How bad is India’s economic and financial crisis?

Of course we don’t know.  However Kapur and Subramaniam make a good case for “probably not so bad.”

Maybe so, but here is my worry.  Within the span of about a year, India has gone from eight percent plus growth to the range of four to five percent, and perhaps with further downward momentum.  That is a big shift.  And that has happened without any initiating financial crisis, without any war or natural disaster, without any collapse in aggregate demand, and without any price collapse of a primary export product.  It just happened.

It could be the Indian economy bumped up against a hard energy constraint; Indian energy policy is notoriously inefficient.  Still, it is unlikely that is the whole story or even half of it.

One has to wonder whether India is an economy moving across multiple equilibra (note to self: FN Roger Farmer), and the passage of time has been revealing that India “deserves” increasingly inferior expectations about future economic performance.  When it comes to multiple equilibria, there may be more than two.  India’s very response to the current crisis will determine which equilibrium comes next and that is not altogether reassuring.

Non-linear effects seem to be in the running here, so India’s crisis could be worse than the brute statistics alone (or an IS-LM model) would indicate.


Perhaps this should be a wake-up call that there's only so far call centers and software body shops can take an economy. India had been growing fast without dealing adequately with its long term flaws, such as bad sewers, roads, and public schools. Those are boring-sounding old-fashioned modern problems in a seemingly post-modern world, but they matter. The nationalist Chinese have executed far better at the blocking-and-tackling basics than the globalist Indians have.

If everyone in India were staffing a call center or a software programmer, the country would be considerably wealthier than it currently is.

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Yes. Yes they have.

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nationalist Chinese.
Yes, I see the "n" is not capitalized but still.....

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" the range of four to five percent..."

Beats the Hindu rate of growth, doesn't it? :-)

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Steve, are you talking about New York, Philadelphia, or Chicago? :-)

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I have to say the ignorance implied your earlier comment on India surprised me. India has to catch up with the East Asia on many parameters, but legal enforcement is not one of them. I have been in banker in Asia for the last 10 years. Try enforcing contracts in Thai, Malay, Indonesian or Chinese (horrors) courts. Indian courts, for their many problems, will enforce contracts. You may want to refer to disputes Indian companies had with foreign banks on derivative trades. Infact for small trades we prefer to refer disputes to Indian courts. The cost of doing legal business in London/New York is prohibitive.

I am a trader. So have learnt the hard way to make predictions about the future. But Indian growth prospects still seem to be the best in Asia. There is a lot of catch up growth left in India. What happened in 2009-2011 was that the India didn't have the institutional capacity to support a 10 growth surge. Not enough engineers with experience to build so many roads/housing complexes/power plants. And the flood of cheap money from monetary easing in the US couldn't change that. Austrian business cycle theory??

You should read less. Think more.

Try getting land rights to build a new hotel.

Hahaha. Maybe you should read more. The hotel industry's biggest problem is overcapacity.

Yes land acquisition is a problem especially for marquee projects. But that has nothing to do with the legal system and everything to do with our democracy. People about to lose their way of life get to make a noise. It could be that they are stupid. Methinks they are just scared.

We've grown at 9-10% with democracy. Will do so again. Our debt is low and the rupee is finally priced competitively. But most importantly we have a lot of catching up to do.

Short the rupee and take your chances.

Here is a good look at how bad land and titling problems are:

And don't expect too much gain from currency depreciation, if any. For one thing, you have to pay more for imports.

My experience is that land in India is very valuable. Indian cities even more so.

It is usually cheaper to litigate (because lawyers and cheap and/or slow) than to pay out.

Delhi metro, although land acquistion was expensive, did manage to break though. They paid a lot, which is what most of the projects refuse to do.

What is hard to do is tax the value of the land.

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Is the problem lack of talent? I know many Indian engineers. They don't seem at all interested in going back to India. I also don't know any non-Indian engineers who are clamoring to go to India. All purely anecdotal, but why would I choose to go to India?

