Growth assumptions in the Indian budget

Called up Niranjan, editor of MINT and good friend, last afternoon to ask him whether he had seen any recent studies on India’s growth sensitivity to global growth. I remain concerned that India’s nominal GDP growth assumptions for 2010-11 up to 2012-13 – used in the budget – do not leave any room for disappointments.

He could not recall any off the top of his head. I  did some Internet search this morning. Could not come up with any pearls. But, saw this post by Eduard Levy – Yeyati of Barclays Capital on regression estimates of Emerging economies’ growth on G-7 growth and China’s growth.

The table 1 is a hard read. I do not get the sense that EM economies have become less sensitive to G-7 growth in the presence of China’s growth as an additional variable. If anything, the co-efficients had become bigger?

Where G-7 growth variable comes in with the wrong sign (negative sign) is for the sample period 2000-09. But, even then, during this period, China’s growth does not have statistically significant co-efficient at the 5% probability level.

Also, it would have been interesting – for the sake of completeness – to have seen estimates of EM growth sensitivity (including China) on G-7 growth and separate regressions of China’s growth sensitivity on G-7 growth.

In the absence of these estimates, I am not fully convinced that China has displaced G-7 as a major external determinant of EM economic growth, as he writes:

However, the data paint a different picture once we include China. The explanatory power of the G7 virtually disappears in the latest period, at the expense of the Chinese influence.4 Reassuringly, the explanatory power of the new specification is significantly larger in all cases (particularly, as expected, in Asian economies and commodity exporters). In sum, the “coupling”, understood as sensitivity to global growth, continues to be there, but seems to have moved to the Far East.

But, the paper is a good starting point.

Collage of views on the Indian budget for 2010-11

I shall start with mine. You can find it here. India’s Finance Minister presented the fiscal budget for 2010-11 on Friday, February 26th. He promised a vision document. It did not quite amount to that, to put it mildly. Given what had happened in Greece and given the fact that this was no ‘election year’ in India, bold strokes were both needed and expected. But, they did not come. As M. J. Akbar puts it, he promised vision but gave revision.

The header that Economic Times gives to the views of Swaminathan Aiyar is misleading.  In my view, Swami Aiyar focuses on the key assumption behind the budget. Any budget statement can be evaluated on its specific measures and/or on the underlying assumptions behind the macro targets.

The budget assumes 8-8.5% real growth and 4% inflation, giving 12.5% nominal GDP growth. This very optimistic scenario assumes that the global economy will not slow down. If it does, all bets on deficit reduction are off. [More here].

In my piece in MINT, I had focused on this too. The nominal GDP growth assumptions for the next three fiscal years are 12.5%, 13.0% and 13.5% respectively. A good way to get there would be to achieve 8.5% to 9.0% real GDP growth and an inflation rate of between 4% and 5%. What has the budget done to achieve these combinations? Second, what has the budget done to guard against the risk of these assumptions not materializing and de-railing the fiscal deficit reduction targets? Third, what has the budget done to ensure that all the outlays are going to result in outcomes?

Writing in ‘Business Standard’, Jahangir Aziz voices similar sentiments:

But if the government truly thinks that the recovery is fragile, wouldn’t it have been wiser to be more conservative as it was last year?… As we have seen recently, the global recovery can turn up nasty surprises and create enough anxiety to keep domestic financial markets volatile. Relying on a narrow set of adjusters is plain risky. If a few things go wrong, the budget will look shaky….So in the coming months we will be living on a prayer for continued high growth, high global liquidity, low global risk aversion and low oil prices. [More here]

Staying with ‘Business Standard’,  I find Mr. Ninan’s comments understated but it is not difficult for any one to grasp the underlying message. The Finance Minister has been lucky. He has to stay lucky. Not too different from Jahangir Aziz’s message. I must say that, based on some of his recent comments, Mr. Ninan’s form has returned.

