India: Sizzling economy may be too hot

[bad_cheque]

By Indrajit Basu

KOLKATA - Call it the result of India's reforms or simply the fact that the elephant has finally begun to trot. For the first time, India has gate-crashed into the list of one of the fastest-growing economies in the world as the country's gross domestic product (GDP) - the favorite gauge of economists - exceeded a growth rate of 9%. India's rise is generating hopes that Asia's other giant is finally catching up with China, and becoming as dynamic; it is also generating warnings that, like China, it is overheating as well.
But from the overall performance viewpoint, the Indian economy is booming. It grew 9.2% in the second quarter and 9.1% in the first



half of the fiscal year 2006-07, which is the highest growth rate registered by the economy since the Central Statistics Office (CSO) started compiling quarterly GDP data (from 1996-97).

"That high oil prices and a series of interest rate hikes by the Reserve Bank of India [central bank], as well as certain inherent disadvantages like inadequate infrastructure and a government consisting of politically diverse interests have failed to dampen performance signals that the Indian economy is growing on its own steam," said Subir Gokran, executive and chief economist, CRISIL, an Indian rating agency. "But more notable is that this growth was not confined to just one or two sectors, but has encompassed the industry, services and a number of other sectors."

According to the CSO, significant growth in the second quarter of 2006-07 over the second quarter of 2005-06 was registered in manufacturing at 11.9%, electricity, gas and water supply at 7.7%, construction at 9.8%, trade, hotels, transport and communication at 13.9%, financing, insurance, real estate and business services at 9.5%, and community, social and personal services at 6.9%.

That said, high economic growth coupled with creeping inflation in manufactured products has also generated some concerns that the economy may be boiling over. "The issue of overheating relates to the fundamental question of whether the country is growing beyond its growth potential, thereby straining its labor force and capital stock and, hence, engendering inflationary instabilities," said the Mid-Year Review 2006-07 presented in the Indian parliament in late December.

Maverick US investor George Soros also echoed this concern in his first visit to India in December and said: "India is a booming economy; however, it also has to control excessive overheating."

Talk of overheating economies in Asia and invariably a comparison is drawn between China and India. Indian economists always prefer to believe that even though Indian economic growth is almost catching up with China's - the latest figures reveal that China is growing at 10.4% - the country is in much better stead. "China is relatively growing more, depending on its manufacturing sector, and the external market which is the United States," said Subir Gokran; "Whereas India is growing on the back of its burgeoning internal market that encompasses both manufacturing and services."

But according to The Economist magazine, despite widespread claims that China's economy is overheating, India may actually be more at risk. It says that although China's scorching growth may look more like a danger sign, the Indian economy carries more of the usual troubles. "Inflation is only 1.4% and China has a widening current-account surplus, which implies excess supply rather than excess demand."

"In contrast," added the publication, "India's economy displays an alarming number of signs that things have gone too far. Consumer-price inflation has risen to almost 7%, well above Asia's average rate of 2.5%."

Besides, stock market prices have risen by almost four times over the past four years and about 50% this year, leading to a bubble in other assets markets including property and bullion.

But according to Gokran of CRISIL, the biggest problem facing the Indian economy is that the growth process has not been adequately intensive. "For instance," he says, "though labor shortage in India has been widely talked about it exists only in certain sectors [primarily in services in a few high-tech manufacturing sectors]. However, there still aren't enough jobs for many people. This means that the growth has penetrated only until a certain level, which is clearly not enough."

This then raises the question of whether India can sustain its economic performance in the next few years. While most experts feel, and perhaps rightly so, that Indian conditions are currently poised to sustain the growth or even take it to about China's level in perhaps the next year, there are fears of tough times thereafter.
After all, this performance is more a result of a strong business cycle rather than a paradigm shift of a trend. "What leads to this [high economic growth] is the business cycle," said Mahesh Vyas, managing director and chief executive officer at the Center for Monitoring Indian Economy (CMIE), a private sector economic research institution. "India is back into the phase where local demand is booming."

"More importantly," said Arvind Panagariya, professor at Columbia University in the US, "India's growth story has been propelled principally by services. Moreover, within services the bulk of the output comes from unorganized activity such as trading, transportation and personal and community services. Organized services such as telecommunications, IT and banking are still a small proportion of the GDP."

Panagariya adds that in any miracle economy manufacturing has to grow significantly higher than services in the early stages of economic transformation. Therefore, to sustain the current growth rate manufacturing has to do much better. But there seems to be little hope on that front. "While China is continuously seeking to ease its capacity constraints, India is sort of hamstrung in its ability to move very quickly on infrastructure," said Gokran. "That's a big risk which should not manifest itself in the short term but in the longer term."

Still there may be hope. According to CMIE, manufacturing is catching up faster than expected, despite infrastructural constraints and restrictive labor laws. A recent survey conducted by CMIE revealed that the Indian manufacturing sector had received fresh investment proposal worth over $130 billion in the past three months (ending November 2006). "This is remarkable," said Vyas, "because three years back fresh investment proposals were one-sixth of that figure in a whole year."

"So there is demand-driven growth in the country in which Indians are happy to splurge in the mall, buy a second car, buy another house and fill them with white goods, all of which has led to higher capacity utilization and more investments," Vyas said.

Indrajit Basu is a Kolkata-based journalist.

[Space-Cowboy]

India has enough of a foothold such that keeping inflation under control shouldn't be a problem........ if the Indian govt. is smart, which I believe it is. Still, it is important to not get carried away by the Chindia hype. As it stands, there are no clear cut signs to definitively claim that India is growing beyond its growth potential.

[deception]

am i the only one who's shocked by the fact that india has only been compiling quarterly GDP figures since 1997-1997?

[bad_cheque]

Originally Posted by deception

am i the only one who's shocked by the fact that india has only been compiling quarterly GDP figures since 1997-1997?

I don't think they cared that much. Quarterly figures came into vogue because of the stock market. But they are important in understanding growth.