BanglaBhoot
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By Ambrose Evans-Pritchard
India’s economic model has essentially failed. Talk of matching East Asia’s growth rates has been exposed as wishful thinking. Superpower dreams are giving way to the same old reality of poverty, depleted ground water and graft.
We can now see that growth averaging 8.2pc from 2004 to 2012 was an anomaly, kept alive by fiscal largesse at the top of the cycle. A torrid global boom masked all sins, itself the result of negative real interest rates in the West, the yen carry trade from Japan, China’s reserve accumulation and ultimately a flood of dollar liquidity that leaked everywhere from the US Federal Reserve.
India’s manufacturing industry remains stuck at 14pc of GDP. This is a far cry from levels in Thailand (30pc), South Korea (31pc) or China (32pc), or Japan in its day, the typical threshold for catch-up economies graduating to a higher league. India has actually lost 5m manufacturing jobs over the past decade, slipping from 55m to 50m.
The economic boom fizzled two years ago, ending in the sort of stagflation that bedevilled Britain in the 1970s. India’s “misery index” is back where it was a quarter of a century ago when the old Hindu Model was overthrown and the country embraced free market globalism, up to a point. The International Monetary Fund expects growth to languish at 4.6pc this fiscal year, with inflation at 10.5pc. “India has very little room to adopt countercyclical policies,” it said.
Voters have turned to Narendra Modi, a Hindu nationalist and celibate “monk” from the Rashtriya Swayamsevak Sangh movement who rose from tea boy to run the state of Gujarat as a relative haven of free enterprise. Billed as India’s Margaret Thatcher, or its Shinzo Abe, some wonder whether he is not really a Hindu Putin, a strongman who plays with ethnic fire sitting on top of a fraying economy.
Markets like him for now, celebrating his pledge to “cut red tape and roll out the red carpet” for investors, though beyond talk of bullet trains and a 100 “smart cities”, his policies are a mystery. The Sensex index of equities in Mumbai has jumped 6pc this week as exit polls show his Bharatiya Janata Party (BJP) close to victory. It is up 13pc this year.
Yet the task is daunting. Capital Economics says India is the only BRIC economy that has slipped down the World Economic Forum’s ranking of competitiveness since 2006, though Russia and Brazil have drifted badly as well. India has dropped from 43 to 60 in relentless decline, scoring 85 for infrastructure, 98 for technological readiness, 110 for macroeconomics and bribes, and 129 for starting a business.
Standard & Poor’s has threatened to relegate India to junk status unless it hacks away a thicket of patronage subsidies – 14pc of the budget, up from 10pc in 2008 – and brings the public accounts under control. The combined state and local budget deficit is down from double-digit levels but is still 7.7pc of GDP. “We may lower the rating to speculative grade in the next year or so if the next government does not appear capable of reversing India’s low economic growth,” it said.
Mr Modi will have to work with coalition parties and Leftist state governors determined to resist any assault on labour protection laws. He has the good fortune of a rock star central banker from the University of Chicago to help keep the world at bay and restore faith in the battered rupee, but not even Raghuram Rajan can perform miracles.
The Reserve Bank has regained its credibility by being tough. Mr Rajan raised interest rates into the teeth of an economic slowdown, halting capital flight and preventing an exchange rate spiral following the first “taper tantrum” set off by the prospect of Fed tightening. He deliberately popped the credit bubble “before it became alarming”, as he put it. When the Fed actually began to taper earlier this year, India was largely insulated from the tremors.
Foreign money is pouring back into the equity and bond markets, which is remarkable given that India scored worst in the world in a Euromoney survey for ease in repatriating money. The regulatory regime was deemed better in Iran. The inflows tell as much about the hunt for global yield as it does about India’s chances of escaping its low-income trap.
The damage from monetary tightening cannot be brushed under the carpet. Stressed assets of the big five state-owned banks reached 11pc in March. Fitch Ratings expects this to hit 14pc by early next year, warning that India’s banks may need to raise as much as $60bn in fresh capital to meet lending rules.
