Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Saturday, December 15, 2007

The Economist on India

Well, I am revving myself up again now to come back at all those people who said that India was overheating when it was growing away at a mere 8%. In fact India grew at an 8.9% year on year rate during the last quarter (and this following 9.1% in the first and 9.3% in the second quarters of 2007), and far from inflation shooting through the roof it is currently not too far from the Reserve Bank of India's 5% target. Perhaps it is towards China that people should be directing their attention, or towards Eastern Europe, or even - god forbid - the eurozone, but India it seems is one country where the "great overheating" argument is steadily running out of steam. Of course one country which everyone will readily admit is not overheating is Japan, but I thinkwe'll leave that topic on one side for today.

Here I just want to repost part of a reply I gave to the Economist when they had the kindness to try to answer some points I had raised about the general quality of their economic coverage, and about what I take to be their obsession with ignoring the demographic component in economic growth. For the Economist, it seems, growth and development is a single issue item, and is all about insitutions, and institutional quality. Which makes it kind of funny that Argentina, which must be among the worst of the emerging economy pack in institutional quality is still powering away, despite more or less openly manipulating the economic data.

Obviously institutions matter, but so does demography. This is not a one horse race, or if you prefer, this particular horse doesn't only run on one leg.

The topic in question here is India's potential growth rate. Recent GDP performance at just under 9% must have been astounding many of India's critics, especially given the way inflation, despite all that growth, has been kept pretty much under control.

Wholesale price inflation has been preforming even better:

So to go to the start of our story, back in September 2006, I post a piece on the India Economy Blog entitled "Uncharted Water" where I argued precisely the following:

What is clear is that the Indian economy is currently gathering steam,
and this at a time when there is a general consensus that the political will for
reform isn’t what it used to be. Strange isn’t it?

My meaning here isn’t that reforms aren’t necessary, but that there are other
factors at work, and in particular demographic ones. The importance of these
demographic factors generally can be seen from the fact that it is now the newly
developing countries (China, India, Brazil, Chile, Thailand, Turkey) who are
pulling the global economy (and in the process pushing up energy and commodity
prices). The developed world - which makes up say 50% of global GDP is growing
much more slowly than the developing world - and some of this for ageing related
demographic reasons. Global GDP is forecast to grow at a 5% annual rate this
year, yet the US is growing at around 3.5%, Japan 2.5% and the eurozone around
2%. So you tell me, who is pulling who here?

And this is why I say we are moving into uncharted territory. Economists
used to have a little model which worked on the assumption of each economy
having a certain growth capacity in any given moment. But could any one tell me,
what *is* the growth capacity of China or India? I certainly have no idea, and I
haven’t seen anyone else make a convincing case on this topic. The magnitude of
the growth we are now seeing in the developing world is beyond all historical

Doesn't look to bad at all does it, in the light of what has been happening during the second half of this year. And remember this was written in the Autumn of 2006, not Autumn 2007 when just about everyone and their auntie is saying something like this. Of course this whole debate is ongoing. Nandan Desai had an excellent piece on IEB which put things pretty much in perspective and in October 2006 I had another piece in the IEB, basically in response to the Sizzling India article in the Economist. I said this:
I am even brazen enough to believe that trend growth may well
have moved up beyond 8.5% going forward, and that indeed within 5 years we may
well see India overtaking China in terms of average quarterly growth rates (of
course this may well vary from one quarter to another, a phenomenon known as
volatility, and of course 5 years from now the Chinese economy may not still be
sustaining the very high growth rates we see today).

Again, I am really comfortable standing by this, and even the point about China, since the inflation problem really does seem now to be getting a grip (remember they have had nearly 30 years now of the one child per family policy, and at some point soon their labour market is going to tighten and tighten, for what may well happen next see my recent article on the growing problem we now have in Russia: "Russian Inflation, Too Much Money Chasing Too Few People" (not too much danger of this getting to be a problem in India in the near future, now is there?).

Since this time of course, the whole recoupling/decoupling issue has really taken off as a live debate. My latest thoughts on this can be found here, and Claus Vistesen's post - The Global Economy, Compass and Charts Needed - follows up on and continues the "uncharted waters" theme.

Now for the Economist. What I said in my response to them was as follows:

To The Economist

Well, at the risk of having to assume some kind of modern "j'accuse" mantle (for which of course there are ample precedents in the early origins of your own magazine) I am going to put up yet another comment. Maybe this is because I would like to participate in that "severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress" which your contents page so boldly announces.

