Lessons for India from other economies in the Asian region
The latest data on the Indian economy is not a pretty picture. Economic growth is at its lowest in six years, while inflation is at its highest in five years. There are good reasons to believe that there will be a mild growth recovery in the coming months while inflation moves back closer to the official target. Yet, the signs of economic stress are undeniable.
This is a good moment to take a look at the rest of the Asian region and especially at countries that are broadly at a comparable level of development as India. The data used for this column are World Bank estimates for economic activity in 2019. There are a lot of sobering lessons here. Four points are especially important.
First, India is no longer the fastest growing economy in the region. There are eight regional economies that are growing faster than India is at this point in time, including China, Cambodia, Indonesia, Myanmar, the Philippines, Vietnam, Bangladesh and Nepal. This is a diverse bunch of countries with diverse economic structures. The fact that they are all growing faster than India is a hard fact that Indian policymakers should not ignore. The old hubris has to be abandoned.
Second, many of these countries have experienced growth slowdowns in the past couple of years. Trade tensions, inventory de-stocking, weak corporate investment, new emission norms and the electronics technology cycle are some of the reasons that are usually trotted out to explain this broad regional economic slowdown.
However, a more detailed look tells us that it is a mixed picture. There are some countries that have lost momentum, including China, the Philippines and Nepal, some that have broadly maintained their rates of economic expansion, such as Cambodia, Indonesia, Vietnam and Myanmar, and one country that has actually accelerated in the midst of the regional slowdown, Bangladesh. There is no country that has slowed down as sharply as India has since 2017, by 2.2 percentage points. The upshot: The regional data suggests that the bulk of the Indian slowdown is because of domestic rather than global factors, including financial sector stress.
Third, most regional economies have macro stability indicators, fiscal and monetary, that are on par with India’s. India is a clear outlier when it comes to fiscal balances. The only other comparable regional economy that has a fiscal deficit in excess of 5% of gross domestic product (GDP) is China, though the actual number is likely to be far higher than the Indian fiscal deficit. The International Monetary Fund says that China is running a fiscal deficit that is in double-digit territory as a proportion of GDP.
China aside, most of the other regional Asian economies that have been considered in this analysis run relatively tight budgets, ranging from the Philippines (1.1%) and Cambodia (1.3%) to Vietnam (4.4%) and Bangladesh (4.8%). This essentially means that these countries have more policy space to increase public spending to support growth in case it falters.
What about inflation? Four of the eight Asian countries have average annual inflation that was higher than India’s in 2019. The other four have lower inflation. India is the median. This challenges the growing consensus in India that the pursuit of low inflation has wrecked growth, because there are countries such as the Philippines that are growing faster than India with lower inflation. The inflation records in different countries obviously depend a lot on the relative weights of food, manufactured goods and services in their respective price indices.
Fourth, it is well known that Vietnam and Bangladesh have got an early lead in the race to attract global supply chains that are moving away from China. They have been the principal beneficiaries of trade diversion. This column had pointed out in October 2018, using data from the United Nations Conference on Trade and Development, that greenfield foreign direct investment had a big role in the relocation of global supply chains.
Too much of the Indian public discourse gave up on manufacturing too early in the game, either citing a unique growth model based on services or arguing that automation was anyway killing manufacturing jobs. There is some truth in both these views, but it is also undeniable that India is missing the opportunities from the ongoing rewiring of supply chains. There is still reason for hope.
Take a look at manufacturing as a percentage of value added in the eight Asian countries considered in this column. China is obviously the leader, with manufacturing accounting for 20% of gross value added. India is at 15%, which does not compare too badly with Cambodia (16%), Indonesia (20%), the Philippines (19%), Vietnam (16%) and Bangladesh (18%). Nepal has a very weak industrial sector. This data suggests that there is still an opportunity for India to take advantage of the trade war, rather than prematurely throwing in the towel. That will need a policy framework that plugs India into global supply chains, rather than moving back into a protectionist shell.
Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics