December 18, 2011
India in for a rough ride in 2012
The euphoria of the past five years is rapidly coming to an end in India. The discovery, in 2004-2006, of its potential to do well on the world arena was a pleasant surprise for most Indians, so depressed had their mindset been before that.
That discovery has not yet translated into ordinary self-confidence. Even today, Indians fear that somehow Walmart will take over India, just like the East India Company did. It doesn't strike them that such sentiment is absurd and totally divorced from reality.
A sense of deep despondency and lack of self-belief sets in when Indians see a foreign well-educated businessman. India's political parties have resisted FDI in retail as if the country was facing a direct military attack by Robert Clive, not a competitive commonplace battle for grocery supply with Walmart.
Indians talk themselves up when no one else is looking (e.g. "Shining India", "Incredible India", India the superpower, and other such bogus mantras). Unlike all well-established nations that don't need patriotic songs to keep them together, India needs a huge repertoire of heroic melodies on TV and radio, and no end of gloating about its ancient past. Without such incessant song for its glorious past, it would appear that India can't survive as a single unit.
All these are signs of someone with a DEEP INFERIORITY COMPLEX.
When competition approaches (even for grocery supply), this high talk and great song disappears, and Indians flee – tails between their legs! RSS and BJP, the so-called proponents of India's "greatness" and "glory" ("Hindutva") lead in the display of TOTAL, rank cowardice.
This half-baked pride, coupled with deep timorousness – like a manic-depressive's unfortunate state of mind – arises from the knowledge (not publicly admitted) that India's useless, socialist education is GROSSLY INADEQUATE for the modern world. This timorousness is based on the sub-consciousness understanding that something is deeply wrong with India, that this "superpower" thing that India talks about is a sham, that the "emperor" is without clothes.
This inability to decide whether it is a land of cowards (with RSS and BJP being its Head Cowards) or a land of the Free (led by FTI), has caused great confusion in India. This confusion sets the context for its rush into economic turbulence today, which it can't avoid given the quality of its governance.
Today, the Keynesians have brought the USA to its knees. The European saga of excessive public debt, driven by a major Keynesian "stimulus", threatens massive loss of wealth among ordinary Europeans. China is therefore wobbling, with rapidly shrinking demand that is forcing the shut down of hundreds of factories.
In the midst of all this, people somehow assume that India will chug along as usual, forgetting that it is still a deeply socialist country. Things are now coming to a head, and India is showing signs of a slowdown that will disrupt economic growth and revert millions of Indians back into deep poverty. All signs are pointing in one direction.
India's inflation rates are very high: around 10 per cent today. The most significant sign of a Third World economy is uncontrolled inflation. India's has always had uncontrolled inflation till its liberalisation allowed it to grow and produce more efficiently, thus lowering inflation. But it is clear (see chart below) that India is reverting to trend rates of high socialist inflation.
But inflation is merely the tip of India's problems. To try to curb inflation, interest rates have been raised to 8.5 per cent, making manufacturing a huge risk. Manufacturing growth rates are therefore steeply down. More problematically, wage growth is unsustainably high (average salaries rose 15 per cent last year).
It is not well understood by many India commentators that its talent pool is very shallow. The students of IITs and other top institutions like the Delhi School of Economics are outstanding, but they are snapped up like hot cakes. Students from second tier universities don't come even a distant second in terms of quality.
Australian newspapers are lamenting the lack of basic English skills among Indian students now coming to Australia: students who are more representative of the third-rate socialist education system of India than those who generally go to top private schools and study in IITs. This second tier of Indian students won't get jobs either in Australia or India – so low is their average productivity.
In 2010, the IMF noted that "simulations suggest that a debt ratio in the range of 60-65 percent of GDP by 2015/16 might be suitable for India" [Source]. Disconcertingly, this high level of public debt seems to have been ALREADY achieved – in 2011; with no signs of a slowdown in growth.
This level of debt might not sound much (in comparison with USA and Europe), but total government spending in India is around 18 per cent of GDP. At such low levels of taxation, the interest burden on 65 per cent debt is crushing. The first cost centre to be curbed is public sector salaries, which further increases much-lamented corruption. The fiscal deficit is currently running at around 6.5 per cent of GDP, and will go up substantially unless the tax base is dramatically widened and tax collection made free of endemic corruption.
There are no signs that India's political parties understand how to fix this chronic problem. Instead of genuine governance reform, they are being forced to create (by the street pressure of Anna Hazare) a most useless organisation (Lokpal) that will do absolutely nothing to curb corruption, but may well dramatically increase public sector inefficiency along the way.
Most problematic of all, for the short term, is excessive private debt. It seems that in the midst of recent euphoria, Indian companies borrowed massive quantities from abroad. The capacity of companies to repay this debt is rapidly dwindling, particularly given the steeply depreciating rupee.
2012 is crunch time for India. A lot of wealth is likely to be wiped out. I note that India is trying to establish a Debt Management Office to "deal with" not just public but also private debt (as if such a thing can be debt with a petty government office).
Is this diagnosis correct?
I havent' had time to explore this issue in depth, but my reading is clear: that 2012 is going to be particularly rough for India. Like all economists I do know one thing, though – that most of my predictions are certain to be wrong. So please send in your thoughts to correct my pessimism. I do hope I'm wrong.