IMF Says India Will Be Fastest Growing Economy in 2021, And That’s Good News, But…

The International Monetary Fund (IMF) in the World Economic Outlook update for January 2021, has forecast that the Indian economy will grow by 11.5% in 2021.

If this happens, it will be the fastest that the Indian economy has ever grown. It will also be the first time that the Indian economy will grow in double digits. (Actually, the country did grow by greater than 10% in 2010-11, but that was later revised by the Modi government, once a new set of gross domestic product (GDP) data was published).

The following chart plots the GDP growth over the years. The GDP is the measure of an economic size of a country.

Source: Centre for Monitoring Indian Economy.

It is interesting that the Indian GDP has grown by more than 9% only twice previously, and both these occasions were before the 1991 economic reforms. The economy grew by 9.15% in 1975-76 (post the first oil shock) and 9.63% in 1988-89. Post 1991, the country grew the fastest in 1999-00 when it had grown by 8.85% (after the American sanctions).

Also, among the selected economies for which IMF published data, India will be the fastest growing economy in the world in 2021. China comes in second at 8.1%.


Source: International Monetary Fund.

India growing by 11.5% in 2021 is indeed a big deal, there is no denying that. But there are a few factors that need to be kept in mind here.

First and foremost is the base effect. Before I go into highlighting the base effect in this context, let’s first understand what it means.

Let’s say the price of a stock in 2019 was Rs 100. In 2020, it falls by 50% to Rs 50. In 2021, it is expected to rise to Rs 75. This means a gain of Rs 25 or 50% per share. If we just look at prices of 2020 and 2021, the stock has done fantastically well and gained 50%.

But what we also need to keep in mind is the stock price in 2019, when it was at Rs 100. It then fell massively by 50% to Rs 50 and rose from there. Hence, the stock price rose from a much lower-base. And this lower base was responsible for a gain of 50%. Further, in 2021, the stock continued to be lower than its 2019 price. This is base effect at play.

One way to look at base effect is to look at the GDP growth/contraction forecast by IMF for 2020.

Source: International Monetary Fund.

As can be seen from the above chart, the IMF expects the Indian GDP to have contracted by 8% in 2020. Hence, in 2020, the Indian economy will be among the worst performing economies in the world. Given this, a 11.5% growth in 2021, will come on a massively contracted GDP in 2020. This is a point that needs to be kept in mind.

Also, all the countries which have done worse than India have a per capita income larger than that of India. In that sense they are economically much more developed than India is and their pain of contraction is much lesser than that of India, given that these countries already have access to the most basic economic necessities in life, which many Indians still don’t.

Let’s go into a little more detail on this point. While the IMF publishes real GDP growth data (which we have been discussing up until now), it doesn’t publish constant price GDP, which adjusts for inflation, in a common currency like the US dollar.

To get around this problem, let’s use the constant price GDP data published by the World Bank. On this we apply, the  GDP contraction/growth rates as forecast by the IMF. As per the World Bank, the Indian GDP in 2019 (in constant 2010 $) was $2.94 trillion. In 2020. A contraction of 8% in 2020 would mean a GDP of $2.70 trillion in 2020. A 11.5% rise on this would mean that the Indian GDP is expected to touch $3.01 trillion in 2021, which is around 2.4% better than the GDP in 2019.

Hence, in that sense, the slowing Indian economic growth for the last few years, followed by the covid contraction, has put the Indian economy back by two years. Of course, it can be argued that every country has gone through this. Indeed, that’s true, but that doesn’t make our pain any better.

Also, before saying stuff like India will grow faster than China in 2021, please keep in mind the fact that the Chinese GDP in 2019 was $11.54 trillion (World Bank data), which is much more than that of the India’s GDP.

In 2020, the Chinese economy was expected to grow by 2.3%. This means that the Chinese GDP in 2020 would have grown to $11.81 trillion. In 2021, the Chinese GDP is expected to grow by 8.1% to $12.76 trillion. This means an increase in GDP of $0.95 trillion in just one year. If we compare this increase with the expected Indian GDP of $3.01 trillion in 2021, what it means is that China will end up adding 31.6% of the India’s economy in just one year. Or to put it simply, China will add a third of India’s economy in just one year.

It also means that between 2019 and 2021, the Chinese economy is expected to grow by $1.22 trillion ($12.76 minus $11.54 trillion). During the same period, the Indian economy is expected to grow by $ 0.07 trillion ($3.01 trillion minus $2.94 trillion). Please keep these facts in mind before saying that in 2021 India will grow faster than China.

