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Is India the New China?

Is India the New China?

As the Indian central bank Governor Raghuram Rajan reviewed Indian interest rates for the final time this year it has become clear that India’s economy grew faster than anyone estimated and significantly its growth rate has now overtaken China.

Gross domestic product rose 7.4 percent in July-September from a year earlier, after a 7 percent expansion the previous quarter, the Central Statistics Office said in a statement in New Delhi on Monday. The median of 44 economist estimates in a Bloomberg survey was 7.3 percent. China grew 6.9 percent in the same period, while Russia contracted 4.1 percent and Brazil is forecast to shrink 4.2 percent.

India’s world-beating pace supports the case for Rajan to hold rates after cutting them this year by the most since 2009. It also offers respite to Prime Minister Narendra Modi, who’s struggling to push key economic bills through parliament. India’s stocks and currency are among Asia’s worst performers over the past month as investors become impatient with the pace of reforms.

"There are positive signs as there is an economic recovery and manufacturing is growing strongly," said Prasanna Ananthasubramanian, chief economist at ICICI Securities Primary Dealership in Mumbai. "The RBI is not going to cut rates because they have already been cut and are waiting for the transmission."

One of Modi’s bills stuck in parliament proposes a national sales tax, which aims to simplify a byzantine tax structure and create a single market among India’s 1.3 billion people for the first time.

The goods and services tax, known as GST, is crucial to boosting revenue as a proposed pay increase for government staff puts Modi’s deficit-reduction goals in jeopardy. The shortfall reached 74 percent of the full-year goal in the first seven months itself, data showed on Monday.

“The increased salaries may hamper the government’s planned shift from more current expenditure to more capital expenditure," said Indranil Pan, chief economist with IDFC Ltd. That threatens Modi’s plan to rely on public investment to kickstart a recovery while private companies battle high debt, he said.

Gross value added -- a component of GDP closely watched by Rajan -- rose 7.4 percent in April-September from a year earlier, matching the forecast, after a 7.1 percent increase in the previous quarter.

Manufacturing output rose 9.3 percent during the period, financial services 9.7 percent, and trade and hotels grew 10.6 percent. India’s electricity and gas production rose 6.7 percent while the construction sector expanded 2.6 percent.

The Indian economy and companies that access it are certainly going to be ones to watch in 2016.

 

 

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