India’s Elections, World Trade, and Energy Prices

India re-elected its ruling Congress Party to a larger majority in its national legislature, good news for the U.S. as well as hundreds of millions of poor Indians. Some U.S. analysts, such as Michael Barone at the American Enterprise Institute, look at these election results as a good sign for American foreign policy. Once the protector of Indian-style socialism, the Congress Party led the opening of the Indian economy to world trade beginning in the early 1990s.

But, the foreign-policy dimension, while important, is overshadowing what may be a more important economic effect of the elections. Many believed that the elections would strengthen the political hand of protectionists and socialists, moving the nation back into an inward development model that would distance it from world trade. If this happened, India’s economic growth would likely have stalled as it had between the 1950s through the 1980s.

With the election of the pro-growth, largely pro-trade Congress Party, almost two decades of reform efforts intended to open the nation to global trade will likely continue. Indeed, my colleague Shikha Dalmia observed in a recent column for the Asian edition of the Wall Street Journal:

“Unlike in the past when the Indian economy contracted pneumonia every time the global economy sneezed, this time the exact opposite seems to be happening: In the final quarter of last year, the U.S. economy shrank by an annualized rate of 6.2% and the Japanese economy by 12.7%. By contrast, India says its economy grew by 5.3% in the same period. (There is a fierce debate among Indian economists about the reliability of government data, but, with some notable exceptions, there is widespread agreement that the country was among the top performers last year.) Next year, India’s economy is expected to grow between 5% and 7%. By contrast, the Organization for Economic Cooperation and Development estimates that the combined gross domestic product of its member developed economies will contract by 4.2% in 2009.”

All this isn’t certain, however. India was already beginning to retrench on trade. Moreover, India’s growth was largely in previously un-regulated export industries such as hi-tech. That’s why outsourcing and telecommunications became so dominant. Traditional industries, from airlines to steel, are still mired in stifling bureaucratic red tape and oppressive labor laws. The real question is whether the Congress Party leadership has the fortitude to unleash entrepreneurship in these traditional sectors.

Indeed, Shikha concluded her column:

“India is on the cusp of a major transformation that could make the country’s crushing poverty a thing of the past. However this will require a renewed commitment to liberalization. India’s parties have a long tradition of dumping their campaign rhetoric as soon as they get elected. This time they should certainly honor that tradition — and throw open India’s doors to foreign investment and globalization.”

If the Congress Party holds onto to its liberal commitment to an open economy, India’s continued economic resurgence is a mixed blessing. Hundreds of millions of Indians will be lifted from poverty. Hundreds of millions of more will become wealthier, creating an broad-based middle class. Combined with the continued economic growth of China, the global economy will likely put serious pressure on world resources, particularly oil and energy prices.

The domestic economic policy implications are clear: we must be in a position to adapt to a radically changing world economic enviornment with unprecedented pressures on traditional world resources. Entrepreneurship, innovation, and a dynamic open economy facilitated by a well functioning price system are more important than ever.

Ironically, just as the U.S. needs more openness, we have a policy regime in place focused on more direct management of the economy from the federal government. This does not bode well for our ability to adapt to the uncertainties, vaguaries, and challenges of a global economic growth led by China and India.