India's Economy - Political Forum

CHUQ · #1 (**permalink**) 02-04-2007, 04:59 AM

Some predictions about India and its growing economy.

The economy has been growing at an impressive 7%-plus for five years in a row. Accompanying the economic boom is a boom in equity markets and in real estate. The current account deficit is widening, but is easily financed because private capital flows from abroad are buoyant.

The currency is not appreciating against other currencies because central bank intervention is ensuring that the inflows are managed well. Does all of this sound like a description of India circa 2007?

If it does, we should be worried. Because this is actually a description of the economies of countries like Thailand, Malaysia, Indonesia and South Korea in the year before the Asian financial crisis hit them hard. In each of these economies, in 1996, the year before the crisis struck, there was little to suggest that a disaster was round the corner.

Will India go down the E Asia road?-Indicators-Economy-News-The Economic Times

Will it be a carbon copy of other E. Asian economies?

Brother Oz · #2 (**permalink**) 02-04-2007, 06:27 AM

The east asian financial crises was sparked by a bubble in the Thai housing market. As far as I can see, there's no great foreign investment in India, so I don't see a bubble developing.

winter6126 · #3 (**permalink**) 02-04-2007, 07:39 AM

India is an important country for this word.I like it.because that country isn't like Japan.and that country seems don't like join the fightting among powers,such as in cold war,India didn't join USSR camp,and it didn't join NATO camp,i wish China could be like India on this subject.
and i agree India will be a powerful country one day.

Sebelius for VP, not Hillary · #4 (**permalink**) 02-05-2007, 12:35 AM

Actually, the cover story on the Economist magazine is this:

Before you read that, you might the definition of economic "overheating" to be useful.

overheating Definition

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Economic situation in which growth is occurring so quickly that economists fear a rise in inflation. This happens when producers are not able to make enough goods and services to meet rising demand, and raise prices instead.

Glossary of planning terms - London Borough of Richmond upon Thames

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Where the economy has grown at such a rate that a scarcity of resources , often labour, traffic congestion and public transport difficulties act as a brake on economic growth and contribute to inflation.

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*snip*

Tweaking the long tail

Fast growth is essential to pull millions of Indians out of poverty, so it is sad to pour cold water on this story. But that is precisely what is needed when there are so many alarming signs of overheating (see article). Across India prices are rising fast, factories are at full capacity, loans are piling up. Yes, the economic reforms of the early 1990s spurred competition, forced firms to become more productive and boosted India's trend—or sustainable—rate of growth. But the problem is that this new speed limit is almost certainly lower than the government's one. Historic data would suggest a figure not much above 7%—well below China's 9-10%.

When you mention overheating, many analysts point towards China. Yet India displays far more symptoms of the disease. Inflation has risen to 6-7% (compared with 2.8% in China); a record 99% of Indian firms report that they are operating above their optimal capacity; and credit is expanding at an annual rate of 30%, twice as fast as in China. Unlike China, India also has a widening current-account deficit—a classic sign of overheating, as domestic output fails to keep pace with surging demand. And if you are looking for a stockmarket bubble, Indian share prices have risen more than four-fold over the past four years, far more than in China. If something is not done, then a hard landing will become inevitable.

The Reserve Bank of India has been too timid in cooling down domestic demand: although one interest rate was raised this week by a quarter point, the overall rise in rates over the past two and a half years has not even kept up with consumer-price inflation. But the main focus of the government's attention should be on supply—and dismantling the many barriers that keep its speed limit below China's.

So far, reform in India has focused on setting its inventive private sector free from the world's most fearsome bureaucracy. This has unleashed entrepreneurial talent, but more change is needed. Now is the time to tackle the public sector itself. Infrastructure, such as roads and power, and public services, such as education and drinking water, are woefully inadequate and limit growth. Even as the economy has been booming, many public services have worsened. It seems incongruous that somebody can own a mobile phone, yet has to waste hours queuing for drinking water. India's top computer scientists are feted around the world, yet most children in rural areas lack the basic education needed to find more productive work. Around half of all Indian women are illiterate, compared with a ratio of around one in seven in China.

Singh's songsheet

India's rulers have two bad excuses for not dealing with those roads, schools and hospitals. The first is theoretical. Many Indian economic commentators say that further structural reforms, though desirable, are not essential to keep the economy growing at 8% or more because of the “demographic dividend”. A fast-growing working population and a falling dependency rate (thanks to a lower birth rate) will ensure more workers, more saving and hence more investment.

India's demographic structure is indeed starting to look more like that in East Asia when its growth took off. But this mechanistic view of growth assumes that demography is destiny and that economic policies do not matter. In fact, open markets, education and investment, especially in infrastructure, were the three chief ingredients of East Asia's success. Population growth by itself does not add to prosperity, unless young people are educated and new jobs are created. India needs to reform its absurdly restrictive labour laws which hold back the expansion of manufacturing particularly.

The second excuse for doing nothing is practical: there is little room to spend more on schools and hospitals. India already has one of the biggest budget deficits among the large emerging economies (as much as 8% of GDP going by the widest measure). In fact, plenty can be achieved by reform, rather than just spending. Private investors are hesitant about putting money in infrastructure, because the regulators are not independent enough of populist politicians to guarantee a decent return.

If these things can be tackled, India can indeed match China's growth. Mr Singh remains a reformer, but his government relies on the support of the communist parties and, with today's prosperity, there is no stomach to take them on. The worry is that today's overheating will need to boil over before that mindset changes.

Daewoo · #5 (**permalink**) 02-05-2007, 01:35 AM

Indias biggest problem is infrastructure. In addition to electircal and communications deficiency, their growthe will be limited by goelogical factors...mainly the lack of sufficient ports, or potential locations for new ports, to expand their export capacity.

On the up side (for india), a large amount of their growth occurs in non manufacturign sectors. An increasingly large amount of their GDP is derived from the sevice sector. India has actually managed to do what the US neve could (and likely never will)....they have turned their service sector into a prime export commodity.

Brother Oz · #6 (**permalink**) 02-05-2007, 05:30 AM

I didn't realise India's inflation was 6%...
but to be honest that isn't that high. Yes the economy isn't going to be great in the long term, but I don't see massively overvalued stuff like in the East Asian countries.

Sebelius for VP, not Hillary · #7 (**permalink**) 02-06-2007, 12:33 AM

I do agree with the Economist, that India's massive structural problems (state ownership of key industries, lack of infrastructure (electricity, rails, roads, ports, etc) and protectionism) will be what always holds India back. I guess we'll see. I really hope that someday the Indian government can get their act together and get rid of their corruption and free their industries from ownership by the state.

BTW, Oz, what is overvalued in East Asia?

Brother Oz · #8 (**permalink**) 02-06-2007, 01:10 AM

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BTW, Oz, what is overvalued in East Asia?

Not much now, but loads in 1997, the Thai real estate market most of all. That's what sparked the crash.