Students walk past a poster featuring a photograph of India’s Prime Minister Narendra Modi at an … [+] IACM Smart Learn Ltd. learning center in New Delhi, India, on Tuesday, Oct. 10, 2017. By 2026, 64 percent of Indians are expected to be in the working age group of 15-59 years, making it home to the largest workforce in the world. Yet the government’s much-touted goal of providing skills training to 400 million people by 2022 is unlikely to be met, increasing the already significant unemployment burden in a country where 69 percent of jobs are under threat from automation. Photographer: Anindito Mukherjee/Bloomberg
India’s economy isn’t doing well during Prime Minister Modi’s second term.
Major economic indicators released recently point to a major slow-down that parallels that of the early 1990s. Real GDP is growing at 4.5%, the lowest in the last five years. Production of industrial goods is flat, while the production of investment goods is declining (again, the worst showing in the last five years).
Then there’s the unemployment rate, which reached an all-time high of 8.50 in October.
These are dismal numbers for a large emerging market economy, which was growing at brisk rates a couple of years ago.
Still, there is one bright spot: the equity market, which is rallying to new highs.
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Koyfin
But that won’t last long if the economy continues to falter. Listed firms are part of the economy, and their shares will eventually follow its pace.
What’s going on with the Indian economy? The country’s two major key drivers, exports and investments have decelerated, following the Global Financial Crisis (GFC).
That’s according to a recent working paper from the Center for International Development at Harvard University, titled “India’s Great Slowdown: What Happened? What’s the Way Out?”
“Export growth slowed sharply as world trade stagnated, while investment fell victim to a homegrown Balance Sheet crisis, which came in two waves,” writes Arvind Subramanian and Josh Felman, authors of the paper. “The first wave—the Twin Balance Sheet crisis, encompassing banks and infrastructure companies—arrived when the infrastructure projects started during India’s investment boom of the mid-2000s began to go sour.”
Nonetheless “the economy continued to grow, despite temporary, adverse demonetization and GST shocks, propelled first by income gains from the large fall in international oil prices, then by government spending and a non-bank financial company (NBFC)-led credit boom. This credit boom financed unsustainable real estate inventory accumulation, inflating a bubble that finally burst in 2019.”
It’s well-known what happens to an economy when a bubble bursts. “Consequently, consumption too has now sputtered, causing growth to collapse” add Subramanian and Felman. “As a result, India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies—and is trapped in an adverse interest-growth dynamic, in which risk aversion is leading to high-interest rates, depressing growth, and generating more risk aversion.”
What’s the Modi government been doing to avert the situation? Several things according to Udayan Roy, Professor of Economics at LIU Post. Like a large cut in the corporate tax, and the resumption of the Privatization of Public Sector Units.
Meanwhile, the Reserve Bank of India (RBI) has eased monetary policy by cutting its main interest rate by 135 basis points.
That’s one of the largest cuts in India’s history.
But these measures haven’t been working, due to a “credit crunch,” according to Roy.
“The monetary transmission mechanism has broken down,” he says. “Even though the RBI is trying to pump money into the economy, lending is not growing (because a business doesn’t want to borrow; there is no demand for loans because the prospects look uncertain). Investment is stagnant.”
And that makes the current situation strangely very similar to the US after the global financial crisis, according to his theory.
“After the global financial crisis of 2008-09 ended, Indian banks began giving loans liberally to infrastructure-building firms,” Roy explains. “These projects ended up unsuccessful and the infrastructure companies began to fail. They could not repay their loans. So, the banks cut back on lending. This began to hurt investment and exports.”
Simply put, monetary easing doesn’t work under these conditions.
What’s the solution? “The government will have to find a way to make the banks and the NBFCs less afraid to lend,” he says. “That’s the only way out.”
This means that Prime Minister Modi has a hard job ahead in his second term.
OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.
She says the changes will come into force in December and better reflect the housing market.
The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.
Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.
Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.
The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.
The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.
The increase followed a 1.7 per cent decrease in June.
The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.
Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.
Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.
In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.
This report by The Canadian Press was first published Sept. 16, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
