India: If it was the US, there would be no Economic Doldrums

After many years of warnings and dire predictions, the bad news for the Indian economy is finally coming true. I have to admit that as one of the soothsayers who had almost gone hoarse with his negative outlook on India, the continuing strength of that economy – particularly in the shadow of the country’s ever declining economic metrics – was making me doubt my prognosticating skills.

However, I am happy that this recent news has restored my confidence and my voice is almost back to its full strength.

Unfortunately, the news isn’t so positive for the Indians. Their country has always had problems with deficits (both fiscal and current account) that have not been helped by New Delhi’s insistence on maintaining high levels of spending.

These deficits may not have been that big a deal had government spending been focused on long-term development projects such as infrastructure – something sorely lacking in India.

Unfortunately, being a democracy, New Delhi focused its spending on subsidies that made it popular with the voting public but did not help foster or lay the conditions for continuing economic growth.

Even though it had been warned for years about the need to get its fiscal house in order, India, for political reasons, prioritized placating its citizens rather than facing up to the difficult challenges.

I don’t mean to imply, however, that the country’s economic woes are all due to domestic factors.

For example, India does not control global oil market so the impact of high oil prices on inflation and deficit (India spends a significant chunk of its foreign exchange on oil imports) isn’t New Delhi’s fault.

The government, though, can be justifiably blamed for the exponentially large impact of these prices on its economic growth since the increase was neither surprising nor unanticipated.

Some other uncontrollable factors are the continuing weakness in the global markets and hints of the US Federal Reserve tightening its monetary policy.

The latter has hurt the economies of a number of developing economies so India isn’t the lone victim here. However, when combined with the aforementioned factors, the affect on the Indian economy has been comparatively stronger.

So what is this impact?

1. Its economic growth at the slowest pace since 2009 – unlike today, all global economies collapsed at that time so India’s slow rate then wasn’t as alarming as it is now.

2. Its persistently high inflation. This is a big problem both in economic and political terms. The former because it makes India less competitive and attractive in the global market and the latter because it means that unless there’s a turnaround, the current government’s chances of staying in power aren’t very good. It’s also consistent and projected to remain high for a number of years.

It’s also important to note that this inflation has had a small impact on the manufacturing sector; small because this was never that completive in the international market. What has hurt exports though is the recent court ruling that stopped most iron ore mining across the country and really put a crimp in India’s mining exports.

3. It’s the fall of the Indian rupee. This one is a little counterintuitive so stay with me as I explain it. In a normal environment, a declining currency is great news for a nation dependent on international markets since it makes its products and services less expensive.

Japan, for example, recently implemented policies to make its currency cheaper in the hopes that it would make its products more competitive. The problem for India, unfortunately, is that it had high inflation before the currency declined, so this new fall means it’s starting from a disadvantage.

The news though isn’t all bad. Even though I have laid out all these negative conditions, let me highlight the positive.

First, one of the major drivers of India’s economy, agriculture, could still come through and soothe some of this pain.

Second, the government could redirect its spending towards more beneficial projects and that may help India decrease unemployment and improve its notoriously bad infrastructure which will help it attract international investment.

Third, a majority of the holders of foreign debt are either major companies or very rich individuals and they can afford to either pay back their obligations or negotiate a relatively reasonable payment plan thereby stunting the impact on the larger economy.

Fourth, once the global markets absorb the news from the US Federal Reserve, its impact will be blunted when that body actually takes this action – which, may not happen for a few years.

Obviously, this doesn’t mean India is out of the woods but that there is a glimmer of hope in the morass of darkness currently facing the country.

Now, onto the more important and self-involved question: Why should we Americans care about what happens in and to India?

I posit that India is essentially the United States with fewer international investors and a currency that is not accepted as the medium of exchange. Both nations have horrible fiscal deficits, carry large debts, and have ineffective and ineffectual governments.

The US is saved by the dollar, which is the default currency for most business transactions – including oil sales – and provides an “out” for Washington’s stupid ideas and gridlock.

However, it would be foolish to continue to rely on this measure for protection and our country’s political leaders should view India’s problems as yet one more piece of evidence that they need to start working together and getting the house in order – and the pun is intended.