India finds the right pace
Published: 12 August 2008
After years on the fast lane, the Indian economy needs a breather
In the last three to five years, India's stellar rise to the global stage seemed unstoppable - a nine per cent average annual growth rate, making it the world's second-fastest growing economy. At the start of 2008, amidst the sub-prime and financial markets shakedown, India was left untouched. The expectations, while lower, were still positive: growth at 8.5 per cent, lower inflation, a pause in rate hikes.
But by February, the country's statistical office presented a scenario of slowing growth and rising inflation. "The key for that downturn is that the Reserve Bank of India (RBI) has been raising the rate for about the past three years but we are just feeling the effects now," says Senior Asian Economist Robert Prior-Wandesforde.
Taming inflation
"India has had years of fantastic nine per cent growth - this is unprecedented and India has never seen anything like that for generations. However, the reality is that India grew too quickly and is not in a position to sustain a 9-10 per cent growth for years on end," said Robert.
And as India reels from soaring inflation and capacity constraints, analysts believe that a 'cooling off' period is necessary. "There is a need to have a period of slower growth, from 7.5 to seven per cent. This would be sustainable, this is where India is at the moment, and this is what the RBI is targeting," he said.
| RBI rate hike history | |
|---|---|
| Expected peak | 9.5% |
| Current | 9% |
| 24 June 2008 | 8.5% |
| 11 June 2008 | 8% |
| March 2007 | 7.75% |
Source: HSBC, RBI
Winds of change
Inflation is the first step but more reforms need to happen. The recent sizeable portfolio outflow exposes one change that India has to face. "When the bubble burst, investors were surprised by some of the weaknesses in the domestic economy. They found out that the India economic growth story was not quite as great as they had thought," Robert explained.
One critical area for reform is the bureaucracy and regulation that governs all business in the country. "India needs a lot of reform but has seen very little. Most reforms so far are piecemeal. There are layers of regulations that still need to be removed. India's IT services leapt into growth because there were no regulations about IT. But there is now a small window of opportunity for reform before the elections, particularly in the financial services sector," he said.
There are suggestions that the banking sector will now be made accessible to private investors, even to foreign players, and that private participation in insurance services may be raised to 49 per cent.
One more area of much needed change is industrial production. India's case has been unusual in the sense that the country has leapfrogged the industrial phase and gone straight into services. But to prosper in the long term, it needs to sustain much stronger industrial growth. "This is a key area for job generation, and this will also help allay the economic problems. India needs to find jobs for its growing population," said Robert.
He recommends that India follow a similar route that other successful emerging economies have taken: invest in infrastructure, improve productivity ("especially in agriculture, it's the country's biggest employer and accounts for 20 per cent of its gross domestic product"), establish more special economic zones, and boost manufacturing activities. "There's an interesting contrast. India is doing very well in IT services but this has not spun off into hardware production. That would be a good idea to explore."
There is a need to have a period of slower growth, from 7.5 to seven per cent. This would be sustainable, this is where India is at the moment.
Develop people edge
The IT services sector remains India's star performer, but it has also helped foster the country's burgeoning business process outsourcing (BPO) industry. These knowledge industries have helped catapult India from poverty into a leading emerging economy. "The good news is that for BPO/IT offshoring, India is still very much at the top and still enjoys a substantial lead. For the short-term future, India should remain at the top of this space," Robert said. However, he is quick to caution that "this is not a reason for complacency. China and the Philippines have been quickly catching up so it should now focus on quality."
According to Robert, particular attention should be geared to educating India's largely young population. The youth makes up around half of India's total population, which the World Bank expects to increase by 300 million in the next 25 years - and this total population growth is something that he views as good news. "This demographic outlook will deliver a much better economic performance - this will mean a bigger domestic market."
Given a forward positive picture, the Indian cooldown should then be treated as a thoughtful pause and a welcome opportunity for reform. "The economy can't grow and grow for years and years without end. And since it is now more open to change and committed to sustainable long-term development, there is still a large pool of confidence in the India growth story," said Robert.
Indian Industrial Production report
The new lead indicator of Indian economic development integrates significant lead indicators such as vehicle sales, credit growth and yield curve. This approach gives a better picture of Indian industrial production growth.
Most computers will open these documents automatically, but you may need to download the free Adobe Reader
Robert Prior-Wandesforde
Robert joined HSBC in 1994, having previously worked for another bank where he was UK economist for three years. At HSBC, he was based in London for 12 years, covering various Continental European economies and becoming HSBC’s chief eurozone economist at the inception of the single currency in 1999.
Robert relocated to the Singapore office in June 2006 and is now co-head of Asian Economics, specifically responsible for the coverage of the Indian, Indonesian, Malaysian and Singapore economies for the Group. He holds a Bachelors and Masters degree in Economics from Warwick University in the UK.
Global Research subscribers and HSBCnet clients can view Robert Prior-Wandesforde's reports on emerging markets by accessing the Global Research website.
Growth amid rough times
The Indian economic engine has been navigating the choppy waters of today's markets and achieving growth at the same time. Read how India discovers the opportunities.
Emerging markets research
Emerging markets research is a key area of focus for Global Research and brings together all aspects of research across Asia, Latin America, Eastern Europe, the Middle East and Africa. Learn more about our emerging markets research.
Articles
Brazil
Chile
China
Egypt
Czech Republic
India
Indonesia
Mexico
Peru
Philippines
Poland
Russia
Taiwan
Thailand
Turkey
UAE
Vietnam
