Post-Crisis Economic Order: How Can Free Market and Control Be Balanced?

National responses to the global economic crisis have included traditional and innovative means of protectionism, challenging the paradigm of globalization and the force of free market.

What must be done to restore balance between regulatory and oversight mechanisms and India’s ongoing reform agenda?

Key Points
• Protectionism is not the answer – there should be collective cooperation among all nations
• The government responded to the financial crisis by stimulating domestic demand – this will have to continue until developed country economies recover
• The government’s three priorities now are investment in agriculture, investment in infrastructure and getting fiscal and monetary policy right
• The free market must be balanced with transparent, innovative regulation – self-regulation has also contributed to India’s resilience during the crisis
• Corruption and red tape are perennial problems holding India back from double-digit growth
• The two key drivers of Indian growth are domestic consumption and investment. The finance minister would be happy with GDP growth of 7%-plus next year and 8%-plus the year after

Synopsis
The spectre of protectionism that seemed likely a year ago has not materialized and global trade flows are now, if anything, more liberal than before. India’s finance minister clearly stated that protectionism is not the answer and called for collective cooperation among all nations.

The minister recounted how his government, faced with shrinking export markets and soaring oil prices, responded to 2008’s financial crisis with two stimulus packages that generated greater domestic demand – enabling India to post modest GDP growth of 6.7% in financial year 2008-2009. This focus on domestic demand will have to continue until the developed world economies, particularly the United States, Europe and Japan, make a more robust recovery. Going forward, the government’s three key priorities are investment in agriculture, investment in infrastructure and getting fiscal and monetary policy right.

In terms of regulation, there was consensus between industry leaders and the government that, while too rule-bound a market would stifle growth, a balance has to be struck in which the free market is governed with sufficient regulation to safeguard the weaker sectors of society. The minister championed regulation that is transparent, innovative and constantly adjusting to the conditions of the market. Self-regulation also emerged as a key factor in limiting India’s exposure to the financial downturn – from banks maintaining strong liquidity ratios and lending only against income to borrowers keeping a close eye on their repayment capacities.

The minister agreed with a comment from the floor that corruption and delays due to red tape remain perennial issues – and may be holding India back from double-digit growth. India’s recent subscription to the OECD’s rules on sharing information about tax evasion is a positive move.

Looking ahead, the key drivers for the Indian economy will be domestic demand and investment. The minister said he would be happy with GDP growth of 7%-plus next year and 8%-plus the year after – with the possibility of 9% or 10% thereafter.

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