India’s industrial production grew in July at the fastest pace in a decade (12.4 percent from a year earlier, which was the largest increase since June 1996) according to data from the Indian Central Statistical Organisation today.
“Power companies almost doubled electricity output in July to keep up with demand from factories producing cars and textiles, while government spending on roads and ports boosted sales at Steel Authority of India Ltd. Accelerating production growth in Asia’s fourth-largest economy may prompt Reserve Bank of India Governor Yaga Venugopal Reddy in October to increase borrowing costs to the highest in more than four years.”
“Growth in consumer goods production more than tripled to 19.9 percent from a year earlier after a 5.6 percent rise in June, today’s report said. Manufacturing increased 13.3 percent from 9.9 percent in the previous month.”
“India’s $775 billion economy expanded 9.3 percent from a year earlier in the quarter ended March 31, rounding off the financial year with growth of 8.4 percent, the fastest after China among the world’s 20 biggest economies.”
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?
And this is why I say we are moving into uncharted territory. Economists used to have a little model which worked on the assumption of each economy having a certain growth capacity in any given moment. But could any one tell me, what *is* the growth capacity of China or India? I certainly have no idea, and I haven’t seen anyone else make a convincing case on this topic. The magnitude of the growth we are now seeing in the developing world is beyond all historical precedent.
And there’s more, since, as US economist (and former chief economist at the IMF) Ken Rogoff keeps pointing out, with the rapid spread of globalisation the very idea of national economic capacity needs to be modified since it is not clear what it can mean any more. Globalisation among other things means the rapid movement of capital, labour, goods *and* technology and this makes it possible for some areas to grow very quickly indeed.
Of course this doesn’t mean you can just sit back and watch, since with Inflation over 5% and salaries predicted to rise by 7.3 more than inflation in 2006 there is nothing to be complacent about. If the huge transition which is currently taking place in India is to go forward as smoothly as possible then inflation needs containing. On the other hand the Central Bank may want to move cautiously, since the US economy is evidently slowing, and it is not clear just what the impact of this will be for everyone else (in an interlocked world), and especially what this will mean in China, which is much more locked into the US than India is.
Some are already warning China of the dangers which a slowdown represents. I appreciate the concern, but I think momentum in both India and China is sufficiently strong to withstand a downturn. This doesn’t mean there will be *no* effect, just that the oft predicted ‘hard landing’ is very unlikely, and especially since China is a long way from being a market economy, and the government can and will intervene to take up the slack.
Which is not the same thing as saying that – in the event of a global slowdown – global prices may not get a huge push downwards from the price reductions the Chinese export industries will be forced to make to sell all that added production which is only now coming online.
This post is not a plea complacency, but it is a plea to keep to the measure of things (such as we are able to estimate them). There is much to be done, let’s go to it!