“You got it right for this quarter.”

Thanks Nitin, I did cheat a little, since it was pretty clear from the Bloomberg survey that the results were going to be pretty good. otoh they did even exceed expectations. Also I was saying all this some three months ago.

Vinod,

“the problem that results is that even though you might have equiv aggregate demand growth, India faces supply side constraints which create the inflationary fears (e.g. instead of buying more cars / trucks / consumer goods / etc., consumers end up spending their $$$ by bidding each other up for fixed assets like real estate)…”

This is certainly true, but my expectation is that the RBI will keep raising to try and take some of the heat out of this. Otoh there are global factors which are beyond their control. One of these is the level of interest rates in Japan, the United States and the eurozone. If these all start to reduce next year then it will be very hard for the RBI to push up longer term rates since the yield advantage (coupled with the high growth rate, and the expectation of more to come) will only attract an inward flow of funds which will tend to keep bond yields down. So they are facing really hard work on this front.

The key issue is the extent to which investment can now take over. I go with Bhalla and our commenter Venkat and think that this is the big part of the picture people are underestimating, and especially if funds move into India, although here the Economist is right, this will have a balance of payments implication.

The thing is a current account deficit to finance a consumer lead boom is one thing, and a CA deficit to finance infrastructural investment is quite another. Obviously to date India has been living with the former, but are we now about to see the latter take hold?

Bombay Addict

“Why is this Economist article being taken so seriously ?”

Well quite. The Economist has a relatively poor track record on global economics of late, but still, it is the magazine everyone likes to read.

“Edward, could you also explain what you meant by “I tend to give a lot higher weighting to the demographic component” ? Are you - and please correct me if I’m wrong - suggesting that the demographic content could actually push India’s GDP growth higher ?”

Yes I am suggesting this, but it is quite a complex picture, since the demographics in Kerala and Tamil Nadu are quite different from those in, for example, Bihar and UP.Nandan makes a relevant point in this regard. Some parts of India are only at the begining of the DD (indeed Bihar and UP etc) are still a long way from approaching it. But one of the factors with the DD is that initially there are very big cohorts of relatively poorly educated workers, and this creates large problems in finding employment, and not a big deal in terms of productivity. So you get big GDP growth but not very spectacular growth in per capita income. Indeed the level pof life of the poorest sections of the population probably deteriorates, as has been found to be the case recently in China for the early years of this century.

But then as these workers age things tend to improve, since they now have more experience, and hence more ‘economic worth’ while the smaller cohorts who arrive behind them tend to find access to employment easier (provided, of course, that economic development has taken place) and at the same time they tend to be better educated, and hence more valuable economically.

This is all pretty complicated and by no means straight forward. I will post some more on all this in the near future.

Nitin

“Growth can occur due to higher labour productivity and a higher workforce participation rate. The demographic component affects the second part. Edward-again, correct me if I’m wrong.”

No. That’s about it. With the rider as I indicate above that as the demographic tarnsition proceeds there is an inbuilt tendency for workers to become better educated and more productive. This is why it can become win-win. As I say, what really needs to be sorted out is the precise weighting to be given to the demographic part. At the end of the day this is the main difference between Ajay and me. I give a higher weighting to demographics, and at present I am coming up smelling of roses. Moving forward we will see more clearly. There is a lot to learn here.

Are you - and please correct me if I’m wrong - suggesting that the demographic content could actually push India’s GDP growth higher ?

Growth can occur due to higher labour productivity and a higher workforce participation rate. The demographic component affects the second part. Edward-again, correct me if I’m wrong.

My guess is that this number is probably higher - perhaps around 6%. This would still mean that todays 9.2% is “inflationary” - but not by terribly much. If anyone here knows where I can find good data on productivity growth in India, please let me know.