Indian growth overtakes China's?

Commentators project India overtaking China's in the near future. The IMF reckons this has already happened, the Economist reports.

The explanation runs as follows. India reports GDP by factor cost; China by expenditure. Look at India's GDP by expenditure and you find Indian GDP was a shade ahead of China's in 2010 (calendar year)- 10.4% and 10.3%. The Indian growth rate is at constant prices, so it has nothing to do with the high rate of inflation.

India decoupled from the world now?

India is eyeing 9% growth when growth prospecs in the US and other advanced economies are uncertain. Fiscal and monetary policies have been tightened over the past several months in India. In the advanced economies, the stimulus vs austerity debate has not died down. Is India getting decoupled in the present situation? Maybe. We got couple in 2009 because of panic outflows of capital. In today's uncertain condition, the same sort of capital outflow appears unlikely. So we may steam ahead regardless of what happens in the advanced economies.

More on this in my last ET column, The world falters, India booms

9% growth is within sight

It looks as though we will touch 9% growth this year itself, assuming the monsoons don't disappoint. Earlier, most forecasts suggested that growth would touch 9% only in 2011-12. If we do touch 9% this year, it will be in the face of a still incomplete global recovery. Conclusion: our growth of 9% is not entirely contingent on a global boom, as some commentators had claimed.

The challenge is to insulate 9% growth from the vagaries of the world economy. More on this in my ET column, Boom or no boom, India can grow at 9%

Budget discussion

I was on CNBC the other day. The topic was the post-budget impact on the economy.

Upbeat on the Indian economy

I am upbeat on the Indian economy as the year end and for reasons I spell out in my ET column,, Economy's stronger than we think. I find I am in good company- several other commentators have since come out with optimistic assessments.

My reasons are:

• This year's growth forecast of 7% plus shows India is not a bubble economy whose growth of 8-9% earlier was linked to the global economic bubble
• The fiscal problem will come under control as growth gets back to the normal trajectory.
• The polity will not be a drag and fears about the country coming apart because of the demand for newer states is misplaced.

On the demand for newer states, I note:

As for the demand for new states, concerns on this account carried greater force when states were first organised along linguistic lines. Then, the greatest fear was that language would rend the country as religion had during Partition. In the early sixties, an American analyst, Selig Harrison, wrote a book, India: The most dangerous decades, in which he warned that linguistic and caste divisions — ‘centrifugal pressures’ — could tear the country apart.

Our experience has been refreshingly different. The creation of new states in the fifties and thereafter has strengthened democracy by creating a better sense of participation among people. As many commentators have pointed out, this has also been our experience in more recent times with the creation of states such as Chhattisgarh, Jharkhand and Uttaranchal.

The division of states being demanded today is not even along linguistic lines. People speaking the same language want to go their separate ways because they want better representation, because administration is too remote in many of the larger states. We have no reason to fear these demands. The movement towards the creation of newer and newer states shows that the Indian state is responsive to aspirations for self-governance. The economy will benefit as it has in the past.

Surjit Bhalla, writing in BS, echoes my optimism and goes further. He thinks India will grow faster than China in the coming years:

China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.

This scenario will have predicted effects — China’s GDP growth should moderate to a less polluting 8.5 per cent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average. In stark contrast, India does not have pressure from the world community to mind its currency or emissions. The productivity growth advantage of 2 per cent a year that China currently enjoys will soon disappear, leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.

Fresh bout of disinvestment

Hopefully, we should soon see a fresh bout of disinvestment, with several unlisted PSUs being brought to the market. That's very good news. Not because it will help contain the fiscal deficit, as some commentators have rushed to point out. The fiscal impact of disinvestment tends to be exaggerated. Its real value lies in its potential to bring about greater commercial discipline through listing on the stock exchange.

Disinvestment helps improve performance when combined with competition and better board room governance. Liberalisation has taken care of competition. More needs to be done on board-room governance in PSUs. Unlike in the private sector, there is scope for doing a great deal more, as I argue in my ET column, Disinvest for better governance.

Cash transfer versus NREGS

NREGS, the national employment scheme, drew a lot of flak when it was first introduced. It has since received some grudging credit and its critics have at least recognised the value of the fiscal stimulus it has provided.

The standard argument against NREGS, which is also the argument against subsidies, is that it is better to make transfers to a carefully targeted segment, namely, the BPL category. If you spend Rs 100 on the NREGS, Rs 20 will be siphoned off, Rs 30 will be spent on administration, Rs 20 on materials, which will be wasted because of poor quality of works, and only Rs 30 will reach the poor as wages. Far better to transfer Rs 30 to designated accounts.

Tushaar Shah addresses this argument in an article in TOI.

The NREGS launch in 2006 had created a widespread impression in many parts of rural India that it would eventually end up as a cash transfer programme. Many people believed the job card-holder household would be entitled to an annual cash transfer of Rs 10,000. This is why numerous well-off households and local bigwigs, including village sarpanchs, acquired them.