Ajit Ranade, inspired by Sachin Tendulkar’s terrific double-hundred in a one-day match recently against South Africa, trains himself to look at the positives. It would be silly to dismiss his comments as cheer-mongering:

After twenty years of India’s reforms, nay his debut, Sachin recently scored four test centuries and an awesome ODI double ton. His best is not over. Assuming his journey is mimicking India’s economic journey, with GST and DTC round the corner, look for a high scoring economy in the coming years. [More here]

I was surprised to find MINT sounding positive on the budget. Both the edit and Niranjan’s comments convey satisfaction with the work of the Finance Minister. The edit calls it a fine blend of pragmatism and vision. Actually, on closer look, Niranjan’s comments are more guarded and neutral than the headline suggests.

Shekhar Gupta of Indian Express subsumes his positive comments on the budget in an overall panegyric on the Prime Minister based on, what he sees as, the developments in the last seven days.

While he is positive based on recent developments, over in ‘Economic Times’ Professor Arvind Panagariya warns of complacency and backsliding on economic reforms. He points to three developments that make him worry. One is the ban on imported machinery and equipment for power sector, second is minimum wages in the organised sector and the third is the ban on Bt. Brinjal that Jairam Ramesh, the Minister for Environment announced recently.

Regardless of whether these developments turn out to be damaging and/or irreversible, I agree with him on one thing: there is a certain sense of complacency on the possibility of higher economic growth rates. To an extent, the budget is an example of that complacency.

Finally, it was delightful to see the Finance Minister of the ‘secular’ UPA government invoking the blessings of Lord Indra to help deliver a broad-based recovery in the coming months. That is what many mean by the essential Hinduness of India, not the ‘Hindutva’ propounded by VHP and Bajrang Dal.

Indian Economic survey

I used to wonder the point of this document and I increasingly do so. There is no connection whatsoever between what the survey says and what the goverment does the next day. It has never been the case. It is just the wish-list of the economist (Kaushik Basu, now) in charge of preparing it. Also, I wonder why the Railway Budget alone should be presented separately. Can we do away with this colonial practice? or, is there something else I am missing here? I like Amol Agrawal’s comment on the survey. Unlike many other bloggers, he rarely writes strongly negative comments. By his standards, these are strong and negative. Hence, they deserve to be taken seriously.

Doomsday cycle

Say what you will, Simon Johnson and Peter Boone cannot be accused of being unclear and also cannot be accused of being reluctant to bear bad news. They name names. Agree on their recommendation to hike capital requirements on banks substantially. When and if would it happen? Worth reading the whole stuff, however.

In the meantime, Martin Wolf’s warnings here are dire:

Unhappily, the result of what I call success would probably be a still bigger financial crisis in future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn, would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.

But, his solutions are tepid:

I can envisage two ways by which the world might grow out of its debt overhangs without such a collapse: a surge in private and public investment in the deficit countries or a surge in demand from the emerging countries. Under the former, higher future income would make today’s borrowing sustainable. Under the latter, the savings generated by the deleveraging private sectors of deficit countries would flow naturally into increased investment in emerging countries.

Yet exploiting such opportunities would involve radical rethinking. In countries like the UK and US, there would be high fiscal deficits over an extended period, but also a matching willingness to promote investment. Meanwhile, high-income countries would have to engage urgently with emerging countries, to discuss reforms to global finance aimed at facilitating a sustained net flow of funds from the former to the latter. [More here]

China links

This article by Geoff Dyer and this one in Bloomberg seem to have been anticipated by James Kynge in this piece written in February 2010.

Geoff Dyer writes this in the opening sentence:

A high school boasts an impressive indoor swimming pool and several of the region’s main universities have built large campuses. Pristine high-rise apartment blocks stand in rows, their new windows glinting in the subtropical sun.