In any case, India does not have the infrastructure to carry a modern economy. Its 12th Five Year Plan (2012-2017), written in the glory days of 2011, competes for realism with Soviet forecasts under Gosplan. It heralded growth of 8pc through the middle of the decade, though ministers talked then of nearer 9pc, such were the habits of extrapolation. These delusions were rudely interrupted when the rickety network of regional grids broke down in the peak summer of 2012, leaving 650m people and New Delhi itself without power for days.
The country has done remarkably little over the years to reform the grid. A quarter of the electricity is stolen or leaks away. Factories suffer stops for hours at a time. Tata Motors has been forced to build its own power grid. Half the roads are still unpaved. Plans to build 25,000km of new railways by 2020 look increasingly implausible.
Sameer Kochhar, author of Modinomics, says the new premier will throw his irrepressible energies into closing this disastrous infrastructure gap, but the lag behind China with its spanking new airports and harbours is startling.
Mr Modi does not have long to revive India’s fortunes and secure a firmer footing on the economic ladder. Bhanu Baweja, from UBS, said the country is already “squandering its demographic prime”, seemingly unable to absorb its surplus labour from the countryside as other catch-up economies have done.
Almost all the success stories of the post-War era – beginning with Japan – saw a surge in manufacturing and productivity after the working age cohort rose above 60pc of the total population. This is typically a window of 10 to 15 years. India has already used it up, yet has been left behind as Vietnam, Indonesia, Mexico and others corner the mid-ranking industries. Mr Baweja blames the country’s fossilised labour laws.
Five years ago it seemed like every big investment bank was publishing “Chindia” predictions, arguing back and forth whether the Chinese tiger or the slower but younger Indian elephant would prove to be the economic hegemon of the 21st Century. It all looks very dated now. China still has a shot. India may have let it slip away.
Modi's Thatcherite talk cannot restore India's flagging fortunes - Telegraph
India’s economic model has essentially failed. Talk of matching East Asia’s growth rates has been exposed as wishful thinking. Superpower dreams are giving way to the same old reality of poverty, depleted ground water and graft.
We can now see that growth averaging 8.2pc from 2004 to 2012 was an anomaly, kept alive by fiscal largesse at the top of the cycle. A torrid global boom masked all sins, itself the result of negative real interest rates in the West, the yen carry trade from Japan, China’s reserve accumulation and ultimately a flood of dollar liquidity that leaked everywhere from the US Federal Reserve.
India’s manufacturing industry remains stuck at 14pc of GDP. This is a far cry from levels in Thailand (30pc), South Korea (31pc) or China (32pc), or Japan in its day, the typical threshold for catch-up economies graduating to a higher league. India has actually lost 5m manufacturing jobs over the past decade, slipping from 55m to 50m.
The economic boom fizzled two years ago, ending in the sort of stagflation that bedevilled Britain in the 1970s. India’s “misery index” is back where it was a quarter of a century ago when the old Hindu Model was overthrown and the country embraced free market globalism, up to a point. The International Monetary Fund expects growth to languish at 4.6pc this fiscal year, with inflation at 10.5pc. “India has very little room to adopt countercyclical policies,” it said.
Voters have turned to Narendra Modi, a Hindu nationalist and celibate “monk” from the Rashtriya Swayamsevak Sangh movement who rose from tea boy to run the state of Gujarat as a relative haven of free enterprise. Billed as India’s Margaret Thatcher, or its Shinzo Abe, some wonder whether he is not really a Hindu Putin, a strongman who plays with ethnic fire sitting on top of a fraying economy.
Markets like him for now, celebrating his pledge to “cut red tape and roll out the red carpet” for investors, though beyond talk of bullet trains and a 100 “smart cities”, his policies are a mystery. The Sensex index of equities in Mumbai has jumped 6pc this week as exit polls show his Bharatiya Janata Party (BJP) close to victory. It is up 13pc this year.
