Is the Indian economy stronger than commonly assumed?

images (5)“When the facts change, I change my mind,” said John Maynard Keynes. Will the revised data on gross domestic product (GDP) for 2010-11 make us do likewise?

For the revised GDP estimates issued last week question popular descriptions of India’s growth slowdown, challenge estimates of a lowered potential output and possibly shed some light on the inflation-growth disconnect in 2012. The improved data has been computed from the dependable Annual Survey of Industries (ASI) rather than the notorious Index of Industrial Production (IIP); it compels us to revisit these issues and raises policy setting concerns.
The facts: India’s GDP growth for 2010-11 stands reworked to 9.3% instead of the earlier estimate of 8.4%—nearly one percentage point higher. Much of this increase comes from revised manufacturing sector growth—9.7% year-on-year, or 2.1 percentage points more. What’s more, the increase in the estimated growth for 2010-11 is itself built upon a 1.6 point increase in growth during the previous year (now 11.3% for 2009-10).
On the demand side, it was the capital stock growth that contributed 4.2 percentage points to the 10.5% real GDP growth (at market prices). Gross fixed capital formation growth is now placed at 14% year-on-year, nearly double the earlier measure of 7.5%, and a substantial jump over the 7.7% growth in 2009-10; this acceleration lifted the real gross capital formation rate to 40% in 2010-11, from 38.4% the previous year. The other demand component that has been revised is public consumption: growth in actual government expenditure was a more modest 5.9% in 2010-11 against the 8.2% recorded earlier and a big drop from the 14% growth in 2009-10.
The new facts challenge some hypotheses about the collapse of the India growth story. For one, the “policy paralysis” explanation that throttled investments and exacerbated supply constraints from 2010 weakens in the light of robust manufacturing growth and capacity creation in 2010-11. This may explain the sudden, sharp drop in growth to 6.2% in 2011-12, when scams emerged to dent business confidence, but not before.

Weak infrastructure holds back Indonesian economy

According to Huffington Post’s Chris Brummitt, Jakarta, Indonesia — Months behind schedule, the construction crew racing to finish a highway encircling Indonesia‘s traffic-choked capital is being blocked by a determined group of locals and the ramshackle cemetery that is home to their ancestors.

Talks on a new location have yet to reach an agreement accepted by all the relatives of the some 500 people buried there. That has not stopped authorities digging a new cemetery a short distance from the old one – pointlessly according to Yaman, the neighborhood chief.

“There is no way we can agree to that,” said Yaman, pointing to workers hacking through the thick red earth during a midafternoon rain shower. “It will be too noisy. How are we supposed to pray for our ancestors there?”

Indonesia‘s economy is booming. But to sustain and deepen its growth, it badly needs new roads, bridges, power stations and ports. Land disputes such as this one in west Jakarta, and a host of other difficulties from corruption to budget-draining populism, make building such infrastructure a long and costly process. That is preventing the country from attaining the kind of transformational development experienced in a generation by countries such as South Korea and more recently China.

Last week, floods engulfed around 30 percent of Jakarta, including its central business district, dramatically exposing decades of underinvestment in the drainage and flood defenses of the city of 14 million people.

To be sure, beleaguered economies in the West would envy Indonesia‘s current growth rate of more than 6 percent. Coupled with political and social stability, it represents a dramatic change from the Indonesia of 12 years ago, when political crisis, separatist violence and economic meltdown led to fears the massive island nation could break apart.

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Malaysia’s Economic Measures Impress China

“I notice that the Malaysian government is carrying out measures and policies that will promote and benefit the people, such as the 1Malaysia concept, the Government Transformation Programme (GTP) and the Economic Transformation Programme (ETP),” he said.

 

Chai stated that both China and Malaysia were in vital phases of development, shouldering the important task of developing their economies and improving the livelihood of their people.

 

China would like to join hands and work together with Malaysia to further deepen our strategic partnership and to embrace a brighter future of the bilateral relationship,” Chai said in an email interview with Bernama in conjunction with the 63rd anniversary of the founding of the People’s Republic of China on Oct 1.

 

However, the policies and measures undertaken by the government were not the only aspect that caught the ambassador’s eyes since taking up his post here in 2010.

 

Malaysia has impressed him with its “beautiful and richly endowed land, its diligent, broad-minded and enterprising people and its splendid, distinctive and diversified culture” as well.

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Manmohan Singh has Pushed Economy Back to 1991 Level: Venkaiah

Alleging that Prime Minister Manmohan Singh has pushed the country’s economy back to the 1991 era of economic crisis, the BJP today hit out at the UPA government for allowing FDI in multi-brand retail.

“The Prime Minister is saying that the 1991 situation is coming back… Who is responsible for this? Prime Minister? You have been in power since last eight years. It’s because of your mismanagement of economy,” BJP leader Venkaiah Naidu told reporters here.

He said the current situation of economy was the result of government’s wrong priorities and overall policy paralysis. “From a robust economy, resilient economy you have turned it into a roasted economy,” he said.

Venkaiah was referring to the serious economic crisis of 1990-1991 when the country’s foreign exchange reserves stood at mere USD 1.2 billion in January 1991. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.

The former BJP president said senior Congress leader Priya Ranjan Dasmunsi was against allowing FDI in retail.

Quoting Dasmunsi’s letter dated December 16, 2002, Venkaiah said, “Multinational retailers are continuously putting pressure on the government to take anti-national decision of allowing FDI in retail trade.”

