As the West scrambles to resolve their financial woes, it seems the East has it better – perhaps. Last Thursday, India’s central bank issued a trenchant warning: economic growth might fall below 8%. This would diminish its structurally high growth trend of 8-8.5% in recent years.
Morgan Stanley’s leading indicator for growth, M1—the measurement quantifying the amount of money in circulation within an economy —is signaling slower growth. It also revised downwards its India’s economic growth forecast for 2012 to 7.4%.
Corporate investments have been responsible for India’s sustainable growth, but the 2008-2009 global credit crisis eroded its share in GDP. Moreover, the erroneous crisis stimulation that boosted consumption instead of the necessary capital creation was unable to reform the economy. The government loosened monetary policy but did not offer avenues for creating more capacity.
Ever since the 1990s, India has been in dire need of foreign investment in infrastructure. Some pundits point to the skewed investments concentrated in consumer durable sectors as the reason for a slower growth compared to China.
In late 2010, Mr Duvvuri Subbarao, governor of the Reserve Bank of India, said:
“Our infrastructure investment needs are huge,” said Mr Subbarao. “The concern though is that infrastructure, by its very nature, needs long term finance, and volatile flows chasing short-term returns does not meet the need.”
It is hard to see investments coming in when electricity is bereft in the country. A large part of India does not receive electricity. While in sub-Saharan Africa, about 70 percent of the population lack electricity, no country has more citizens living without power than India. And the recent ‘coal rush’ is not mitigating this problem.
The locals protested intensely, culminating to violent repressions and deaths, when the government decided to jump onto the bandwagon.
As Justin Guay, of the US Sierra Club’s International climate programme, blogged:
“The sheer scale of this expansion has left local communities to bear the brunt of an increasingly violent onslaught of land acquisition and displacement, corruption and intimidation, and a toxic legacy of localised pollution.”
Last year, 173 coal-fired power plants were approved, which amounted to one project per day. Recently, the government announced an addition of about 200 new coal-fired power plants over the next five years.
The lack of electricity is only one of the reasons affecting India’s economy, but it is one that does not surface in public debates as frequently as the issue of corruption.
As doubts linger over India’s economy, the same could be felt for a China economy that is pumped up on steroids. The two giant economies could potentially falter like their counterparts in the West – but not just yet.