Maybe it is also because I want to pin down quite clearly for future reference just what the issues are, and just why it isn't "absurd" to suggest that the Economist currently systematically fails to factor-in the demographic components in economic growth (or the lack of it). Well, saving the best (or should that be the worst) to the last, I would like now to come to the case of your India correspondent. This gentleman (and I sincerely hope that despite his evident predilection for strong Vindaloo curry he is one of these) has been systematically re-adjusting upwards India's potential trend growth rate in recent months. In fact his estimate seems to have shot up from 6.5% in November 2006 to 7% in February 2007, to 8% in June 2007. Now that's an upward adjustment of around 25% in trend growth in roughly 8 months. Quite an achievement, especially since he offers absolutely no explanation whatever for these adjustments, but what he does not fail to tell us - oh, he never lets a moment rest without beating this drum - is that: "India's economy, like Delhi this week (or Vindaloo curry perhaps, EH), remains far too hot."

Now just in case what I am suggesting here is questioned I would like to quote chapter and verse, since the issue is an important one.

In November 2006 the Economist's India correspondent estimated capacited growth for India at around 6.5%.

23 November 2006 Too Hot To Handle

INDIA'S curries can be even hotter than the fieriest of Chinese hotpots; likewise the temperature of the two economies. Despite widespread claims that China's economy is overheating, actually India's shows more signs of boiling over.

In the year to the second quarter, India's GDP grew by an impressive 8.9%, while China's more up-to-date figures show even more breathtaking growth of 10.4% in the year to the third quarter. But to judge whether an economy is too hot, one needs to compare this expansion in actual demand with potential supply, ie, the sustainable rate of growth. Despite India's growth spurt in recent years, its sustainable pace is still much lower than China's, which puts its economy more at risk of overheating and rising inflation.

India's trend growth rate has almost certainly increased but it is still
nowhere near as high as China's. Mr Prior-Wandesforde estimates that it is now
around 6.5%, up from 5% in the late 1980s. But India's recent acceleration
largely reflects a cyclical boom, thanks to loose monetary and fiscal policy.
The Reserve Bank of India has raised one of its key interest rates by one and a
half percentage points to 6% over the past two years, but inflation has risen by
more, so real interest rates have fallen and are historically low. This makes
the economy more vulnerable to a hard landing.
By February 2007 the estimate had risen to "not much above" 7%.

1st February 2007 India overheats
"But the problem is that this new speed limit is almost certainly lower than the government's one. Historic data would suggest a figure not much above 7% - well below China's 9-10%......If something is not done, then a hard landing will
become inevitable."

and by June 2007 it had been revised up nearer to 8%.

June 7th 2007 Waiting For The Monsoon
"This is not to deny that India's economic speed limit has increased, to perhaps 7-8%, thanks to stronger investment and economic reforms. But growth has
exceeded that limit. The economy still shows alarming symptoms of overheating"

And depispite all this, we are now in December 2007, the Indian economy has been growing at around 9% for the last three quarters, and inflation has been kept remarkably under control.

So actually what we are all really waiting for here is not the arrival of the monsoon, but some explanation from the Economist's India correspondent about how he is calibrating all these estimates. There is nothing particularly to be embarassed about in getting this one wrong, since it is pretty difficult to put a number on where Indian growth is going, but it does seem hard to maintain the credibility of your calls if you conveniently keep ignoring what you were saying only yesterday, and more importantly fail to diagnose exactly why it is that India has been able to grow so much faster than you expected. And of course one day India may overheat, and stopped clocks do give the right time twice a day, but this doesn't make them especially useful measuring instruments.

Back in the autumn of 2006, on the India Economy Blog, I argued that we were now entering "uncharted waters" and that no-one really had any accurate idea of what India's true mid-term trend growth rate actually was. I also asserted that it was in all probability way above the more conservative and conventional estimates. I was guessing really, but behind my guesswork was a long hard look at India's underlying demography, and it is just this kind of approach that your India correspondent discounts. Again, chapter and verse:

1st February 2007 India On Fire
Many Indian economic commentators say that further structural reforms, though desirable, are not essential to keep the economy growing at 8% or more because
of the "demographic dividend". A fast-growing working population and a falling
dependency rate (thanks to a lower birth rate) will ensure more workers, more
saving and hence more investment." "India's demographic structure is indeed
starting to look more like that in East Asia when its growth took off. But this
mechanistic view of growth assumes that demography is destiny and that economic
policies do not matter. In fact, open markets, education and investment,
especially in infrastructure, were the three chief ingredients of East Asia's
success. Population growth by itself does not add to prosperity, unless young
people are educated and new jobs are created. India needs to reform its absurdly
restrictive labour laws which hold back the expansion of manufacturing

