Wednesday, September 28, 2011

Indian Economy Slowing to "Hindu Rate of Growth"?

The "Hindu rate of growth" is a derogatory description of the low annual growth rate of the pre-1991 Indian economy, which stagnated around 3.5% from 1950s to 1980s, while per capita income growth averaged 1.3%. In what appears to be an exaggeration, the Financial Times in its latest issue has an article titled "India’s abject return to talk of Hindu growth rates".

Written by James Lamont, the FT story says that "India trails in terms of attracting foreign capital and beating inflation.... some economists and industrialists fear India’s economy could shrink back towards what was derisively called the “Hindu rate of growth” from initial projections of 9 to 7 per cent this year."

With the India story unraveling due to big corruption scandals and governance deficit this year, the FDI fell by 28%, the second consecutive year of decline and the first such large decline since the opening up of the economy in 1991-92. As a result of this decline, the present level of $27 billion of FDI inflows is the lowest in four years.

Spurred by a tidal wave of hot money from the US Federal Reserve stimulus, the big drop in Indian FDI has been largely offset by the surge in FII in the last two years. In fact, the outflow of $15 billion was more than made up by inflows of $29 billion — their highest ever — in 2009-10. This level was largely maintained in 2010-11 as well, with a small increase. These hot money inflows continue to be a source of instability in the face of the Indian Central Bankers attempts to cool rising inflation. Such hot money inflows accounted for 58% of India's forex reserves in March 2010 compared to 47.9% in 2009, according to the Financial Express.

Even after the central bank boosting interest rates six times this year to 8.25 percent, India’s benchmark wholesale-price inflation has accelerated to a 13-month high of 9.78 percent in August 2011, according to Bloomberg.

It is very likely that the Indian central bankers will continue to maintain a tight money policy in the foreseeable future, and slow down the economy further to fight continuing inflation. I do think, however, that the Indian policymakers will try and orchestrate a soft landing in 2011-12, while still maintaining significantly higher gdp growth rates than the pre-1991 "Hindu rate of growth".

Related Links:

Haq's Musings

India Story Unraveling

India Soft Landing in 2011?

Inaction Against Corruption in South Asia

2G Corruption Scandal in India

Musharraf at Davos 2008

Imran Khan at Davos 2011

Delhi in Davos: How India Built its Brand at the World Economic Forum

FDI India, Pakistan, China and Vietnam 2003-2010

China's Trade and Investment in South Asia

India and Pakistan at Davos 2009

India's Twin Deficits

Pakistan's Economy 2008-2010


Anonymous said...

umm the WHOLE WORLD is slowing/going into recession US/EU/Japan is going into recession.China has had shocking PMI figures this quarter and is gonna grow 2-3 % slower.

Is it really a surprise if Indian GDP growth slows a few % points from the projected 7% in this fiscal year??

I think a 5-6 % growth is good economic management if achieved as is likely.

Anonymous said...

Riaz jee

a high interest rate regime is sure to ATTRACT more foreign money FII.

QE 3 is almost certainly on the way...

Rahul said...

Well the Islamic rate of growth is always 0. Therefore no pressure on Muslim countries especially Pakistan. They know that they have nothing to do. Only beg for more aid. The last 3 years of growth has been 2%. Wonder when it will increase to 2.1%

Riaz Haq said...

Rahul: "Well the Islamic rate of growth is always 0"

With dozens of Muslim nations in all parts of the world over several continents, there is no such thing as "Islamic growth rate".

As to Pakistan, its economy has grown much faster than India's for bulk of the period since 1947.

Pakistani economy grew at a fairly impressive rate of 6 percent per year through the first four decades of the nation's existence. In spite of rapid population growth during this period, per capita incomes doubled, inflation remained low and poverty declined from 46% down to 18% by late 1980s, according to eminent Pakistani economist Dr. Ishrat Husain. This healthy economic performance was maintained through several wars and successive civilian and military governments in 1950s, 60s, 70s and 80s until the decade of 1990s, now appropriately remembered as the lost decade.

In the 1990s, economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s total public debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998).

After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class.

Oostur said...

I love your blogs and this one had good information. I thank you for that.

I just wanted to (politely) point out that the title bothered me. You begin by calling
the "Hindu rate of growth" a derogatory description. So, why use it. I know others
did etc.

I have seen enough people attach words Islam and Muslim to many things and all of us
have taken exception to that.

So, keep writing and my apology if this annoys you. I would love to see your thoughts on
"Global peace via end of Israel" or "Is Single super Power syndrome over" .

Riaz Haq said...

Oostur: "I just wanted to (politely) point out that the title bothered me."

This post of mine is a commentary disagreeing with Financial Times' story titled "India’s abject return to talk of Hindu growth rates". Hence the reference to it.

Ali Hasan said...

Yes. Words don't have universal meanings. Ideas conveyed are understood in the context they are being articulated. An Afro-American calling another Afro-American a nigger has one meaning, a Caucasian calling an Afro-American a nigger has a completely different nuance to it. Calling an economic growth-rate a "Hindu growth-rate" is OK for a 'Hindu' commentator or for someone who is not a party to the communal discordance of South Asia, but the use of this terminology--no matter how many times used in quotations, or referenced to be borrowed from other sources--by an Indian Muslim (or a Pakistani Muslim) certainly indicates, rightfully or wrongly, a deep-seated ill will towards the Hindus.

