(Bloomberg) — Thirty years ago, on a summer evening in late July, India liberalized its Soviet-style economy in a transformation that eventually pulled about 300 million out of poverty, fueling one of the biggest wealth creations in history.
Then came the world’s fastest coronavirus surge which left overflowing hospitals turning away the dying and crematorium smoke darkening city skies.
Years, and perhaps decades, of progress have been unwound in months, as many Indians who had clawed their way out of poverty face grim job prospects and carry heavy debt loads wracked up to get themselves and loved ones through the pandemic. The devastation has highlighted just how much poor health care and infrastructure — often neglected in the boom after liberalization — are holding back the nation and its people.
More than 200 million have gone back to earning less than minimum wage, or $5, a day, the Bangalore-based Azim Premji University calculates. The middle class, the engine of the consumer economy, shrank by 32 million in 2020, according to the Pew Research Institute. That means India will be regressing on vital fronts just as its global importance is growing.
This decade, India is expected to become the world’s most populated nation, taking that mantle from China, which for years drove global growth. But the Indian economy is grappling with big threats even as it becomes home to the kind of young, working-age population that drove lengthy booms in other nations.
“We’re talking about a decade of lost opportunities and setback,” said Arvind Subramanian, a fellow at Brown University and a former chief economic advisor to Prime Minister Narendra Modi’s administration. “Unless there are some big reforms and fundamental changes in the way economic policy is done, you’re not going to be anywhere close to what we saw in the boom years. A lot needs to happen in order to get back to the 7%, 8% growth that we desperately need.”
Even before the pandemic, cracks had begun to emerge. Modi came to power in 2014 amid voter frustration over scandals and policy paralysis that had contributed to bad loans at banks and threatened to derail Indian growth. Yet, the economy has faced other hurdles in recent years including Modi’s 2016 cash ban, which roiled the informal sector, and a hurriedly implemented new tax system.
Modi had pledged to turn India into a $5 trillion economy by 2025, but the pandemic is set to push that back by years. The International Monetary Fund expects India to grow 6.9% in the next fiscal year that starts in April 2022, lower than the more than 8% needed long term to reach Modi’s ambitious target and create jobs for the millions entering the work force.
Jim O’Neill, chairman of Chatham House in London — who coined the term BRICs to describe the emerging markets of Brazil, Russia, India and China while serving as a top Goldman Sachs Group Inc. economist — is these days cautious on India, largely because the government hasn’t made many of the long-term structural changes he believes are needed for it to reach its full potential.
When still at Goldman Sachs, O’Neill says he presented a paper to Modi in 2013, before he became prime minister, recommending 10 things that would allow the Indian economy to be 40 times larger by 2050. The list included making substantial improvements to areas like infrastructure, education, introducing better public-private partnerships in areas like healthcare, further liberalizing financial markets and working on environmental issues. Modi hasn’t fully pursued these ideas, O’Neill said.
“India’s got these fantastic demographics, which should have given it the potential to be rising a lot more strongly, possibly at the same kind of double digit rates China enjoyed for a long time,” O’Neill said. Yet “the Indian system seems to quite often smother itself, as we’ve seen sadly a few times during the Covid pandemic,” he said.
A government spokesperson didn’t respond to request for comment, but the Modi administration has in recent weeks acknowledged the need for longer term changes. “If we are looking at getting growth — of 8%-10% — back on a sustainable path, we have to think about not just a current revival,” Sanjeev Sanyal, the government’s principal economic adviser, said at the India Global Forum on June 30. Structural changes are needed and to that end the government is constantly opening up new sectors of the economy, he said.
Once the fastest-growing major economy, India saw its biggest ever contraction last year — shrinking more than 7% — after a stringent nationwide lockdown. Just when the economy started showing some momentum, another wave of infections hit the nation. This year, the central bank expects India to grow at 9.5%, sharply lower than the double-digit rebound many had earlier expected. That estimate is heavily boosted by the comparison with the sharp contraction of the previous year, and many economists expect it could be pared even further.
Foreign direct investment surged 19% last year, but even that remains lower as a percentage of GDP compared with countries like Singapore and Vietnam. And a big portion of the foreign investment went to billionaire Mukesh Ambani’s digital platforms.
Some experts, including former central bank head Duvvuri Subbarao, have warned of a K-shaped recovery for India, where the rich get richer and poor get poorer. “Growing inequalities are not just a moral issue,” said Subbarao. “They can erode consumption and hurt our long-term growth prospects.”
The of the two richest men in Asia – Ambani and ports magnate Gautam Adani — are Indians, and their net worth has surged as stocks rallied on the back of cheap liquidity worldwide and tax cuts for companies even as economic growth slumped. Meanwhile, overall Indian wealth — or the value of financial and real assets owned by households minus debts — fell by $594 billion, or 4.4%, in 2020, according to Credit Suisse Group AG.