Basically I find myself in agreement with the Indian economists he doesn't like. It isn't that these reforms aren't desireable, as he admits, we all agree on this. But the point is, even ex-reforms (and of course there have been reforms and global opening) demographic momentum would indicate that substantial growth is now going to occur. How substantial? Hard to say, but I think it is quite probable that 5 years from now India will be growing faster than China, and may even peak out at the highest annual growth rates yet seen for a significant economy over the 5 to 10 year window. I can justify why I think this with some sort of coherent argument if anyone wants. I think the big danger for the sort of view you are advancing here at the Economist is that you imagine virtually nothing is possible with institutional reform, and this is just as big a mistake as saying demography is everything. You need to systematically take the two components into account. If you don't do this you risk getting into the ridiculous position the World Bank found itself in this week, when countries like Argentina and Thailand complained that since their countries were registered as going backwards on the global governance index, while both countries were growing quite nicely, then logically the methodology used to construct the index must be wrong. IMHO the World Bank has been totally mechanistic about institutions and thoroughly deserves all the problems it creates for itself on this count. OK, so that's it. I finally rest my case. The dialogue will continue.

And it is, undaunted by the failure of all that vindaloo curry to overheat more than his own digestive tracts our dear correspondent is now worrying about, guess what, the rise of the rupee. Continued in this post here.

India GDP Q3 2007

I think it is important here to note right at the outset that what the Indian Central Statistical Office calls Q2 is in fact what everyone else knows as Q3 (ie July to September). Apart from that everything is more or less in order, so.... according to the CSO:


(a) At constant (1999-2000) prices

2. Quarterly GDP at factor cost at constant (1999-2000) prices for Q2 of 2007-08 is estimated at Rs. 7,10,578 crore, as against Rs. 6,52,450 crore in Q2 of 2006-07, showing a growth rate of 8.9 per cent over the corresponding quarter of previous year.

3. The economic activities which registered significant growth in Q2 of 2007-08 over Q2 of 2006-07 are, ‘mining & quarrying’ at 7.7 per cent, ‘manufacturing’ at 8.6 per cent, ‘electricity, gas & water supply’ at 7.3 per cent, ‘construction’ at 11.1 percent, ‘trade, hotels, transport and communication’ at 11.4 per cent, ‘financing, insurance, real estate and business services’ at 10.6 per cent, and ‘community, social and personal services’ at 7.8 per cent. The growth rate in ‘agriculture, forestry & fishing’ is estimated at 3.6 per cent in this period.

4. According to the information furnished by the Department of Agriculture and Cooperation (DAC), which has been used in compiling the estimate of GDP from agriculture in Q2 of 2007-08, the crops rice, coarse cereals and pulses during the Kharif season of 2007-08 recorded growth rates of zero per cent, 3.5 per cent, and 16.2 per cent, respectively over the corresponding season in the previous agriculture year. Among the commercial crops, the production of oilseeds increased by 15.7 per cent during the Kharif season of 2007-08, while the production of cotton and sugarcane is estimated to grow at 1.1 per cent and 0.1 per cent, respectively during the agriculture year 2007-08.

5. According to the latest estimates available on the Index of Industrial Production (IIP), the index of mining, manufacturing and electricity, registered growth rates of 8.1 per cent, 8.3 per cent and 7.1 per cent, respectively in Q2 of 2007-08, as compared to the growth rates of 2.6 per cent, 13.0 per cent and 8.0 per cent in these sectors in Q2 of 2006-07. The key indicators of construction sector, namely, cement and finished steel registered growth rates of 9.9 per cent and 9.6 per cent, respectively in Q2 of 2007-08, as against the growth rates of 11.1 per cent and 11.2 per cent, respectively in Q2 of 2006-07.

6. Among the services sectors, the key indicators of railways, namely, the net tonne kilometers and passenger kilometers have shown growth rates of 7.4 per cent and 6.9 per cent, respectively in Q2 of 2007-08. In the transport and communication sectors, the production of commercial vehicles, cargo handled at major ports, cargo handled by the civil aviation, passengers handled by the civil aviation and the total stock of telephone connections (including WLL and cellular) registered growth rates of (-) 0.2 per cent, 13.2 per cent, 22.1 per cent, 14.7 per cent and 46.3 per cent, respectively in Q2 of 2007-08 over Q2 of 2006-07. The other key indicators, namely, aggregate bank deposits, and bank credits have shown growth rates of 23.9 per cent, and 21.9 per cent, respectively in Q2 of 2007-08 over Q2 of 2006-07.