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It's a credit bubble and it's global, that's why Indonesia is sinking as fast as India. Maybe India isn't in the worst position, but if they even suffer a middling crisis that devalues the rupee further, it's could knock over the dominoes across emerging markets because of the size of the economy.

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I have no intention of making any short term predictions about India's pathetic economic performance/future but there are two fundamental reasons India is going to underperform for a VERY LONG TIME, compared to its potential.

1) Missing governance. With absence of any form of reliable governance, markets are extremely thin/shallow in India. The vast majority of the people still resort to gold and other such means to preserve/transfer wealth. Public sector efforts/undertakings have tried to 'complete' many of these markets but they simply can't. The incentives of politicians/bureaucrats are entirely opposite to those of the community.

2) Social system. Key aspects of this include the caste system and severe levels of disrespect of women (including torture and killing of thousands of women for dowry, preventing higher caste women from working in the fields, and killing around 50 million girl children).

Most economists are wasting their time in through superficial and pointless 'theories' such as ISLM or 'multiple equilibria' or 'aggregate demand' or 'linear/non-linear' analyses. I assure you this is PURE junk. Public choice analysis of its governance/democratic system can help. Key issues involved are the incentive structures within the governance system. In such a system, individuals matter a lot (e.g. Modi). The 'system' is more Kafkaesque than Kafka could possibly have imagined.

Let me discuss an implication of the social system. Average measured Indian IQ over the past 60 years is around 80-85. India continues to performs at the bottom of the world on academic (average) performance. Why? Because of the government's "management" of schools (I was Secretary of the Assam Government in the education department so I know precisely how the system 'works') and because of caste oppression (and other social system issues). When 80 per cent of the population is unable to grasp basic facts of life, and when socialist interventionist policies are imposed at every step (e.g. Food bill/NREGA and other rubbish), what is the point of any other analysis?

India has exhausted most of the gains from its 1991 reforms. It is now in a sustained low level 'equilibrium' and will suffer significant bumps on the way.

The solution? Outright and TOTAL reform of the governance system. Some work I had done in this regard can be downloaded here: I'm in very close touch with most political outfits in India, and I can assure you none are interested in reforms. So if you ask me, India is in for a very long and sustained period of further under-performance.

" Average measured Indian IQ over the past 60 years is around 80-85. "

This seems gibberish unless you can point to some legitimate source for this claim.

Nutrition is linked to IQ. Given the rates of malnutrition in India, it would be astonishing if average IQ in India is 100.

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>India has exhausted most of the gains from its 1991 reforms.

Thanks for this. My shallow understanding is that the electoral results over the last few years have been tending towards slowing or reversing reforms that made any economic growth possible.

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I don't quite understand why there's so much alarm about India's lower growth rate. A year ago India was dealing with crippling high inflation and the central bank significantly tightened monetary policy in an effort to cool down the economy. Admittedly inflation remains high but not, I believe, as high as before. Isn't the slowed growth rate simply a result of the tightening of monetary policy? Once the lags are considered slowed growth is precisely what we should expect as a result of the Central Bank's actions, no?

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I'm not sure I'd add nonlinearities and multiple equilibria to macro, we have enough things to deal with already. In this case, why not just lack of confidence in the government: Vodaphone, capital controls, etc, did a lot to convince investors to take their money abroad while they could.

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Being an Indian who has been studying the issues in India more closely, there are a number of factors responsible towards the trigger of downturn in Indian markets.

1. High volatility in the stock markets because of FIIs and the withdrawing of the money. It has been seen over many years that FIIs have brought in a lot of volatility in the Indian Stock Market.
2. Huge Current Account Deficit that has reached alarming levels accompanied with high inflation rates that the government has largely been unable to control despite the monetary policies.
3. High imports of gold and turn of the investors towards gold as a safe haven in the declining market conditions.
4. Undoubtedly, as other eminent authors pointed out the missing governance is one of the attributable factors as well.
5. The primary focus on IT and service sector and the neglect on the manufacturing sector which even showed negative growth during recent times.
6. Presence of rampant corruption and loss of faith of people in the present UPA government. A large number of scams have turned up such as the 2G scam, Coalgate Scam to name a few which have maligned the reputation of the governing party and stirred the already shaky coalition foundation at the centre.