Between 2019 and 2021, the gap between India and China has grown even bigger and that is a fact that needs to be kept in mind. All numbers and figures need some context, otherwise they are useless and as good as propaganda, which I think will happen quite a lot during the course of the day today.

If you have already read the newspapers and the websites on this issue, you might have seen that almost all of them say that India will grow faster than China in 2021. But almost  no one bothers to mention the fact that China grew faster than India both in 2019 and 2020. Or the fact that China is growing on a significantly larger base (the most important point when we are talking percentages).

At the risk of repetition, you won’t see any such analysis appearing in the mainstream media. So, kindly continue supporting my work. Even small amounts make a huge difference.

IMF’s love for printing more money is like treating the wrong ailment

3D chrome Dollar symbolChristine Lagarde, Managing Director of the International Monetary Fund (IMF), issued a statement at the end of the recent G20 meeting in Ankara in Turkey. G20 is essentially an organisation of the governments along with their central banks of the twenty major economies (19 countries plus the European Union) of the world. The finance ministers and the central bank governors of these countries along with those of the European Union, meet regularly “to discuss ways to strengthen the global economy,” among other things.

At the end of the summit in Ankara, Lagarde of IMF said: “The G20 meeting took place at a time of renewed uncertainty for the global economy…The major challenge facing the global economy is that growth remains moderate and uneven. For the advanced economies, activity is projected to pick up only modestly this year and next…A concerted policy effort is needed to address these challenges, including continued accommodative monetary policy in advanced economies.”

What Lagarde meant in simple English is that global economic growth continues to remain slow. And given that central banks of Western economies need to continue doing what they have been since late September 2008—i.e. print money and maintain low interest rates. The term “accommodative monetary policy” is essentially a euphemism for printing money to maintain low interest rates. The hope is that people will borrow and spend more at low interest rates, and economic growth will return.

But that really hasn’t happened. A significant portion of this printed money has found its way into financial markets around the world, leading to bubbles. Now Lagarde wants central banks to carry out more of the same.

Nevertheless, the fundamental problem with the developed countries still remains. As Raghuram Rajan and Luigi Zingales write a new after­word to Saving Capitalism from the Capitalists: “For decades before the financial crisis in 2008, advanced econo­mies were losing their ability to grow by making useful things.”

Further, as Thomas Piketty points out in Capital in the Twenty First Century, between 1900 and 1980, 70–80 percent of the glo­bal production of goods happened in the United States and Europe. By 2010, this share had declined to around 50 percent, around the same level it was at in 1860. This has led to loss of jobs and a slow economic growth through much of the Western world.

This phenomenon which played out over a period of time. The Western governments and central banks tackled this by following an easy money policy, where they kept interest rates low and made borrowing easier for citizens. As Rajan and Zingales write: “They needed to somehow replace the jobs that had been lost to technology and foreign competition… So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrow­ing, proved unsustainable.”

All this easy money ended up causing the financial crisis which started in September 2008. And now Lagarde wants the Western world to do more of the same. The Western world is likely to follow this, given that there is a great belief in central banks being able to engineer growth.

The trouble is that the basic issue discussed earlier, which is at the heart of low economic growth through much of the developed world is something that central banks cannot do anything about. Further, printing money in order to maintain low interest rates, in the hope of people borrowing and spending, can never lead to sustainable economic growth.

As James Rickards writes in The Big Drop—How to Grow Your Wealth During the Current Collapse: “Investors and the Fed [the Federal Reserve, the American central bank] have been expecting another strong expansion since 2009, but it’s not materialized. Growth today isn’t strong because the problem in the economy is not monetary, it is structural.”

This means economic growth cannot be created simply by maintain low interest rates.

Along with the Federal Reserve, other central banks through much of the developed world also believe that they will be able to engineer economic growth. But things have changed at the ground level. The sooner, the IMF and the Western central banks understand this, the better it is going to be for all of us.

The column originally appeared on Firstpost on Sep 7, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Why money printing hasn’t led to inflation Part 2

