The economies we have come to term the “emerging markets” — if you read Jim O’Neill — we should now term “growth markets” with both surprise and, let’s face it, just a little envy.
While mature Western markets grow at 2-3 percent in the good times, those of China, India, Brazil and so on have achieved high single, even double-digit growth over recent years. Even the financial crisis of 2008/9 hardly dented their phenomenal rise, adding to our sense that they are all but immune to debt-laden Western economies’ travails.
We’ve seen China slow down over this year, but the slowing has been self-induced to tame inflation and we all had a sense that Beijing’s hold on the reins could be relaxed at any time if they wanted more growth (which is exactly what happened yesterday). Less is reported about India, the most populous country in the world with growth rates largely matching China’s, so the assumption goes they too must be doing well, particularly as their economy is more self-supporting as it relies more on domestic consumption rather than exports.
Actually, all is not well in the Indian economy as pressure mounts for some significant political action to avert a marked decline. Inflation has been ripping through the economy all year. According to a BBC report, the wholesale price index rose at an annual rate of 9.73 percent in October, up slightly on 9.72 percent in September despite 13 consecutive rises in the Reserve Bank of India’s (RBI) main repurchase rate since March 2010 such that it now stands at 8.5 percent. Critically, fuel price inflation is running at 14.79 percent and food inflation at 11.06 percent, causing social tension if not yet outright unrest.
So Does a Weak Rupee
Source: Financial Times
Even as global commodity prices have fallen recently, the rupee has fallen just as fast, making imports more expensive. Just since July, the rupee has fallen some 17 percent, undoubtedly helping exporters but creating a massive burden for Indian companies that turned to the global debt market during the last decade, taking on billions of dollars of debt in the form of dollar-denominated convertible bonds.
According to the FT, Indian companies face an overall short-term foreign debt maturity of $16 billion for the year ending in March 2012, a commitment that has sent shock waves through the stock market, pushing companies’ share prices down dramatically 57 percent for wind turbine maker Suzlon; 86 percent for Tata Motors.
Meanwhile, growth is, if not collapsing, then falling fast. From expectations of 9 percent growth for the next 12 months back in April, the economy is actually only achieving around 7 percent today, and down from 8.3 percent last year. The latest quarter’s fall was driven largely by a sharp decline in the rate of growth of manufacturing output, to 2.7 percent for the quarter compared with 7.8 percent in the same quarter last year. Mining activities actually contracted by 2.9 percent, down from 8 percent growth a year ago. Many economists who had expected growth for the year between 7 and 7.5 percent are now revising their estimates downwards.
Inflation is rightly identified as a major contributor to the current woes. Private enterprises like Honda manufacturing in the highly competitive motorcycle market cannot raise prices due competition level, yet input costs are rising fast: steel and rubber by 20 percent this year, the cost of money due to successive rises in the RBI’s rates, and rampant wage inflation. The cost of unskilled labor at the plant is rising 10 percent a year to keep pace with core inflation, but an engineer can expect a salary increase of 15 percent.
While still cheap by global standards, an entry-level assembly line worker is paid between 7,000 and 10,000 rupees ($145 and $207) a month and requires a week’s training before he takes up his tools. This only benefits firms with a large proportion of their product going for export. For firms selling largely in the domestic market, it is a real and rapidly rising cost. India has the highest inflation in any major emerging market and, in part due to the falling rupee, it is stubborn to fall from the 13-month high of 9.78 percent reached in August. Meanwhile, the rising cost of money has been a disincentive to invest in new capacity or to hire workers particularly among the primary industries, many of which are still under state control and are recognized as a major constraint on the economy.
As in the past, economic reform in India only comes when serious economic problems force change on policy makers. Lacking the coherence and political will of China’s single-party state, India seems unable to fully embrace the market reforms needed to free the economy and achieve the growth of which it is capable. The next year is going to be almost as tough for India as many Western countries; certainly, the economy won’t contract, but growth will continue to slow, inflation will remain high and potential will continue to be wasted.