International | May 09 2012
By Greg Peel
The three big “headline” influences in current global financial markets are Europe, China and the US. Will Europe fall apart? Will China come in for a hard landing? Will the US recovery stall again? India is oft included alongside China and as a member of the BRIC quartet, but is rarely mentioned in dispatches.
Indeed from Australia's more localised perspective, India seems to be an ever present addendum in discussions about resource export opportunities and Australia's economic future. It's always China (and India). But while we pour over every piece of periodic data coming out of Beijing as if our lives depended on it, even though we know most of it is totally spurious, hands up anyone who can tell me just what's going on in India right now?
I thought so. Tyler Cowen thinks so too, which is why he opened his weekend New York Times piece with this observation:
“The economic slowdown in India is one of the world's biggest economic stories, but it is commanding only a modicum of attention in the United States.”
We know that China's GDP growth has been slowing, on a combination of Beijing's policy tightening and lower export demand from Europe. Cowen suggests the economies of both China and Russia have been slowing, but “to an unknown extent and duration”. I can't speak for Russia but presumably Cowen is not trusting of data out of Beijing, otherwise he would suggest that after the March quarter China's GDP was growing at an annualised rate of 8.1% to mark its slowest rate since the GFC. Beijing's new target growth rate is nevertheless 7%.
Cowen does trust that Brazil saw only 2.7% growth in 2011, down from 7.5% in 2010.
The IMF estimates that India's economy will grow by 6.9% in 2012. That's strong growth by anyone's standards, but the figure has been revised down from an earlier 8%. And the December 2011 quarter produced only 6.1% growth.
It should be noted at this point that large, rapidly growing populations in countries undergoing “industrialisation and urbanisation” require a greater level of GDP growth than, say, Australia, in which a mature economy is comfortable with relatively “full” employment. An economy must first grow sufficiently to “beat” population growth and provide enough jobs for those reaching working age. In Australia we are currently trying to bring in skilled migrants and our workforce will shortly be retiring faster than it's being replaced, if that hasn't started already. A “recession” in Australia largely means negative growth.
In China and India however, a strong positive GDP growth number is required just to get over the working population growth hurdle. And in these countries in particular, not only do youths provide “new” workers but so too do adults who were previously subsistence farmers but have now migrated to the cities for a new chance in life. On this basis it has been suggested that while Australia's line between recession and growth might be a flat GDP, China's line is more like plus 6%. You could thus say China's March quarter result showed only 2.1% growth. And assuming India's situation is roughly equivalent, India's December quarter growth would be 0.1%.
What is disturbing to Cowen is that the slowdown in India's growth rate is unevenly distributed, such that the greater burden is falling on the already poor. If the slow rate continues or declines further, another generation of Indians is unlikely to rise above poverty. “The problems of the eurozone,” suggests Cowen, “are a pittance by comparison”.
It is suggested that China's population is likely to peak relatively soon while India's will continue to grow, which implies that by next century India's will be the world's largest economy. It is also suggested a strong Indian economy potentially energizes the neighbouring economies of Bangladesh and Nepal and, maybe even one day, Pakistan and Burma. A wealthy India would provide an impetus for regional democracy.
The reasons for India's slowdown are many and various, Cowen suggests. For starters, the government exhibits a negative attitude towards foreign investment. For example, New Delhi is considering the application of years of retroactive taxation on foreign companies, and has recently changed its mind about letting Wal-Mart into the country. Energy infrastructure is also an issue, with coal mining dominated by an inefficient state-owned company and various price controls being placed on coal and natural gas. There is little progress towards liberalisation and market reform.
These issues can be fixed, notes Cowen, but more worrying are problems that have no easy fix.
India underwent an agricultural revolution in the 1970s and today the agricultural sector employs about half of the country's workforce. However, the sector has since slowed, transport and water infrastructure is poor, crop yields remain low, and again New Delhi is hostile to foreign investment in agribusiness. The economic revolutions of Japan, South Korea and Taiwan all began with significant gains in agricultural productivity yet in India, notes Cowen, it is estimated half of all children under five are malnourished.
On the other end of the scale is the infamous Indian call centre – an economic success story – but indications are that this little service sector growth spurt may have run its course. Either way such success has been isolated, with call centre businesses having built their own infrastructure to operate as “economically segregated islands of higher productivity”, to use Cowen's words, such that success has been achieved by separating from India's broader economy rather than integrating with it.
India's legal system is also considered to be a nightmare, to the point the World Bank rates India 132 out of 183 countries in its “Doing Business” index – just behind Honduras and just ahead of Syria.
Yet globally India is recognised as a country of considerable talent, energy and entrepreneurship, with a worldwide network of trade and migration. What's going wrong? The problem appears to be that India has lapsed back into a structure of heavy government regulation. You don't get government much heavier than a communist regime, yet China's development and market liberalisation progress is going from strength to strength.
As we spend our time in the market these days spontaneously responding to each little headline while being dominated by political bickering, it is easy to lose sight of the big picture and take things for granted. Can we safely continue to add “and India” every time we consider the potential to Australia, or the rest of the world, offered by China? The world is shaped by deeper structural forces, warns Cowen, such as resources, technologies, demographics and economic growth rates.
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