Edward Hugh

Outlook for the Indian Economy

Hello again everyone,

You raise some interesting points.

Sadpuppy2

"So to summarize - yes, but not yet?"

Exactly. Just give this a little time. India has waited patiently over half a century, a couple more years isn't the end of the world.

Hi Yank,

"The "wild card" here is the future direction of oil prices. It is very hard for me to get behind the recent spike in the US dollar (USD) as making the case for much lower oil prices."

I agree completely. And remember, the higher dollar means a lower euro, so even though the dollar price is down, the euro one isn't down anything like so much.

But basically energy and food prices aren't being driven up by relative currency movements, but by long term growth dyanamics. A very important - and very populous - set of emerging market economies have just "broken loose" from the poverty to which they had been chained, and they are now growing very rapidly, at the same time as the "resource constraint" on food and energy means that the OECD countries are headed for some years of sub-par growth (aka stagflation). What this basically means is that the win-win increasing returns dynamic works as a strong tailwind for many of these emerging economies as investors can get both currency appreciation and stronger growth out of these economies and for some years to come.

Obviously the market can eventually correct for the food and energy supply constraint, but this needs time. Simply bringing a new generation of nuclear power plants on line would seem to need between now and 2020, and the sort of horizon is going to apply to effective alternative energy passenger transport. We have land available in places like Russia and the Ukraine, but they are short of people, so unless we open up globalisation to population movements like those seen at the end of the nineteenth century - which is unlikely for political reasons I think - then you are only going to see agricultural output grow through productivity yield, and hence demand is going to be constantly testing supply here as far forward as we can see.

Obviously as global growth slows, prices fall back - which is what we are seeing now, half of Europe is, imho, already in recession, as, probably, is Japan, and all the emerging markets are slowing.

But then, as prices drop back, countries like Brazil, India and Turkey simply accelerate again, as so prices will once more start to rise. I guess we can envisage this yo-yo type effect for some years to come now.

One last point. Not all emerging markets are the same. If you want to know more about what I think here you need to go round some of my country level blogs, but Russia and the CEE countries are very overstretched already, and I think the risk of a serious slowdown in China later this year is definitely non-negligible. My guess is that India will ultimately win the "great China context" hands down.

Hi dancingdiva,


"History looks like it is repeating itself. What makes you think the high level of growth in 2009 and 2010 can occur under since interest rates are likely to remain at a high level to curb inflation? Or was it something other than the high interest rates that had an impact on the 1997 economy?"

Well the key point that some people inside India are making - and I am endorsing - is that there has been a structural break in trend Indian growth around 2000. So the position looking backwards and looking forwards is not symmetrical.

There are various reasons for this structural break. One of them is almost certainly demographic - the age structure of the population moved from being a tremendous drag to being a significant advantage as the median age rose.

But also policies inside India have changed - slowly, but they have - and globalisation is offering significant advantages in things like capital flows and the possibilities for outsourcing.

So I think we can't really compare the inflation and growth tendencies pre- and post- 2000, and also for the sort of reasons I have just explained to yank.

Basically due to India's huge labour force reserve supply I think the "second round" inflation effects can be much better kept under control there than in many other countries, and if the government adopts some of the efficiency related structural reforms the possibility will exist to have inflation at a much lower level, interest rates down, and growth significantly up. At any rate this is the policy challenge, and I am optimistic that it will - at least partially - be risen to, whoever forms the next government. In other words, I see India going forwards, and not backwards. This is not Argentina or Venezuela.