Riaz Haq said...

Ali Hasan: "An Afro-American calling another Afro-American a nigger has one meaning, a Caucasian calling an Afro-American a nigger has a completely different nuance to it. Calling an economic growth-rate a "Hindu growth-rate" is OK for a 'Hindu' commentator or for someone who is not a party to the communal discordance of South Asia.."

I think it's a real stretch to compare the N word used for African-Americans with the with the use of the phrase "Hindu Rate of Growth" to describe pre-1991 economy of India.

In my view, there is simply no comparison given the very different histories and origins of these terms.

Anonymous said...

I think a 5-6 % growth is good economic management if achieved as is likely.

Exactly and a job well done by RBI and other regulators!!

Thaank god it is them and not the clowns in politics who actually control our economy!

Anonymous said...

dear sir, even if India's growth rate in just 3.5%, it means compared to Pakistan, it is 5%. This is because the GDP (ppp)is just 2500$ per year. India's GDP is 3500. Also, Pakistan GDP to BE correct due to the devastating floods of 2011. So Pakistan has to reach 5% plus growth rates to keep parity. If the story is true, India will have double the GDP of pakistan by next year.

Anonymous said...

'The figures I have posted in my recent blog posts were released in May 2011 by India and in July 2011 by Pakistan. This is the only apples-to-apples comparison that is valid. The rest is irrelevant.'

Really I would have thought figures released by IMF,WB,OECD or some other such neutral third party with a reputation would have been beter.

But then they all show Indian nominal per capita income 20-30% more than Pakistan.

So what the 'only relevant figures' according to you seem to be saying is that even though by all sources India and Pakistan were neck and neck per capita nominal GDP in 2008.We have then had ZERO per capita growth in Pakistan and 5-6% per capita growth per annum in India for the past three years HOWEVER Pakistan is still marginally richer????!Amazing!

Do you have a theory behind this?
We are talking NOMINAL here not any PPP index fudging.And also Pakistani rupee has depreciated MUCH more vis a vis the USD than the INR since 2008.
I believe the exchange rates are roughly 50 for INR and 85 for PKR respectively.

Riaz Haq said...

Anon: "Really I would have thought figures released by IMF,WB,OECD or some other such neutral third party with a reputation would have been beter."

They, too, get their data from the national economic surveys of India and Pakistan with some lag in reporting.

BTW, I just located a document by Economic Survey of India which puts India's GDP at INR 78.78 trillion which is about $1.75 trillion or per capita gdp of $1458 at INR 45 to a US dollar.

Anonymous said...

If I am not mistaken PAkistan economic year begins in July 1 and India begins in April 1.

Therefore an apples to apples comparison should take into account growth in Q1 of FY12 to the existing $1458 .So a $1500-1550 figure is appropriate.assuming 2-3% growth per quarter.
so India is roughly 20% richer than Pakistan.

Just putting the facts straight :)

the.real.facts said... please go to the link to find the truth about child malnutrition in india and that the findings of WHO are completely nonsensical. please go to the link to find the truth about child malnutrition in india and that the findings of WHO are completely nonsensical.

Riaz Haq said...

Here's a news report on India's slowing car sales:

Passenger car sales in India grew at a scorching 30% in 2010-11 (April-March). But with rising interest rates on auto loans and a sharp rise in petrol prices, car sales this year have slowed down to a crawl.

In fact passenger car sales crashed 16% in July and 10% in August, according to data by Society of Indian Auto Manufacturers (SIAM). Strike at Maruti Suzuki’s plant in Manesar, which had hit output of one of its most selling cars, the Swift hatchback, has only added to the pressure on overall industry sales.

SIAM has already cut its growth forecast for car sales to 10-12% from earlier 16-18%. Last month it said it would further downgrade growth forecast for the full year.

Research firm Crisil painted a bleak picture earlier in the week, saying it expects "growth in passenger vehicles to decelerate sharply to 2-4% with domestic cars growing at a mere 0-3% as against earlier forecast of a growth of 8-10%."

Crisil said its latest downgrade was prompted by Rs 3 rise in petrol price and 25 basis points hike in interest rates by Reserve Bank of India in September.

Other analysts, like Nikhil Deshpande of Pinc Research and Sejal Jhunjhunwala of Way2Wealth Securities too agree that sentiments are not looking good this year, despite the ongoing festive season.

"Automakers had expected car sales to pickup in the festive season. But there were two conditions -- interest rate hike cycle would peak out and fuel prices wouldn’t rise. But there has been no respite on either front," Deshpande told

No wonder then the automakers are going all out to tempt customers now, with more offers this year than last year, in the hope that people will spend impulsively during Dassera-Diwali. Fiat India, for instance, is offering benefits up to Rs 1.30 lakh on its Linea sedan, and Rs 75,000 on the Punto hatchback. Fiat’s offer includes insurance at Rs 1, exchange benefits, gift cheque and free road side assistance for 50 months.

