Wednesday, April 23, 2014
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The Indian Miracle Lives

NEW DELHI – To hear some people tell it, the bloom is off the Indian economic rose. Hailed until recently as the next big success story, the country has lately been assailed by bad news.

Tales abound of investor flight (mainly owing to a retrospective tax law enacted this year to collect taxes from Indian companies’ foreign transactions); mounting inflation, as food and fuel prices rise; and political infighting, which has delayed a new policy to permit foreign direct investment in India’s retail-trade sector. Some have even declared that the “India story” is over.

But today’s pessimism is as exaggerated as yesterday’s optimism was overblown. Even as the world has faced an unprecedented global economic crisis and recession, with most countries suffering negative growth rates in at least one quarter in the last four years, India remains the world’s second-fastest-growing major economy, after China.

Many reasons have been cited for this success. India’s banks and financial institutions were not tempted to buy mortgage-backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions. And, though India’s merchandise exports registered declines of about 30%, services exports continued to do well. Moreover, remittances from overseas Indians remain robust, rising from $46.4 billion in 2008-2009 to $57.8 billion in 2010-2011, with the bulk coming from the blue-collar Indian expatriate community in the Gulf.

Finally, the external sector accounts for only about 20% of India’s GDP. Most of the economy is a domestic affair: Indians producing goods and services for other Indians to consume in India.

The Indian private sector is efficient and entrepreneurial, and is compensating for the state’s inadequacies. (An old joke suggests that the Indian economy grows at night, when the government is asleep.) India is good at channeling domestic savings into productive investments, which is why it has relied so much less on foreign direct investment, and is even exporting capital to OECD countries, where it is well able to control and manage assets in sophisticated financial markets. Indeed, India, home of Asia’s oldest stock market and a thriving democracy, has the basic systems that it needs to operate a twenty-first-century economy in an open and globalizing world.

There are other reasons for confidence that India will weather the storm. Not only does India have considerable resources of its own to put towards investment; as the persistence of global recession drives down returns in the West, foreign investors will look anew at India.

Still, many are inclined to compare India unfavorably with China, so a few macroeconomic numbers are worth considering. Half of India’s growth has come from private consumption, and less than 10% from external demand; by contrast, 65% of China’s real GDP growth comes from exports, and only 25% from private consumption. China is thus far more vulnerable to external shocks.

Moreover, India has the highest household savings rate in Asia, at 32% of disposable income. In fact, households account for 65% of India’s national annual savings, compared to under 40% in China. Bad loans account for only 2% of Indian banks’ credit portfolios, versus 20% in China. And India’s workforce has been growing at nearly 2% annually in the last decade, while China’s grew at less than 1%.

Putting China aside, India’s economy grew by 6.5% in 2011-2012, with services up by 9% and accounting for 58% of India’s GDP growth – a stabilizing factor when a world in recession cannot afford to buy more manufactured goods.

McKinsey & Company estimates that the Indian middle class will grow to 525 million by 2025, 1.5 times the projected size of the US middle class. According to last year’s census, the country’s 247 million households, two-thirds of them rural, reported a rise in the literacy rate to 74%, from 65% in 2001. In just the last two years, 51,000 schools were opened and 680,000 teachers appointed.

An impressive 63% of Indians now have phones, up from just 9% a decade ago; 100 million new phone connections were established last year, including 40 million in rural areas; and India now has 943.5 million telephone connections. Nearly 60% of Indians have a bank account (indeed, more than 50 million new bank accounts have been opened in the last three years, mainly in rural India).

Some 20,000 MW in additional power-generation capacity was added last year, with 3.5 million new electricity connections in rural India. As a result, 8,000 villages got power for the first time last year, and 93% of Indians in towns and cities now have at least some access to electricity.

These trends all augur well for India’s economic future. And they aren’t slowing: India is looking for $1 trillion in infrastructure development over the next five years, most of it in the form of public-private partnerships. This offers hugely exciting opportunities to investors.

