India Watch: Keeping Our Eyes on the Ball
The Economist and other publications in the last weeks have been reporting on the slowdown of economic growth in China, below its habitual 9% plus. They attribute this to a combination of declining demand for consumer goods in the United States and Europe, a credit squeeze orchestrated by the government, effective rise in the value of the RMB (when you combine PBC’s policies and 6% inflation) and some loss of investor confidence.
India is experiencing the same slow down, but for reasons of its own. Industrial production growth of 4.1% for the quarter ending in August sounds pretty good from the Canadian perspective, but in India, where over 12% year-on-year expansion in manufacturing, 4%, as the new norm, is a substantial comedown. And this is consistent with the declining growth rate of the GDP overall, to below 8%. Investment is at a 9 quarter low. The rupee is down, making crucial imports for power and manufacturing more expensive. (In August, the rupee’s fall surpassed all others in Asia.) New loans by banks as a proportion of fresh deposits have fallen to a four-year low, and equity markets are wobbly. Services are also seeing a slow-down. Even the tax collectors are collecting less taxes!
It’s not all bad news. Unlike with China, India’s exports continue their steady expansion, even if at a declining rate. A number of industrial sectors are maintaining gang-buster growth rates: transport equipment (up 17.4%), motor vehicles (15.5%), ICT equipment (12.5%). But these are all in the medium and large industrial sectors. In the SME world, only food products are as buoyant. The consumer goods segment only managed to eek half of its 9% regular expansion.
Prime Minister Manmohan Singh said this week that India would "achieve a growth rate of close to eight percent this year", down from an initial projection of nine percent. But most economists predict 7%.
What’s happening in India?
Some of the reasons are pure macroeconomics: higher input costs (rail transportation rates were recently increased by 15%); sticky inflation (just a shade below 10%, despite 12 interest rate cuts by the RBI since March 2010); jittery markets.
But India’s supply side factors eat into its undoubted economic potential. While it can be proud of the performance of many state institutions (the Supreme Court, the Comptroller and Auditor General, the Election Commission, the Reserve Bank of India), its political class is not living up to the democratic institutions post-independence India has built. Corruption is both flagrant and rampant. Infrastructure is being built – you can see it when you travel in India - but at a snail’s pace. Crony contracting is endemic, especially at the State level.
And the liberalizing impulse is dormant if not dead: legislation, drafted in some cases years ago, to modernize corporation law, agriculture, mining, land holdings and so on remain in suspended animation. And regulations are not moving in the right direction: for example, in the last few months, new rules have made more difficult if not impossible for real estate firms to tap foreign sources of capital; new rules in the insurance sector have severely impacted the profitability of foreign and domestic companies; environmental review processes are discredited. The Prime Minister, no less, recently spoke of his fear that India is stepping back into a licence-permit raj era.
In the meantime, the World Bank says three-quarters of the population of 1.2 billion survive on less than $2 a day.
Relevance to Canadian business: by all means, don’t throw in the towel on India. Seven percent growth is greater than the best that we can expect in North America, by a factor of three. At the business level, things may not be getting easier, but India’s best firms continue to enjoy strong balance sheets and make excellent business partners. The frustration that many feel about India comes from the gap between today’s reality and tomorrow’s potential. That’s the ball on which we have to keep our eyes.