Well, here I am, hard at it trying to write a review for this blog of
the latest Economist Intelligence Unit country risk report on India (which,
worry not, will follow in due course) and what I find myself doing is
revving-up on all cylinders to come back and point out some of the facts of
this life to all those people who spent their time during the second half
of 2006 arguing that India was overheating when it was busily growing away
at a mere 8%. In fact India’s growth has not only continued, it has
even accelerated slightly since the debate got started, growing at an 8.9%
year-on-year rate during the most recent quarter (following 9.1% and 9.3%
in the first and second quarters of calendar 2007, respectively). And far
from inflation shooting up and away through the roof it is currently not
too far from the Reserve Bank of India’s 5% target. Perhaps it is
towards China or Russia that people should be directing their attention, or
towards Eastern Europe, or even - god forbid - the eurozone, but India it
seems is one country where the “great overheating” argument is
steadily running out of steam. Of course there is one country which
everyone will readily admit is not overheating, and in comparison with the
rate of negative price increases they have on their hands in Japan
India’s inflation may seem serious, but I think we can safely leave
that topic on one side for today.
At this point I just want to repost part of a reply I gave to the Economist
when they had the kindness to try to answer some points I had raised about
the general quality of their economic coverage, and in particular about
what I take to be their obsession with ignoring the demographic component
in economic growth. For the Economist, it seems, growth and development is
a single issue item, and is all about insitutions, and institutional
quality. Which makes it kind of funny that Argentina, which must be among
the worst of the emerging economy pack in institutional quality is still
powering away, despite more or less openly manipulating their inflation
data.
Obviously institutions matter, but so does demography. This is not a one
horse race, or if you prefer, this particular horse doesn’t only run
on one leg.
The topic in question here is India’s potential growth rate.
Recent GDP performance at just under 9% must have been astounding many of
India’s critics, especially given the way inflation, despite all that
growth, has been kept pretty much under control.
So to go to the start of our story, back in September 2006, I posted a
piece here on this blog entitled “Uncharted Water” where I
argued precisely the following:
What is clear is that the Indian economy is currently gathering steam,
and this at a time when there is a general consensus that the political
will for reform isn’t what it used to be. Strange isn’t it?
My meaning here isn’t that reforms aren’t necessary, but
that there are other factors at work, and in particular demographic ones.
The importance of these demographic factors generally can be seen from the
fact that it is now the newly developing countries (China, India, Brazil,
Chile, Thailand, Turkey) who are pulling the global economy (and in the
process pushing up energy and commodity prices). The developed world -
which makes up say 50% of global GDP is growing much more slowly than the
developing world - and some of this for ageing related demographic reasons.
Global GDP is forecast to grow at a 5% annual rate this year, yet the US is
growing at around 3.5%, Japan 2.5% and the eurozone around 2%. So you tell
me, who is pulling who here?