3D chrome Dollar symbolIn a column published on March 24 I had explained why despite all the money printed by the central banks of the world over the last six and a half years, we haven’t seen much conventional inflation. The central banks have printed money (or rather created it digitally through a computer entry) and used it to buy government and private bonds
By buying bonds, central banks pumped the printed money into the financial system. This was done primarily to ensure that with so much money floating around, the interest rates would continue to remain low. At low interest rates people would borrow and spend. This would help businesses grow and in turn help the moribund economies of the developed countries.
But money printing should have led to inflation as a greater amount of money chased the same amount of goods and services. Nevertheless, inflation continues to remain very low in most of the developed world.
This, as I had explained, is primarily because of the fact that the world is in midst of a balance-sheet recession (a term coined by Japanese economist Richard Koo). Between 2000 and 2007, people in the developed world had taken on huge loans to buy homes in the hope that prices would continue to go up forever.
A recent report titled
Debt and (not much) deleveraging brought out by the McKinsey Global Institute explores this point in great detail. As the report points out: “Between 2000 and 2007, household debt relative to income rose by 35 percentage points in the United States, reaching 125 percent of disposable income…In the United Kingdom, household debt rose by 51 percentage points, to 150 percent of income.” Other parts of the developed world also saw similar sort of increases in their household debt.
Much of this increase in household debt came from people taking on more and more home loans (or mortgage) to buy property. “In the United States, for example, household debt grew from just 16 percent of disposable income in 1945 to 125 percent at the peak in 2007, with mortgage debt accounting for 78 percent of the growth. Mortgage debt represents the majority of household debt growth in other countries as well. Our data show that mortgages now account for 74 percent of household debt in advanced economies,” the McKinsey report points out.
What is interesting is that this increase in home loans (or mortgage debt) in particular and overall household debt in general, was not accompanied by an increase in home-ownership rates. “In the United States, for instance, the rate of homeownership rose from 67.5 percent in 2000 to 69 percent at the peak of the market in early 2007, while household debt rose from 89 percent of disposable income to 125 percent. In the United Kingdom, the homeownership rate rose by 1.3 percentage points from 2001 to 2007, while the household debt ratio rose from 106 percent of income to 150 percent,” the McKinsey report points out.
As home loans were easily available at low rates of interest, more and more money was borrowed to buy homes. This pushed up home prices in most of the developed world. Between 2000 and 2007, home prices rose by 138 percent in Spain, 108 percent in Ireland, 98% in United Kingdom, 89%in Canada and 55% in the United States (on a slightly different note, real estate prices in India during the same period would have risen at a much faster rate. But we are talking about developed economies here where home-ownership rates are high and populations are stable or declining).
As home prices went up, this meant that the newer individuals wanting to buy homes had to take on a larger amount of home loan. This pushed up total household debt.
The correlation between rising home prices and increase in household debt to income ratio is very strong across countries. What also encouraged people to take on home loans was the fact that interest rates were very low, which meant that monthly EMIs required to pay off home loans were low as well. Hence, people could borrow much more than they would otherwise have.
Also, as home prices went up, people borrowed and bought homes not to live in them, but to just speculate, hoping that prices will continue to go up forever. A survey of home buyers carried out in Los Angeles in 2005, found that the prevailing belief was that prices would keep growing at the rate of 22 percent every year over the next 10 years. This meant that a house, which cost a million dollars in 2005, would cost around $7.3 million by 2015. So strong was the belief that home prices will continue to go up.
But that wasn’t to be. Once the bubble burst, housing prices crashed. This meant the asset (i.e., homes) people had bought by taking on loans had lost value, but the value of the loans continued to remain the same. Hence, people needed to repair their individual balance sheets by increasing savings and paying back debt.
Further, many of these loans had been issued at low interest rates. Once these interest rates started to go up, the EMIs also went up. As the McKinsey report points out: “In countries where many households have variable rate mortgages [home loans], such as the United Kingdom (and more recently Denmark), households are exposed to interest rate risk. When rates rise and monthly debt service charges are adjusted upward, some households may find they cannot afford their mortgages. This occurred in the United States prior to 2007, when households took out variable-rate mortgages with low “teaser rates,” but had trouble keeping up after a few years when the teaser rates expired.”
As EMIs went up and home prices crashed, more and more income was used to service the home loans. This had an impact on consumption. As the McKinsey report points out: “This dynamic is seen clearly across US states…A similar pattern can be seen across countries: the largest increases in household debt to income ratios occurred in Ireland (125 percentage points) and Spain (59 points), which also had the largest drops in consumption.”
As the accompanying table(from the McKinsey report) shows, households in many countries have been deleveraging since 2008, after the start of the financial crisis.
What this tells us clearly is that people are using more and more of their income to pay off their existing loans. Hence, even though central banks have ensured that low interest rates continue to prevail, people are no longer interested in borrowing and spending money. They are more interested in paying off their existing loans.
And that explains why all the money printing hasn’t led to conventional inflation though there has been a lot of asset price inflation. Investors have borrowed money at low interest rates from developed countries and invested them in financial markets all over the world, leading to stock markets rallying.

