Financial Times/ by Surjit Bhalla
I’m a natural optimist, but there are still plenty of good reasons to be positive about India’s growth, even if May’s election does not go the way polls suggest. Perhaps the best way to appreciate this is just to assume that this is not one of the most important polls in India’s democratic lifetime. What would you expect to happen? For starters: the normal improvements of the business cycle.
This means inflation is set to decline from its lofty and sustained 10 per cent plus levels, down to earth levels below 7 per cent. To put this in context, the Reserve Bank of India (RBI) has signalled a consumer inflation target of 8 percent by December, even though the seasonally adjusted annualised rate for the first quarter of this year is already just a minimal 4.4 per cent.
To miss the RBI’s target, consumer prices will now have to leap by more than 9.2 per cent during the rest of this year. It might happen, but that would go against thirty years of data, and the last decade in particular.
Take government procurement prices of food grains, the major cause of administered food inflation in India, which rise with a one year lag. These rose at an average of 13.5 per cent between 2007 and 2012. But in 2013, they rose at less than half that rate, meaning food inflation is highly unlikely to top 7 per cent this year. As a result, the RBI target will be met comfortably.
Put another way, this means interest rates are now also unlikely to be raised further, moving down sometime in 2014. And there is even better news for the business cycle in terms of industrial production, which has averaged less than 0 per cent over the last three years.
Over the decade to 2010, industrial growth averaged 8.2 per cent; for the previous twenty years, 7.7 per cent. Regardless of rising global competition or worries over emerging markets, India’s industrial slump must have bottomed out — even before accounting for rising global growth, which has returned, if not to pre-2007 boom levels, then to a respectable 4.8 percent, increasing demand for exports.
All of these interrelated factors help to explain why the rupee now sits at a respectable Rs 60 to the US dollar, which adjusting for productivity and inflation, puts it within 1 per cent of its value a decade ago. At that time, global growth had not become exuberant or irrational, and Indian exports and growth were buoyant. So there is little reason to think that the rupee needs to depreciate much beyond this levels for exports (and indeed growth) to get their mojo back.
Simply re-finding that mojo would mean something in the region of 6.5 to 7 percent growth. But all of this is without incorporating any of the possible effects of the new political order that may arrive if polls are correct in forecasting a debacle for the Sonia Gandhi’s Congress-led government — and a victory for Narendra Modi’s economically right-of-centre Bharatiya Janata party.
Assuming this does happen, it remains to be seen whether that new order would be Reagan or Thatcheresque, but whatever happens it is likely to be significantly to the right of the heavily populist incumbents. Given economic policies matter for growth, a reasonable assumption is that firm reformist policies could then add a further 1 to 2 percent to the economy. And this means that India’s actual and potential GDP growth will both be aligned at around 8 percent, after a gap of three years.
Of course, this forecast is dependent on what is euphemistically called a “stable government” — which is shorthand for the Congress getting below 100 seats and Modi and only his pre-poll allies picking up the 272 required for a simple majority. In this scenario, horses will not need to be traded post- election, to tempt other regional parties into a wider, and less stable, coalition government.
Even with India’s under-appreciated underlying economic strength, this is clearly the most favourable scenario — and one that could also signal the end of the Congress party’s ruling Nehru-Gandhi dynasty.
There is an old adage: “from shirtsleeves to shirtsleeves in three generations”. Rahul Gandhi is the fifth generation of his family’s line; so, statistically, its end is long overdue. But for Indian growth, it can’t come soon enough.
(The views expressed above are the personal views of the writer)
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India, get ready for the growth mojo