 

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Some Questions for the Asian Economic Century

Of course, it was not possible to avoid discussion of Europe, the US and elsewhere with clients as I travelled, especially as there is so much in the news about them. I shall touch on those parts of the world briefly before I turn to Asia. Before I do that, to emphasize the relative importance of regions for just this second decade of the century, let me repeat something key from our economic assumptions that I occasionally refer to. We are assuming that the eight economies we define as “Growth Economies” – Brazil, Russia, India, China, Indonesia, South Korea, Mexico and Turkey – will contribute around $15 trillion in real terms to the world this decade. This contribution will allow for faster, yes faster global GDP growth of around 4.2% than for each of the past three decades. Of this $15 trillion, one-half will come from China, and another quarter of the total will come from the other Asian Growth Economies. This $15 trillion total will be more than twice that of Europe and the US combined. The Next 11 (N-11) economies, which as well as including South Korea and Indonesia, include another four Asian economies – Bangladesh, Pakistan, the Philippines and Vietnam – will contribute nearly as much as the G7 and more than either the US or Europe.

More Mixed Signals in the US

As we await the all important payrolls and ISM data, last week was another mixed week in terms of data with only the drop in weekly job claims to encourage the optimists and the notable weakness in durable goods, the highlight to excite the bears.

 

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Oil Ealls as European, Asian Economic Data Weighs

Brent crude fell slightly on Monday in choppy trading as oil markets balanced better-than-expected U.S. manufacturing data against signs of economic weakness in Asia and evidence of a new recession in the debt-saddled euro zone.

The international benchmark came under early pressure from data showing factory activity in No. 2 oil consumer China contracted, while euro zone manufacturing suffered the worst quarter for three years in the three months to September.

Prices briefly pushed higher in early U.S. activity after data showed U.S. manufacturing expanded in September, shaking off three months of weakness as new orders and employment picked up. The data helped keep U.S. crude in positive territory, even as Brent shook off gains to trade lower.

“This is a market that has plenty of excuses for moving higher,” energy analyst Tim Evans of Citi Futures Perspective said, pointing to the U.S. Federal Reserve’s latest quantitative easing and geopolitical tensions in the Middle East.

“But without stronger physical demand for petroleum, higher price levels will not be sustainable.”

 

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US Manufacturing Grows but Europe, Asia Wilt

U.S. manufacturing grew slightly last month for the first time since May but euro zone factories suffered their worst quarter since early 2009, suggesting the region may struggle to avoid recession.

Factory activity in China also contracted, suggesting the world’s No. 2 economy lost momentum for a seventh consecutive quarter.

The data showed companies across the world have yet to benefit much from the aggressive stimulus spending undertaken recently by the world’s major central banks.

Even the U.S. data was considered only mildly encouraging. While a jump in new orders nudged the Institute for Supply Management’s index of national factory activity up to 51.5 last month, ending three months of contraction, it remained well off levels seen in early 2012.

A separate index on U.S. manufacturing activity from financial information firm Markit came in at 51.1 in September and averaged 51.4 in the third quarter, both three-year lows. A reading above 50 indicates expansion.

Weaker overseas demand for U.S. products, the result of recession in many European countries and slower growth in Asia, was the main drag on U.S. factory activity, the data showed.

 

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Taking a Reality Check on China

The idea that the US faced eclipse by its Soviet adversary was common through the 1950s and 60s, although Samuelson clung to it longer than most. The Soviet state could marshal the resources to drive rapid investment, bringing economic growth rates approaching 10 per cent through the first two post-war decades. It was hailed as “an economic miracle”.

The obvious parallel is China, where hyperbole over the power of its compound growth has captured official thinking. Wayne Swan says the speed of Asia’s transformation is staggering, noting at the recent Treasury and Reserve Bank conference on the rise of Asia that China had doubled its gross domestic product in a decade, one-fifth of the time it took Britain during the Industrial Revolution. “By early next decade, the economies of China and India alone are expected to be larger than all the major advanced economies combined,” Swan said.

The story is familiar. The influx of peasants from the countryside into the urban workforce brings a powerful boost to productivity, and this can continue for decades.

China is following the same trajectory as Japan and South Korea but on an incomparably larger scale. It may happen, but right now there is an urgent need for clearer analysis of the forces slowing the economy of Australia’s largest market.

 

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China Slowdown Overshadows Japan Economy

Japan’s economy is leveling off as China’s slowing growth casts a deep shadow over production and exports.

The Bank of Japan’s quarterly Tankan survey released Oct. 1 showed a sharp loss of business confidence among automakers and steelmakers.

The diffusion index for large automakers plunged from 32 in the previous June survey to 19, while the diffusion index for large steelmakers sank from minus 17 to minus 28.

The 13-point drop for large automakers was the steepest among all industry sectors. Automakers are key customers for steelmakers.

The diffusion index for all large manufacturers, the headline component of the Tankan survey, dipped 2 points to minus 3, for the first fall in three quarters. The index stayed below zero for the fourth consecutive quarter.

The index is calculated by subtracting the percentage of companies reporting unfavorable business conditions from the percentage of companies reporting favorable conditions. A negative reading means pessimists outnumber optimists.

 

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Credit Suisse: The Chinese Economy Is A Car ‘Stuck In The Snow’

Overinvestment, along with many reasons, mean that private sector is not willing to invest because their businesses are becoming unprofitable in China. On top of the the private sector are highly leveraged, which means that central banks may lower interest rates, but in the absence of profitable businesses and high debt, private sector will not invest. This is reflected by the fact that investment in manufacturing sector is now a major drag on total investment.

Dong Tao of Credit Suisse, one of the best China economists, came up with the following perfect metaphor describing the Chinese economy (emphasis ours):

Imagine the scene when a car is stuck in the snow. The driver keeps stepping on the gas pedal. The wheels move, but the car does not move forward. This car is called the Chinese economy. The Beijing leadership is in the driver’s seat, stepping on the gas pedal. Between the wheel and the snow is the liquidity trap.  Thus, under excessively loose monetary conditions, further easing in monetary policy does not get the Chinese economy moving forward.

 

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