India’s headline GDP growth disguises problems below the surface

So it is official. India is the only Bric left standing. Brazil, which shrank 4.5 per cent year on year in the third quarter, seems destined for its worst recession since the 1930s. Russia’s oil-dependent economy is in the grip of fierce contraction and South Africa has only just managed to avoid outright recession. Even the mighty China, after years of stimulus and over-reliance on ozone-destroying heavy industry, is growing at its slowest pace in 25 years.

That leaves India alone among the once-vaunted Brics nations putting up a decent show. Official data this week show that its economy grew 7.4 per cent in the third quarter from a year earlier, accelerating from 7 per cent in the previous three months. The performance, driven by fixed capital investment and industrial production, was more impressive still given that output from farming, which employs about half India’s workforce, is limping along at 2.2 per cent. On the face of it, there is much growth to be had simply by shifting some of those farm labourers into more productive sectors. In short, the world’s third-largest economy in purchasing power parity terms can now legitimately lay claim to be the global economy’s most impressive outperformer.


Indeed, much is going right for India. Even before Narendra Modi swept to power last year in a blaze of optimism, its economic fundamentals were im­proving. Low oil prices are a boon: they have helped repair a current account position that once put the country among the most vulnerable to US Federal Reserve-induced capital outflows. Its growth is less dependent on exports than that of many developing economies, with 70 per cent of gross domestic product driven by consumption.

In Raghuram Rajan, its central bank governor, it has a figure akin to Paul Volcker, the former Fed chairman, in his determination to control inflation, a phenomenon that is particularly damaging to the hundreds of millions of India’s poor. Steady improvement on that front means India now has the room to lower interest rates: they have already come down 1.25 percentage points this year.

Nor can the “Modi effect” be discounted. Although some of the shine of the prime minister’s election victory has been wiped off by subsequent defeats — most recently in the state of Bihar — India has a greater sense of purpose than it did in the final lacklustre years of Manmohan Singh’s administration. Mr Modi has ramped up spending on infrastructure and taken credible steps to deal with the legacy of rampant corruption in the auction of government assets from coal to telecoms spectrum.


It would be wrong, however, to take continued outperformance for granted. That is what countries such as Brazil and Russia did — and look where they are now. India has many problems bubbling beneath the surface, from bad debts in the banking system to a worrying reluctance of entrepreneurs to invest in their own, seemingly successful, economy. Most of the rise in investment has been government-led.

There are at least three reasons not to count India’s chickens just yet. First is the slow pace of reform. Despite all his vim and vigour, Mr Modi has found it hard to push his agenda through Delhi’s political process. Because of a hostile upper house, almost nothing of import was passed in the last parliamentary session. Optimists say the wily prime minister will get the better of the system yet. One hope is that he will spark competition between states implementing, say, the most attractive land reform as they vie for investment. Many hope that one more push will result in the enactment of a much-delayed goods and services tax. Reform of restrictive labour laws, which will hobble Mr Modi’s ambition to make India a manufacturing hub, has not even been discussed.

Nor is it clear whether the GDP numbers can be taken at face value. A rebasing exercise means that the 7.4 per cent headline figure is almost certainly flattering. The outwardly robust performance is hard to square with other data such as weak corporate earnings, slow motorcycle sales and subdued loan growth.

Finally, even if we believe the numbers, headline GDP growth is not everything. Of course, poor countries need to grow fast if they are to tackle poverty. Yet, unless they lay the foundations for development — not only through appropriate reforms but also through investments in health and education — that growth can quickly peter out. India lags behind its peers in measures of health, literacy and its record on improving the position of women. None of this bodes well for a country where, courtesy of a youthful population, almost one in five of all global jobs must be created in the next several decades.

For the moment, India is a standout. But as the fading fortunes of its fellow Brics demonstrate, that is no guarantee of future success.




David Pilling




Fonte: FT