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The ‘bright spot’ of emerging markets promises much but has yet to deliver
©Bloomberg
T
he truth may finally be wearing off the old saying that India only ever compares itself with itself. As the Indian economy has proved to be one of the least dim spots in a gloomy emerging market landscape, boasts are multiplying that it is overtaking China as the engine of world expansion. Jayant Sinha, India’s junior finance minister, recently laid down the bold prediction that “in coming days, India will leave China behind as far as growth and development matter”.
Not, as it were, so fast. WhileIndia’s short-term macroeconomic performance has put it at a better place in the cycle than most big emerging markets, the longer-term structural problems that have kept it in a lower growth class than China unfortunately persist, as do the political elephant traps awaiting intrepid reformers
On the face of it, the Indian economy is performing well, and the popularity ofNarendra Modi, the prime minister elected on the promise of liberalising reform last year,is holding up. Christine Lagarde, IMF managing director, hasreferred to Indiaas a “bright spot” in the slowing global economy. Growth equalled China’s last year at 7.3 per cent, andthe IMF predictsIndia will be the fastest-growing large economy in the world this year.
The reality is less encouraging. For one, the statistics may quite simply be wrong. A new data series for GDP introduced in February did much of the work in raising India’s growth rate near China’s, and the numbers, with a short history and without detailed data to underpin them, sit at odds with other indicators such as industrial production and imports.
Second, the current conjuncture has been delivered by a number of one-off factors. The falling global oil price since late 2014 has benefited India both in holding down inflation and in helping Mr Modi reform public finances by cutting expensive government fuel subsidies without raising the price to consumers.
Third,substantial impediments remainto the challenge of increasing investment, particularly in infrastructure, to unlock India’s potential for competing with east Asian countries for the manufacturing industry currently being priced out of China by rising wages and costs. Growth in manufacturing came to a halt between 2012 and 2014 after several years of expansion, casting severe doubts on its underlying momentum.
Certainly, macroeconomic policy has improved compared with earlier eras. Fiscal and current account deficits remain manageable. The Reserve Bank of India, which has traditionally struggled with a multiplicity of targets and instruments, adopted a more conventional model, targeting consumer price inflation using the short-term interest rate. Under Raghuram Rajan, who took over as governor in 2013, the RBI got on top of inflation by rapidly raising rates. It has now been able to cut them by 125 basis points to stimulate growth while other EM countries such as Turkey and Brazil have had to tighten.
But theRBI statementaccompanying its latest cut, a larger-than-expected 50 basis points on September 29, made quite clear that the contribution of monetary policy to growth was running out of room. Mr Rajan said: “While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.”
Indeed, problems in the banking sector are exactly one of the problems holding back investment. State-controlled banks have overlent, often under political inducement, to failed infrastructure projects, and overall theaccretion of bad loansin the system is blocking the extension of fresh credit. The state banks will need new capital over the next few years, the government wanting nearly two-thirds of it to be raised from markets, but whether that will permit the widescale rationalisation and privatisation that many banks need remains to be seen.
There is a problem with the demand for investment lending as well as the supply. India has always struggled to expand its industrial sector on a scale to match the fast-growing economies of east Asia, and the share of manufacturing in the Indian economy appears to have stalled at a lower rate than for other emerging economies.
Alongside poor supporting infrastructure, one of the reasons has almost certainly been the difficulty of acquiring land for industrial development, given the complexity of antiquated land laws. Long before Mr Modi came to power, the problem was symbolised by Tata being forced to relocate the manufacturing plant for its Nano car across India after it was driven out of its initial site in West Bengal by angry locals,raising the cost of the project.
Reforming land acquisition laws was one of Mr Modi’s signature projects as prime minister. But a change in the law, along with the introduction of a value-added “Goods and Services Tax”,stalled this summerin a session of parliament dominated by corruption scandals rather than legislative progress. Without the ability to build large-scale industrial plants near a source of workers, any Indian push into manufacturing is likely to be dominated by capital-intensive projects that provide fewer jobs.
Mr Modi’s government insists it will push on with reform but, given the snarl-ups in parliament over the summer, his political space is shrinking. An important test of his government’s political momentum comes next month in the state elections in Bihar. The eastern state has long been one of India’s poorest and, while it has been growing rapidly, it has struggled to expand its manufacturing sector. If Mr Modi’s message of clearing away the impediments to investment does not resonate, it does not bode well for his chances of maintaining momentum into next year.
