Waiting for a Modi miracle: despite impressive growth figures, all is not well.

AuthorTwining, Daniel
PositionNarendra Modi

India is the shining star in the emerging-market pantheon. This is quite a transformation--only a few years ago Chinese growth was rampant while India looked to be falling ever further behind, with growth bottoming out below 5 percent. Today the tables have turned. India is the world's fastest-growing major economy: according to the Asian Development Bank, it grew 7.6 percent last year, and will grow 7.4 percent this year and 7.8 percent next year. While this is not the 9-10 percent annual GDP expansion India clocked a decade ago during the emerging-market boom years, it is perhaps more impressive in light of today's broader global slump. By contrast, China's "official" rate of growth was 6.9 percent last year, with a target of 6.5 percent this year and sinking; actual growth is likely lower as the economy slows, the workforce shrinks, and overcapacity and excessive leverage take their toll. Meanwhile, both the Russian and Brazilian economies are contracting due to the commodity bust and gross political malfeasance.

In this light, India's expansion is counter-cyclical as the rest of the emerging world slows down. "India is a light in a gloomy world economy," argues the Financial Times' Martin Wolf. The country is better-governed than its emerging-world peers; its income levels remain so low that its upside potential is greater than that of any other major market. Its infrastructure and investment requirements are such that India attracted more foreign direct investment in 2015 than any other country, including the United States and China, and could easily absorb more global investment capital than any other economy for years to come. To boot, India will soon possess the world's largest workforce, creating a demographic boon that could power rapid growth for decades. But its singular supply of raw human capital is also the country's Achilles heel: India's long-term performance hinges on its ability to productively employ a labor pool approaching one billion people.

Over the past few years, despite slowing global growth, India nonetheless has benefited from global tailwinds. As one of the world's largest energy importers, the collapse in the traded price of oil has been a windfall, enabling the government led by Prime Minister Narendra Modi to slash energy subsidies and reduce the current account and fiscal deficits. The plunge in commodity prices that hollowed out government budgets in countries such as Brazil and Russia has not negatively impacted India, since it is not primarily a commodity exporter.

Lower import prices have helped contain inflation, supporting the Reserve Bank of India's quest for price stability. RBI Governor Raghuram Rajan is on his way to meeting an official inflation target of 5 percent. This is an accomplishment in a rapidly growing country that suffers from structurally high rates of inflation, and creates space for interest rate cuts to boost economic activity. Nor is India heavily exposed to the Chinese market: strategic wariness between the competitive Asian giants has limited economic interdependence between them, so China's growth slowdown has not rocked India as it has other Asian markets.

While India's administrators have enjoyed a favorable set of global conditions supporting growth, they have also done some things right at home. Finance Minister Arun Jaitley has reduced a dangerously high fiscal deficit inherited from the previous administration to only 3.5 percent in the 2016-2017 fiscal year, restoring stability to government finances. The government's current budget forecasts nominal GDP growth of 11 percent this year, as against 8.6 percent last year, and anticipates revenue growth of 17 percent over the fiscal year. International Monetary Fund Managing Director Christine Lagarde has praised the government's channeling of investment into infrastructure development and cleanup of bank balance sheets weighted down by bad loans.

Corruption is down after the go-go years of the late Congress Party-led administration, when stunning amounts of money washed through Indian politics...

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