Great headline growth
Tuesday the 5th April India’s central bank cut the rate by 0.25 pct. and one could think that it was in honor of the recent fiscal budget which was praised by the central bank. It is not impossible that there is a connection but it is contrariwise no big surprise with the rate cut. The central bank had indicated that the continued decline in inflation could lead the way for lower interest rates. It probably cheers the medium-sized companies in India as they have long complained about the high-interest rates. The ongoing interest rate cuts that started last year I expect to contribute positively to domestic growth and the belief in the way forward.
OPTIMIZATION INSTEAD OF REFORMS
It was also quite remarkable that the country’s PMI index for the service sector rose to 54.3 in March as graphic one shows. The PMI index has not been higher in almost two years so there is a healthy base for an optimistic trust in a robust momentum in the domestic economy and demand. Surely, it confirms the assessment of the future economic growth in India is domestic-oriented. But what pay attention to is how much the government in India, in reality, can, and will, change the country’s economy by its own power and through major reforms. Right now the process rather looks like optimization of the existing economy combined with a large number of individual projects. Though I argue that India’s stock market since long has priced significantly bigger economic reforms in, which is a risk for the market.
Prime Minister Modi has implemented changes and some minor reforms, but it’s not major political reforms, which does not seem to be his intention – or he can’t as the opposition has the majority in the upper house. So far I conclude that there is no reason to expect the many big reforms that were the talk when Modi came into power. The positive development remains to be long-term and happens more through optimization rather than big reforms. Here is the payment of grants or pensions to destitute a good example (to own a bike can in India be enough to be considered wealthy).
It has long been a well-known secret that only a limited part of destitute pensioners in the country got their pensions because payments were intercepted by corrupt officials. I recently came across an analysis that dealt with the subject where the report indicated that only 20 pct. of all disbursements ended up where they should. Overtime comes, however, a solution to the problem due to technological advances. Today the technology to detect fingerprints and identification of the eye is so cheap and reliable that it increasingly is used for the registration and identification of the population in rural India. In the future disbursements are tied to such safe identifications of recipients so that the benefits end in the right hands.
THE TRICK WITH GDP GROWTH
It is yet another example of how India’s state budget will be utilized better within the existing framework and fiscal budget. In addition, the Indian government will be able to make some reforms but far more pronounced are projects and similar initiatives within the housing, infrastructure development, and development in the rural areas as such.
But very interestingly the Indian government must accept that global trends, such as urbanization, have far greater importance in the Indian economy than the government wants. Also in India, the big cities are growing dramatically like big cities are around the globe. I take it as one more example where the government in reality only to a limited extend manages the economy and certainly by no means radically changes it. But the government is making many good initiatives such as the new project favoring the construction of small and affordable houses. In the four largest cities it applies for homes up to 30 square meters where it’s up to 60 square meters in other cities. I regard these as exciting initiatives, but again, it is the optimization and not reforms.
The sum of government initiatives, the domestic momentum, rate cuts, etc. will probably be enough to keep the GDP growth at a high level. At least enough so India can maintain its position as the country with the highest GDP growth rate among the world’s largest economies – on paper. There is a nice big “but” about India’s GDP growth, which has existed since India changed the calculation methodology for the GDP growth.
When the statistical office in a country collects data it happens on current prices. To make the development historically comparable the economic data has to be adjusted for inflation. The correction factor is called a “deflator” which typically involves both the inflation that companies and households are experiencing. In most countries, there is almost no difference between the Whole Price Index (WPI) and the Consumer Price Index (CPI) but in India there traditionally is, and currently, the difference is very big. When the statistical office converts the GDP growth from the annual current prices (nominal growth rate) to historically comparable fixed prices (real growth rate) it is important that the “deflator” is properly set. With the big difference between the WPI and the CPI in India, it’s important that these two components are mixed correctly into the final “deflator”. Otherwise, it won’t the correct GDP growth rate in real terms that is calculated. The criticism from numerous economists is that the “deflator” contains too little of the high inflation from wholesale prices. The assessment among several well-respected economists is that India’s GDP growth more likely is 6 pct. instead of the official 7.5 pct. – It’s ok, as long as the investors remember it…..
