How China’s Consumption Matters

31 Aug 2015 | Author: | No comments yet »

Eeconomic growth slows to 7%, sets stage for RBI rate cut.

New Delhi: India’s economy grew at a slower pace in the first quarter of 2015-16 compared with the previous three months, although sectoral trends revealed a fragile but uneven recovery, setting the stage for a rate cut by the Reserve Bank of India (RBI). New Delhi • India’s GDP grew slower than estimated, boosting pressure on Prime Minister Narendra Modi to make more progress in overhauling Asia’s third-largest economy. The data, however, threw up more questions than answers about the state of the Indian economy—continuing the trend seen for the past eight months, since the Central Statistics Office (CSO) changed the way it measures India’s economic growth, The latest data released by the statistics department on Monday showed India’s gross domestic product (GDP) growth slowed to 7% in the April-June quarter from 7.5% in the January-March quarter as measured at market prices.

Another measure—gross value added (GVA) at basic prices—showed that economic growth accelerated to 7.1% in April-June against 6.1% in January-March. India’s currency and stocks plummeted last week along with other emerging markets on concerns that China’s slowdown would be worse than anticipated as the Federal Reserve prepares to raise interest rates. While CSO insists that the GDP-at-market-prices number should be referred for internationally comparable growth rates, the RBI looks at GVA at basic prices for even making growth projections. This week he stepped back from land reforms after opposition from farmers, and proposals to overhaul labor laws and implement a national goods-and-services sales tax face delays. “What is needed is to get the GST implemented as land reforms are tougher now,” Vishnu Varathan, a Singapore-based economist at Mizuho Bank said before the data, referring to the Goods and Services Tax.

Yet over the past decade per-capita consumption in China has increased by about 8% to 9% in real terms after adjusting for inflation—multiples faster than any other developed economy and on average twice that of developing economies. Since the nation exports little to China while benefiting immensely from lower commodity prices, India will be less impacted than other countries from developments in China, central bank Governor Raghuram Rajan said in an interview at Jackson Hole in the United States on Saturday.

Many analysts have attributed China’s unbalanced growth to distorted interest and exchange rates, which are seen as repressing consumption and encouraging excessive investment. Showing signs of continued distress in consumption demand, growth in private final consumption expenditure slowed sequentially to 7.4% in the June quarter from 7.9% in the March quarter. The economist Arthur Lewis showed how the transfer of surplus workers from the agricultural sector to the modern industrial economy, complemented by rising investment, leads to rapid but unbalanced growth. The shift of workers from labor-intensive activities to more capital-intensive urban industrial activities increases the share of profits that accrue to firms and entrepreneurs. Asia’s third-biggest economy will expand 7.5 percent in the current year, compared with China’s 6.8 percent, an average 4.2 percent for emerging markets and 3.3 percent for advanced nations, the International Monetary Fund forecast in July.

However, Ghosh said despite the disappointing headline numbers, growth in agriculture, manufacturing, trade, hotels, transport services and construction were encouraging. In Japan, South Korea and Taiwan, consumption’s share of GDP fell by 20 to 30 percentage points over several decades before bottoming out when these countries reached high income levels. The widening but temporary imbalances in these economies were associated with high growth rates, but this allowed them to escape the middle-income trap and eventually transition to a more balanced and mature economy.

The challenge now is to increase productivity through reforms so that moderately rapid growth and continued increases in personal consumption can be sustained. Though inflation levels have been benign, RBI has argued that its previous rate cuts have not been fully transmitted to lower interest rates by commercial banks. “The efficacy of the monetary policy transmission mechanism needs to improve since the pass-through of recent cuts in policy rate to the bank lending rate has been partial, reflecting the constraints in transmission under the existing base rate system,” RBI said. International credit assessor Moody’s Investors Service cut its India growth forecast by half a percentage point from the 7.5% it estimated earlier to 7% due to below-normal monsoon rain and the resultant impact on rural demand. Another much-needed reform would make it easier for private investors to operate in important service sectors such as finance, health and telecommunications, since China’s barriers to entry into these industries are among the world’s most restrictive.

The country will receive only 84% of the 50-year average rainfall in the second half of the June-September monsoon season this year, the weather office said. The government has been striving to push growth in Asia’s third-largest economy since it took office in May last year, promising a spending boost and moving to clear up a regulatory logjam that has held up large infrastructure projects. In its annual report released last week, RBI said the growth outlook for the Indian economy is improving gradually as business confidence remains robust, even as it reiterated its GDP growth forecast of 7.6% in 2015-16, up from 7.2% reported in 2014-15.

While non-Plan expenditure jumped to 33.8% of the allocation during April-July period from 30.5% during the same period a year ago, growth in Plan expenditure was substantial, at 33.9% of target, against 23% during the same period last year, signalling more focus on spending that creates durable assets.

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