India Inside Out: A 'sweet spot' moment for India's foreign policy *and* economy?
Back from the break!
India Inside Out took a few months off. We’re back.
The last edition was this fascinating interview with author Vineet Thakur on his book about VS Srinivasa Sastri. I’ve spent the months since then navigating a move to Egypt – where my wife has recently been posted – and figuring out what it means to shift cities and countries with a 10-month-old baby.
I write this edition from our perch above the Nile in Cairo, where the ‘hot’ weather is far cooler than what we left in Delhi, the mangoes are just going out of season, and the only butter available is unsalted. (I spend the mornings sprinkling salt on our toast, and did google how to make all of this more Amul-like. We do get ghee here though, which is nice).
Earlier in the year I put out a call for recommendations of people to meet, things to do and books to read on Cairo and Egypt.
I’ll flag that once again: Please send me any suggestions you might have, and on the off chance that you are making your way down to Egypt anytime soon, please do drop a line.
‘Sweet’ and ‘bright’ spot?
I wrote in May about how, thanks to India’s legacy of staying away from great-power ‘camps’ and the current leadership’s deft handling of the new conditions created by Russia’s war on Ukraine, India found itself in a ‘geopolitical sweet spot.’
Essentially, the sense at the time – confirmed by a stream of major diplomatic engagements by foreign powers with New Delhi – was that India was being courted by all sides, and could, in a sense utilise the crisis to emerge stronger.
On the one end, the West was making an extra effort to help India reduce its dependence on Russian arms and build its capacity to balance China, while on the other, Moscow and – even to an extent Beijing – tomtommed New Delhi’s refusal to join the sanctions regime in an effort to convey the idea that the entire world wasn’t toeing US President Joe Biden’s autocracies vs democracies line.
There was the concern that this balancing act could not last forever.
And yet, by all accounts, eight months into the war, India continues to inhabit that sweet spot, despite Prime Minister Narendra Modi’s harsher words for Russian President Vladimir Putin and grumbling from Western commentators about India’s abstentions in the United Nations Security Council.
From the Hindustan Times:
“Russia and Ukraine are fighting, but both want to be friends with India and have a degree of appreciation for its position on the war. Europe and the United States are key players in the war helping the Ukrainians, but despite Delhi’s indifference and refusal to participate in any of their measures to make life tough for the Russians, they are happy enough with India’s position. Smaller countries in Asia, Africa and Latin America don’t like the war and are aggrieved that they are suffering for no fault of their own. But the global South sees India as a voice of reason which can highlight the consequences of the war on the big power stage that they have little access to. And the top United Nations leadership is keeping India briefed on developments, and sees India as a valuable partner in its efforts to lower the temperature.
Both on the war, and beyond the war on the most pressing strategic and development issues of the day, the world is wooing India.”
Of course, the tightrope walk isn’t necessarily easy or inevitable.
If a cornered Russian President Vladimir Putin further escalates civilian attacks in Ukraine, New Delhi may find it harder to maintain what is effectively a ‘not-our-problem’ stance on the war.
And on the other side, in the optics of its red-carpet welcome for the Pakistani Army Chief, the US ambassador’s visit to Pakistan-occupied Kashmir and the F-16 deal, Washington, DC has offered a reminder that its growing relationship with India does not mean it will align with all of New Delhi’s stances either.
Despite these diversions, as long as the West continues to see Xi Jinping’s China as the long-term threat to global order, it will continue to seek way to align further with India. And even as it continues to delink from Russia, New Delhi will still look at pathways – such as its presence at the Shanghai Cooperation Organisation or among its BRICS peers – to sustain a multipolar world.
But this is no longer just a geopolitical moment for India.
As nations around the world grapple with high inflation and the prospect of a global recession, the spotlight has turned also to the Indian economy.
From the New York Times in September,
“As global economic growth slows sharply, with many major economies gripped with worries of recession, there has been a conspicuous exception: India.
The Indian government says the country’s economy remains on track to grow 7 percent or more this year, more than double the projections for global growth…
The rapid expansion in India reflects in part the depths to which the economy had fallen during the most devastating shocks of the pandemic, with lockdowns forcing an exodus of laborers from urban centers. It also reflects the insulated nature of India’s economy: It has avoided the worst of the global slump because it is driven more by local demand than exports.
But perhaps most important has been a suite of government policies, including increased public investment, relief to debtors, and credit guarantees to small and medium-size firms hit hardest by the pandemic. Policy interventions have kept inflation — which has historically been high in India — relatively in check. And purchases of discounted oil from Russia, against the wishes of the United States and Europe, have helped buffer rising global energy prices.”
The ‘sweet/bright spot’ terminology has been embraced by many.