Riaz Haq said...

Here's an excerpt from a NY Times story on India's slowing economy:

Most countries would be thrilled to have a growth rate of more than 7 percent, but for India, which strode at a 9 percent pace before the financial crisis of 2008 and hit 8.5 percent last year, it would be a significant letdown. Slower growth would mean fewer Indians climbing out of poverty and could help spur greater social unrest.

And it would pose yet another challenge to the global economy, which is increasingly depending on emerging markets like India and China to make up for stagnation in the West.

The Indian slowdown was in the making long before most analysts were concerned about a double-dip recession in industrialized nations. Private investment has been sliding since late last year and once-robust car sales have decreased in recent months. Indian stocks began falling in November and are now down more than 24 percent from their high. Moreover, inflation has been hovering at nearly 10 percent even after the Reserve Bank of India raised interest rates 11 times in less than two years.

“Today, the economy is running on the engine speed achieved some time ago,” said R. Gopalakrishnan, an executive director at the Tata Group, India’s largest business conglomerate. Stressing that he was speaking for himself and not his company, he added, “It’s not sputtering to an end, but it’s slowing down.”

The new economic worries are occurring while the Indian government has been preoccupied with the biggest protests the country has seen in nearly two decades.
Now, analysts said, the government is unlikely to act on the land and retail measures for several months, if not longer. Even as markets elsewhere were relatively stable, India’s benchmark Nifty stock index fell 1.9 percent on Friday, to its lowest level in 14 months.

Furthermore, many analysts say the government is unlikely to push big reforms next year because India’s largest and one of its poorest states, Uttar Pradesh, will go to the polls in 2012. Federal elections are due in 2014.

Still, some business leaders say the corruption movement has demonstrated that the government, which is run by a coalition led by the Congress Party, may no longer be able to postpone difficult policy decisions. Many of the most vocal protesters at Mr. Hazare’s rallies have been people 25 or younger — a group that makes up about half India’s population.

“The middle class has been created; it wasn’t there 30 years ago,” said Mr. Gopalakrishnan, the Tata executive. “And their aspirations have been created. There is an energy there that has come out of human passion. Being standstill and letting this putter out is not an option.”

Anonymous said...

Slower growth would mean fewer Indians climbing out of poverty and could help spur greater social unrest.

Dear Riaz, you can forget the social unrest angle. I am heading a multi-national company. I am unable to get working hands for the lower level jobs even after paying Rs.300 per day, which is almost Rs.600 in pakistani rupees. there is a shortage of working hands. reality. do u expect social unrest soon.... of course, we may see anti-corruption movements.

Riaz Haq said...

Here are some interesting excerpts from an Outlook India interview with Prof Aswath Damodaran of NYU Stern School of Business:

What risks do the present crisis hold for developing economies like India, grappling for well over a year to curb inflation?

If you are a developing economy you are like a growth company, which is far more dependent on the economy because everything gets magnified. Developing countries are far more exposed to global real economic growth because so much of the value comes from future growth. It is like a mature company is less affected by a recession than a growth company; mature economies are less affected than developing economies by a slowing global economy. Everybody gets hurt, but developing economies in a strange way can get hurt more because everything gets magnified at their level.

So, is India’s current pace of economic growth sustainable?

A scaling effect is going to kick in. It is one thing to grow at 9 per cent a year when you are a smaller economy, but as you get larger people have to get realistic. Policymakers have to realise that planning for 6 per cent real growth for the next 10 years is absurd. As the country scales up, you have got to get more realistic about real growth and have policies in place for what to do as real growth slows down, because it will. It will in India and it will in China. It has got nothing to do with the quality of the policies, it is a fact that as the economy becomes larger maintaining those growth rates is going to be unrealistic.

As we speak, corruption has become a major cause for protests in India....

The way I think about corruption is that it is like paying an unofficial tax. What corruption has done is it has raised the effective tax rate for businesses operating in India from 33.99 per cent to 41, 42, 43 per cent and that lowers investment. It lowers real growth. It has always been a deterrent and it will continue to be so. I think it is important that corruption be dealt with, but you can’t deal with it with an ombudsman, or a group that gets together and says let’s catch corrupt politicians, because it is entrenched in the system. It is built into the system because the salaries of many public servants are set with the implicit assumption that they can supplement that salary by getting paid on the side. It’s almost like waiters in the US get paid a low minimum wage because the assumption is that people will tip them 15 per cent so they can make up that money. It is not going to be easy to take out of the system because you have to revisit the way in which public servants get salaries.

Rahul said...

Here is what your experts and intellectuals say about your economy...

Renowned intellectual Mr. Pervez hoodbhoy ridicules the Pakistan economy..Watch it in the video...

Amar said...

What a spin you gave. However, according to IMF which takes into consideration the G8 slow down, India's. Per capita GDP will grow from $3608 to $5398 between 2011 and 2016.

Pakistan on the other hand will grow from $2851 to $3678 for that period.

Riaz Haq said...

