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India leaving China behind? Not so fast
The truth may finally be wearing off the old saying that India only ever compares itself with itself. As the Indian economy has proved to be one of the least dim spots in a gloomy emerging market landscape, boasts are multiplying that it is overtaking China as the engine of world expansion. Jayant Sinha, India's junior finance minister, recently laid down the bold prediction that "in coming days, India will leave China behind as far as growth and development matter".
Not, as it were, so fast. While India's short-term macroeconomic performance has put it at a better place in the cycle than most big emerging markets, the longer-term structural problems that have kept it in a lower growth class than China unfortunately persist, as do the political elephant traps awaiting intrepid reformers.
On the face of it, the Indian economy is performing well, and the popularity of Narendra Modi, the prime minister elected on the promise of liberalising reform last year, is holding up. Christine Lagarde, IMF managing director, has referred to India as a "bright spot" in the slowing global economy. Growth equalled China's last year at 7.3 per cent, and the IMF predicts India will be the fastest-growing large economy in the world this year.
The reality is less encouraging. For one, the statistics may quite simply be wrong. A new data series for GDP introduced in February did much of the work in raising India's growth rate near China's, and the numbers, with a short history and without detailed data to underpin them, sit at odds with other indicators such as industrial production and imports.
Certainly, macroeconomic policy has improved compared with earlier eras. Fiscal and current account deficits remain manageable. The Reserve Bank of India, which has traditionally struggled with a multiplicity of targets and instruments, adopted a more conventional model, targeting consumer price inflation using the short-term interest rate. Under Raghuram Rajan, who took over as governor in 2013, the RBI got on top of inflation by rapidly raising rates. It has now been able to cut them by 125 basis points to stimulate growth while other EM countries such as Turkey and Brazil have had to tighten.
Indeed, problems in the banking sector are exactly one of the problems holding back investment. State-controlled banks have overlent, often under political inducement, to failed infrastructure projects, and overall the accretion of bad loans in the system is blocking the extension of fresh credit. The state banks will need new capital over the next few years, the government wanting nearly two-thirds of it to be raised from markets, but whether that will permit the widescale rationalisation and privatisation that many banks need remains to be seen.
Alongside poor supporting infrastructure, one of the reasons has almost certainly been the difficulty of acquiring land for industrial development, given the complexity of antiquated land laws. Long before Mr Modi came to power, the problem was symbolised by Tata being forced to relocate the manufacturing plant for its Nano car across India after it was driven out of its initial site in West Bengal by angry locals, raising the cost of the project.
For the moment, it seems that India will be happy being regarded as a standout in the otherwise disappointing emerging market class. If its cyclical advantage fades and it returns to its familiar sub-China levels of growth, its politicians are unlikely to be so vainglorious.