I agree with other people as well on the large number of issues that have been held responsible. Indian education system is far far behind. The growth in manufacturing sectors has not been remarkable when compared to its counter parts such as China (Although I have never been able to see a point in comparing India with China (which has shown tremendous dedication towards growth)).

Revamp of institutions and policies along with the judiciary systems are the factors to look into. Apart from this it is time that India realizes that the growth story can't be continued without bringing the manufacturing sector into the picture.

But the story doesn't end on a positive note, we have not been able to change the policies in tune with the pace of the world. Any signs of recovery seem far from being achieved in the near future.

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I thought you believed something called IQ, or is another blog I've been reading?


On Economic Growth: India Versus China

"If you go back over the last few years, you will see the Indian economy, as per the numbers its government has put out—some of the numbers its government has projected—are comparable with those of China. Then you go see both countries and you’ll realize something is wrong. If India’s growth over the last couple of years was comparable to that of China, where are the schools, the highways, the infrastructure, the housing, where has it all gone?" (Jim Rogers, Friday, August 16, 2013)

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India is the sore thumb of modern economics in which they are going to suffer a good ole fashion Volcker recession. This an economy that has too much AD and also has a fast growing adult population (like the US in the 1970s) and the government is going to have to take Volcker/Carter/Reagan measures to improve things.

1) Strengthen the rupee with high interest rates to get more investment while controlling the cost of all commodities, oil, gold, etc. (The fall in rupee is fast increasing the Indian price of gold and oil.)
2) Allow retail freedom to grow. This means "selling their soul" to big black box stores but workers are not going to be competitive without changes here.
3) Go all Thatcher on the coal and energy industries.


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Regarding land issues, it seems that Indians are more aware of their legal rights, or more persistent in enforcing them, than with other democracies at comparable stages of development. When the US was building the transcontinental railroad, it was sure nice that the natives just up and left their tribal territories behind.

Not to mention compared to modern China, where you take the government money and leave, or you go to jail. Either way your house gets wrecked. Do you think they consult with all the businesses on the street before they decide to tear up the road for the new subway line? Nevermind lost revenues because your shop front is covered in debris. Your problem.

India, like China, has a lot of people who have lived across a limited amount of land for many thousands of years. It's hard to uproot them, and especially hard when a court might side with the residents in question.

Land rights don't account for all of India's woes, but certainly the poor infrastructure is related to this. A more accommodating policy towards foreign investment across the board would help greatly. Foreign companies could potentially offer higher bids on plots of land than Indian developers would, meaning the residents move out happily and the subway line finally gets built. But the lingering socialist ideologies in Congress seem to never go away

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Where are the cheerleaders of “India shining”, “incredible India”, or “India world superpower by 2010, 2020, 2030, 2050” now? So–called “major economists” and “major financial institutions” in the world got India wrong, very wrong, almost always wrong and will keep getting it wrong.

It is because unlike Jim Rogers who has been constantly on the move for a decade putting his feet on the ground zero, most of these “major economists” have never been to India, or have never been there for an extended period of time, on their own, outside a 5-star hotel.

If India’s problem is merely due to limitation of democratic consultancy and lack of land reform which hinder the infrastructure development, then how to explain that even a short motorway to the airport of a major city is full of poleholes, let alone a network of highway? Land reform and democratic consultancy don’t stop people from fixing poleholes, cleaning up the garbage piles alongside of it, and maintaining already built roads well, do they?

What these economic genius have no clue on, though, is that India’s problem is NOT just simple economics, not its lack of land reform, not its democratic system per se, not its politicians...