Inflation slowing in Pakistan, reports Businessweek:

Oct. 3 (Bloomberg) -- Pakistan’s inflation slowed for a second straight month in September, giving policy makers more scope to cut interest rates to bolster economic growth.

Consumer prices rose 10.46 percent from a year earlier, after climbing 11.56 percent in August, the Federal Bureau of Statistics said in Islamabad today. The median of six estimates in a Bloomberg News survey was for a 10.65 percent gain. The bureau in August changed the base year for inflation to 2008 from 2001.

Pakistan’s central bank unexpectedly cut rates in its most recent policy decision on July 30, breaking away from Asian neighbors such as India and Malaysia that have increased borrowing costs or kept them steady in recent months to tame inflation. Growing public debt and living costs have fanned Pakistan’s 10-year government bond yields to the highest level after Greece and Venezuela, according to data compiled by Bloomberg.

“The biggest contributor to the slowing inflation rate is the relative stability in food prices,” Khalid Iqbal Siddiqui, head of research at Invest & Finance Securities Ltd. in Karachi, said before the report. “I am expecting a 100 basis-point cut in rates in the next meeting.”

The State Bank of Pakistan reduced the discount rate in July to 13.5 percent from 14 percent. The central bank’s next monetary policy announcement is scheduled for Oct. 8, and three of five economists surveyed by Bloomberg News predict the rate will be lowered to 12.5 percent. The other two expect a 50 basis-point cut to 13 percent.

Government borrowing for budgetary support rose 23 percent to 224 billion rupees ($2.56 billion) in the fiscal year starting July 1 from a year earlier, according to data on the State Bank of Pakistan’s website. The government announced this year that it plans to maintain zero net borrowing from the central bank to contain inflation, one of the highest in Asia.

The International Monetary Fund forecasts Pakistan’s economy will expand 2.56 percent in 2011, the slowest pace since the 1.72 percent growth in 2009.

Riaz Haq said...

India’s manufacturing grew in September at the slowest pace in 2 1/2 years after the central bank’s record interest-rate increases, according to a Bloomberg report:

The Purchasing Managers’ Index was at 50.4 from 52.6 in August, HSBC Holdings Plc and Markit Economics said in an e- mailed statement today. That’s the weakest reading since March 2009. A number above 50 indicates expansion.

The Reserve Bank of India last week signaled it may maintain its tight monetary policy after Governor Duvvuri Subbarao said inflation remains above the acceptable level. In China, a manufacturing index advanced for a second month, suggesting the world’s second-largest economy is weathering Premier Wen Jiabao’s steps to check price gains.

“Inflation control would continue to be the dominant theme and goal in India,” Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore, said before the report. “The sheer size of the rupee’s move makes imports costly and adds to price pressure.”
The International Monetary Fund last month cut its forecast for India’s economic growth. The South Asian economy will expand 7.8 percent in 2011, the Washington-based lender said, slower than the 8.2 percent projected in June. For 2012, it lowered its estimate to 7.5 percent from 7.8 percent.

Merchandise exports growth slowed in August, gaining 44.3 percent to $24.3 billion from a year earlier, according to an e- mailed statement from the commerce ministry today. Exports jumped 81.8 percent in July, the biggest increase since at least April 1995, Bloomberg data show.

Riaz Haq said...

Here's a Dawn report on Pakistan auto sales July-Sept 2011:

KARACHI: While sale of cars, two and three wheelers and light commercial vehicles remained brisk from July-September 2011, production by a leading tractor assembler remained suspended between second week of July 2011 and September 2011.
Buying spree was witnessed for locally assembled cars thanks to huge arrival of home remittances, surging farm income, slight increase in car sales through bank financing, etc.

Even rising prices of locally produced cars and high cost of fuel (petroleum products and CNG) did not make any adverse impact on vehicle sales.

Pak-Suzuki Motor Company Limited (PSMCL) raised the prices by Rs14,000-30,000 followed by two to four per cent by Indus Motor Company (IMC).

Honda City also became costlier by Rs25,000 while Civic price was raised by Rs38,000.

Pakistan Automotive Manufacturers Association (PAMA) claimed rise in overall car sales to 38,065 units in July-September 2011 as compared to 30,030 units in the same month of last year.

Overall sale of costly cars (1,300cc and above) rose to 16,936 units as compared to 14,949 units.

Sale of Honda Civic, Honda City and Toyota Corolla stood higher at 1,710, 2,562 and 10,682 units as compared to 1,558, 2,274 and 10,371 units respectively. Suzuki Swift sales also surged to 1,826 units from 673 units.

In 1,000cc segment, overall car sales jumped to 7,343 in July-September 2011 from 5,679 units in the same period of last year in which sales of Suzuki Cultus and Suzuki Alto swelled to 3,710 and 3,633 units from 2,860 and 2,819 units respectively.

Increase in Suzuki Mehran sales to 8,415 units from 5,356 units made a positive impact on overall sales of 800cc and below 1,000cc cars which rose to 13,786 units from 9,402 units.

Sale of Daihatsu Cuore and Suzuki Mehran went up to 1,282 and 4,089 units as compared to 1,136 and 2,910 units.

