Archive for the ‘India’ Category

file000132701536

The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

Earlier this year, the runes pointed to a much needed improvement in China. That’s a relief said the markets, which went out and bought.

Over the last couple of weeks things have not been looking quite so rosy on the other side of the Great Wall.

Take the latest GDP data. This was published today and showed that in Q1 of this year the Chinese economy grew by 7.7 per cent, compared to an expected growth rate of 8 per cent.

More to the point, Chinese GDP expanded by 7.8 per cent in Q4 of last year, so that is some recovery! If the data is right, China’s economy has actually seen deterioration.

China has more woes. There are signs that businesses in China are pulling back on investment. After all, China does have rather a lot of surplus infrastructure at the moment.

There have also been growing fears of a credit bubble in China.

It is quite worrying that despite a possible credit bubble, China’s GDP is still slowing. In 2012 China’s GDP expanded by 7.8 per cent, which was the lowest year on year rise since 1990.

A growth rate of 7.7 per cent may seem pretty good to Westerners – and indeed European countries can only dream of such expansion – but productivity rises in China are such that without what by western standards is impressive growth, Chinese unemployment will surge.

The solution for China lies in trying to ensure more of China’s GDP trickles down into wage packets, and that consumer spending rises as a result. China’s government knows this, but knowing and making it happen are two quite different things.

We may think of China’s government as being all powerful, but in reality it is struggling to ensure the Chinese economy adjusts in the way it wants it to.

Meanwhile, in India, industrial production rose 0.6 per cent year on year in February, which was better than expected. It’s encouraging, but as Capital Economics pointed out on Friday, infrastructure activity weakened unexpectedly in February, and recent data shows that the auto sector remains in a funk, and the upturn in capital goods production looks unsustainable.

Aninda Mitra, India Economist at Capital Economics, said: “We would become more convinced about a sustained revival of investment and GDP growth only if both capital goods production and the infrastructure components of IP began growing together. This highlights once again the importance of speeding up approvals of infrastructure projects, and ensuring adequate power production by resolving power tariff disputes, and speeding up environmental clearances which are hobbling domestic coal supplies.”

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

188

Is this not one of the most optimistic statements you have ever read? According to India’s Minister of State for Human Resource Development Shashi Tharoor: “It is now widely accepted across the political spectrum that India’s growth and prosperity would be impossible without the rest of the world.”

In short, India needs the rest of the world. But frankly, every country that wants to see more prosperity needs the rest of the world. We are all like the symbion, which is a tiny aquatic animal that has been found attached to lobsters. It feeds off the lobsters own leftovers, cleaning the lobster in the process, which means that the symbion needs the lobster, and the lobster needs the symbion.

So the UK, the US, and China are all symbions. Countries that do not have a symbiotic relationship with the rest of the world pose a threat to global peace. That is why the rise of China, and China’s reliance on trade, is to be celebrated not lamented.

Anyway, returning to Mr Tharoor, he said: “One of the lessons that history teaches us is that history often teaches us the wrong lessons. For India’s nationalist leaders, this meant that every foreigner with a briefcase should be viewed as the thin edge of a neo-imperial wedge…. Instead of integrating India into the global capitalist system, as only a handful of post-colonial countries – for example, Singapore – chose to do, India’s leaders (and those of most former colonies) were convinced that the political independence that they had fought for could be guaranteed only through economic independence.”

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here