The column originally appeared on The Daily Reckoning on April 2, 2015

The IMF growth forecast for India needs to be taken with a pinch of salt

imf-logoVivek Kaul

The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith


Every bull market needs a story. In fact, different phases of the same bull market need different stories.
The latest story to hit the Indian stock market is that India will grow faster than China in 2016. This economic forecast has been made by the International Monetary Fund (IMF) in the World Economic Forum Outlook Update which was released yesterday (January 20, 2015). In this update, the IMF expects India to grow by 6.5% against China’s 6.3%.
This forecast is along the lines of another forecast made by the World Bank on January 14, where it said that India will grow by 7% in 2017-2018. It expects China to grow by 6.9% during the course of that year.
The IMF offers reasons as to why it sees growth in China slowing down from 7.8% in 2013 to 6.3% in 2016. “Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation,” the IMF states.
For India, the IMF states that the “weaker external demand” will be “offset by the boost to the terms of trade from lower oil prices and a pickup in industrial and investment activity after policy reforms.”
As far as justifications are concerned, you cannot get more general than this. Having said that, this bit of news drove the BSE Sensex to rally by 1.84% to close at 28,784.67 points on January 20. The foreign insitutional investors who have been at the forefront of driving the Indian stock over the last few years, bought stocks worth Rs 1275.59 crore. The domestic insitutional investors, who on most days do the opposite of what the FIIs are doing sold stocks worth Rs 761.7 crore.
With India likely to grow faster than China in the years to come, it is but natural that FIIs want to bet their money on India. Nevertheless, the question is, should the IMF forecast on India (or even their forecasts in general) be taken so seriously?
IMF forecasts in general have a certain amount of optimism bias built into them. As Chris Giles wrote
in the Financial Times in October 2014: “Between 2011 and 2014, these forecasts have averaged 0.6 percentage points higher than the outturn…In the very laudable exercise to examine what went wrong, the fund discovered about half of its errors came from predicting greater strength in Brics countries – Brazil, Russia, India and China – than occurred.”
So, in the recent years the forecasts made by IMF have been going wrong big time. In fact, in the aftermath of the financial crisis, the forecasts have been going wrong since 2009. As Alex Christensen writing
in a June 2014 article for Global Risk Insights points out: “Every year since 2009, the IMF has overestimated the growth of not only the US but also of Europe and the world…Since 2009, when economic prospects looked dour, these forecasts have consistently been too optimistic. In 2010 and 2011, the IMF projected the world to catch up to the pre-crisis GDP trend by 2015. Now, it projects that world output will still be 4% lower than the pre-crisis trend in 2018.”
What these insights tell us is that IMF forecasts usually turn out to be wrong. In fact yesterday’s outlook release was an update on forecasts first made in October 2014. And sample what IMF had to say in this release: “Global growth in 2015–16 is projected at 3.5 and 3.7 percent, downward revisions of 0.3 percent relative to the October 2014 World Economic Outlook (WEO). The revisions reflect a reassessment of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices.”
In a period of less than four months the IMF has had to revise the global growth numbers majorly. Taking these factors into account, it is safe to say that IMF’s forecast for India growing at 6.5% in 2016 will turn out to be wrong. And given this, this and other forecasts made by the IMF need to be taken with a pinch of salt.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on www.firstpost.com on Jan 21, 2015