A leading car assembler said he checked with many banks who intend to cut interest rates from Nov 1 after Central Bank`s decision to lower interest rates.

He said car financing by banks now enjoys 20 per cent share in overall car sales and this share may go up slightly after cut in interest rates.

From July onwards, the buyers especially on cash basis had resumed purchases and it was evident from sales trend in the first quarter of the current fiscal year.

Rising farm income also encouraged farmers and growers to purchase more new bikes, thus pushing up Honda bikes sales to 152,605 units in July-September 2011 from 126,701 units in the corresponding period of 2010.

Sale of Suzuki bikes also increased to 5,506 from 4,588 units while sale of Ravi and Habib bikes (Chinese two-wheelers) improved to 6,680 and 7,707 units from 5,971 and 4,053 units.

Qingqi and Sazgar three-wheeler sales reached 5,193 and 3,901 units from 2,787 and 2,976 units.

In pick-ups, a total of 4,586 units of Suzuki Ravi and 856 units of Toyota Hilux were sold in July-September 2011 as compared to 3,129 of Ravi and 285 units of Hilux in the same months during 2010.

In heavy vehicles, sales of only Master trucks rose to 110 units from 82 units while sales of Hino, Nissan and Isuzu trucks plunged to 231, 33 and 36 units from 422, 102 and 119 units.

In buses, Hino bus sales dropped to 56 units from 110 units and Isuzu bus sales also came down to 12 units from 23 units........

Riaz Haq said...

Car sales are rising by double digits in Pakistan and declining by double digits in India:

SIAM, India's auto-industry lobby, forecasts sales growth will slow to 2% to 4% for the year ending April, about one-tenth of what it was last year, according a report in the Wall Street Journal.

Rising prices are usually something auto makers welcome. Not in India.

As recently as April, some Indian auto makers were struggling to produce enough cars to meet demand as sales hit successive monthly highs.

But thanks to rising interest rates, buyers are hitting the brakes.

Across the industry, sales fell 16% in July compared with last year and 10% in August. September's decline was a relatively mild 1.4%, the Society of Indian Automobile Manufacturers reported Monday, though sales figures in the three ...

Buying spree was witnessed for locally assembled cars thanks to huge arrival of home remittances, surging farm income, slight increase in car sales through bank financing, etc.

Even rising prices of locally produced cars and high cost of fuel (petroleum products and CNG) did not make any adverse impact on vehicle sales.

Pakistan Automotive Manufacturers Association (PAMA) claimed rise in overall car sales to 38,065 units in July-September 2011 as compared to 30,030 units in the same month of last year.

Riaz Haq said...

Here's a BBC report on IMF's downbeat forecast of Asian growth:

The International Monetary Fund (IMF) has cut its growth forecasts for Asia over worries about eurozone debt and new fears for the US economy.

The IMF said risks for Asia were "decidedly tilted to the downside" because of these concerns over its two major export zones.

It said gross domestic product (GDP) growth across Asia would average 6.3% in 2011, and 6.7% in 2012.

In April, it had predicted close to 7% growth in both years.

The body warned about a risk of capital outflows from the region, and the possibility that oversees investors may reverse the large positions they have built in Asian markets since 2009.

In addition, inflation is still high in a number of Asian countries, the IMF said.

But it believes consumer prices could ease after peaking this year, as food and energy prices "gradually moderate".

The IMF also said that Asian policymakers were faced with "a delicate balancing act".

"They need to guard against risks to growth but also limit the adverse impact of prolonged easy financial conditions on inflation," it noted.

Riaz Haq said...

Here's an except from on slowing Indian economy:

It finally took a foreign journalist to burst their bubble. James Lamont of the Financial Times reported that several economists had begun to voice fears that India could return to a ‘Hindu’ rate of growth. “Far from being in a pole position among emerging markets,” he wrote, “India trails in terms of attracting foreign capital and beating inflation. Senior executives complain bitterly about Delhi’s painfully slow or inconsistent decision-making. Many local companies are focussing their investments on Africa or Latin America.” Similarly, a senior executive of a Singaporebased investment company expressed his shock at finding that when he asked senior executives of Indian firms where his company could invest in India, they sought his advice instead on where they could invest in east Asia. The official growth figures were misleading, and the real rate of growth, in their opinion, was not more than 5 percent.

The hard data support this conclusion. According to the latest estimates, industrial growth has fallen from 9.7 percent in April-July 2010 to 5.8 percent this year. The decline in manufacturing has been even more steep, from 10.5 to 6 percent.

Sectoral growth rates are even more revealing. Growth in the capital goods sector fell from 23.1 percent in April-July 2010 to 7.6 percent this year. Growth in the production of intermediate goods, which is considered the most reliable indicator of future production, fell from 10.1 percent to 0.8 percent. If one looks closely at the data, one sees a pattern of recession spreading from the most interest rate sensitive industries outwards to the less sensitive ones. The real estate sector went into an absolute decline in the last quarter of 2010-11. Car sales have also slumped.

