- India may not realise its ambitions
By: Chan Kung
Under Prime Minister Narendra Modi, India is now more ambitious than ever. However, will such ambitions be implemented smoothly? Will India emerge as the world’s seventh most powerful country, as expected in its Vision 2030– “Let India become the new world’s factory” and the “$5 trillion economy”? From comments and reports, it seems plenty of people believe India can achieve this, but it may not be so because the barriers posed by global overproduction are grossly underestimated, and India’s economic growth is extremely difficult to overcome the huge barriers to regional competition.
The first barrier is a marked slowdown in Indian economic growth. In recent years, India’s growth record has been very good. Since 2014, India’s growth rate has exceeded that China’s, being around 7-8 percent. However, the “India model” that emerged from the “China model” also has major problems. India’s economy has been in significant decline since 2019, with predictions of 5 percent growth in the fiscal ending March, the third consecutive year of slowing growth. With growth of 5.8, 5.0 and 4.5 percent in the first three quarters of 2019, India’s economy has plunged to its lowest level since 2013. Although some analysts believe India’s economy will rebound to 6.2 percent in fiscal 2021, if it happens, it would fall far short of forecasts.
The likelihood that the Indian economy will continue to be affected by external factors to come is high, and it is likely to become a global risk factor rather than a comprehensive and positive market factor
What makes the India model slightly better than the China model is that it is built on the basis of “production + consumption”, unlike the “China model”, which is basically purely production-oriented. However, this feature has higher requirements for inflation control, as higher prices will seriously affect consumption. Indian inflation is spiralling out of control. India’s CPI rose much faster than expected in December 2019, to 7.35 percent from 5.54 percent in November. Indian food prices rose 14.12 percent in December, of which vegetable prices rose 60.5 percent. The CPI rose well above the median of 6.7 percent. It was India’s largest increase since July 2014 and the first time since July 2016 that the CPI exceeded the 2-6 percent Reserve Bank of India target range. Consumption accounts for about 60 percent of GDP, so rising prices will inevitably lead to layoffs and debt problems. India’s private consumption growth slowed to a five-year low of 3.1 per cent in the third quarter of 2019. The rapid rise in inflation has also limited RBI’s monetary policy effectiveness, suggesting structural problems in the financial sector.
Third, India’s manufacturing sector faces huge challenges. Five years ago, India came up with the slogan “Make in India”, which was an initiative for India to participate in globalization and develop its manufacturing industry with abundant labour resources. Yet the initiative seems to be failing. India’s industrial production growth has fallen to its lowest in a decade. In 2019-20, India’s manufacturing sector was depressed, hitting a 15-year low, with industrial growth estimated at 2 percent, down from a low 6.9 percent in 2018-19. At the same time, annual growth in India’s construction industry was less than 3.2 percent, compared with 8.7 percent earlier, which implies a sharp contraction in the sector.
Fourth come obstacles to the debt and capital environment. In its annual economic report, the IMF stated India was the most indebted of emerging markets, with general government debt 68.1 percent of GDP in fiscal 2019, the highest level in three years. According to the latest RBI data, India’s public debt reached about $1.4 trillion by 2019, but its forex reserves are only about $ 401.776 billion. Devaluation would be inevitable if it had not been for Indian exports and forex inflows. Devaluation is one of the fundamental flaws in the India model.
India’s development of manufacturing as a latecomer will face a very unfavorable factor. In a world with overproduction, “Made in India” will face not only competition from “Made in China”, but also from the world. Therefore, in a world with overproduction, the advantage of India’s large and young labour force cannot be overestimated. However, then there is the intense competition from across regions.
While India’s economy continues to slide, US data showed Asian exports to the USA were up significantly from June 2018 (a month before the trade war began), with Vietnam, Taiwan, Thailand, Indonesia and Malaysia all up. In addition to the Pacific Rim countries, on the Atlantic side, exports from Mexico soared 12.7 percent. Mexico and Canada, are now the USA’s top two trading partners. Some may think this has to do with the US-China trade war.
Generally speaking, while the world’s leading exporters (supply side) have been affected by the external environment, hampered by the world’s conservatism and rising sentiment, and also suffered a slight slowdown in economic growth, the economic performances of countries around the Pacific Rim and the Atlantic, such as Mexico, were still significantly better than India’s.
Therefore, the real challenge for India is intense regional competition. This is also the biggest pitfall of the India model. Today, China’s imports and exports still remain at a relatively high level. China’s trade volume in 2019 was RMB 31.54 trillion (US$ 4.6 trillion), up 3.4 percent over 2018. Production capacity of India’s major competitors has increased dramatically. Thus the problem of world overproduction will become more serious and competition more intense. India’s growth and its capital-driven model that emphasizes production expansion will inevitably be greatly affected. External factors will have a significant impact on the India model.
It is hard to say whether India will be ride out the crisis and return to high growth soon. This depends on the policy adjustment of Modi’s government, and also on whether the major importers implement monetary easing and artificially expand demand. In general, the challenges of overproduction are global, and thus inevitably affect India’s ambitions. In addition, estimates of factors like labour, cost, market size and technological progress in India cannot be overestimated. These are variables in the framework of time and regional competition and may not be decisive positive factors. The likelihood that the Indian economy will continue to be affected by external factors to come is high, and it is likely to become a global risk factor rather than a comprehensive and positive market factor.
