This story gave some context to the lecture I attended at the LSE a couple of weeks ago. The original title of this lecture would have been much to dull to introduce this post: “India – Macroeconomic Challenges, Some Reserve Bank Perspectives”. Until I arrived at the lecture I had not realised the speaker was in fact the Governor of the Reserve Bank of India (RBI), the Indian equivalent of Sir Mervyn King, Governor of the Bank of England.
I was quite surprised at the turnout in the middle of the afternoon but the timing allowed many students to attend. Many of the student attendees were of Indian origin, and from India it seemed, judging by the Hindi I heard around me. All seemed confident and many equipped with 2 mobile phones - presumably one for international calls and one for UK calls. There seemed to be an ease between the sexes and a lot of what might be considered flirting - which I hadn't expected, but probably a reflection of the more recent urban liberalising of modern India.
Before going I had been a little concerned about whether my economics knowledge would stand the test of time, having done economics A level and some at university. When I learnt the speaker, Dr Duvvuri Subbarao, was in fact the Governor of the RBI that did not ease my concern. But I needed not have worried; from the dark recesses of my brain I was soon attuned to growth rates, fiscal deficits, current account deficits, quantum and price elasticity.
Before the lecture the chairman Professor (Lord) Desai noted that the “global” recession was one that only affected the Western world; China and India, and the Far East generally were enjoying relatively high levels of growth.
Although most of the lecture was rather dry as one would expect from a central banker to a School of Economics Dr Subbarao did mention he was formerly a scientist, originally studying physics, before doing graduate studies in economics in the US. He started with quite a good joke saying that he knew exactly when the recession would end. Lehman Brothers had collapsed when he was originally appointed, and the recession had intensified when he was re-appointed for a second term. Dr Subbarao suggested that the audience take note of when he steps down as a marker for the end of the recession.
Dr Subbarao began with a review of the economic situation in India. Its growth rate of 5% is the worst for a decade – we in the UK would be grateful for 5% or even 3%. But India has 7% inflation, and high current account and fiscal deficits. He suggested growth had slowed in recent years because of lower levels of investment, low business confidence, and infrastructure / governance issues. “The Hindu Rate of Growth” – low growth in the years from independence to the early 90s was said to be 3.5%. Overall with the rise in population that would mean lower living standards.
I would have liked more detail on the infrastructure and governance issues (perhaps code for economic mismanagement, corruption and the rule of law). Later on Dr Subbarao did suggest that India cannot raise long term finance for infrastructure as its financial sector is not fully developed with less sophisticated bank lending and limited pension funds. As a contrast, although Dr Subbarao did not say this, China is building almost a power station a week (remember India’s power cuts of a year ago?) and new roads and high speed railways are being built aplenty. China is also building huge numbers of airports. Dr Subbarao did say that he thought there were financial schemes such as Private Public Partnerships (PPP) that may offer solutions – although that is horribly reminiscent of PPI for British readers. But PPP requires good governance and a working court system to effectively settle disputes.
Dr Subbarao focused on inflation although we were not told whether the RBI has explicit inflation targets. He attributed relatively high inflation to rising food prices – as rural incomes rise there is more demand for food, and meat – rising global commodity prices, in particular oil and coal, and the fiscal deficit. He suggested rising food prices were a sign of success in raising rural incomes. But with GDP / head of $1500 any increase in rural income would automatically translate to a rise in inflation. Inflation had dropped from 11% a couple of years ago but has stayed stubbornly high despite growth leveling off.
I read later – again in Robin Pagnamenta’s column – that Indian efforts to reduce poverty has had limited effects and compares badly to its neighbours. The University of Oxford reported that both Nepal and Bangladesh had cut their multidimensional poverty index far faster than India. With an economy growing strongly recently far more progress should be expected in addressing poverty. Little of the wealth India is creating is trickling down to assist the poor.
Dr Subbarao accepted one criticism of the RBI in that he has only instrument, interest rates, to tackle inflation. But he focused on the fact that he needs to encourage savings to help oil growth in infrastructure projects in particular. There was acceptance that the RBI needs to strike a balance and that it is not possible to lower inflation without forfeiting some growth. Another dilemma is that inflation affects the poor more than the rich. Dr Subbarao suggested that encouraging more infrastructure was vital to ease inflationary pressures. A rather vicious circle but the message I got was that inflation would be high for some time to come.
The conclusions were that “The India Growth Story” was still credible but that it needs to grow at 7-11% for 10-15 years. One cannot take people out of poverty at 5% growth.
I would have liked some comparisons with India’s chief rival China, but Dr Subbarao is a representative of the Indian state putting the best slant on India. In addition, some discussion on the nature / structure of the Indian economy would have been helpful e.g. services / manufacturing, rural / urban, plus whether these infrastructure bottlenecks can be resolved. This week’s Economist shows that while India is forecast to grow at 6.5% in 2013, China will grow at 8.5% with both suffering from the downturn in the world economy. Indian industrial production growth is 2.4%, China’s 9.9%, China has much lower inflation, a huge current account surplus while India has a continuing deficit.
My “takeaway” from the lecture was concern about the long-term future of the Indian economy. The Congress Party is committed to raising rural incomes, using schemes such as the National Rural Employment Guarantee Act, but this leads to inflation. Furthermore, faster rising middle and upper class incomes leads to increasing purchases of imported consumer goods and a consequent rise in inflation. Developing infrastructure is the means to increase living standards and help drive down inflation e.g. getting more domestic goods and food to the urban market, and also precipitating a strong manufacturing sector which is presently unable to rely on guaranteed electricity supplies. Contrasts with China are inevitable and while China has its own issues, corruption included, these do not significantly impact on the development of it economy.