Rajan is right, the world does not need another China

ARTS RAJANVivek Kaul

The index of industrial production (IIP) for the month of October 2014 fell by 4.2%, in comparison to October 2013. IIP is a measure of the industrial activity within the country.
The biggest fall within the IIP came from ‘Telephone Instruments (including Mobile Phones & Accessories)’ which fell by a massive 78.3%. Several analysts have linked this massive fall to the decision of Nokia to shut-down its mobile-phone manufactruing factory in Chennai.
The fall “reflects the impact of the shutdown of the Chennai-based Nokia mobile manufacturing plant,” write Chetan Ahya and Upasana Chachra of Morgan Stanley in a research note dated December 13, 2014. Nokia shut-down the factory on November 1, 2014. Hence, production must have been falling through October and that is reflected in the IIP number.
If the shut-down of one factory manufacturing mobile phones has led to such a massive fall in telecom manufacturing in the country, what does that tell us? It tells us that Nokia was just about the only company manufacturing mobile phones in India. Even the home grown Indian brands (and there are many of them), which now have a significant presence in the mobile phone market, also don’t manufacture mobile phones in the country. They simply import phones from China and put their own brand name on it.
In fact, mobile phones are a fairly complicated instrument, we don’t even produce the 
rakhis, pitchkaris and ganeshas that we buy at different times of the year to celebrate different festivals. It is cheaper for businessmen to buy things over the counter in China or manufacture them there, and simply ship it to India.
India lacks competitiveness even in making the most basic products. So, everything from the most complicated electronic products to nail-cutters that we buy, are made in China.
Keeping this in mind, where does the 
Make in India programme launched by the prime minister Narendra Modi stand. The website of the Make in India programme defines it as “a major new national program designed to transform India into a global manufacturing hub.”
There are a couple of questions that crop up here. The first is that when Indian companies are not manufacturing goods in India and sourcing them from China, why will the foreigners come to India and make it a global manufacturing hub?
The second and the more important question is can the world absorb another global manufacturing hub like China? This point was raised by Raghuram Rajan, governor of the Reserve Bank of India (RBI) 
in a recent speech.
Rajan started his speech talking about slowdown of global growth. As he said: “The global economy is still weak, despite a strengthening recovery in the United States. The Euro area is veering close to recession, Japan has already experienced two quarters of negative growth after a tax hike.”
Over and above this things in China are not looking good either. Albert Edwards of 
Société Générale whose work I closely follow has been talking about things not being well in China for a while now. In his latest research note dated December 11, 2014, Edwards writes: “Chinese inflation data surprised to the downside this week with November’s producer prices falling more deeply than expected at 2.7% – a record 33 consecutive months of yoy[year on year] declines.”
Producers price index is essentially what we call the wholesale price index in India and its been falling for 33 consecutive months in China. What this means is that prices have been falling in China and China can end up exporting this deflation or fall in prices to other parts of the world.
Long story short: Global economy will not grow anywhere as fast as it was in the past or even currently is. This is a sentiment echoed by Niels C. Jensen, in 
The Absolute Return Letter for November 2014, where he writes: “I don’t think GDP growth at an aggregate level will return to levels experienced in the past anytime soon.” Jensen is another analyst whose newsletter I closely follow. The International Monetary Fund has also been downgrading its global growth forecasts.
In this scenario, how much sense does it make to build an export led growth strategy right from scratch. As Rajan put it in his speech: “Slow growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future. Other emerging markets certainly could absorb more, and a regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-led China.”
Over and above this, developed countries are also trying to get their respective manufacturing sectors up and running again. The 
Make in India strategy will have to counter that as well. “Industrial countries themselves have been improving capital-intensive flexible manufacturing, so much so that some manufacturing activity is being “re-shored”. Any emerging market wanting to export manufacturing goods will have to contend with this new phenomenon,” Rajan said.
And last but not the least, China will not sit around doing nothing if India gets aggressive on the export front. “When India pushes into manufacturing exports, it will have China, which still has some surplus agricultural labour to draw on, to contend with. Export-led growth will not be as easy as it was for the Asian economies who took that path before us,” Rajan pointed out.
Moral of the story: just because something has worked in the past, doesn’t mean it will work now. This does not mean that India should stop banking on an export led strategy totally. What it means is that an export led strategy of “subsidizing exporters with cheap inputs as well as an undervalued exchange rate” that worked beautifully for Japan, South East Asia, South Korea and China, will not work at this point of time.
In this scenario, if the government should first encourage Indian companies to make products in India for the Indian market. Doing that would be a good starting point. This would mean trying to improve the ease of doing business in India. 
In the latest Ease of Doing Business rankings, India ranks 142 among the 189 countries that were considered for the ranking.
On the critical parameters of starting a new business, dealing with construction permits and enforcing contracts, the country ranked 158th, 184th and 186
th, respectively. These rankings need to improve if Indian businesses are to be encouraged to invest in India.
There are a whole host of things that need to be done. As Rajan put it: “This means we have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transactions costs of buying and selling throughout the country. Improvements in the physical transportation network I discussed earlier will help, but so will fewer, but more efficient and competitive intermediaries in the supply chain from producer to the consumer. A well designed GST bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come.”
Over and above this, labour reforms need to be carried out as well. Unless these and many other steps are carried out, what seem like innovative policy proposals, will end up sounding like hollow marketing slogans.
While the government has made all the right noises on this front, no significant economic reform has happened until now. As Arun Shourie
told The Indian Express in a recent interview quoting the legendary Urdu poet Akbar Allahabadi: “Plateon ke aane ki awaaz toh aa rahi hai, khaana nahin aa raha (The  plates’ sound can be heard but the food is not coming).”
To conclude, once Indians start making in India, the foreigners will automatically follow.

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Dec 16, 2014