Naturally, the government has adopted it, talking up the successes of the Indian economy. But its use goes beyond just New Delhi’s cheerleaders.
Deutsche Bank CEO Christian Sewing called India the “shining star” of the global economy at the moment. Citigroup Chief Jane Fraser, back in July, called this a “pretty unique point in time for India.” The International Monetary Fund’s Managing Director Kristalina Georgieva reportedly called India a “bright spot” in the global economy.
What explains this sudden optimism for an economy that was seeing a major slowdown in growth even before the Covid-19 pandemic hit?
Some of it has to do with China’s continued adherence to the zero-Covid strategy, meaning the country just about avoided contraction in the April-June quarter and is unlikely to see much annual growth – prompting global capital to look elsewhere for investment opportunities (in addition to the efforts to diversify from China that have become more urgent for many Western businesses over the past few years).
Some of it has to do with India appearing to weather the current “polycrisis” better than many of its neighbours and peers, with the rupee holding firmer than a number of other currencies, external debt being under control and prices not seeing the runaway inflation that is affecting much of the world. Here, there is a general sense that, despite the mismanagement of economy prior to the pandemic, and the fears of demand destruction because of limited fiscal spending during the crisis, India’s policymakers successfully kept the ship steady and weathered the storm better than many others.
And some of it is in reaction to the news that India overtook the United Kingdom to become the world’s fifth-largest economy – an important development, given the colonial history of the two countries, but also a complex one given the huge per capita disparities.
The ‘sweet spot’ plus ‘bright spot’ conversation has placed India in a prominent place on the world stage, reviving “superpower” predictions (despite the rather unfortunate recent history of the ‘Superpower 2020’ trend). But much of it is based on extrapolating from India’s potential, rather than its current stature. And there are plenty of challenges to tackle before India can achieve that potential.
Even if you put aside the “risks [to] social harmony” that ‘Raghu Sanjaylal Jaitley’ mentions here in a thoughtful evaluation of India’s ‘sweet spot’ moment, there is the much touted economy to consider. While India’s GDP growth figures will undoubtedly be the fastest of any major economy this year, and most likely the year after, the numbers themselves have been disappointing relative to original expectations.
As Mihir Sharma explains on Bloomberg,
“India’s official statisticians reported 13.5% growth in the April to June quarter of this year. This meant that the country whooshed into top place as the world’s fastest-growing large economy — and, incidentally, replaced Great Britain as the world’s fifth-biggest economy.
Unfortunately, that’s where the good news about India’s growth prospects ends. Those GDP numbers were actually a disappointment, given that the same quarter last year saw India shut down amid its devastating Delta-driven Covid wave; a Bloomberg survey of economists expected growth in excess of 15%.
Over the past three years, in fact, GDP in India has grown just over 3% — and less than 4% since the last quarter before the pandemic. This financial year — which will end in March 2023 — is unlikely to break any records: Most now expect that real growth will not reach 7% even off a low base.”
Indeed, growth estimates for this financial year (2022-23) have been cut by the Reserve Bank of India (from 7.2% to 7%), the State Bank of India (from 7.5% to 6.8%), the International Monetary Fund (from 7.4% to 6.8%) and the World Bank (7.5% to 6.5%). Japanese brokerage Nomura said it expected India to hit 7% this year, but to sharply decelerate afterwards, coming down to 5.4% (as opposed to the 6.1% expected by the IMF, for example).
“While we broadly agree with our interlocutors on the growth prospects in FY23, we believe the optimism in FY24 may be misplaced and that the spillover effects from the global slowdown are being underestimated,” analysts from Nomura said, in a note.
As TN Ninan explains, “the signs of an economic slowdown are unmissable. Whether it is industrial production, electricity generation, exports, or revenue from goods and services tax, there is a loss of momentum.”
This is obviously connected to the expectation that a third of the world will be in recession next year, which cannot but affect India, especially as it has depended heavily on exports to power growth over the pandemic years. But it also reflects weaknesses in the underlying economy.
Abhishek Anand, Arvind Subramanian and Josh Felman write in the Business Standard,
“Is the Indian economy truly booming? The short answer is that the latest data flatters to deceive. The economy is out of the ICU, but its health remains fragile and still needs the doctor’s attention…
In GDP terms, the economy is just 3.8 per cent larger than it was three years ago. And it is worth noting that 2019-20 was a year when the economy was in ICU, with most indicators showing negative growth as Figure 1 shows. Thus, a comparison with the healthier 2018-19 would present a much dimmer picture…
All the heady optimism has overlooked the vulnerable state of the macro-economy. Headline inflation has been above the target 4 per cent for 35 consecutive months, above the ceiling of 6 per cent for 21 of the 35 months, and core inflation remains close to this ceiling rate. According to the IMF’s latest estimates for 2022, the general government fiscal deficit is almost double-digit, and the current account deficit is 2.9 per cent of GDP. When we compare the macro index to India’s own past, vulnerabilities are at their highest since the fallout from the Global Financial Crisis even if India’s high but depleting foreign exchange reserves provide cushion against real crisis.”