...It is NOT its complete lack of vision & disregard for long-term planning, not its perpetual “the UK robbed us 200yrs ago” chip on the shoulder mentality, not its prevalent rape-culture, not its major lack of roads, bridges, schools, hospitals, factories, toilets & whathaveyou...

...It is NOT its lack of will and capability to maintain most infrastructure that are already there, not its 10,000 gods and 10 million gurus with cows & stray dogs leading them all roaming the streets 24X7, not its mass malnutrition, not its mass illiteracy, not its filthy and dangerous cities, not its mediocre power generation capability which leads to 1/3 of the country have never seen electricity...

...It is not its lack of clean water, not its corruption, not its using annual international aid money, for decades and ongoing, to help funding a large amount of imported advanced rockets, tanks, warplanes, nuclear submarines, aircraft carriers & ego trips to another galaxy... is not its predatory caste system, not its armed rebel groups that control 1/3 of the country, not its widespread discrimination & hatred against women and girls, not its lazy work ethnics, not even its never ending “promising gold while delivering dirt” empty boast attitude across the society …

Don’t you get it?

India’s real problem is about ALL of them, and beyond.

For the last two decades, Indians prone to bombast and eager to impress the West despite or because of their past colonial masters frequently proclaimed themselves to be "the next superpower." Having drunk deeply from the cup of glowing tributes proffered by a fawning western press, who could blame them? Alas, because of their status as the "world's largest democracy," their every achievement was being magnified tenfold as a foil to the ascending but worrisome "communist" Chinese, particularly in the US.
The many shortcomings comprehensively listed by SP above forewarn that past achievements may not have been attained through sound economic policies and their implementation, but rather through a serendipitous confluence of favourable factors beyond India's control. If the tide has indeed turned, India after all the hype, may turn out to be the emperor with no clothes.

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It's true India has many problems, public health is a major factor and corruption is supposedly pretty rampant. I think another factor not discussed here is that U.S. and Europe ran into India in a big way from 1992 until (roughly) 2009, and things have been cooling off since. IT, call centers, architecture, graphic design, they got a lot of it but it's not an endless supply. I know for a fact a lot of graphic design is moved back to the U.S. as prices (costs) have fallen substantially.

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Why no right thinking person is ever talking about the ' panacea' or the magic pill called ' U I D A I ' number. Yes, if implemented and taken forward with religious fervor it can uproot all the rotten roots and land fiscal deficit in surplus. Already INCOME TAX authorities have on record stated that there is a catch of 36 lakh accounts with doubtful transactions inviting everybody's attention . Now, the important step is to all the H N i 'S bank accounts as well as SB accounts of real estate agents to be scanned for unearthing likely humongous tax evasion numbers. Simultaneously, intensify the efforts to computerise land records and ascertain the holdings of ' looters' and confiscate that property or slap heavy tax. Use all these collected money for agri , industry , waste management , water conservation and solar energy development. Take the national media help and exhort them to support u openly. Well this is the only solution for better INDIA in the medium term.

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I think you have a valid point here. To the people who cite governance challenges, I would say that those problems always existed and it's foolhardy to pin everything on the efficiency or lack thereof in the public system of India. Yes, the governance lacuna probably shaves off few points from our potential growth rate but no, they don't explain why the growth rate decelerated so sharply in just 1-2 years.
It's not altogether a mystery though - inflation, fiscal deficit and a turn in external funding environment has hurt us. Add to that the fact that last decade was the first India made a huge concerted effort to privatize infrastructure development and many of the firms at the forefront didn't exist 10-15 years ago. Infrastructure projects are inherently complex management challenges and there is definitely a learning curve. Most of these firms are heavily indebted, with severe cash flow challenges and the bad loans have weakened the banking system. From there it rolls.

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Just read this article by V Vaidyanathan, Chairman, Capital First, on expectations from the RBI’s credit policy. What do you think?

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