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Indian Economy is it going off the rails or is it just a blip?

Indian-economy-jean-boillotIndian locomotive derailed, or a blip, this is a phenomenon that is all makes sense due to the combination of a degraded international environment and a specific business cycle India , what were called the “business cycle.” In reality, it is over three years where India reached 9% growth between  2005 and 2007 in the context of global exuberance everyone today considers the 5% growth coming from be announced.

If one looks last twenty years, both in steady growth and a cyclical perspective, the Indian economy is quite in his normal diet with 5% growth this year. It is within the range of what I consider to belong the growth potential of India: 6-7%, with cyclical lows 4-5% depending on the particular state of the monsoons.

Have we misinterpreted the Indian growth factors? What it does is based really?

Disappointment vis-à-vis 5% of India’s growth is good to read that you may have the “Indian locomotive” in the mid-2000s. The tendency has been to present India as a country that would make up the Chinese growth rate and, given its size, would obviously become an engine of the global economy. In reality there are three factors that justify this comparison and perspective were unfounded.

The first is that the demographic transition in India has a profile in any way to the Chinese. And this is a key element in the growth rate of emerging countries. It is much less pronounced and more gradual in India than it is in China.

The second reason is that in terms of economic institutions , the Indian transition is relatively slow, some even say chaotic. In reality, this is due to the fact that India is the “largest democracy in the world.” Things take time to be discussed and decided. Indians working on the basis of consensus essentially. Consequently, the development of reforms is more gradual than that of China.

The final explanation lies in the fact that a “locomotive Indian” does not have as factors stimulating the growth driven by exports and investment, including foreign and China . The Indian economy is mainly articulated on its domestic demand , its domestic entrepreneurs and a relative balance between different sectors including agriculture, services, industry and infrastructure. This equilibrium strategy does not produce extremely fast off but a more regular and spread over time growth.

Today are based on what the economic benefits of India and what are its weaknesses?

I begin with the strengths because I am quite surprised by the negative tone of what you read right now about the prospects of the Indian economy. We’re simply forgetting that last year became the third largest economy GDP calculated by purchasing power parity, ahead of Japan . Second, even if India does cyclically 5% growth rate is still high for an economy of this size, which is relatively a locomotive for Europe in recession.

The first advantage of India is of course the size of its domestic market with one and a half billion people in 2030.  The second is precisely that to capture the domestic market, we must invest in India. And for good reason: it is too big a market that has merely to export. However, when investing in India, which is not always easy I agree, we see that companies like Renault, Michelin and Saint-Gobain, to take only the French groups, perfectly successful because it is a society of law with justice, an undeniable mental openness etc. Look at the huge success of Suzuki and Hyundai, for example, which became the number 1 and 2 of the Indian car market. In what other country of this size you watch this opening is?

The third advantage is that the Indian model is a complementary model of the Western model. Our companies learn to work with tools, business models are quite specific. For example, L’Oreal discovered in India called the format of the “pod” Renault India has learned to design real frugal small cars, including the “global car” that will come out soon.

Regarding weaknesses so often for strength and it is this balanced view that is generally lacking in those who speak of the difficulties of India.  The first weakness is that India is a country unreadable to any vision of medium-or long-term would be too rigid or too patient . When invests with a 10-year plan, it is almost certain that the result will not be what was expected. Renault has been a big failure with the launch of its Logan in 2007. However, he bounced back completely changing his tune. The difficulty of predicting the medium term therefore requires companies to have a very high flexibility in their approach to India.

The second weakness is the quality of the workforce, excellent Indian engineers and technicians, but also one has to maneuver the red tape. But overall, the Indian way of training is too theoretical. There is no learning on the ground system and it is therefore completely reforming its staff without being certain. In short, one must invest heavily in training.

The third major weakness of India is well known, is that its infrastructure. The country suffers from significant shortcomings both in the transport, communications and energy. Therefore, companies are forced to internalize all these poor infrastructure for example by producing their own energy or harvesting their own rainwater. This is a real extra cost, especially if you’re unprepared.

What were the effects of the “Big Bang” which was announced in 2012 to open the economy to foreign investors?

This was mainly a communication operation because in practice the measures that have been taken have been very selective (aviation, retail trade). And they were accompanied by draconian and difficult to fulfill. Especially if I take the example of the airline industry,  an Indian company wanted to take advantage of this opening – TATA group, it was immediately subjected to multiple requests for authorization and draconian controls on airlines exploitable.  We see absolutely no impact on the Indian economy, except perhaps the buzz about India in some communities very sensitive to the effects of announcement of liberal reforms foreign investors. But this is not really the way the world!

Standard & Poor’s believes that there is a one in three chance that the Indian rating, already the lowest of the BRICS (currently BBB) is lowered into the “speculative” category. The Indian growth can  be upset, especially since they say a minimum of 10% growth would be needed to reduce India’s poverty?

I subscribe personally & totally disagree on the diagnosis of the S & P is not binding and it reminds me of the Catechism of the rating agencies for decades with the effects we know, especially in 2007. When I see the progress by the rating agency for India to maintain its current rating recommendations, it is neither more nor less than a standard program reforms quite classic ignores the current cycle and by cons that could increase the difficulties of India to finance including financial markets.

This does not mean that all is well in India. I watch myself to the budget deficit of the balance of payments, or the debt of large private companies, some of which concerns me. But the feeling of extreme anxiety that may have read in relation to the Indian situation surprises me because these tensions are by no means dramatic, and even less like systemic bank debt in China for example. When a country of this size is subject to an economic downturn, there are actually fiscal pressures and external financing, especially as commodity prices remain very high for a country dependent. But how can India it back into a debt crisis? I do not know for now.

Another good example of this statement is hazardous building you repeat that less than 10% growth in India could not reduce poverty. It is a magic number we do not know where it comes from. In reality it depends on the speed and direction of growth.

Rather my own estimate based on the work of economists from all sides gives the following figures: with 5% growth and given a population growth of 1.5% per year, the per capita growth rate is +3.5% . If this growth is distributed fairly evenly, poverty may decline by about 0.5 percentage points per year. India is actually 1% per year reduction in poverty in the past decade with an average growth of 8%. In fact, we find the same magic numbers in China with the idea that China will collapse politically with less than 10% per year as a cyclist going at full speed and with the bike to stop abruptly. It is better to 7% at the moment (of course not officially) and there are nothing more nor less social tensions.

Therefore, I do not see why there would be an urgent need for India to rise to 10% growth. A diet of 6-7% per year seems both sustainable economically, socially and environmentally.

What are the consequences for the rest of the South Asian Indian and global economy downturn?

The impact will be negligible and for a simple reason. If the Indian economy is the third largest in terms of GDP in terms of purchasing power, the degree of trade openness to the outside is particularly low : the order of about 20%. In this opening, the rate of exposure to the rest of Asia is very low. India in its foreign trade, but also and especially in trade in service is primarily directed towards the United States, Europe, the Middle East and finally Africa. The Indian anchor is not at all an Asian anchor unlike China which, if really coughing, will catch cold throughout Asia.

  • P V Rajeev Sebastian

    India squanders a lot or resources on subsidies, social welfare schemes like PDS and so on. China invests more on concrete infrastructure development and building its national economy. The result can be seen in the growth rates achieved by the two countries.