No Proof Required

This is India’s Shining Decade

By

Surjit S Bhalla

(Business Standard, Dec. 26, 2009)

Blurb:   The new decade will likely belong to India; when will this reality be recognized by Indians?

End of the year, end of the decade. Time for assessment, rumination, and forecasts. And if it is the year after the greatest financial crisis, what else can the forecast be about than GDP growth?  Oh yes, it could be about climate, but after hope and Dopenagen, that assessment can wait.

Two key conclusions emerge about Indian GDP growth. First, that this growth is now at a plateau level of 8-9 percent. Second, that very soon, analysts and punters will have to change their Word documents to “India is the fastest growing economy in the world” rather than, “excepting China, India is the fastest growing economy”.

There are three separate reasons for this, all of which have been outlined numerous times before in these columns (and a detailed assessment was provided in Bhalla(2007)*). The reasons refer to the broad determinants of economic growth – capital, labor, and productivity. On the first, India is investing at the same rate as China (approximately 40 percent of GDP), on the second, India’s labor force growth is about 1.8 % per year faster than China, and on the third, China has outpaced India by about 2 percent per annum (for the last five years). Most of this outpacing has had to do with the deep and deeper currency undervaluation practiced by the Chinese authorities. Which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world. For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.

This scenario will have predicted effects –  China’s GDP growth should moderate to a less polluting 8.5 percent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average.  In stark contrast, India does not have pressure from the world community to mind its currency or its emissions. The productivity growth advantage of 2 percent a year that China presently enjoys will soon disappear leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.

I realize I am going out on a limb, because no one has even dared to project India to grow at even the same rate as China  – and I am saying that India exceeds the China growth rate as early as 010 (as it happens, this is the exact year forecast in Bhalla(2007)). But I have good fortune on my side – my forecast of 8 % plus for Indian GDP growth for 2009/10 (made on  April 18 2009, V – Shape of Things to Come, Business Standard) got an “endorsement” from India’s finance minister, Mr. Pranab Mukherjee  when just yesterday he claimed Indian growth could top 8 % this fiscal year.

What Indian policy makers have not realized, and their counterparts around the world, especially China, do recognize, is that what international organizations say affects perceptions of the world, and affect our own negotiating positions. Take for example the assessment of poverty in India. We keep coming out with poverty lines and expert committee reports whose only terms of reference is to increase the rate or poverty to somewhere around 80 to 90 percent (why they don’t reach 99 percent poor is a mystery). China, on the other hand, refuses to let the Asian Development Bank even mention the word China in its poverty assessment report for all of Asia (presumably, China is situated in Europe).  China does not ask for money for climate control, and Jairam Ramesh gets berated for sacrificing India’s interests by not begging for more aid.

As you mistakenly perceive yourself, so do others. For example, the IMF comes out with  “respectable” forecasts of GDP growth for China but, low ball estimates for India. [Haven’t you heard - India has 50 percent poor, China does not have any poor]. The first low attempt by the hallowed (hollow?) institution was 4.5 percent GDP growth for 2009. Recognizing the error of its ways, the IMF has revised this forecast sharply upward to 5.4 percent. For 2010, the forecast is even higher at 6.4 percent; presumably, that comes with an admonition that the Indian economy is overheating.

The IMF is in Washington, and its thinking is still respected by many government officials. But one might justifiably ask, a la the Joker, “Why so Low” for India? In a revealing contrast, the IMF forecasts for China are a lot closer to reality, and at least 3 percentage points a year higher than those for India. And here am I, ordinary mortal, daring to contend that GDP growth for India will be higher. Goliath vs. David ?

But the IMF is in good company – in India. We have more than a smattering of the nattering nabobs of negativity (in homage to the recently departed William Safire) to supplement the dark IMF view. Most notably, practically everybody outside of Oxus, Ministry of Finance and the Planning Commission is targeting weak GDP growth for India (should make the poverty investors at the World Bank and the UN very happy). All of this was all too apparent on Nov 30^th, when GDP growth figures for July-Sept. 2009 were released. The official estimate for year-on-year  growth: 7.9 percent (Oxus’s seasonally adjusted annualized rate calculation: 11.5 percent). Most forecasters, (including the prestigious PM Council of Economic Advisers headed by former Central Bank Governor, C Rangarajan)) had an estimate of growth a full 2 percentage points lower at 6 percent. It is not easy to get a forecast that far off. Especially interesting was the excuse made by most for getting it all wrong – Oh, the drought effects of the summer Kharif crop were not factored in. But the last time the Kharif crop got harvested by September was in historic cooler climes of a few hundred years ago.

This has been  a structural change decade for India. Sadly, this reality hasn’t quite seeped into the psyche and mind set of a large body of Indian policy makers and opinionratti’s. This should, will, also change in the new decade.   

*Bhalla, Surjit S., Second Among Equals: The Middle Class Kingdoms of India and China, May 2007, available at www.oxusinvestments.com; revised version, forthcoming 2010, Peterson Institute for International Economics, Washington, DC.

The author is Chairman of Oxus Investment; all the past articles (and forecasts)  are available  on  www.oxusinvestments.com .