Surveys of industry’s future intentions are uniformly pessimistic. The purchase managers’ index has fallen continuously for five months and is close to 50 percent, which indicates zero growth. A massive postponement of investment is taking place: the latest survey of investment intentions by the Centre for Monitoring Indian Economy shows that these have declined by 55 percent over what they were a year ago.

Riaz Haq said...

Moody's downgrades India's banks, according to WSJ:

MUMBAI -- Global ratings firm Moody's Investors Service Wednesday changed its outlook for India's banking system to negative from stable, flagging concerns of a possible rise in bad loans, capitalization constraints and pressure on profitability in a tough environment.

The action, however, is in contrast with the stable outlook assigned to the financial strength rating of 14 out of the 15 banks rated by Moody's.

"India's economic momentum is slowing because of high inflation, monetary tightening and rapidly rising interest rates," said Vineet ...

Riaz Haq said...

Indian rupee hit record low amidst high inflation and high twin deficits, according to Wall Street Journal:

The Indian rupee fell to a record low against the U.S. dollar Tuesday as high inflation and a gaping current-account deficit weighed on demand for the local unit, before a recovery in global risk appetite helped trim the greenback's gains.

The dollar was at INR52.30 late Tuesday, up from INR52.16 late Monday, after rising to as much as INR52.725 during the session, its highest ever. The dollar's previous high was INR52.1950 on March 3, 2009.

The pace of the rupee's fall caught most market watchers off guard, forcing firms with unhedged overseas debt to rush for cover, accelerating the fall.

Adding to this, exporters have been wary of locking into a dollar rate for their future revenue, when the dollar's rally may well have more steam.

"The rupee is being swept by a self-fulfilling squeeze--capital is being pulled from hot money markets in Asia, and the rupee is just far more vulnerable than other Asians with its trade deficit," said Sean Callow, a Sydney-based currency strategist at Westpac Bank.

But some argue that the rupee's slide could be on its last legs. UBS, for example, argues that the rupee's fall has less to do with local factors such as inflation and slowing economic growth in India, and more to do with re-rating the rupee to a basket of currencies that's more sensitive to the global economy. The Swiss house advises buying the rupee at this point, as a bet on a global cyclical rebound.

Rupee bulls got a boost when a federal government official told Dow Jones Newswires that the central bank was planning to offer a dollar liquidity window to oil importers. Under the planned window, oil importers would be able to pay for their greenback purchases by selling the central bank the so-called oil bonds, which are issued to them by the government in exchange for selling fuel products at below-market prices.

If this window comes into effect, it would take a key source of greenback demand out of the currency market, helping to ease the rush for the dollar, said the treasury head of a foreign bank.

In the sovereign debt market, Indian government bonds were under pressure on the growing view that the federal government would struggle to stick to its fiscal deficit target.

The benchmark 8.79% 2021 bond ended at INR99.64, from Monday's INR99.76.

Royal Bank of Scotland reckons India's fiscal deficit will overshoot its target of 4.6% of gross domestic product by at least one percentage point because of rising subsidies on food and fuel and dwindling tax revenue.

Traders say an overshoot of the fiscal deficit of that magnitude could push the benchmark bond yield beyond 9%.

Riaz Haq said...

Here's an FT report on India's widening trade deficit:

India’s trade deficit widened to a 17 year high of $19.6bn in October, according to Rahul Khullar, the country’s commerce secretary.

The record number highlights the underlying problems in India’s economy and represents a dilemma for the Indian central bank, already struggling with inflation, that might force it into another rate hike in the future.

According to Khullar, and reported by Bloomberg, India’s deficit was caused by slowing export growth, driven to a two-year low by shrivelling demand in Europe and the impact of higher oil prices on the cost of imports.

The balance of trade for the first seven months of the year that started April 1 was $93.7bn and “that is clearly something to be worried about, because at this rate you’re clearly going to breach the $150 billion mark for the fiscal year”, said Khullar.

Khullar told reporters in Delhi that although merchandise exports rose 10.8 per cent to $19.9bn in October, compared to a year earlier, imports gained 21.7 per cent to $39.5bn, leaving a gap of $19.6 billion, the highest recorded since at least 1994.

But as Andrew Kenningham of Capital Economics told beyondbrics: “India’s trade numbers are not usually a source of real interest as they are normally quite good. The current account deficit was only 2.5 per cent a year ago but the number for October is quite nasty and reverses the previous positive trend. However, it isn’t a complete picture of the current account as it does not include services figures or remittances – the current account deficit is always lower than the trade deficit.”

And Kenningham thinks October’s import figures may be a one-off anyway. India’s trade deficit is particularly vulnerable to fluctuations in world oil prices as it imports almost three-quarters of its oil requirements and Kenningham argues that “it is probable that this month’s import figure will be an outlier – the oil price has not moved dramatically and slowing internal demand should push down overall imports.”

Kenningham sees these figures as more of a problem for the Indian central bank “which considers a 3 per cent current account deficit to be the maximum sustainable level. A weaker rupee will but further upward pressure on inflation. Investors may have been expecting a downward rate move next rate year but this raises a few question marks over that.”

