Statistical Silver Lining Looking For Implementation Gold

Statistical Silver-Lining Looking For Implementation Gold

Prime Minister Narendra Modi signs his name, when he does it in English, by writing a right-leaning capital ‘N’, with a loop around it, and a dot to finish. It is, of course, representative of his given first name, Narendra. But the legible ‘N’, the only part of the signature that is not abstract, also reminds one of Napoleon, not so much because Napoleon was a plebe who became an emperor, but because he believed in luck being as important as skill. 

Brilliant military strategist, beloved general, ardent lover and tolerable politician, Napoleon Bonaparte did, it is said, consult a book of oracles he kept at hand. In has, in fact, been handed down to the present world of divination and prophecy as Napoleon’s Book of Fate.

But what then do the fates have in store for the monkish NaMo’s India? He too is a man of considerable destiny, and there is a tremendous sense of anticipation about all that he has promised.

Narendra Modi is proving himself lucky as Prime Minister, despite all the trials and tribulations of his early life. He has raised himself from poverty and obscurity to the most powerful job in the country, run the gauntlet of opposition, from within and without, and won; that too with a full majority for the first time in 30 years.  He is now plainly determined to transform India into a prosperous nation as soon as possible.  And circumstances seem to be helping him.

The dramatic oil price fall to below $50, cured the nation of inflation in one fell swoop. And most estimates do not see it rising to beyond $60 a barrel, even in a year’s time. As net importers of crude oil to the tune of an ever-expanding 80% , India’s oil bills have been more than halved, and worked its magic; particularly  to arrest  high-inflation and the falling worth of the rupee. The Government is a beneficiary of this, as much as the learned RBI, alongside the people of India.  The economy is even headed for a current account surplus, for the first time in seven years.

The billions in pledged money from foreign Governments and privates is likely to come in shortly. The external  environment has favoured India; and because the Modi Government is moving on its promises to cut red tape and taxes, reduce interest rates, streamline processes, reform labour and land laws, improve infrastructure and communications, and implement  a  large number of second generation reforms.  India is clearly the best performer in BRICS now, and amongst the EMs too.

But are we truly going to grow into a $ 20 trillion economy, the putative size of the US economy today? We will, on the present base of $2 trillion, take 25 years to get there. And, if we do, it will be provided we can keep growing at over 9.5% year-on-year for the whole time, even when the base is not so small. But getting started as soon as possible will be a tremendous boost to our spirits.

The fact is, China had an economy the same size as India once, before Deng Xiaoping got to work in the eighties. And it did achieve over 10% growth for 30 years. Its present, largely planned decline to 7.4%, in order to cool it, is the lowest its been in 24 years . So, impossible it is not, particularly if the US helps us now, as it helped China then, and all through most of the subsequent years.

But India will have to rely on a domestic consumption path rather than an export-led one today, at least till the world economy gets stronger, even in the main thrust to its ‘Make in India’ campaign; and it will have to ignite all sectors of the economy simultaneously, to gain, and keep the momentum.  

The IMF has followed on from Goldman Sachs and the World Bank in predicting India will  indeed become the fastest growing major economy in the world by 2017, and overtake China, if only just, in the growth stakes by then, (India’s 6.5% to China’s 6.3%).

When these august organisations call India a major economy, it is not so much based on our actual GDP number, which is still only at a modest $ 2 trillion in absolute money, without going into purchase power parities (PPP); but the undeniable potential of our massive domestic market.

Besides, Indians are going to be young, 65% between 15 and 35 years of age, for decades to come; while China is greying fast. India also has a free press, a lot of quasi-independent institutions that function, an independent, feisty, judiciary, the basic rule of law, and above all, a thriving democracy.

But of course, China’s economy is already five times bigger than India’s at $10.4 trillion, and percentages, by no means, reveal all. China’s present growth rate of 7.4% is predicated on a size of $10.4 trillion and our 5.7% for 2014, or the projected 6.5% in 2015, is still on an economy that tops out at $ 2 trillion.

We are growing from a low base, wherein the percentages look good, and China is declining, by design as well as circumstance, from a base that is five times bigger. The absolute numbers in every case, including foreign investment into the two countries, will stay very different. A poor man’s growth is being compared to a rich man’s decline.

One irony of the situation is that India needs an estimated 8% minimum  in annual growth to reduce its humungous poverty statistics, with a third of Indians below the dubious ‘Poverty Line’. And China needs that very percentage also, but to keep its massive population from becoming restive.

The Emerging Market (EM) allocations may indeed be enhanced for India this year and going forward. But actually, we need very little in absolute terms to get the Indian stock market soaring. Where we need trillions from abroad is in infrastructure development.

Consider that, even at our worst showing of some 4% plus in GDP, under the last years of UPA rule, we were still growing, when most other countries in the ‘developed world’, were not.  Presently, almost every other major country is facing declines, stagflation, deflation, and the world economy is expected to grow at a modest 3.5% in 2016, and 3.7% in 2016.

But even then, we cannot put the cart of our attractiveness before the horse of difficulty in doing business in India. Our own self-posted target to attract $ 40 billion into the equity market alone in 2015, with a similar sum into the Debt Market, seems exaggerated; at least for 2015.

This seeks to double the roughly $ 20 billion each that flowed into the equity and debt markets respectively in 2014; impressive, but only by our local standards, given that the world of global equity runs into many trillions in annual investment.

More of the ‘stimulus’ funds actually came in last year to buy Government debt that paid about 10% on the zero interest investment. But for India, it was thrilling to receive such large sums, which promptly came in once restrictive FII investment caps were raised by the UPA Government.

The Chinese have trillions in dollar reserves from the good years, and have been investing it around the globe. It is famously leveraging  African raw materials, Russian oil, building infrastructure in all parts of the South Asia, and wherever else they can participate in a mega project, and may  soon do  so in India too. But, lifting the world’s second biggest economy on such long-term development, without commensurate domestic demand, or buoyant exports, is not easy.

China’s own factories to serve export demand are now working well under capacity, its domestic infrastructure is over-developed and under-utilised, its banks are scandalously over-leveraged, and burdened with trillions in bad debt. Domestic consumption, though growing at over 10% per annum, is simply not high enough, in absolute terms, to pick up the slack.

It takes considerable heavy lifting to get a $10.4 trillion behemoth going  to right the balance. China can, and probably will go the quantitative easing ((QE) route, like Japan, the EU, and indeed America, to keep things from nose- diving.  The big spending oil-rich countries too are facing deficits in their budgets for the first time in decades.

Only America, working on itself doggedly since 2008, with its innate advantage of huge domestic consumption, in a way, like India, and being the most technologically advanced $20 trillion economy, the largest in the world, is now definitely growing.

It is, of course, hoped, that this US recovery, in turn, will lift all boats, including that of Chinese in time.  Meanwhile, external events, as well as our own self-help moves are making the Indian economy look promising. Acche din may indeed be round the corner for India, and its lucky leader.

(1,476 words)

January 21^st, 2015

Gautam Mukherjee