One of the key worries is that, despite all the reforms and policy adjustments meant to make the business environment friendlies, private investment – which would provide an engine of growth even at a time when the global market is struggling – simply hasn’t taken off.
You know things are bad on this front when politicians have to complain to industry leaders about why they are not investing. Here is Finance Minsiter Nirmala Sitharaman in September 2022 at a corporate summit:
“I want to know from the Indian industry what is it that they are hesitant about… Since 2019, when I took charge of the finance ministry, I have been hearing industry doesn’t think its (environment) is conducive. Alright, the (corporate) tax rate was brought down. I keep defending the industry even when people provocatively ask me what I would like to tell the private sector. We will do everything to get industry coming and investing here. Give PLI, we have given PLI. I want to hear from India Inc: what’s stopping you?
Is it like Hanuman? You don’t believe in your own capacity, in your own strength and there’s got to be someone standing next to you and say you are Hanuman, do it? Who is that person go`ing to tell Hanuman? It can’t certainly be the government.”
And why isn’t private investment taking off?
One answer is that, despite these positive GDP growth numbers indicating a recovery from the depths of the pandemic-created contraction, businesses have little confidence that there is consumer demand over the coming months and years will be robust and broad-based. Consumption has indeed been growing at the premium end of the market, but numbers remain worrisome across the broader economy, reinforcing the sense that India’s recovery from the pandemic has been ‘K-shaped’ – meaning extremely positive for the affluent, and disappointing for everyone else.
“The confidence of the private sector on the sustainability of demand is low, given economic headwinds. This is leading to lower appetite for investing to build capacity,” Ranen Banerjee, leader economic advisory Services, PwC India, told Business Standard.
Niranjan Rajadhyaksha has for some time now been writing about how India’s post-lockdown recovery – as measured through GDP growth, buoyant tax numbers and healthier balance sheets – has been led by corporate profits, rather than wages. That in itself is not a problem: Higher profits can lead power an economic recovery, but only if conditions are right. And for India, right now, they don’t seem to be.
Rajadhyaksha writes:
“A higher share of profits can boost economic activity if companies use their net income to expand capacity in their factories by buying new machines; however, companies will prefer to use their net income to either save money or pay off old debts when there is no compelling reason to buy new machines because of excess capacity or business uncertainty…
This year’s festive season has started off well, but companies, policymakers and analysts have to be alert to the possibility that a lower share of wages in national income, persistent inflation and a gradual whittling down of the excess financial savings accumulated during covid lockdowns can lead to weaker consumer demand in the coming quarters.”
Still, the government – which continues to spend heavily on public capital expenditure with the aim of driving growth until the private sector kicks in – is hoping that the cleaner balance-sheets and availability of credit will act as a springboard for whenever businesses start investing.
From the Ministry of Finance’s July Economic review:
“Conservative estimates of medium-term potential growth for India may be missing a trick as they overweight the decline and subsequent stagnation in capital formation in the country in the second decade of the millennium. That was due to the stress in the financial system. As and when the Indian private sector embarks on the long-awaited capital expenditure cycle, building on the government’s capital expenditure of recent years, India’s potential and estimated economic growth performance in the rest of the decade will inevitably be revised higher.”
That ‘as and when’ is crucial. Will it be in the next few months? Or is it several years down the line – years that are likely to include a global recession, rising energy costs and no guarantee that the corporate profits and tax revenue spikes of this financial year will be sustained?
Will global headwinds, persistent inflation and a K-shaped recovery prevent India’s economy from taking advantage of its ‘bright spot' moment? Or will the government – or indicators from the broader economy – finally convince ‘Hanuman’ to step up in time?
More links on this subject:
Why is Hanuman not flying? Answers from Pulapre Balakrishnan, Udit Misra, Anirban Bhattacharya, Vivek Kaul and Ajit Ranade.
What accounts for the economic gap between China and India? Cameron Abadi speaks to Adam Tooze on this all-important question.
Pranjul Bhandari asks: Are India’s exports holding up?
Somnath Mukherjee argues that the ‘bright spot’ talk is being spouted by those influenced by India’s performance on the markets, rather than on the macroeconomic front.
Can’t Make This Up
Thanks for reading India Inside Out. Send feedback (and material for ‘Can’t Make This Up) to rohan.venkat@gmail.com
I enjoyed reading Naguib Mahfouz, Palace Walk and all other books. This author I think is the Rohinton Mistry of Egypt. Have a look and see if it appeals. Cheers, Surjeet