Milan Brahmbhatt

India in the Global Economy

This study reviews trends in the process of Indias integration into the world economy in the context of the experience of developing countries as a whole, and evaluates the main factors which may hamper the pace at which integration occurs in the future. Based on a consideration of prospects for key export sectors, the study appraises the prospects for a major improvement in some export sectors targeted by the government. Finally, it assesses the potential effects of increased foreign direct investment in the Indian economy. The study concludes that Indias progress in global integration has been modest and its level of integration remains low with only modest future prospects because macroeconomic policies, notably a large fiscal deficit, and comparatively high trade restrictions block and discourage foreign investors, transportation and communications infrastructures are weak and inefficient, and the large labor pool is on the whole qualitatively inadequate and inflexible. Moreover, India remains vulnerable to a combination of external and internal shocks, specifically to unexpected oil price increases and domestic production stagnation, to foreign interest rate fluctuations and macroeconomic instability triggered by the combination of a large deficit, to high domestic consumption, to low investment and export growth, and real exchange rate appreciation.