Interesting talk from Goldman Sachs's chief India economist
So, lecture clubs are still a thing in India (they're kind of cool), and the one I'm a member of just had Goldman Sachs's chief India economist give a talk about India's GDP growth in recent years.
The Indian government just changed the way they calculate GDP in three very important ways which have resulted in some odd numbers. First, they updated the "basket" of goods and services used to calculate prices (it had previously included things like mechanical typewriters). Secondly, they joined pretty much the entire rest of the world in moving to a market price rather than factor price system of measuring (basically, previously they had been measuring the cost of industrial and agricultural inputs, and now they are measuring the actual price of the finished good). Thirdly, whereas they had previously relied on a survey of about 3000 businesses, they now use raw data from 500,000 businesses. As a result of these changes, the GDP growth went from 6% in FY2013 to nearly 9% in FY2014 by these new metrics.
The economists like that the Indian government has modernized its reporting system, at least in principle, but they dislike that they now have no consistent time series data -- the large suspicion is that the size of the GDP has been vastly underestimated for decades, with the result that inflation has been over-reported (it is officially at about 7% right now, but realistically is probably more like 4%).
Anyways, for anyone who's interested, here is Goldman Sachs's take on the forecast for Indian growth in the near term:
1. GS thinks rural demand is significantly lower than the government says. Rural demand remains a huge driver of the Indian economy, but while the government says it grew by 4% last year, GS estimates it fell by 2%.
2. The Indian government needs to collect a lot more in taxes. India collects income taxes from only the wealthiest 3% of individuals, and has a much higher corporate tax rate than most of the rest of the world. Tax receipts are up somewhat this year but still insufficient to meet the country's infrastructure spending needs. The new government has proposed what is essentially a VAT to make up the difference; GS likes that it is a reliable way to get revenue, but fears its regressive nature will further impede rural demand.
3. Internet access is far too low. Internet access is a key indicator of economic growth in developing economies, but it remains stubbornly stuck at around 20% in India. India has 37 cell phones per 100 citizens, compared to for example Malaysia which has 147 cell phones per 100 citizens. This lack of access is particularly strong in rural areas.
4. Too much of the economy is informal. I assumed it was a typo, but he confirmed: 90% of the Indian labor force is in the informal economy.
5. Trade is weaker than everyone thought it would be. Trade still has not recovered from 2008, and models that assumed trade would drive growth wound up being too optimistic because of that.
6. International investment cannot substitute for internal demand and infrastructure. See #5. India has to continue investing in its own people and particularly work on building its education system.
7. The civil service needs reforming. India is basically alone among Commonwealth countries in that it never reformed its civil service after independence. They still have the old Whitehall style system where literally all promotions are based entirely on seniority. As a result, the senior civil service in India is the oldest in the world, with an average age of 62.
8. India needs to make it easier to start businesses. He used as an example the state of Maharashtra's requirements to start a warehouse -- even not factoring in bribes, simply getting permission to build a warehouse takes 190 days and costs 1.2 million rupees ($200,000 -- that's just for getting the permits, not the construction itself).
During the question period I said that coming from the US, where there's almost magical thinking about monetary policy, it was odd to hear a talk that didn't mention monetary policy at all, so I asked whether he viewed the Reserve Bank as having a role to play in India's economic growth in the future. His reply was interesting: apparently the RBI vastly over-responded to the 2008 crisis (which actually didn't hit India very hard at all) with very loose policy, resulting in 4 years of double-digit inflation. Because of that, the Bank is very gunshy about stepping in again right now, so as a political reality all of the direction will have to be fiscal for the time being. (This is, basically, the reverse of the situation in the US, where fiscal direction is politically impossible and everything has to be monetary.)
Anyways, just wanted to share that for any other econ nerds out there. India remains the fastest growing economy in the world, but there are some worries about how "deep" that growth is, and whether rural demand can sustain it.