www.fnsr.org

Wednesday, Oct 17th

Last update07:16:12 AM GMT

Font Size

Screen

Profile

Layout

Direction

Menu Style

Cpanel

Uniquely Indian problems

  • PDF

Uniquely Indian problems

Ruchir Sharma

For decades India’s economic fortunes ebbed and flowed with other emerging nations, but in recent months it seems to have become unmoored. The global economy is enjoying its best year of the decade, with a worldwide pick up in GDP and jobs growth, and very few economies have been left behind. India is one of the outliers, with GDP growth slowing and unemployment rising.

The Organisation of Economic Cooperation and Development says that all 45 economies that it tracks will grow this year, the first time this has happened since 2007, the year before the global financial crisis led to a worldwide recession. Moreover, three quarters of all the countries will grow faster this year than they did last year; India is in the slumping minority, with GDP growth now expected to decelerate this year.

In the global jobs picture, India stands out as even more of a sore thumb. The worldwide unemployment rate, as calculated by JP Morgan research, is almost back to its pre-2008 crisis low of 5.5 per cent. Developed economies from the UK to Japan have the lowest unemployment rates seen in many decades. In emerging economies, the unemployment rate has been falling since 2014 and this year even countries such as Russia and Brazil, which experienced deep recessions, are seeing a marked improvement in the labour market. In India, meanwhile poor quality data makes it difficult to put a number on the job woes, but the available data is grim and news stories about jobs losses abound.

So why is the Indian economy, which rose and fell with global trends for so long, bucking them now? One theory points the finger at India’s high real or inflation-adjusted interest rates, but real rates have risen in most countries this year as inflation has unexpectedly declined everywhere; so this can’t explain why India is different now. A part of the explanation is that the broad economic recovery has led to a rebound in global trade, which had slumped badly after the 2008 crisis, and India is sitting out this recovery. Indian exports have picked up this year, but much less than in other emerging nations.

The question then is why are Indian exports underperforming? One possibility on offer is the rising value of the rupee, which makes exports less competitive, but the rupee’s rise against the dollar has been exactly in line with other emerging market currencies this year. So currency doesn’t answer the mystery. Also, latest research shows that trade is seven times more sensitive to changes in demand than to exchange rate movements.

The best explanation lies in recent domestic policy moves, as until last year both India and emerging markets broadly were slowing down in sync. A disconnect began late last year when growth in emerging markets started recovering and India kept slowing.

The first of the policy moves was the unique demonetisation experiment. The second was the Goods and Services Tax, which was supposed to bring India in line with global standards but instead added typically Indian layers of complexity. These policies disrupted local businesses, including exporters. Imports have surged to meet consumer demand, widening the trade deficit and cutting into GDP growth.

It is disappointing that India is missing out on the global revival in economic growth, but perhaps even more troubling that it is missing out on jobs growth – a trend that precedes the GDP slowdown but has also gotten worse over the past year.

Many commentators are blaming these troubles on global forces. In India, especially, it is popular to talk about how automation is taking jobs away from humans. But the global jobs boom suggests that there is little evidence for such losses. At any point in time technology is destroying some traditional jobs, and creating them in new industries.

India’s apologists also point to “premature deindustrialisation”, the idea that it is increasingly difficult for countries to export their way to prosperity, because of a more competitive environment for manufacturing globally and slumping world trade. Even though trade volumes have perked up this year, they are well below the pace seen before 2008. And competing in global manufacturing, which was always the most important path to mass employment, is harder now following the rise of China.

Still, there are countries at India’s income level that are excelling in manufacturing and creating jobs. Vietnam, Bangladesh and Cambodia, for example, have seen a surge in manufactured exports in recent years, partly by taking share from China in low-end goods from toys to textiles. India’s continued lack of success in these industries may be the single biggest reason why it keeps falling short of being the next China and why the jobs market is so weak.

There are many reforms that India could carry out to become more competitive in manufacturing. These would involve changing its cumbersome labour laws, cutting corporate taxes to levels seen in East Asian countries and improving the transportation networks.

But don’t hold your breath for any of these reforms to happen lest they are perceived as too pro-business. Instead, hope there are no more uniquely Indian policy experiments. That might be enough to push India back into sync with the world, hopefully while it is still enjoying this synchronised global recovery.

Ruchir Sharma is chief global strategist at Morgan Stanley Investment Management.

Source: The Times of India

Latest Publications

India's National Security
Annual Review 2018
Edited by Satish Kumar

Contact us

Foundation for National Security Research

Z-24, (Ground Floor) Hauz Khas New Delhi – 110016

Tel: 91 (11) 41656842, 91 (11) 26531541, Fax : 91 (11) 46018144

Email: director.fnsr@gmail.com, foundation.nsr@gmail.com, info@fnsr.org

 

You are here: India Economic Developments Uniquely Indian problems