Last March I had to answer an analysis question on whether or not India can keep up its 8.5-10% growth. With inflation then raching 7.5%, its deficit 6% of GDP, its national debt close to 80% of GDP, the Government’s lack of infrastructure spending, excessive transfer payments for populist schemes and with a vast majority of the population earning less than $2 a day, I took a stand that the current growth was not sustainable and expected a slowdown. I compared it with China which despite its high inflation could control it by letting its currency float freely and with its National Debt just 15% of its GDP had lots of room to fund its growth.
Business Week writes
Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. “India has gone from hero to zero in six months,” says Andrew Holland, head of proprietary trading at Merrill Lynch India (MER) in Mumbai.
The Oil price shock once again hastened what would have been a gradual slowdown process. Inlation is a big concern hitting 14%. So far this has not lead to labors demanding higher salary but once that happens, the inflation is bound to spiral out of control. The Government has been subsidizing Petrol and Diesel prices artificially. With its deficit mounting and rupee falling, and the higher import prices of the Oil, the subsidies have to go. This will lead further price increases and further strain the population that lives on less than $2 a day.
Just like the shock is sudden, India’s growth came at a fast pace without any strategic action by the Government. There is infrastructure to support this growth, no even wealth allocation, no investment in primary education and labor training. An year ago the Business Week wrote about India as “Bursting at the Seam
s”. Now the global macroeconomic conditions have placed a considerable roadblock in India’s path.
A Goldman Sachs report released in June a report on India’s potential to grow 40 times by 2050 and the 10 things it needs to do to get there. For the record that would be 3-4 times current US economy. Those are steps the Government should have taken 5-10 years ago, when the economy was still healthy. Now we are in a ER room and looking at triage. Let alone quadrupling, if India wants to prevent social unrest and save its millions from starving, it needs some drastic steps now.
I would start with improving tax collection and re-purposing Government spending. But with elections around the corner, the Government may not have the courage to act. The problem is inaction is not enough in the ER room when the patient is bleeding.