20231004

India’s Growth Story May Not Have a Happy Ending

The debt burden of Indians is also increasing. Household financial liabilities rose sharply to 5.8% of GDP in the last financial year. The ratio had stood at 3.8% the previous year.

This is a problem. If a country does not save, it does not grow. It is increasingly hard to see where India’s growth momentum will come from.

What the data suggests, however, is that India’s numbers are unsustainable. They’re driven by debt-fueled household consumption and government investment. Neither can form the basis of a long-term growth strategy for India.

In its boom years of the early 2000s, when India grew almost as fast as China, investment by companies optimistic about the country’s long-term prospects powered its expansion. That was backed up by a decent savings rate and a government that steadily decreased its primary deficit — the fiscal deficit less interest savings. That figure was in surplus by the time the financial crisis hit.

Naturally, that couldn’t last. Through much of the 2010s, the government cut down on overall spending. An increase in the share devoted to investment, as well as a consumption boom as more Indian households began to spend on luxuries and access to formal finance increased, kept the economy ticking over for a while.

Now, however, post-pandemic inflation has shrunk real household incomes. That has intensified a pre-existing trend: Gross household savings peaked at more than 25% of GDP in 2010 and have declined sharply since. Households are increasingly borrowing to finance their spending.

At the same time, private-sector investment has never fully recovered since the boom years. China’s investment rate is 40%; India’s is 28% to 30%, well below the peak rates of 34% to 36% achieved in the 2000s.

This decrease is almost entirely due to a collapse in investments made by private corporations since 2008. Attempts to reverse this collapse have not succeeded: Corporate investments continued to decline in the last two quarters, according to Motilal Oswal Financial Services.

Today, the government is doing most of the work on investment; companies aren’t taking on their share of the burden. Total private-sector projects sanctioned by Indian banks and financial institutions, when the government-driven infrastructure sector is excluded, have grown by only 1.8% since the current government took office in 2014.

First, the government must stop taking the lion’s share of Indian households’ declining savings, so that more capital is available at an affordable rate to firms.

Second, it needs to reassure private companies that it is safe to invest in India. Pro-business rhetoric from officials has consistently been undermined by the politicization of tax collection and enforcement, by more complex forms of tax compliance, and by the unthinking extension of regulation. High tariffs meant to boost domestic manufacturing have instead convinced local suppliers that they will not be able to participate in global value chains.

EK: Sounds very familiar. Invest more than spend. And give more autonomy. Popping the cork too quickly is not a good idea.

Made-in-India iPhones Get Trashed on Chinese Social Media

Apple’s India manufacturing has advanced rapidly over the past couple of years to now ship as early as China, albeit at a much smaller quantity.

The prank emerged amid a flurry of snarky nationalistic posts spreading across Chinese social media, Hong Kong-based colleague Zheping Huang helped me confirm. One example of the misinformation percolating on Weibo included the suggestion that European customers are rejecting India-made iPhones due to poor quality and Chinese units are being sent as replacements.

The flood of fake news stems from the fact that China makes the majority of the world’s iPhones — an achievement many are rightly proud of and that provides employment for more than a million people across the country. China prides itself on its tech and manufacturing prowess, and from where I stand, this anti-India sentiment suggests a measure of insecurity about how long that will be sustained. The world’s number two economy is looking over its shoulder.

But, let’s be fair here, Indians give China and its products a hard time too. Our social media discourse has its share of caricatures about the people on the other side of the northern border. Indians buy Chinese tech products, from home lighting solutions to smartphones, without ever fully trusting the country.

Think of Xiaomi Corp. and Oppo’s experience dealing with the New Delhi government, which handed down fines and alleged a series of misdeeds by the Chinese phone makers. Or the 200-plus Chinese apps that India banned — TikTok among them — after a border clash with the Chinese military.

Still, it’s a bit ironic for allegations of subpar production to be coming out of China, after that country took so long to shake off the prejudice around “made in China” as a mark of inferior quality.

Also, I just don’t think there’s that much to worry about. Apple boss Tim Cook has said he wants to do more business in India, but earlier this year he also called Apple’s relationship with China “symbiotic.”

India isn’t going to replace China in Apple’s supply chain anytime soon. It could take about eight years to move just 10% of Apple’s capacity out of China. In other words, it might take us less time to find a successor to the smartphone as everyone’s go-to gadget than see the bulk of iPhones made outside China.

EK: Two-way bashing, Americans swinging.