Raghuram Rajan could be the ‘go-to-guy’ to get India out of it’s slower than expected growth-woes
Hey folks! Let’s take a dive into some metrics that have come out
of India recently; figures which have many investors scratching their head
wondering, ‘what happened to the rapid-growth (and returns) seen only a few
years back?’
Let’s get down to the point and expose the elephant in the room:
GDP growth. The once jewel of the British
Empire’s economy expanded at a rate of only 5.5% in the April-June period.
Granted this was higher than the 5.3% GDP growth of the previous three months BUT it cannot even come close to the
9% expansion of early 2011!
"Whilst
an upside surprise at 5.5%, the pace of growth is undeniably below potential
and validates the need for the government to address sluggishness in investment
and external sector activity," said Radhika Rao an economist at Forecast
Pte.
So let’s break down what’s holding our mighty elephant back:
Slowing global demand and uncertainty: What a surprise! (well, not really)… with key economies in trouble (such as Europe and even China) the global macro climate is hurting India in a big way.
- India's factory output fell 1.8% in June from a year earlier, the third fall in four months
- Foreign direct investment in India fell by 78% in June, from a year earlier
A growing trade deficit:
- Recent figures show that imports outgrew exports by 15.5 Billion dollars
- India's trade deficit with China jumped 42% to $40 billion in the last financial year
An indecisive government in a political deadlock and numerous allegations of corruption has harmed India’s outlook toward foreign investors.
- There is becoming a growing concern amongst economists and opposition parties that India’s government will only pursue reforms which are favorable to its political partners
- Analysts are recommending that the government needs to take action to improve the investment climate in order to maintain a high growth rate in the future
The S&P's has stated it would be more comfortable if the government raised retail petroleum prices and reduced energy subsidies as it has promised, and introduced a goods and services tax (GST)
Let’s talk about the Trade Deficit for a moment…
A 15.5 Billion dollar deficit is no laughing matter, especially
given the perceived notion of India being an exporting power house. What’s
happening… is this a cause for concern? Or should we be tingling from the excitement
of new growth possibilities? Well, if India plays its cards right, the latter
may be the correct course of action.
India has significant investment needs; it has issues in its
infrastructure – or lack thereof – and needs to import capital goods as a part
of where it is in its growth cycle. The result is (no matter how you spin it),
India simply needs to import at this phase in the game.
And with a specific note on China; as China advances its
production to a more value-added model, India will become more of a
manufacturing center than what it is today – so it might sound like a good
idea now to recapitalize and invest in infrastructure for the future.
So who will guide India through these uncertain times?
Enter: ‘reformed minded’ and newly appointed Chief Economic Adviser to
the Indian Government: Raghuram Rajan (he called the 2008 Financial Crisis in 2005!!)
Could he be the man to save the day in India? As a strong believer
in liberalization and privatization, he says “We need to become paranoid again
[about growth], as we were in the early 1990s,” And while it might take
some work, here’s what he suggests in terms of policy reform as quoted from a
recent speech:
1) Raise fuel prices to international levels in a
set of quick steps, and then completely deregulate them. Announce this as soon
as politically possible, and do not roll back.
2) Be kinder to foreign investors – they are not
the enemy but a necessity -- we need their money to fund our spending to the
tune of 4% of GDP. No doubt, however badly we treat them today, they may
eventually want to be in India, but crisis are always about timing. We need
them now, when India looks increasingly tattered compared to alternative
investment opportunities, not five years from now when growth recovers.
3) We should bring certainty about taxation to
foreign investors, and resist the temptation to levy new retrospective claims.
What in effect Mr. Rajan is trying to do hand India over to the
free market again. Reduce government subsidies and appease foreign investors by
making India a reliable market to do business in. Can it work? I think so, but
there needs to be strong support from the government and a crackdown on
corruption for it to happen.
The bottom line:
While recent scares in growth and trade metrics might make you
skeptical of India’s future – hold on a moment and think: the trade deficit is
there because India needs to invest in capital for production and
infrastructure, all which will pay off in the future. Moreover, now with a more
free-market inclined chief economic
advisor, India will (hopefully) take the correct policy actions to promote
a healthy market and ensure foreign investors are kept happy and wanting to
come back to India for their business needs.
Matthew
MacMull