The real picture of dogged progress is far removed from the perception of a government beset by inaction and policy paralysis. As Prime Minister Manmohan Singh modestly put it: “I will be the first to say we need to do better. But let no one doubt that we have achieved much.”

Read more from our "Will India's Boom Go Bust?" Focal Point.

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  1. CommentedAbhimanyu Sharma

    Shashi Tharoor is almost right here, we can actually measure growth by cell phone connections, its a lead measure, (China is ahead of us in that too). But the metric you use for slums and villages is standard of living (which is poor in India & China). By the way China has become the 2nd largest economy (5 trillion $) and it has done better than us in past 20 yrs . If we were to believe that we are doing ok, then I feel we should consider this- what would have happened if there were no credit crisis in the world? who would have done better, China with its enormus manufacturing of goods (with increased consumption of goods in world) or US/EU/Brasil/Russia/SA or India? So, I guess a good question is were we on the right track, or are we?

  2. CommentedViswanathan Suresh

    Mr. Tharoor selectively plucks macro-economic data to bolster his thesis about the so called Indian miracle. Whilst I do not wish to nitpick on his cherry picked data, I am somewhat surprised that he chooses to completely ignore the severe inhibitors to growth that frustrate and drive away entrepreneurs and investors alike. Mr. Tharoor does not mention the rampant corruption at all levels of the political class and the bureaucracy, the crumbling infra-structure, a clogged up judiciary and a broken educational system to name a few. What matters is not the addition of 20,000 watts of extra power but the availability of this power to industries and domestic consumers; a vibrant democracy is an asset but not when democracy equals dynastic rule or a caste based spoils system; 63 % of Indians may have phones but an equally relevant question is how many have access to clean water or toilets. Yes, the 1990s might have dismantled some superficial aspects of the licence raj but still, India remains a country where it is incredibly hard to do business. The World Bank`s "Ease of Doing Business" rankings available at www.doingbusiness.org/rankings/ puts India at # 132, with Nigeria at 133 and even Pakistan at a more respectable 105.

    Perhaps Mr. Tharoor could explain whether he is still optimistic given my cherry picked numbers too.

  3. CommentedMurali Krishna Hari

    Dr Sashi Tharoor, i have great respect for you for your intellectual knowledge, but you dont know the ground reality in India. Please visit villages and slums, you will know what exactly is India. We cannot measure growth based on number of cell phones. Please understand following facts which are Government data
    1) 46% children are malnutrtion
    2) 50% still practice open defecation
    3) 25% of India is under left wing extremism
    4) Reading skills of our children are very poor

    We have to progress a lot.

  4. CommentedManish Maheshwari

    // Not only does India have considerable resources of its own to put towards investment; as the persistence of global recession drives down returns in the West, foreign investors will look anew at India.//

    --- Tharoor was making the case for Foreign investment into India as late as June 11, 2012? The man is completely clueless. Even Indian businessmen are investing outside India these days. How can a government that persistently runs huge budget deficits and current account deficits have ''considerable resources of its own"?

    Let me cite another example of his cluelessness. Shashi Tharoor, when he was the (thoroughly undeserving) Deputy Foreign Minister of India used to argue that India has ancient civilisational links with Iran, which is the foundation of Indo-Iranian diplomatic relations.

    Little does he know (and he really knows little) that the last major interaction between India and Iran was Nadir Shah's invasion of 1739 when he plundered Delhi's treasury and killed 100s of thousands of civilians in cold blood. A man who thinks that this is what constitutes the foundation of a modern diplomatic engagement between India and Iran, should not only be ignored and but also never allowed to come anywhere near a position of power where he can cause immense harm with his woolly ideas.

    1. CommentedViswanathan Suresh

      Mr. Manish Maheswari,

      I dis-agree with your view that the Iranian Nadir Shahs invasion of Delhi in 1739 should determine India`s relations with Iran. Countries have all fought horrible wars against each other and made up later, often through trade links. The wars between Germany, France, Italy, the UK etc. have indeed resulted in horrendous casualties. But that has not prevented these countries from forging new ties predicated on peace, trade and open borders.

