Is India Really Immune to the Global Slowdown?

My new column in Thursday’s edition of The Wall Street Journal Asia is up:

So far India seems to be weathering the global economic meltdown better than almost any other country. But this blessing might turn into a curse if it makes India skittish about further opening its economy, especially to foreign investment. If the agenda and rhetoric of the main political parties this election season is any indication, that’s a very real possibility.

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.

But in the face of all this good news, the emerging wisdom among India’s political parties is not that its previous round of liberalization worked and now the country needs to move post-haste toward the next round. Rather, they are suggesting that India’s relatively strong economic performance shows that it has struck the optimal balance — open enough to benefit from global upswings and closed enough to avoid global contagions. “This financial crisis might well bring out India’s latent but powerful dirigiste impulses,” warns Raghuram Rajan, an economic advisor to Prime Minister Manmohan Singh and a professor at the University of Chicago.

India’s export sector is small, thanks in part to the country’s failure to liberalize its archaic, union-friendly labor laws that have diminished manufacturing productivity. But politicians are now hinting that perhaps underdeveloped exports are not such a bad thing after all, as this has made India less vulnerable than other Southeast Asian economies to plummeting global demand. India also does not rely on foreign investments as much as many Eastern European countries do, which has allowed it to avoid the capital flight those countries are now experiencing.

Full Column Here