India, China Industrial Growth Outlook Attached at Hip? Not So Fast

India and China are often linked in the same sentence in any conversation involving emerging markets, or when mentioning engines of global growth, or Asian powerhouses in general.

But in truth, apart from large populations, there is more to differentiate them than to bring them together.

One is a centralized communist state with a high level of party control, almost a command economy even after a decade of greater commercial freedom; the other is a decentralized gloriously robust democracy, with fundamentally weak government control of the economy and an appallingly chaotic bureaucracy.

The fact that both have achieved high levels of growth over the last decade or more and both weathered the financial collapse of 2008/9 much better than Western nations has more to do with momentum in their economies and a large degree of financial independence, rather than similarities in their economic models.

So while China is gradually engineering a slow course change from an export-based manufacturing economy to an internal consumption-driven economy (with some considerable success so far), despite many claims of catastrophic consequences, India’s declining rate of growth is less engineered than the result of a failure of government.

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So what does this mean for industrial metals markets?

Reforms that released a wave of investment and growth in the last decade have stalled in the face of political infighting and bureaucratic indecision. The most painful consequences for the economy have been faltering consumer confidence and, according to the FT, a sharp fall in private sector industrial spending.

Reforms promised by Mr. Singh’s government to restart stalled large-scale infrastructure projects have themselves failed to materialize, while falls in the rupee forced the Reserve Bank of India to tighten liquidity during July – meaning that hopes for imminent interest rate cuts have been replaced by worries that a worsening international environment could force the central bank to raise borrowing costs.

Meanwhile, GDP growth has slowed to below 5% while fixed investment growth has slowed to 1.7% in 2012-13 from 4.4% the previous year, an FT article reports. This GDP growth rate is the lowest for a decade and, without a recovery in the investment cycle, is unlikely to turn around in this fiscal year.

Indian industrial equipment makers have been announcing a string of downbeat results recently, leading to the benchmark capital goods index on the Bombay Stock Exchange falling nearly a quarter over the past three months. The rupee has fallen about 9% against the US dollar in the same period, potentially bolstering exporters, but making life tough for those dependent on imports, while the fall in profitability of India’s industrial conglomerates does not bode well for investment over the coming year.

As a separate article quotes Leif Eskesen, chief economist for India & Asean at HSBC, as saying: “The bottom line is that the recovery in the investment cycle will be very slow and very protracted, and at the moment I think the likelihood is that the recovery won’t materialize at all in this fiscal year.”

Likely to get worse before it gets better, then.

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