If India’s so rosy, why no local investment?
INDIA’s just-released GDP figures show it’s still the world’s fastest-growing large economy. Over the past decade or so, those numbers have swooped and stuttered — from the boom years of the mid-2000s to the hard stop during the 2008 financial crisis, to the stimulus-driven recovery immediately after and, finally, the decline once the stimulus ran out of steam.
India now looks to be on an even keel. Its macroeconomic numbers are strong and growth appears solid, if slower than hoped. Its government, led by Prime Minister Narendra Modi, has reiterated this over and over again.
What officials won’t say is that the quality of growth is poor. Look closely, and the economy doesn’t seem like the good-news story the government is telling the world.
In fact, today’s growth levels appear unsustainable. They’re driven by the government’s belief that it can ramp up its own spending to make up for a private sector that isn’t yet optimistic enough to invest. Over the past two years, growth has come to depend dangerously on an overstretched state.
GDP grew in the first quarter of this financial year (India’s financial year begins on April 1) by 7.1% over the equivalent quarter last year. That was slower than the previous quarter’s growth rate — 7.8% — but still impressive enough given sluggishness elsewhere in the world. Value added by private sector manufacturing grew almost 12% between April and June, and the flagship IT sector grew at 9.6%. So far, so good.
But robust demand isn’t what’s fuelling this growth. Another indicator the government puts out — the index of industrial production, a series that measures actual physical output — is shrinking: between April and June, it was 0.7% lower than the previous year.
Other indicators of real economic activity also look weak. Perhaps most worrying is data about how much freight Indian Railways is moving: down almost 9% from last year, when measured in tons moved per kilometre.
In other words, while the balance sheets of companies look good, they don’t seem to be producing or trading as much.
The government seems to assume that public spending can pick up the slack, with the share of government expenditure in GDP rising. But that’s a dangerous trend, conflicting with the government’s promise to reduce its fiscal deficit to 3% of GDP in a couple of years.
Growth that depends on public spending is in any case of poor quality, unsustainable in the long run.
Even the government admits that sustainable growth won’t return unless the private sector begins to invest. Its argument is that public investment is rising in tandem with overall government expenditure, and this “good spending” will lead to more private investment. Yet investment in India is shrinking ever faster, by 1.9% between January and March, and 3.1% in the three months after that.
So, when the government — or, indeed, multilateral institutions such as the IMF — tout India as the one bright spot for global growth, investors should ask hard questions.
First, if things are so rosy, why aren’t Indian businesses investing? Why should foreign capital imagine it can get sustained returns when domestic capital is sitting on its hands?
There are signs that growth
A miracle dependent on weather and state spending
might pick up in the coming months. For one, the monsoon has been better this year than last, and the agricultural sector might expand, which in turn might help rural demand recover. And urban demand will receive a boost from the government’s decision to give its employees a hefty pay hike.
But that, again, puts government expenditure at the centre of India’s growth story. A growth miracle dependent on the weather and state spending isn’t much of a miracle at all.
India’s growth numbers may look bright. But they also reveal an economy that’s storing up trouble, with low demand and crashing investment propped up by government largesse. Seen this way, India doesn’t appear to be an exception to the gloomy emerging-markets story after all.