International | Sep 01 2010
By Greg Peel
With all the concern with regards to emerging markets surrounding China at present, and Beijing's ongoing attempts to keep a lid on economic growth, little BRIC brother India is often forgotten in the equation. Indeed, China gets all the attention from commentators before they say “and there's India too!”.
India did not disappoint yesterday, posting an annualised GDP growth result for the June quarter of 8.8%, up from 8.6% in the previous quarter. While China's numbers might be on the slide out of double digits as intended, it looks like India might be picking up pace to fill the gap.
The Indian central bank has already raised its effective cash rate four times this year, and some commentators suggest another raise will likely be forthcoming at the September 16 meeting in the wake of the GDP result and given ongoing inflation pressures. The Reserve Bank of India manages the rupee in a “dirty float” against the US dollar.
But when one digs down into the GDP numbers, some curious factors arise.
Exports account for only 20% of India's GDP, so it is not as reliant on export customers as other emerging economies. However, the June quarter figures show exports dropping to the slowest pace of growth since the beginning of 2010, and government officials are now acknowledging their 2010 export targets may not be reached.
This should not be too much of a concern given the world is hanging its hopes on the growth of domestic economies in emerging markets as a means of addressing the global imbalance. Western economies want the Chinese, Indians, Brazilians etc to expand their middles classes and buy, in their millions, the sorts of goods developed economies take for granted. Basically everything from computers to cars. But there is a problem.
GDP breakdown by industry shows services expanded by 9.7% in the quarter, manufacturing 12.5% , mining 9% and agriculture 2.8%. Services account for 55% of output. (When the Western world divided up its unwanted processes, it sent the manufacturing to China and the services to India. Just think of those dinner time phone calls). The figures also show that growth in domestic demand was “dismal”, to quote the Times of India. Private consumption growth fell to a mere 0.3% from 2.6% in March and fixed investment crashed to 3.7% growth from 17.7% growth.
The numbers also show that government consumption growth was negative and that both import and export growth contracted.
So hang on – all of export growth, import growth, domestic and government consumption growth fell in the June quarter, yet the GDP rose from 8.6% to 8.8% growth. There has to be something wrong, doesn't there?
The articles I sourced for this report do not mention the Delhi Commonwealth Games, and not being an economist myself I'm not entirely sure how such construction spending is dealt with in the GDP numbers. But one assumes there's some sort of impact. Perhaps the economists at Nomura have the answer.
Nomura has calculated real GDP growth at market prices compared to the official figure. The difference is a drop to only 3.7% growth rather than 8.8% growth.
The difference, says Nomura, is explained by indirect taxes and government subsidies. Taxes are falling, while subsidy payments have risen substantially. This should become apparent in governments accounts, but these are impacted by substantial licence fees received from selling telecom spectra.
The bottom line is that 8.8% might be the last of the stunning results. The data are now pointing to a slowing in subsequent quarters.
It is thus also possible the RBI may have to think twice about aggressive tightening, given domestic demand is slumping. Wages, however, are growing at the fastest rate in Asia. Last year saw 6.6% wage growth and economists are suggesting the 10% mark could be hit this year. But India's surging inflation is not simply about higher wages.
The Street notes output is growing faster than the infrastructure can cope with. The auto industry, for example, is facing shortages which means waiting lists for family cars. It's a simply supply/demand equation, and one which will likely sort itself out soon if domestic consumption is on the wane.
But the point is Indian officials risk bringing the country's growth story to a sudden halt if the central bank tightens monetary policy in the face of what are somewhat misleading figures. If subsidies are driving GDP growth, then it's simply fiscal stimulus at work. After four interest rate rises this year alone, it's little wonder domestic consumption and investment are dropping.
So what we have in India is not that much different to the world's China problem. The world does not want China to slow down its economy too much given a slowing US economy and ongoing concerns over Europe. Similarly, if India forcibly slows its economy, policy might backfire.
For both, monetary and fiscal measures are newish tools to master.