      You may not agree with Mr. Tharoor`s views or policies but he surely is a learned man and I respect his erudition. Additionally I doubt you have any evidence to buttress your claim that Mr. Tharoor was clueless about Indo-Iranian history of the 18th century. Assuming of course that it is relevant and should form the cornerstone of Indo-Iranian relations in 2012...

  5. CommentedSankaran Sivaramakrishnan

    Mr Tharoor is very good at misrepresenting facts to suit his political convenience. His party, the Indian national Congress and the people who run the party are chiefly responsible for the gloom that prevails.

    The "Loot Politics" of UPA constituents has been thoroughly exposed.

  6. CommentedAlok Shukla

    Seems very interesting points, though no one talks about
    #1 . the rottenness of governance at Center and State level. Despite of an eminent economist at the helm of affairs seems complete paralysis at policy making level.

    #2. Collectively the electorate are giving a decisive mandate which crimps whoever comes to power, seems to me a -ve spiral.

  7. CommentedSudhanshu Neema

    Is it even possible for the private sector to compensate for the state's inadequacies ?? Just wondering !! I mean when was the last time a private enterprise showed interest in improving the justice system, provide basic services, maintain law and order.

  8. CommentedSudhanshu Neema

    Dear Sir,

    I would like to bring to your notice a mistake of fact here. The tax law is with the objective of collecting taxes from foreign companies' Indian transactions, not Indian companies' foreign transactions.

    Provided that the reference is made to the General Anti Avoidance Rules (GAAR), announced by the Hon'ble finance minister during the budget speech.

  9. CommentedProcyon Mukherjee

    As Raghuram says, India's growth is a no-brainer; only if it exceeds a hurdle rate of 8% to 9%, it is really worth a discussion, otherwise it simply means that something is amiss. A growth rate of 5% to 6% is recessive, when normal inflation is at a high rate and when a burgeoning populace seeks pastures of hope from every bit of offering that comes at a price. Pricing of opportunities for the larger sections of people is a bizarre tale of resource allocations that have gone wrong, when all the shine is left to the few, in the echelons that are close to either power or wealth; the institution building for this has been left to the lurch that coalition politics knows the better of, or worse.

    Procyon Mukherjee

  10. CommentedAmar Harolikar

    Hi Shashi, Agree with you. Though I need to make clear that I don't hold the current leadership in high esteem. Pasting below a story I did a few days back.

    India’s Growth Story Intact: Interpreting macro numbers and trends the right way

    There has been a lot of debate about India’s growth story coming to an end, with many top brokerages like Morgan Stanley and Goldman Sachs cutting GDP forecasts to sub 6% levels. However, my analysis shows India’s growth story is not only intact, it continues on a robust path.

    The gloom-and-doom scenarios being painted today are an exact repeat of the phenomenon that happened during 2008-09 when the debate started that India’s growth story might be over and the Morgan Stanleys and Goldman Sachses of the world cut the GDP forecast for FY10 to sub 6% levels and some to even sub 5% levels.

    What happened next?

    In FY10, India posted a GDP growth rate of nearly 8%!

    So what went wrong with all the doomsday scenarios for India? Two things went wrong.

    First, an undue importance was placed on year-over-year (YoY) growth rates without looking at the trend in absolute GDP. That’s a simple number interpretation issue. A case in point is all the gloom surrounding the sub 6% YoY growth rates posted in the last two quarters of fiscal 2008-09 and the latest 5.3% YoY growth posted for the March 2012 quarter.

    Second, not looking at the long-term trend and the impact of business cycles. That’s an economic analysis issue. Take a look at the chart below. I have compared the trend in absolute values of India GDP with that of U.S. GDP since 2005. I have compared just the India and U.S. trends in order to clearly explain how long-term growth rates and business cycles need to be interpreted. To facilitate a comparison, I have indexed the GDP values by initializing the starting values to 100.