Friday, December 14, 2007

Rupee on the rise

India's rupee headed its third weekly gain in a row this week on speculation declining interest rates in the U.S. will prompt global funds to boost holdings of high-yielding emerging-market assets. The rupee gained after the Federal Reserve cut its key interest rate this week to the lowest in almost two years. Funds based abroad have bought a record amount in Indian debt this year, more than doubling holdings as the nation's economic growth accelerated to the fastest rate since 1989.

The rupee rose to 39.35 per dollar as of 11:05 a.m. Friday in Mumbai, up from 39.3975on Thursday. Its 12.4 percent gain this year is the second-best performance by an Asian currency after the Philippine peso.

The Federal Reserve cut its benchmark rate on Dec. 11 to 4.25 percent, the lowest since January 2006, from 4.5 percent to prevent a housing slump from slowing growth in the world's biggest economy. The Reserve Bank of India's benchmark rate is 7.75 percent, the highest in five years.

Overseas funds bought $2.05 billion more Indian debt than they sold this year, compared with $881.3 million for the whole of 2006, data released by the Securities and Exchange Board of India showed. Their Indian debt holdings are currently $3.37 billion, compared with $1.33 billion at the end of 2006.

India December 2007 Price Inflation

India's wholesale price inflation accelerated to a three-month high this week as the prices of fruits, vegetables and oil products increased, the government said. Still, the general position across 2007 is not that bad.

Wholesale prices rose 3.75 percent in the week ended Dec. 1 from a year earlier, faster than the previous week's 3.01 percent gain, the Ministry of Commerce and Industry said today in New Delhi. That was the highest since 3.94 percent in the week ended Aug. 25. Analysts had forecast inflation at 3.49 percent.

India today revised the inflation rate for the week ended Oct. 6 to 3.22 percent from 3.07 percent. The government revises the figure after a delay of two months on additional price data.

In October, the consumer price index for industrial workers (CPI IW) rose at a monthly rate of 0.75% after having remained unchanged month-on-month in September, and having risen 0.76% in August. As a result, annual headline inflation has dropped steadily from 7.3% in August to 6.4% September and to 5.5% in October.

Despite the benign inflationary environment of the past months, in line with market expectations, the Reserve Bank of India decided to maintain the interest rate unchanged at 7.75% on its 30 October policy meeting. However, the Bank unexpectedly raised the cash reserve ratio (CRR) for the fourth time this year by 50 basis points, from 7.0% to 7.5%, in order to prevent what monetary authorities consider “unacceptably high” inflows of foreign capitals from fuelling price pressures.

The Bank’s governor, Yaga Venugopal Reddy recently described the current inflation rate as “suppressed”, since it does not reflect the record oil prices, as the government has restrained from raising fuel prices so far this year. The Central Bank aims at keeping inflation close to 5.0% this fiscal year ending March 2008, and to lower it to a range of 4.0% to 4.5% over the medium term.

Wednesday, December 12, 2007

India Risk Elements

According to a recent assessment by the Economist Intelligence Unit the risk situation in India looks like this:

Banking sector risk

Stable: Bank credit is rising as a percentage of GDP. An increase in household
defaults remains possible, especially given the central bank!s maintenance of
current interest rates.

Political risk

Because both the government and its leftist supporters have compromised"at
least in the short term"on some of the issues that divide them, the prospect of
an early general election has, for the time being, receded.

Economic structure risk

Although wholesale price inflation, targeted by the central bank, continues to
decline, rising oil prices are likely to increase pressure on both producer and
consumer prices.

India Industrial Output October 2007

India's industrial production grew more than analysts predicted in October as the onset of the festival season and rising incomes seem to have spurred consumer spending. Production at factories, utilities and mines increased 11.8 percent from a year ago, up from September's revised 6.8 percent rise, the statistics office said in New Delhi today.

Consumer spending got a boost in October as India's 830 million Hindus prepared to celebrate the Deepawali festival of lights and the nation's 140 million Muslims observed Id-Ul-Fitr, which marks the end of the fasting month of Ramadam. Demand for cars, mobile phones and other manufactured products rose as companies offered bonuses before the festivities.

Company sales in India get a fillip in the festive months of October and November as people consider it an auspicious time to make purchases. Deepawali, the most important festival on the Hindu calendar, fell on Nov. 9 this year and Dusshera was on Oct. 21. Muslims celebrated Id-Ul-Fitr on Oct. 14.

Manufacturing, which accounts for 80 percent of industrial output, gained 13.3 percent in October from a year earlier, according to today's statement. That was the quickest pace since March. Consumer-goods production jumped 12.5 percent, the most in six months.