Thirty years ago, India was forced to remake its economy. A mammoth trade deficit and plunging foreign exchange reserves necessitated a loan from the International Monetary Fund. On July 24, 1991, then finance minister, Manmohan Singh, announced major steps to cut tariffs and encourage trade, essentially opening up the economy to the outside world.
In the boom that followed liberalization, growth crossed 8%. Technology giants like Infosys were born and start-ups worth billions are now mushrooming in Bangalore. A new middle class emerged that watched Netflix and shopped online on Amazon. In the south, the Wistron factory won special economic benefits to assemble Apple iPhones. India became the world’s biggest supplier of generic medicines and the Serum Institute of India became the world’s biggest vaccine maker. An Indian exchange now handles the world’s highest number of derivatives contracts.
Yet there were signs that India wasn’t hitting its full potential. Average GDP growth of 6.2% over 30 years has been lower than China’s 9.2% and even lagged Vietnam’s 6.7%. For years, Indians have been living shorter lives and are now earning less on average than people in smaller nations like Bangladesh.
Vast inequities developed. Researchers have found wealthier people in urban areas and from upper castes were taller in India, a sign of development favoring groups that were already advantaged. The percentage of women joining the workforce fell from 30.3% in 1991 to about 21% in 2019, according to data from the International Labor Organization. India’s government spent less than 2% of GDP on healthcare before the pandemic.
“Had the healthcare system not been so neglected for so long, India would have been prepared to face the Covid-19 crisis,” said Jean Dreze, the Belgian-born Indian economist and a lecturer at Delhi University. “Had India built a more robust social security system, the humanitarian toll of the crisis would not have been so catastrophic.”
Unlike the old guard in 1991, Modi has turned the economy more inward, focusing on self-reliance and homegrown companies. Despite championing free trade in global forums, he’s raised tariffs on goods including electronics and medical equipment, partly reflecting global trends.
Some of those decisions came back to haunt India when citizens struggled to import life-saving products like oxygen concentrators during the pandemic. Top scientists wrote to Modi, asking him to reverse protectionist duties imposed on key items needed to study the coronavirus and its variants including the delta one, which now threatens the globe.
After pledging to contribute to global vaccine programs, the Modi government slowed exports of Covid-19 shots, derailing the inoculation program of a World Health Organization-backed initiative.
“India’s ambition of being seen as a major player on the world stage has taken a substantial hit as the pandemic has laid bare the weaknesses in the capacity and competence of its government,” said Eswar Prasad, professor of trade policy at Cornell University.
The key question for global investors now is whether India will get old before Indians get rich. Netflix is counting on India for its next 100 million customers. Bezos is pouring billions of dollars — and even braving Indian courts — to battle India’s richest man Ambani for a slice of the only open retail market with more than a billion people.“The pandemic has set us back hugely, and we were already on a growth downswing when it happened,” said Indira Rajaraman, an economist and a former member of the Reserve Bank of India’s board. “Going forward it all depends on how cleverly we design the way we come out of these doldrums.”
©2021 Bloomberg L.P.
China's Economy Improves in June From Lockdown-Induced Slump – BNN
(Bloomberg) — China’s economy showed some improvement in June as Covid restrictions were gradually eased, although the recovery remains muted.
That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge returned to the neutral level after deteriorating for two straight months.
Economic activity picked up in June after financial hub Shanghai lifted its lockdown, allowing businesses to restart and most residents to leave their homes. That can be seen in a rebound in small business confidence, which started growing again after contracting for two months.
A survey of more than 500 smaller firms showed that “demand and production recovered strongly among manufacturing,” and export-oriented smaller firms outperformed, according to Hunter Chan and Ding Shuang, economists at Standard Chartered Plc.
However, “the manufacturing recovery was more significant than services,” they said. Contact-intensive industries such as retail and catering continued to be a drag, while real estate, transport and information technology reported an acceleration in activity and construction jumped.
Rising activity isn’t translating into higher demand for some building materials yet. More steel plants have been idled and inventory levels at major Chinese steel mills have climbed 10.7% in mid-June from earlier in the month, and are about 82% higher than the start of this year. Stocks of steel rebar, which is used in construction, rose slightly in June.
Beijing has pledged to boost policy measures to support growth, with President Xi Jinping saying last week China would strive to meet its goals for the year. Stocks were up for a fourth week on optimism of stimulus and as lockdowns ended, with foreign inflows rising.
However, the housing sector continued to be a drag on the economy. Property sales declined in the first three weeks of June in the top four cities in China, even though sales in Shanghai last week had mostly recovered to the level before the lockdown.
An official index that tracks apartment and home sales has now declined for 11 straight months — a record since China created a private property market in the 1990s. The slump likely continued into June, with weekly sales in the top 50 cities contracting from the level last year.
