What can burst the bullish balloon about India’s surge

  • Sanjoy Narayan, Hindustan Times, New Delhi
  • Updated: Mar 22, 2015 01:44 IST

India’s economy, if analysts are to be believed, could be on the verge of a surge.

Its growth rate could outstrip China’s, which has been slowing down, and beat other emerging markets, notably Brazil and Russia, about both of which forecasters are downbeat. Chief among the reasons for India getting an upbeat forecast is the perception that the Narendra Modi government, despite a hiccup over the land acquisition Bill in Parliament, is headed in the right direction.

Last week it managed to get two pro-reform laws on mines and coal enacted; before that it had pushed through the insurance Bill; and, if later in the ongoing session of Parliament, it gets to pass the goods and service tax Bill, which will unify India’s fragmented markets, it will send solid signals about being seriously reformist.

Good fundamentals have also played their part in the predictions of an economic surge. A new index from SBI, India’s biggest commercial bank, shows a rising trend in manufacturing activity and borrowing by companies — always a good sign for any economy; and services, which account for more than 60% of India’s GDP and create the most jobs, have been growing at more than 7% a year.

Besides, India has an advantage because unlike China it is not overly export-dependent and has a latent domestic demand that, once stimulated, can drive growth.

All of this — the aura of business confidence around the new regime as well as some of the economy’s favourable fundamentals — can only be promising for the Indian economy.

So, when there’s so much bullishness about how India is surging ahead, it may seem churlish to prick the balloon of optimism with a sharp reality check but let’s do that. Start with the farms.

What if, as it happened last year, the monsoon fails India again this year? Agriculture contributes just 17% of GDP but half of India lives off its farms.

A poor monsoon can hit rural incomes and affect demand for manufactured goods such as two-wheelers, tractors and television sets; and that in turn can have a cascading effect on the rest of the economy in a manner that is pretty much the opposite of a multiplier effect. Besides depressing demand for goods, an aberrant monsoon (in the same way that the recent unseasonal rains did) can lead to higher food and vegetable prices, fuelling inflation once again and, thereby, inhibiting the central bank from further cuts in interest rates.

What if global oil prices, which have hit rock bottom, start climbing once again? Although there are few signs that this could happen anytime soon, it can’t be ruled out if, say, China, a much bigger importer of oil than India, recovers its growth momentum and increases its demand for oil, or, if OPEC or other oil producers such as Russia decide to cut oil production. If oil prices begin rising again, it will raise India’s import bill and industry’s input costs, hurting investment and growth.

What if, as the US Fed Reserve has indicated, interest rates in the US go up later this year, perhaps in June? Rising US interest rates would mean increased dollar flows from the rest of the world, including India, to the US. Besides affecting foreign investment in India’s financial markets and industry, a dollar flight would make the rupee weaker, further increasing the import bill and input costs for Indian manufacturers.

Of course, in most such scenarios, the government has possible solutions. If a poor monsoon stunts demand, the government can spend big on social sector schemes and on public infrastructure; if rising oil prices or a stronger US dollar inflates the import bill, the government can resort to borrowing to pay for it. But solutions come at a price and for these that means a bigger fiscal deficit — never good news for an economy.

Maybe I’m being a party pooper. Sorry, I’ll make quick amends. Let’s say none of those ‘what ifs’ happens and India indeed surges. Then who can put it better than the IMF’s boss Christine Lagarde, who recently said: “Chak De, India!”


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