    As you can see, the chart speaks for itself. The trend in U.S. GDP is like a straight line, having grown only a total of 7% in the past six years. India GDP, on the other hand, is on a strong uptrend, having grown more than 80% in the same period. Within this long-term trend, the ups and down of a normal business cycle can clearly be seen.

    Understanding long-term trends and business cycles, more often than not, does not need complex models. Most of the time simple charts and a bit of common sense work well enough. For those who would rather look at complex models, the RBI website is the right source, not brokerage research reports. There is some fantastic analysis available on the RBI site, the summary of which is that a growth rate in the 8% range is now the new normal.

    Current Economic Problems: More imagined than real
    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

    The U.S. economy faces some structural issues, which are very real. Meanwhile, in India, the challenges to the long-term growth trend are more imagined than real.

    The problems facing the Indian economy today are more tactical and cyclical rather than of a strategic or long-term nature. It’s not as if everything is hunky dory – no it’s not. There are challenges around fiscal deficit, current account deficits, governance and reforms. But all these challenges have pretty much existed for the past six years during which the economy continued to grow at a very healthy rate.

    So, Is India’s Growth Story Intact?
    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

    As of now, yes.

    As the chart clearly shows, the long-term trend in India GDP is fully intact and issues like the slowdowns in 2008 and 2011 are simply the business cycle playing itself out.

    So, is there nothing that can derail the growth story? Of course, there are many factors which can do so. But it’s only major structural changes that can derail India’s growth story, things like a significant fall in competitiveness in services exports, a rollback of reforms and such like. Not factors like dollar volatility, oil prices and minor variances in fiscal deficit.

    India has continued to grow at a steady pace for six years, a period characterized by a slowdown in reforms, the Lehman meltdown, dollar volatility, high fiscal deficits, high food prices and what not. Factors like these have only caused the normal ups and downs of a business cycle in India, and I forecast that they would only cause normal business cycles going forward, too.

    So, What Happens Next?
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    In the next phase of India’s business cycle, the continuing drop in commodity prices, oil prices and interest rates will speed up the recovery process. Corporate profitability, which has already improved significantly, would post some handsome growth numbers. All these would result in a continuing GDP uptrend.

    Amar Harolikar
    Unknown Insights

  11. CommentedAmar Harolikar

    Pranab is right - growth story intact

    Pranab Mukherjee has given statements in press saying that S&P report is not based on fresh rating action, and that there would be a turnaround in country’s growth prospects in coming months.

    I believe him to be right. My analysis shows that India growth story is intact and the gloom and doom scenarios being painted is due to inability of analyst’s to interpret numbers correctly, and an undue focus on business cycles at the cost of long term trend.

    As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded India sovereign rating just three months before the markets did an upward breakout and growth numbers turned around !

    India’s growth story is no thanks to the current government, but is a tribute to a basic resilience and the underlying growth momentum of Indian economy itself.

    India growth story is intact, not because of government action, but notwithstanding government inaction !

    Amar Harolikar
    Unknown Insights




    Related analysis
    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
    Be wary of S&P ratings
    India’s Growth Story Intact: Interpreting macro numbers and trends the right way
    5.3% GDP: Numbers not being interpreted correctly; recovery is intact
    GDP Downgrades: Be wary of research house estimates; India’s growth story intact
    Party Time Again: Time to buy panic for the Sensex ride to 80,000
    Hiring and Salaries Going Up: Where’s the slowdown?
    Greece Paranoia: A blessing in disguise for India
    IIP Shows Recovery, Not Contraction
    Recovery Underway: Fears unfounded

  12. CommentedTushar Katira

    You write: "India’s banks and financial institutions were not tempted to buy mortgage-backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions."
    You conveniently omit the fact that Indian government banks were forced to bailout Kingfisher Airlines and the MD of the government owned LIC Housing Finance is in jail for taking bribes to provide loans to builders?

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