Read more: China’s Property Slump Is a Bigger Threat Than Its Lockdowns
The car market is making a gradually recovery after the lockdowns. Based on sales in the first two weeks of this month, more cars were sold in June than the same period in 2021. Sales fell in the past three months as Covid restrictions caused car plants and dealerships to shut and also prevented people across the country from leaving their homes to go shopping.
Total retail sales also dropped in that period, with the economies of Beijing and Shanghai the worst hit.
The recovery in the services industry will likely take longer than for goods. Consumers are still unwilling or unable to go out as much as before since China’s strict Covid Zero policy means they face being quarantined for weeks if they’ve been in the same location as a positive case.
The restrictions and factory closures of the past months have also curbed the incomes of many businesses and workers, even if they weren’t locked down.
Read more: Even Without a Lockdown, Beijing’s Economy Struggled in May
The export sector likely supported demand in June, as companies ramped up shipments that had been delayed and ports worked to clear the backlog of containers. Although South Korean exports in the first 20 days of the month fell for the first time in more than a year, that was largely because of fewer working days this year than last.
The daily average value of Korean shipments rose 11% in the period from the same time in 2021. Exports have been a strong driver for China’s economy and the strong growth continues to defy predictions that they would slow markedly or start to fall.
Read more: Metals Haven’t Crashed This Hard Since the Great Recession
The outlook for those shipments in the rest of this year depends on whether rising concerns about a global recession are correct or not. The price of copper had its steepest weekly loss in a year last week as global recession fears mounted, damping the outlook for demand and battering commodities from oil to metals. The metal used in wires and cables extended its weekly loss to 7%, with prices hitting the lowest level since February last year following disappointing US business activity data that included an abrupt cooling in manufacturing.
Bloomberg Economics generates the overall activity reading by aggregating a three-month weighted average of the monthly changes of eight indicators, which are based on business surveys or market prices.
- Major onshore stocks – CSI 300 index of A-share stocks listed in Shanghai or Shenzhen (through market close on 25th of the month).
- Total floor area of home sales in China’s four Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen).
- Inventory of steel rebar, used for reinforcing in construction (in 10,000 metric tons). Falling inventory is a sign of rising demand.
- Copper prices – Spot price for refined copper in Shanghai market (yuan/metric ton).
- South Korean exports – South Korean exports in the first 20 days of each month (year-on-year change).
- Factory inflation tracker – Bloomberg Economics-created tracker for Chinese producer prices (year-on-year change).
- Small and medium-sized business confidence – Survey of companies conducted by Standard Chartered.
- Passenger car sales – Monthly result calculated from the weekly average sales data released by the China Passenger Car Association.
©2022 Bloomberg L.P.
BIS warns economies are approaching 'tipping point' where high inflation becomes entrenched – The Globe and Mail
Many economies are approaching a tipping point where high inflation becomes normal while economic growth slows sharply, the Bank for International Settlements warned in its annual report published Sunday.
Countries around the world are facing a dangerous cocktail of high inflation, slowing economic growth and heightened financial vulnerabilities tied to high debt levels and rising interest rates, said the BIS, which acts as a bank for the world’s central banks.
This may quickly turn into a period of stagflation resembling the high-inflation and low-growth era of 1970s and early 1980s, the organization said. It argued that economic policy makers around the world need to move rapidly to halt inflation, even if that means causing significant economic hardship.
“We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift,” the BIS said.
Central banks around the world have stepped up the pace of interest rate increases in recent months to try to tame inflation. Two weeks ago, the U.S. Federal Reserve announced the largest interest rate hike since 1994. The Bank of Canada has increased its benchmark rate at three consecutive rate decisions, and hinted that it is considering a supersized 0.75 percentage point rate increase in July. That would be three times the size of a normal rate hike.
Interest rate increases lower demand in the economy, which can help bring down the pace of consumer price growth. But higher interest rates can also push the economy into a recession, as steeper borrowing costs curtail consumer spending and business investment, and push up unemployment.
“The overriding near-term challenge is to prevent the global economy from shifting from a low- to a high-inflation regime. In doing so, policy makers will need to limit the costs to the economy as far as possible and to safeguard financial stability. Some pain, however, will be inevitable,” the BIS said.
Getting inflation under control won’t be easy, the organization warned. The recent commodity price shock tied to Russia’s invasion of Ukraine has added to multiple inflationary pressures that have been building over the past year. This resembles the oil price shocks in the 1970s that pushed the United States, Canada and other countries into a period of high inflation, high unemployment and low economic growth known as stagflation.
The situation today, however, could be even more dangerous than in earlier periods of stagflation because of the amount of debt – particularly housing market debt – that has built up over more than a decade of ultra-low interest rates, the BIS warned. It called the current combination of soaring inflation and elevated financial vulnerabilities “historically unprecedented.”