The one drawback: at the moment, Chenggong is almost completely empty. Its wide streets are all but bereft of traffic, a bank branch has no customers and leaves collect in the foyers of the municipal offices. [More here]

James Kynge appears to have anticipated this:

China’s fixed asset investment statistics illustrate this trend. In 2005, FAI was most robust in Beijing, Shanghai, Guangzhou, Shenzhen and the provincial capitals, but in the first 10 months of 2009 lower-tier cities accounted for a sharply growing portion of total investment. The transformation of China into a continental economy, driven increasingly by internal energies rather than by any dependence on trade, mirrors a similar process that took place in the US during the 19th century. [More here. Subscription may be needed]

Update: I agree with Ken Rogoff, however, that the biggest ‘this time it is different’ story right now in the world is China:

“If there’s a this-time-is-different story in the world right now, it’s China,” Rogoff said in the speech at a forum hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank.

People say China “won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah,” he added. “I say of course China will have a financial crisis one day.” [More here]

Take a close look at his last sentence, however. Of what use is that, to an investment strategist or investor? It is not a criticism but that is the freedom that academics enjoy but investors or strategists don’t. They have to get the direction and timing both right.

Simon Johnson calls upon the US Treasury to name China a currency manipulator. A facile recommendation unmindful of broader consequences.

Three cheers to the private sector

This Bloomberg story on Glaxo, Avandia (diabetes drug) and the risk of heart attack it causes, whether Glaxo was aware, informed patients, physicians, etc. has an all-too-familiar and depressing ring to it. GSK’s explanation on its web site appears convincing until you read this piece in NYT and the last lines:

In 1999, for instance, Dr. John Buse, a professor of medicine at the University of North Carolina, gave presentations at scientific meetings suggesting that Avandia had heart risks. GlaxoSmithKline executives complained to his supervisor and hinted of legal action against him, according to the Senate inquiry. Dr. Buse eventually signed a document provided by GlaxoSmithKline agreeing not to discuss his worries about Avandia publicly. The report cites a separate episode of intimidation of investigators at the University of Pennsylvania. [More here]

GlaxoSmithKline said that it “does not condone any effort to silence” scientific debate, and that it disagrees with allegations that it tried to silence Dr. Buse. Still, it said the situation “could have been handled differently.”

Given all these, as an ordinary individual, my concern is over how do we know, in today’s world with its labyrinthe of interlocked interests, conflicts of interest and non-transparency, who is saying the truth? Whom do we trust and on what basis?

Is this behaviour of the private sector making the best champions, out there, for state control of the economy? Markets, moraltiy and materialism – is there no intersection?

Good pre-budget writing

Swaminathan Aiyar’s piece on 15th Feb. on the budget speech that the Finance Minister would not make is an oustanding one.  How one dearly hopes that the FM would make such a speech. That would make India the beacon of sound public policy and development for the entire world. Well, if wishes were horses…

The second piece is by Dr. Vijay Kelkar that provides a clear road-map or framework for privatisation. Disinvestment is an awkward phase. It is about selling assets to finance consumption. It is neither sound nor sustainable. The amount of resources that would be unlocked if the government followed Dr. Kelkar’s suggestions is mind-boggling.

Instead of talking about the third piece, I must talk about the third and fourth pieces. Both were written by Niranjan Rajadhyaksha, editor of MINT. On Feb. 8th, he gave some staggering numbers to put the issue in perspective:

The size of the economy grew 578 times since 1950 while the size of the government’s spending bill grew 3,020 times. [More here]

His second piece was published on Feb. 9th. There, he said that it would be more realistic to expect growth to bail India out of the fiscal mess rather than expect fiscal consolidation from our governments. Fiscal consolidation has often come from cuts to capital spending (capacity building) rather than from cuts to revenue expenditure (more desirable).

Let us see if the budget delivers on fiscal consolidation or growth or both or none.

The one depressing message from all of this is that, despite all that is known and written about, Indian public policy is about maximisation of rents rather than economic development.  I am not saying anything new. Just sharing my angst.