The Indian economy is growing fast, but where is it really headed?
A couple of weeks ago Weetabrics happened to spend a night in a family-run hotel in rural Mexico. As part of the welcome pack, along with a towel and a small bar of soap, was a shampoo sachet. Nothing unexpected in this, but it gave an opportunity to Weetabrics’ travel companion, who happened to be a pundit of the Indian market, to observe that shampoo sachets are ubiquitous in the Southeast Asian nation. In fact, she said, shampoo is more commonly sold in sachets than in plastic bottles.
At a time when a shower of contradictory data is making it hard for experts to conclude anything about the Indian economy, the anecdote provides an interesting bubble through which to analyse the market.
The most puzzling figure is the country’s GDP growth estimate for the three months to June, released yesterday, which came at 7 percent. This matched China’s own rate of expansion and was a big cut above the dismal performance of other large emerging markets such as Russia, Brazil or South Africa. As Beijing’s economy tumbles, there is therefore much anticipation in New Delhi that India will overtake China as the new engine to power the world economy.
But then again the figure came below forecasts, which placed India’s expansion rate at 7.5 percent. In fact, most headlines reporting on the stats expressed disappointment. So should we be happy or grumpy about the recent performance of the Indian economy?
The shampoo sachet story, admittedly, doesn’t directly answer the question. But it still gives us a few drops of real-life insights. For one, the continued growth of markets such as this, where very small consumer transactions end up making big rivers of economic activity, is what is allowing India to outpace peers. The country’s economy is indeed largely driven by domestic consumption, in contrast to China, Russia and Brazil, which in varying proportions rely more on investment or exports. That makes the country less vulnerable both to capital outflows and global trading conditions.
Unfortunately, however, it also provides a number of caveats to nuance the merits of India’s economic performance. First, the country is growing all the faster as it is starting from a very low base. The reason why Indian consumers buy shampoo in 30ml sachets is because the traditional shampoo bottles have a higher unit price than most of them can afford. India’s GDP per capita, at $1,631 in 2014, indeed remains far below China’s $7,594.
A consumer-driven economy also works better when the value of imports remains under control, as internal demand otherwise creates a current account deficit that must be financed. As it turns out India is being lucky these days, as it is a big oil importer that’s benefitting handsomely from low hydrocarbon prices. But that may not last forever.
The other side of the trade balance equation is more worrying: despite a rupee at rock-bottom levels against the dollar, India’s exports have grown at no more than 2.2 percent year-on-year in 2015. While the lacklustre performance owes partly to paltry global economic conditions, it also points to India’s enduring competitiveness deficit relative to emerging market peers. Investors and companies continue to complain that the country remains a tough one to do business in: red tape is rife, infrastructure is poor and corruption hasn’t gone away.
It doesn’t help that the government’s reform impetus seems to have stalled on a number of fronts. Narendra Modi, elected last year on a strong liberalisation mandate, has dropped ambitions to revamp land acquisition laws, which would have made it simpler to buy land for industry, housing and roads. He has also been blocked from introducing a nationwide goods and services tax that would have turned India into a single market by the opposition.
U-turns may soon characterise India’s monetary policy as well. Confronted with what it calls disappointing GDP figures, the central bank is considering easing interest rates by 75bp at the end of the month. But as a study of shampoo prices over time would reveal, Indian inflation hasn’t gone away. And the Reserve Bank of India’s target of bringing it below 6 per cent by next January may suffer from laxer liquidity conditions (and a dent in the bank’s credibility stemming from a change in direction).
The sachet tale does provide us with a positive note with which to finish on, however. In a 2007 book titled “Winning in the Indian Market”, management consultant Rama Bijapurkar observes that keeping costs down and preserving profit margins is requiring relentless innovation by shampoo makers. Filling exactly the right amount of shampoo in each sachet, for instance, has induced companies like Hindustan Lever to learn from fuel injection pumps that were used by the automobile sector.
That the shampoo market continues to thrive shows how much Indian entrepreneurs and corporation have been able to innovate – something that should help them conquer both domestic and international markets. That is, if their political leaders finally clean up their act by removing the barriers that continue to block them.