“Unlike in the past, stagflation today would occur alongside heightened financial vulnerabilities, including stretched asset prices and high debt levels, which could magnify any growth slowdown,” it said.
As they push interest rates higher, central banks are trying to engineer a soft landing – a situation where inflation comes down without a sharp slowdown in economic activity or significant rise in unemployment. Top central bankers, including Fed chair Jerome Powell and Bank of Canada Governor Tiff Macklem, have said in recent weeks they believe a soft landing is possible, although they acknowledge that it is getting more difficult.
The BIS poured cold water on the probability of a soft landing in its report. BIS economists looked at monetary policy tightening cycles in 35 countries between 1985 and 2018, and concluded that about half of them resulted in a soft landing – that is, did not end in a recession.
However, further analysis showed that recessions were more likely if rate hikes followed a period of ultralow borrowing costs and a build-up of financial vulnerabilities. That is the situation Canada and many other advanced economies are in today.
“A hard landing may not be foreordained,” Columbia University professor Adam Tooze wrote in a newsletter commenting on the BIS report. “But what the BIS is telling us, is that central bankers have never attempted to stop an inflation as rapid as the one we have seen in the first half of 2022, with the level of debt build-up we have seen since the early 2000s.”
The BIS is not alone in its grim prognosis. Earlier this month, the World Bank cut its 2022 global growth forecast to 2.9 per cent from a 4.1-per-cent forecast in January, and said that “the danger of stagflation is considerable today.”
Much of the BIS report focused on the changing dynamics of inflation, which is surging across large parts of the globe for the first time in decades. The annual rate of inflation hit a 39-year-high of 7.7 per cent in May in Canada, the highest since 1983. It averaged 9.2 per cent in April across countries in the Organization for Economic Co-operation and Development.
The BIS noted that once economies shift into periods of high inflation, consumer price increases become self-reinforcing. Businesses and consumers start paying more attention to rising prices and start behaving differently, respectively setting higher prices and demanding higher wages to protect their margins and purchasing power.
“Whether inflation becomes entrenched or not ultimately depends on whether wage-price spirals will develop. The risk should not be underestimated, owing to the inherent dynamics of transitions from low- to high-inflation regimes,” the BIS said.
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India's Economy Shows Spark on Pent-Up Demand After Reopenings – BNN
(Bloomberg) — India’s economy gathered momentum in May driven by pent up demand for services and higher output from industries as reopening continued from pandemic restrictions.
Five of the eight high-frequency indicators compiled by Bloomberg News showed improvement, pushing the needle on a dial measuring so-called ‘Animal Spirits’ to 6, from 5, for the first time since July and the first upward move in more than a year. The gauge is based on the three-month weighted average scores to smoothen out volatility in the single-month readings.
The upturn was fueled by an expansion in services activity and a robust growth in core infrastructure industries. However, an unprecedented rise in input prices, due in part to Russia’s invasion of Ukraine and persistent demand-supply imbalances, may spoil sentiment going forward.
Higher food, fuel, labor and transportation costs are forcing central banks globally to prioritize price stability over growth. The Reserve Bank of India has raised borrowing costs by 90 basis points so far this year and vows to do more to bring price gains below its target ceiling of 6%.
Erratic weather and an uptick in virus cases risks also impeding the recovery. The number of daily virus cases increased about sixfold in the last one month.
Below are details of the dashboard. (For an alternative gauge of growth trends, follow Bloomberg Economics’ monthly GDP tracker — a weighted index of 11 indicators.)
Purchasing managers’ surveys showed activity in India’s dominant services sector in May rose to the highest level in eleven years, while momentum in the manufacturing sector remained steady. That helped pull the S&P Global India Composite PMI to the 10th consecutive month of expansion.
Inflation expectations, though, continued to weigh on business confidence as input costs climbed to a new record, the survey showed. Companies will continue to transfer mounting costs to consumers going ahead, which could keep inflation elevated.
India’s trade deficit widened to an all-time high of $24.33 billion in May due to higher gold and petroleum imports. Official data showed that surging commodity prices kept merchandise imports above $60 billion for the third month in a row, while exports growth slowed due to geopolitical uncertainties.
India’s automobile sector saw another month of decline in May, but the extent of fall was smaller as some segments such as car and two-wheeler sales showed a pick-up from a month ago.
In other signs of consumer activity, bank credit grew 12.1% at the end of May, from 11.1% in April. Liquidity conditions also remained in surplus.
Two other key indicators of industrial activity, which are published with a one-month lag, showed robust growth in April. Factory output growth rose to a eight-month high of 7.1% from a year ago, led by a double-digit increase in electricity production, while manufacturing and mining also expanded at a healthy pace. A similar trend was seen in the output growth of eight infrastructure industries, which increased to 8.4% from 4.9% in March.
©2022 Bloomberg L.P.
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