Global Investing

In India, not a bang but a whimper

April 30, 2012

It may not end with a bang but with a whimper. Fears of impending economic disaster  in India are unfounded but growth is likely to taper off, eventually dragging  the country back to the bad old days of 2-3 percent annual growth, according to economist Jonathan Anderson at  Emerging Advisors Group.

Anderson, formerly chief emerging markets economist at UBS, predicts India will revert to the much-scorned “Hindu rate of growth” which characterised it for the first half century of its independent existence and which the country hopes has been relegated to its quasi-socialist past. Anderson’s prognosis will be unpopular in a country that sees itself as a superpower in the making, and won’t appeal to investors who are betting billions of dollars on India taking over China’s mantle as the world’s fastest growing economy. He lists three reasons to back up his thesis.

a)Failure to export

b)Failure to control public finances

c)Infrastructure

First the exports. According to Anderson, Indian exports simply are of the wrong sort. Software or pharma exports do not create jobs for a huge and largely unskilled population. India needs to be selling toys, clothes, shoes – all the things that helped lift hundreds of millions of Chinese  out of poverty, he says. As China moves away from low-value manufacturing exports, now is the chance to move in on market share but India is not being quick enough and  is being overtaken by the likes of Vietnam and Bangladesh.

The failure on the exports front is bad news for savings rates too. The savings boom of the past three decades  lowered the cost of capital in India and allowed the government to run budget deficits and raise funds for investment.  But the source of these savings was the rise in exports — the note calculates that between 1980 and 2010 the ratio of exports to GDP rose 20 percent, exactly the rise in the gross savings rate. If exports don’t grow, nor will savings. The lack of exports means India is one of the few countries in Asia to run large current account deficits.

A wide and rising deficit is also a drag on potential growth (Anderson writes) If you can’t pay for the rapid expansion in commodity, material and equipment imports, you have no choice but to slow down.

Now for the deficits. India’s fiscal profligacy is notorious –it runs public sector deficits around 10 percent of GDP while public debt ratios of 70 percent of GDP are among the highest in emerging markets.  But as savings slow, the government  must either cut spending or face funding stress, Anderson warns. And lastly, he notes India’s failure on the infrastructure front.  His graphic is best illustrates India’ abysmal steel and electricity  consumption.

Anderson concludes:

Despite the fact that India changed its game in many ways over the past decade this is one where India clearly didn’t change. Which even in the absence of external and fiscal constraints would in itself be enough to make us question the economy’s ability to drive double-digit growth over the coming decade.

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