A Bric hits the wall
Other BRICs have slowed too, including China and Brazil. But India's GDP figures, the worst for at least nine years, will have a deep impact on the sub-continent. The country was meant to grow in its sleep—regardless of what happens in the rest of the world. A quick bounce back looks unlikely. The central bank has cut interest rates a little this year, but will struggle to loosen policy further given high inflation. The ruling coalition keeps on promising a bout of reforms to boost confidence, but it is so divided, its behaviour so erratic and its record of delivery so poor that few believe this will actually happen. Expectations for growth over the next couple of years will probably slip further, to 6%.
A 6%-growth-India raises three issues. For one, the old orthodoxy was that after liberalisation India had been on an accelerating path, driven by demographics and its high rate of savings and investment. A rival view is now likely to take hold. It notes that India has grown pretty consistently at 6% since the mid 1980s, with the exception of a faster period in 2004-2007. What looked like a step up in trajectory now looks like a one-off blip driven by a global boom, an uncharacteristic bout of tight fiscal policy and an unsustainable burst of corporate optimism. Political history may have to be rewritten too. The reformers of 1991, who include the present prime minister, have turned out to be not visionaries, but pragmatists without a deep commitment to liberalisation who have been unable to build a lasting consensus among voters and the political class in favour or reform.
Second, financial stability will become trickier. Nominal GDP growth (including inflation) has slipped to the low teens. This is still above the rate of interest India's government pays on its debt and thus in theory enough to avoid a debt spiral—despite high fiscal deficits running at almost a tenth of GDP. Government bond yields are artificially depressed because banks are forced to buy government paper and because the central bank has been buying bonds actively in the last six months. Although this can go on for a while, the stress is showing up in two different areas. One is the banking system where gross bad debts plus "restructured" loans have risen to over 8% of the total—a figure high even by western banks' standards. Bankers and the central bank argue that "restructured" loans are unlikely to result in large losses. But with lower growth more corporate borrowers will come under strain, as will the credibility of those reassurances.
The other area of financial stress is the balance of payments. The rupee has already slumped by almost a fifth in the last year. But India, which lacks a big export industry other than technology, and which finds it hard to ramp up production of physical goods quickly, is unlikely to see a sudden bounce in exports as a result. With a large current account deficit it needs to attract $50-70 billion of foreign capital a year at present oil prices. That's going to be tough given the gloom and the government's inept and ambivalent handling for foreign investors. Once again the central bank can come to the rescue by propping up the currency, but its firepower is finite.
The third—and perhaps most important—issue raised by lower growth is another kind of stability: social. India, unlike the other BRIC countries, is still desperately poor. One businessman and guru interviewed by your correspondent recently declared that "the next fifteen years will be India's worst since independence" and that there was a one-in-ten chance of a revolution. If India's economic miracle turns out to have been a mirage, it will not be so easy to dismiss that kind of talk as cranky. There is already widespread disgust at corruption. And at least ten million young folk will enter the workforce every year for the next decade or so. They will be coming to the big cities, looking for jobs that won't be created if India expands at a rickshaw rate of growth. Talk of a demographic dividend may turn back into talk of a time bomb.
Perhaps growth will bounce back. And if it doesn't, perhaps public frustration will be expressed at the ballot box, creating a new, less complacent political climate. The view that India's democracy is a self correcting mechanism that steers the country back onto the right course when things go wrong, was an integral part of the bull's view of India. Hopefully it is one idea from the boom that proves to be correct.