Yet the task is daunting. Capital Economics says India is the only BRIC economy that has slipped down the World Economic Forum’s ranking of competitiveness since 2006, though Russia and Brazil have drifted badly as well. India has dropped from 43 to 60 in relentless decline, scoring 85 for infrastructure, 98 for technological readiness, 110 for macroeconomics and bribes, and 129 for starting a business.
Standard & Poor’s has threatened to relegate India to junk status unless it hacks away a thicket of patronage subsidies – 14pc of the budget, up from 10pc in 2008 – and brings the public accounts under control. The combined state and local budget deficit is down from double-digit levels but is still 7.7pc of GDP. “We may lower the rating to speculative grade in the next year or so if the next government does not appear capable of reversing India’s low economic growth,” it said.
Mr Modi will have to work with coalition parties and Leftist state governors determined to resist any assault on labour protection laws. He has the good fortune of a rock star central banker from the University of Chicago to help keep the world at bay and restore faith in the battered rupee, but not even Raghuram Rajan can perform miracles.
The Reserve Bank has regained its credibility by being tough. Mr Rajan raised interest rates into the teeth of an economic slowdown, halting capital flight and preventing an exchange rate spiral following the first “taper tantrum” set off by the prospect of Fed tightening. He deliberately popped the credit bubble “before it became alarming”, as he put it. When the Fed actually began to taper earlier this year, India was largely insulated from the tremors.
Foreign money is pouring back into the equity and bond markets, which is remarkable given that India scored worst in the world in a Euromoney survey for ease in repatriating money. The regulatory regime was deemed better in Iran. The inflows tell as much about the hunt for global yield as it does about India’s chances of escaping its low-income trap.
The damage from monetary tightening cannot be brushed under the carpet. Stressed assets of the big five state-owned banks reached 11pc in March. Fitch Ratings expects this to hit 14pc by early next year, warning that India’s banks may need to raise as much as $60bn in fresh capital to meet lending rules.
In any case, India does not have the infrastructure to carry a modern economy. Its 12th Five Year Plan (2012-2017), written in the glory days of 2011, competes for realism with Soviet forecasts under Gosplan. It heralded growth of 8pc through the middle of the decade, though ministers talked then of nearer 9pc, such were the habits of extrapolation. These delusions were rudely interrupted when the rickety network of regional grids broke down in the peak summer of 2012, leaving 650m people and New Delhi itself without power for days.
The country has done remarkably little over the years to reform the grid. A quarter of the electricity is stolen or leaks away. Factories suffer stops for hours at a time. Tata Motors has been forced to build its own power grid. Half the roads are still unpaved. Plans to build 25,000km of new railways by 2020 look increasingly implausible.
Sameer Kochhar, author of Modinomics, says the new premier will throw his irrepressible energies into closing this disastrous infrastructure gap, but the lag behind China with its spanking new airports and harbours is startling.
Mr Modi does not have long to revive India’s fortunes and secure a firmer footing on the economic ladder. Bhanu Baweja, from UBS, said the country is already “squandering its demographic prime”, seemingly unable to absorb its surplus labour from the countryside as other catch-up economies have done.
Almost all the success stories of the post-War era – beginning with Japan – saw a surge in manufacturing and productivity after the working age cohort rose above 60pc of the total population. This is typically a window of 10 to 15 years. India has already used it up, yet has been left behind as Vietnam, Indonesia, Mexico and others corner the mid-ranking industries. Mr Baweja blames the country’s fossilised labour laws.
Five years ago it seemed like every big investment bank was publishing “Chindia” predictions, arguing back and forth whether the Chinese tiger or the slower but younger Indian elephant would prove to be the economic hegemon of the 21st Century. It all looks very dated now. China still has a shot. India may have let it slip away.
Modi's Thatcherite talk cannot restore India's flagging fortunes - Telegraph