NREGS design - guaranteeing 100 days' unskilled manual work toany household, rich or poor, willing to do such work - minimises type II error. Even if the rich acquire job cards, they can benefit from NREGS only if they are ready to do unskilled manual work, which they are generally not. NREGS self-targets the needy. The BPL card, ration card and NREGS job card under cash-transfer denote entitlement, not what their holders do. That NREGS reduces type II error is evident in the fact the number of households registering for work that is much smaller than that of job card-holders. Again many NREGS projects remain unfinished and funds are returned because those who registered for work do not show up. This would hardly be the case if all job card-holders were automatically entitled to Rs 10,000 deposited in their accounts.

There you have it: cash transfers would amount to looting by the powerful in the countryside. Those who advocate it have no clue as to how things work in the countryside. Shah concedes that poor quality of works is an issue. But this needs to be addressed through better governance. Indeed, that is an argument I would make for NREGS, that by mobilising NGOs and other agents at the grassroots level, it becomes a powerful tool for improving governance.

One aspect of NREGS is that the access to information on the scheme is superior to what would be provided under the RTI Act. To make NREGS-based works worthwhile, we have to bring about greater accountability at the grassroots. It is a challenge, of course, but the effort is worth it, quite apart from the purchasing power it confers on the poor.

Pranab Mukherjee's budget

The market tanked yesterday. I wasn't surprised at all and had forecast a correction in my ET column a fortnight ago, Market rally may prove deceptive.

I based my assessment on two things. One, the $ 5 bn plus FII inflows in the present financial year represented something of a correction to the huge outflow of $11 bn last year. We could not expect this sort of inflow to continue. Secondly, I, for one, have never bought the notion that the Congress or the present UPA is hugely reformist is orientation and that all that it needed to get into reform mode was shake off the Left. Sonia Gandhi retains the leftward leanings of the family and this is duly reflected in the Congress today.

So, I had a few quiet laughs when I saw the commentators and businessmen on TV shake their heads in sadness at the many missing items- fiscal consolidation or even a medium term plan for one, disinvestment, petroleum deregulation, impetus to FDI, labour market reforms, financial sector reform (the Raghuram Rajan report was not even mentioned in passing).

I must mention one distinguished exception to the nay-sayers: Surjit Bhalla, whom one would regard as ultra-reformist. I did a double take reading his piece in BS today. He hails this as the second most reformist budget ever presented after Yashwant Sinha's 1999 budget. I read his piece again thinking this was being said tongue- in- cheek. No, Bhalla is serious. Well, leaving aside the critics on TV, I doubt that that is a claim that even the FM or the Congress would make!

What do I make of the budget? Well, I am yet to put the numbers on a spread sheet and pore over them (which is what I do once the media frenzy dies down). I have just a couple of thoughts for now. One, the budget is true to the Congress manifesto and the broad indications given in the President's speech.

Two, the focus is on providing the maximum fiscal stimulus. This probably reflects the government's view that the 'green shoots' hypothesis is premature, that the global economy will take its own time recovering and that, therefore, the Indian economy's growth momentum is best sustained through as big a stimulus as possible. People fear that this will push up interest rates and crowd out private investment. But private demand for credit is weak, which is why there is huge liquidity out there in the markets, so this fear may prove misplaced.

Three, my guess is that the FM has left the possibility for greater disinvestment proceeds than budgeted and spectrum auction for later in the year. To do this now would detract from the stimulus. So, give the maximum stimulus now and once there are signs that growth is of the order of 7%, push ahead with disinvestment. If this hypothesis turns out to be right, the FM may well surprise us with the fiscal deficit number in his next budget- it could prove lower than 6.8%.

Now, this is not how economists and market analysts view matters. They would have liked some fiscal consolidation here and now and they probably reckon that economic recovery is happening anyway. Unlike most of the intelligentsia (which is not necessarily very intelligent), I have great respect for the instincts of politicians, so I would go along with the FM. If the FM's calculations prove right, it would be quite an achievement.

Gujarat a star in agriculture

Gujarat has always been a star in industrial performance. It was news to me that Gujarat is a star i in agriculture. Gulati and Shreedhar analyse the phenomenon in an ET article. Agriculture has grown in Gujarat at an astonishing 9.6% in 2000-01, more than the thrice the all-India figure.

One key driver has been the Sardar Sarovar project and the increased availability of water in a state in which irrigation cover is only 36%. One can understand why the project arouses strong emotions in the state. Another driver is technology, especially new varieties of cotton with the private sector taking the lead. Then, good roads, better regulation of electricity for agricultural use and a thrust on extension services have helped.

The authors conclude, "Strong political commitment to promote rural development, a long term vision, and the capacity to implement this are perhaps the key ingredients of Gujarat’s success story".

That must explain Modi's success- there's a lot more to development in Gujarat than the Nano project.

Academics in government

There has been much criticism about how the "dream team" of Manmohan Singh, Montek Ahluwallia and P Chidambaram did little or nothing on economic reforms. It's interesting that two of the three members have strong academic credentials. An article in FT echoes the criticism:

The whole reform programme relies on the prime minister himself. Mr Rao and A.B. Vajpayee proved their mettle, despite heavy political constraints. Mr Singh has failed; he should bear much of the blame. The Congress party does not deserve to be re-elected and the dream team does not deserve to continue in office.