And the rupee has continued to weaken as the eurozone crisis drives demand away from EM currencies and weakens demand for India’s exports.

India’s currency has now depreciated more than 11 per cent against the dollar this year but Kenningham told beyondbrics India’s exports shouldn’t count on any major boost from the weakening rupee: “The rupee is only about 10 per cent below its average level for the last five years so I wouldn’t think India’s exports would get too much of a boost from there.”

Thus, although Kenningham is not particularly concerned about India’s balance of payments as “it has $310bn of foreign reserves, low external debt and low levels of portfolio investment in the fixed income market,” he does see it as “a sign of stress in the economy and a further complication for the central bank.”

Riaz Haq said...

India industrial output falls 5.1%, reports Wall Street Journal:

Industrial output fell 5.1 % from a year earlier in October, after a 1.9% expansion in September, dragged down by a contraction in manufacturing and mining production, government data showed Monday.

The reading widely missed the median estimate in a poll of 15 economists for a contraction of just 0.55%.

Industrial output last fell in June 2009, when it shrank 1.8%.

Government bonds rose following the data amid growing expectations the RBI will hasten a rate cut. The benchmark 7.80% 2021 bond rose to 101.85 rupees from 101.76 rupees before the data and closed at 102.26 rupees.

Economists said a rate cut may come early next year if inflation continues to decline over the next few months.

"While the governor of the RBI continues to stress that he is more concerned about inflation than growth, this is the sort of number that will surely make him sit up and take notice," said Robert Prior-Wandesforde, director of Asian Economics at Credit Suisse.

The RBI, which has raised interest rates 13 times since March 2010, has previously said the likelihood of another increase at its next policy review on Dec. 16 was low.

Despite headline inflation likely remaining elevated at about 9% for November, the sharp contraction in production could prompt some monetary measures at the policy meeting this week, added Citigroup economists Rohini Malkani and Anushka Shah.

Monday's data showed that manufacturing output, which has a 75.5% weighting in the index of industrial production, fell 6% from a year earlier in October, compared with a 2.4% rise the previous month. Mining output shrank 7.2%, after falling 5.6% in September.

Riaz Haq said...

Here's an excerpt from a Bloomberg piece written by Pankaj Mishra:

A few years ago, one of India’s private airlines started operating a flight from Delhi to the Himalayan city of Shimla, a few miles from my village. The brisk descent in a small turboprop aircraft isn’t for those with a fear of flying. The runway on a table-top mountain seemed particularly short last week, when the plane, breaking free of the fog over Delhi, came down to a wintry Himalayan mist.

Still, cutting down journey times to a fraction, the flight seemed too good to be true; and, having endured many very long drives up and down winding mountain roads, I became one of its keenest and more regular customers.

The airline was subsequently bought by Kingfisher Airlines Ltd. (KAIR), one of the New India’s iconic corporate brands. Owned by Vijay Mallya, a man fond of horse racing and swimsuit calendars, Kingfisher simply ran out of money earlier this year, reflecting more broadly the troubles of most private airlines in India. They are struggling despite the favor shown to them by the government, which has systematically denuded the publicly owned Air India Ltd.
The metaphor of highways has been deployed frequently to describe India’s potential, most famously by Thomas Friedman, who claimed in 2005 that India “is like a highway full of potholes,” but “off in the distance, the road seems to smooth out, and if it does, this country will be a dynamo.”

Like many other popular metaphors about India -- tiger, elephant, cellphone -- this one isn’t wholly mistaken. Indian highways rank highly among the infrastructure projects crucial to sustaining the country’s rapid economic growth (INQGGDPY), which is threatened by inflation, declining industrial production, a weakening currency (the rupee has dropped about 15 percent against the dollar this year) and corruption scandals that implicate some of India’s most well-known politicians and businessmen.

The question that Friedman asked in 2005 has grown more urgent: “Is that smoother road in the distance a mirage or the real thing?” Or, to put it differently: Did the perennial gap between illusion and reality somehow widen imperceptibly in the New India?
Education Racket

The answer to this question seemed obvious on the half- built highway to Delhi. The most conspicuous sights along the roadside were the placards for shiny new private educational institutions. They seem -- if you have never been inside one or met any of their alumni and looked only at the (misspelled) signboards promising professional success -- to be hectically preparing the basis for India’s “demographic dividend”: an overwhelmingly youthful population (WPOPINDI) that will soon become producers and consumers in the global economy.

In actuality, while most state-funded schools and colleges are barely functional, private education in India is largely a money-making racket. In September this year, a study of schools in the biggest states discovered that India’s peers in adult literacy are Afghanistan and Papua New Guinea.

Hundreds of millions of poorly educated and unemployable youth increasingly find themselves drawn to some peculiar forms of entrepreneurship. Twice on the highway from Shimla to Delhi, we were flagged down by groups of young men collecting “taxes.”

I have often come across these soft forms of banditry on the country roads of Uttar Pradesh and Bihar, two of India’s poorest and most populous states. The only difference here was that the young men seemed better educated, more resourceful and authoritative. One of the groups that stopped us near the Indian capital, less than a mile from an authentic police checkpoint, even had a jeep with the words “Delhi Municipal Toll” painted on the windshield......

