quell regional tensions; coordinated relief efforts and offers of help to neighbors increase attractiveness.

### Risks, trade-offs, and concluding prospects
- Competition brings greater volatility; governments should avoid being insurer of first resort that bails out politically connected firms.
- India has opportunities to become:
  - A global financial center (advantage: perfect time zone, IT, communication, and financial skills; missing: sounder regulatory environment and conditions for capital account convertibility).
  - A center for higher education (advantage: core human capital in India and abroad; needs: more welcoming environment for foreign educational institutions, faculty, and students, and greater tolerance for market clearing fees and salaries).
  - Growth in tourism and healthcare are additional potential hubs.
- Final assessment: "The stars are well aligned for India to become a hub of globalization, but it is still some distance from that goal." Foreign investor confidence bets on potential, not reality; it is up to India to realize that potential.

*Remarks by Raghuram Rajan, January 7, 2005.*

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## References

- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Republic of Korea and the IMF](http://www.imf.org/external/country/KOR/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Raghuram G. Rajan](https://www.imf.org/external/np/bio/eng/rr.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp010705_