For the moment, it seems that India will be happy being regarded as a standout in the otherwise disappointing emerging market class. If its cyclical advantage fades and it returns to its familiar sub-China levels of growth, its politicians are unlikely to be so vainglorious.
http://www.ft.com/cms/s/3/71a4cad2-728e-11e5-bdb1-e6e4767162cc.html#axzz3opVjL5bc
T
he truth may finally be wearing off the old saying that India only ever compares itself with itself. As the Indian economy has proved to be one of the least dim spots in a gloomy emerging market landscape, boasts are multiplying that it is overtaking China as the engine of world expansion. Jayant Sinha, India’s junior finance minister, recently laid down the bold prediction that “in coming days, India will leave China behind as far as growth and development matter”.
Not, as it were, so fast. WhileIndia’s short-term macroeconomic performance has put it at a better place in the cycle than most big emerging markets, the longer-term structural problems that have kept it in a lower growth class than China unfortunately persist, as do the political elephant traps awaiting intrepid reformers
On the face of it, the Indian economy is performing well, and the popularity ofNarendra Modi, the prime minister elected on the promise of liberalising reform last year,is holding up. Christine Lagarde, IMF managing director, hasreferred to Indiaas a “bright spot” in the slowing global economy. Growth equalled China’s last year at 7.3 per cent, andthe IMF predictsIndia will be the fastest-growing large economy in the world this year.
The reality is less encouraging. For one, the statistics may quite simply be wrong. A new data series for GDP introduced in February did much of the work in raising India’s growth rate near China’s, and the numbers, with a short history and without detailed data to underpin them, sit at odds with other indicators such as industrial production and imports.
Second, the current conjuncture has been delivered by a number of one-off factors. The falling global oil price since late 2014 has benefited India both in holding down inflation and in helping Mr Modi reform public finances by cutting expensive government fuel subsidies without raising the price to consumers.
Third,substantial impediments remainto the challenge of increasing investment, particularly in infrastructure, to unlock India’s potential for competing with east Asian countries for the manufacturing industry currently being priced out of China by rising wages and costs. Growth in manufacturing came to a halt between 2012 and 2014 after several years of expansion, casting severe doubts on its underlying momentum.
Certainly, macroeconomic policy has improved compared with earlier eras. Fiscal and current account deficits remain manageable. The Reserve Bank of India, which has traditionally struggled with a multiplicity of targets and instruments, adopted a more conventional model, targeting consumer price inflation using the short-term interest rate. Under Raghuram Rajan, who took over as governor in 2013, the RBI got on top of inflation by rapidly raising rates. It has now been able to cut them by 125 basis points to stimulate growth while other EM countries such as Turkey and Brazil have had to tighten.
But theRBI statementaccompanying its latest cut, a larger-than-expected 50 basis points on September 29, made quite clear that the contribution of monetary policy to growth was running out of room. Mr Rajan said: “While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.”
Indeed, problems in the banking sector are exactly one of the problems holding back investment. State-controlled banks have overlent, often under political inducement, to failed infrastructure projects, and overall theaccretion of bad loansin the system is blocking the extension of fresh credit. The state banks will need new capital over the next few years, the government wanting nearly two-thirds of it to be raised from markets, but whether that will permit the widescale rationalisation and privatisation that many banks need remains to be seen.
There is a problem with the demand for investment lending as well as the supply. India has always struggled to expand its industrial sector on a scale to match the fast-growing economies of east Asia, and the share of manufacturing in the Indian economy appears to have stalled at a lower rate than for other emerging economies.
Alongside poor supporting infrastructure, one of the reasons has almost certainly been the difficulty of acquiring land for industrial development, given the complexity of antiquated land laws. Long before Mr Modi came to power, the problem was symbolised by Tata being forced to relocate the manufacturing plant for its Nano car across India after it was driven out of its initial site in West Bengal by angry locals,raising the cost of the project.
Reforming land acquisition laws was one of Mr Modi’s signature projects as prime minister. But a change in the law, along with the introduction of a value-added “Goods and Services Tax”,stalled this summerin a session of parliament dominated by corruption scandals rather than legislative progress. Without the ability to build large-scale industrial plants near a source of workers, any Indian push into manufacturing is likely to be dominated by capital-intensive projects that provide fewer jobs.
Mr Modi’s government insists it will push on with reform but, given the snarl-ups in parliament over the summer, his political space is shrinking. An important test of his government’s political momentum comes next month in the state elections in Bihar. The eastern state has long been one of India’s poorest and, while it has been growing rapidly, it has struggled to expand its manufacturing sector. If Mr Modi’s message of clearing away the impediments to investment does not resonate, it does not bode well for his chances of maintaining momentum into next year.
For the moment, it seems that India will be happy being regarded as a standout in the otherwise disappointing emerging market class. If its cyclical advantage fades and it returns to its familiar sub-China levels of growth, its politicians are unlikely to be so vainglorious.
http://www.ft.com/cms/s/3/71a4cad2-728e-11e5-bdb1-e6e4767162cc.html#axzz3opVjL5bc