Riaz Haq said...

Here are excerpts of a Marketwatch commentary on India's "fading star":

...China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen to under 3% from around 7.5%. Russia’s economy is heavily dependent on oil and energy prices.

And India? It seems destined to never fulfill its economic potential.
Over the last two decades, India’s economy has almost quadrupled in size, growing at an average rate of about 7% per annum. India’s GDP rose by 43% between 2007 and 2012, slightly less than China’s, which increased by 56%, but much faster than developed economies that grew only 2%.

In late 2011, the Indian government’s 12th five-year plan forecast growth of 9% between 2012 and 2017. Yet by early 2012, India’s growth had slowed to around 6%, high by the standards of developed countries but well below the levels required to maintain economic momentum and improve the living standards of its citizens.
ncreasingly, India’s problems — poor public finances, weak international position, structurally flawed businesses, poor infrastructure, corruption and political atrophy — threaten to overwhelm its potential.

In recent years, India has consistently run a public sector deficit of 9%-10% of GDP, including the state governments and off-balance-sheet items. The problem of large budget deficits is compounded by one major cause — poorly targeted subsidies for fertilizer, food and petroleum which may amount to as much as 9% of GDP.

In March 2012, India brought down a budget that forecasted a fiscal deficit of 5.9%, well above its previous fiscal deficit target of 4.6%. India’s strong rate of recent growth (an average rate of 14% between 2004-05 and 2009-10) made large deficits, on the order of 10 % of GDP, relatively sustainable. Slowing growth will increasingly constrain India’s ability to run continuing large deficits.

India’s government debt is around 70% of GDP. As its debt is denominated in rupees and sold domestically, India faces no immediate financing difficulty. Instead, the government’s heavy borrowing requirements crowds out private business.

But India is running a current account deficit of over 3% of GDP, and trending higher — among the highest in the G-20. The cause is slowing exports as a result of weakness in India’s trading partners, while imports, mainly non-discretionary purchases of commodities and oil, have increased. India imports around 75% of its crude oil.
Slowing growth, tighter credit and other economic problems have increased corporate defaults to the highest level in 10 years. Non-performing loans are now around 2.5%-3% of bank assets. Analysts estimate that the major banks have around $25 billion in bad loans, an amount which is increasing.

The Indian government has already moved to recapitalize state-owned banks to ensure their capital position. In the process, the budget deficit and the government borrowing requirements have come under increasing pressure.

India is plagued by inadequate infrastructure. In critical sectors like power, transport and utilities, there are significant shortages. Yet political pressure to keep utility costs low has impeded investment.

In the electricity sector, for example, state-owned utilities that purchase power from producers and sell to residential users have incurred large losses. State governments are unwilling to raise retail consumer rates despite increases in the price that power producers charge the utilities. Attempts to increase rail ticket prices have failed. The Railways Minister’s own party opposed the proposal and demanded he be removed from his job. ...

Riaz Haq said...

Here are some excepts of a BBC Op Ed on Indian economy titled "Five things wrong with India's economy":

After several official predictions that India would grow by 7-8% in 2011-12, the finance minister finally admitted in his Budget 2012 speech that the growth would be 6.9%.

The actual figure may be lower at 6.5%, thanks to the statistical error in sugar production, which dragged down January's industrial production growth figure from 6.8% to 1.1%.

Although ratings agency Standard and Poor's estimate for 2012-13 is 5% or above, Indian economists feel they won't be surprised if the economy grows by just 4%.

"If things remain the way they are, in terms of policy decisions, investments and sentiments, I would go to the extent that the figure may be 3%," says a senior economist with a leading business association.
Wholesale price inflation, which is under 7%, could increase to 9-10% over the next few months.

Food inflation is still high at double-digit levels, and any hike in fuel (petrol and diesel) prices in the near future will spur inflation.

A combination of low growth and high inflation, or near-stagflation, would be India's worst economic nightmare come true.
In 2011-12, the fiscal deficit zoomed from a projected 4.6% of GDP to 5.9%. Although Budget 2012 predicted it would come down to 5.1% in 2012-13, most economists remain sceptical.

Low growth rates, lower-than-estimated government revenues, and higher-than-expected expenditures, especially on welfare schemes for rural employment and the right to food, may force the deficit to go up in 2012-13, as happened in the previous financial year.

Although exports grew by 20% in 2011-12, imports rose at a faster pace, and the trade deficit went up to $185 billion, the highest ever in the country's history.

Since August 2011, foreign exchange reserves have dipped from $322bn to $293bn due to the higher trade deficit and other foreign exchange outflows.
Coalition compulsions, a united opposition and corruption allegations have forced the government to backtrack on key economic reforms, including foreign direct investment (FDI) in multi-brand organised retail.
In 2011-12, the domestic private sector was wary of huge investment commitments; many firms delayed or postponed plans to invest in expansion or building new factories.

An April 2012 overview of the Reserve Bank of India (RBI) stated that "consultations with industry and banks suggest that new project investment continue to be sluggish"