India, an Exception in a Disappointing Global Growth
According to the World Bank’s latest report on economic prospects, India stands out as the world’s fastest growing economy, forecasted to stay ahead in the next three years. By contrast, “2015 growth estimates for more than half of developing economies were further downgraded” noted the report, released bi-annually. Indeed, up from a strong 7.3% growth in the current year, India’s economy is expected to grow by 7.8% in the next financial year, and the two following years at 7.9%.
Arsha Consulting explores the key take-aways on global growth from the World Bank’s Global Economic Prospects report [PDF – 17 MB], with a focus on the Indian subcontinent and its trading environment.
A bright spot in a dull context
As the prospects continue to worsen for developing countries, global trade is slowing down, the financial market is increasingly volatile and the capital inflows are substantially reducing. External and domestic factors have both contributed to the slowdown of developing countries’ growth to 4.3% in 2015, weakest year since 2009.
In emerging and developing economies, persistent growth slowdown has resulted in forecast downgrades, with the largest emerging markets experiencing the more significant revisions to their long-term forecasts. Explanatory factors include low commodity prices, weak global trade and slow productivity growth. In addition to that, the developing countries will likely face rising borrowing costs with rising US interest rates.
However, not only does India stand out in the global economy, it is also noteworthy that four out of the five BRICS countries (Brazil, Russia, India, China and South Africa) are experiencing slowing activity, so the Indian exception is true even amongst its fellow BRICS countries.
Indeed, the Chinese economy, in a transition phase as it rebalances away from import and commodity intensive activities, continues to slow down. Both Brazil and the Russian Federation are experiencing above-target inflation and deteriorating public finances while in South Africa the growth is hindered by chronic power supply bottlenecks.
By contrast, Indian growth remained robust. The currency and stock markets have proved to be resilient over the past year, even in a context of global financial volatility, and the economic growth was boosted by strong investor sentiment and the positive effect of the recent fall in oil prices on real incomes. Coupled with the decline in food inflation, as India has a large share of food in its consumption basket, headline inflation has drastically reduced.
The improved conditions in India reflect on the rest of South Asia, the fastest growing among all developing regions with a projected growth at 7.5% in 2016-18 from 7% in 2015. The domestic policy reforms in India have reduced vulnerabilities and fiscal deficits have shrunk in South Asia at large, as a result of reduced energy subsidies and domestic policy efforts. In India, this fiscal consolidation has supported investment spending.
Indian specificities at play
Although India has seen its industrial momentum slow down, the investment is steadily growing, with a push from the government to invest in infrastructure, especially roads, railways and urban infrastructure.
The two consecutive years of drought have impacted farm output, with food price pressures starting to appear towards the end of the year, however, fiscal restraint is curbing demand-side pressures. Lower inflation has enabled central banks to cut policy rates to support activity. The fiscal consolidation has also reduced the central government’s deficit to nearly 4% of GDP, down from a 7.6% peak in 2009. Furthermore, along with Mexico and South Africa, India has decreased the share of its external debt in foreign denominations.
The critical GST and Land Acquisition reforms are still pending, but the government has made significant progress in energy, and has announced major reforms in November, to liberalise FDI (Foreign Direct Investment). The Central Bank has already liberalised the framework for foreign portfolio investment to attract long-term investors and take part in market development. In the South Asia region, 90% of portfolio and FDIs go to India.
Domestic demand is expected to drive the regional growth to 7.5% by 2017, and government efforts should result in investment growth and Public Private Partnerships (PPPs), as well as offset the impact of any tightening of borrowing conditions linked to US monetary policy. International energy prices at a low and domestic energy reforms will benefit energy intensive Indian firms.
Last but not least, the share of working age population is expected to keep growing over the next few decades, with an estimated 300 million working age adults to enter the labour force by 2040 in India alone.
Risks and challenges
Mostly reducing, the potential risks are linked to the fact that the upper house of parliament is not controlled by the ruling party, therefore it could be a barrier to the government’s legislative agenda. Investments could be delayed if the progress on land reforms were too slow, and private investment may slow down. The financing of PPPs could also pose a challenge. If the goods and services tax didn’t pass, the needed investment in infrastructure could be hindered, thus prolonging the current scenario of fragmented domestic markets.
South Asian trade dynamics
Still at a relatively low 20% or less of GDP, the trade flows between South Asia and the rest of the world are rising as a result of unilateral trade liberalisation measures introduced in the 1990s (Ahmad and Ghani 2007). In India, the growth is more services-based than in China - the FDI has seen its focus shift towards services as opposed to the traditional sectors of mining or industry, yet the demand for primary energy and metals has grown rapidly as well. The flows tend to be concentrated mostly on the European Union and United States but have recently shifted towards the Middle East, Asia and Africa. In fact, the trade of Middle East and North Africa (MENA region) with BRICS has tripled since 2000. Investments from India flowed into energy and public sector-linked investment in Nepal; chemicals, food processing, banking and garments production in Bangladesh, and a similarly diverse range of sectors in Sri Lanka over the past decade.
Amelie Chodron de Courcel | Senior Consultant International Trade