It also has some strong things to say about academics in positions of authority:

........Mr Singh has proved a hopeless decision-maker as prime minister. Sadly, he proves the rule that academics should generally be “on tap” but not “on top”.

Satyam sale

The sale of Satyam to Tech Mahindra is a morale booster, never mind the ifs and buts as to whether the buyer can make a success of the acquisition. For once, the print and visual media were willing to acknowledge the role played by the government in preventing a debacle and arranging a rescue.

It's an amazing end when you think of how things would have ended in, say, the US. The moment the fraud came to light, the company would have gone into bankruptcy proceedings and it would have been embroiled in litigation. In a software company, value comes from intangible assets- the people and the brand- so there's little that investors can claim from liquidation and litigation.

The only hope is to turn the company around under new management and wait for the stock prices to revive. Those who filed class action suits in the US may well find that they may be better off waiting for the stock price to rise instead of trying to claim a settlement from the new management.

In making the decision that Satyam was too important to go under and that it could and should be revived, the Indian government was spot on. It also acted swiftly in putting in place a new board and the regulatory authorities helped by creating a fresh set of rules for takeovers in such exceptional cases. (This was wrongly derided by some as being anti-investor, overlooking the fact that we are talking of a company that was on the brink of a collapse that would have washed out investors altogether).

What can we learn from this episode? One is that government may need to intervene in the case of any systemically important institution, not just those in the financial sector. The second lesson- driven home already by the financial crisis- is that 'leave it to the market' can be sheer nonsense in such situations.

Responses to readers' comments

1. Subiksha- The question is asked: if it's an unlisted company, why should directors owe anybody an explanation for quitting? Well, I believe directors' responsibility should be viewed in broader terms- they have obligations towards all stakeholders, not just shareholders of the company. Investors in ICICI Venture might want to know what went awry; lenders in Subiksha too would be interested. When directors quit, especially when they do so en masse, citing reasons is a good idea.

2. First Global- My limited concern was about the linkage between the Tehelka exposure and the crackdown on First Global. If First Global or Shankar Sharma violated any securities laws, that is a different matter which I, for one, am not competent to judge. I also hold no brief for any political party and I accept that misuse of investigative and law-enforcement agencies has not been confined to any one party or coalition.

'IT industry facing unprecedented crisis'

That was a headline in Indian Express today. The quote was acribed to Nandan Nilekani of Infosys. I read on to see what was meant. Nilkeani is quoted as saying:

....the compounded growth rate was 30 per cent and more and now it is reduced to 20 per cent due to economic slowdown.

Well, I guess that's the sort of 'crisis' most industries would love to have!

I do not, by the way, wish to understate the impact of a slowdown of this magnitude on the jobs market in India, especially the impact on the fresh crop of graduates from engineering colleges this year.

Will oil prices derail the Indian economy?

Could soaring oil prices wreck short-term growth prospects? The pessimistic view is that it can - especially because it comes on top of troubled conditions in international financial markets.

Not so, methinks- and I said as much in my ET column, Please, this is not the 90s economy.

• First, I don't buy the proposition that prices above $125 are here to stay. The imbalances in oil supply and demand are very small - and feverish speculation is at the root of the present spike. Saudi Arabia's decision to step up oil output in response to President Bush's plea will have the necessary softening effect.
• Oil prices of around $100 are not a big deal for the world economy- in real terms, these would be close the peak of the seventies. But the developed world is far more energy efficient today than i the seventies.
• A high inflation- high interest rate cycle putting the brakes on India's economic growth is unlikely. Inflation will moderate in the months to come. Interest rates have risen but, in real terms, are way below those in the nineties.
  
• The structural characteristics of the Indian economy are far superior to those of the nineties, so the chances of a lapse into a 6-7% growth band are negligible.
• The prospects of the international financial market crisis receding are brightening by the day- the latest addition to the ranks of the optimists is Fitch, the credit rating agency. Ftich estimates total losses on account of the crisis at $400 bn, with banks accounting for half of this. Of the total $200 bn in estimated losses, banks have already provided for $160 bn.
  

No housing bubble in India

Housing prices elsewhere have collapsed. There has been talk that India might witness such a correction. Rubbish. There's no real estate bubble here, as Keki Mistry, MD of HDFC pointed out recently.

True, housing prices have shot up. True also that EMIs have gone up thanks to the increase in interest rates. But, compare affordability- income in the relevant segment to EMIs- with those of 15 years ago and you realise how far we have travelled. This ratio is 4.9 today, according to Mistry, compared to nearly 15 about ten years- an improvement by a factor of three!

Affordability is better for a number of reasons:

• Sharp increases in income
• Lower interest rates
• Tax incentives for housing

Remember this the next time somebody comes up with a doom scenario for India arising from a collapse in housing prices similar to what we have seen elsewhere.