Also Indians received the second-highest salary increase in the Asia- Pacific region this year, helped by the unprecedented economic growth. Wages rose an average 14.8 percent in 2007 from 14.4 percent last year, according to human-resources consulting firm Hewitt Associates Inc.

Accelerating industrial growth, which makes up a quarter of the $906 billion economy, has helped the benchmark Sensitive Index to soar 47 percent this year.

Local sales of passenger cars in October rose 14.6 percent from a year earlier to 105,878 units, the New Delhi-based Society of Indian Automobile Manufacturers have said. S

Honda Motor Co., Volkswagen AG and half a dozen other companies plan to spend at least $6.6 billion in India on new factories to cash in on rising auto demand. GM is spending more than $300 million to build a second car factory in India.

The Reserve Bank of India has lifted its benchmark interest rate nine times since October 2004 in an attempt to fight inflation, making commercial bank loans more expensive.

Sustaining high industrial production growth will require the creation of supportive infrastructure, Finance Minister Palaniappan Chidambaram said in a mid-year review of the economy last week. The government estimates India will need $500 billion worth of investments in the next five years to build and upgrade its roads, ports, airports and utilities if it wants to accelerate growth to a 10 percent pace by 2012.

India's gross domestic product has expanded at an average annual pace of more than 9 percent since April 2005, making it the world's second-fastest growing major economy after China. India's economic growth, currently the world's fastest after China, is constrained by the lack of skilled manpower and inadequate infrastructure, Prime Minister Manmohan Singh said in New Delhi earlier today.

Sunday, December 09, 2007

India Industrial Output

India Current Account

India Population

India Annual Inflation

India Annual GDP Growth

India's Dollar GDP

Basically there seem to be two versions of the "decoupling" thesis knocking about. The first of these (which is now very definitely going out of fashion very fast) was based on the idea that the global economy was finally decoupling itself from the US one due to the fact that key global engines among the G7-type economies - and in particular Germany and Japan (and following in both cases lengthy periods of structural reforms) - were finally coming out of a long period of sub-par economic growth and achieving "home grown", domestic-demand-driven, sustainable recoveries in a way which would enable them to take more of the global strain during what was perceived as being a period of inevitable US "correction".

Claus Vistesen and I never actually bought this story, in particular we didn't buy it since we never thought that domestic demand would recover in countries like Germany, Japan and Italy in the way in which many were expecting, essentially for age-related demographic reasons. I think history has, more or less, borne us out on that one.

But there is another sense of "decoupling" (which is the one Claus and I prefer to call "recoupling", although this is not recoupling in the way in which Nouriel Roubini uses the expression, which seems to refer to a renewed coupling to a US economy which is on its way down) and this is to do with the way in which certain emerging market economies (the EU 10, Ukraine, Russia, China, India, Turkey, Brazil, Argentina, Chile etc) are now accounting for a very substantial proportion of global growth (Claus and I have yet to do the detailed numbers on this, but suffice it to say that India, China and Russia alone will account for over 30 % of the growth in the global economy in 2007). This is a far cry from the central role which the US economy was playing in global growth in the late 1990s. So in this sense something fundamental has changed, and this is what Claus and I are calling "recoupling".

This situation can be observed quite clearly in the two charts which follow, which are based on calculations made from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001 - the weight of the soc called BRIC economies (Brazil, Russia, China and India) has been rising steadily. This is just one example - and a very crude one at that - of why Claus and I consider that demographics is so important, since it is precisely the population volume of the BRIC countries (and the fact that they start their development process from a very low base, ie they were allowed to become very poor comparatively, for whatever reason) that makes this transformation so significant.

Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these economies in recent years and the significantly weaker role of "home grown" US growth. The impact of the collapse of the Tech stocks/internet boom in 2001 is clear enough in the chart, as is the fact that everyone went down at the same time, and this is the old form of "coupling" wherein the US economy due, to its size (and hence specific weight) and "above-par" growth potential played a key role, and, as can be seen, when the US went down, then god save the rest. The present debate is really about what will happen if the rising dollar cost of oil and the ongoing difficulties in the financial sector caused by the sub-prime problem leads the US into recession in 2008. Will everyone else follow this time? In 1999 the US economy represented 30.91% of world GDP, and in 2007 this percentage will be down to 22.4% (on my calculations based on the forceast made by the IMF in October 2007). In 200 the US economy accounted for a staggering 40.71% of global growth, and by 2007 this share is expected to be down to 6.43%. So there are prima-facie reasons for thinking that this time round the impact of any US slowdown will not be as acutely felt in some parts of the globe as was the case in 2000, but which parts of the globe will be more affected and which less so?