India’s Economic Problems Further Exposed

Business, China, Company Strategy, Economics, India, Polyolefins

Indiapolyolefins.jpgBy John Richardson

CHEMICALS company executives are going on the record to say that the outlook for growth in China has become exceptionally uncertain.

This echoes comments first made by the blog 18 months ago.

At that time, the consensus view amongst analysts seemed to be that China was definitely heading for a Supercycle, when it would power global petrochemicals consumption, more than compensating for any continued weakness in the West.

And now doubts are increasing over another great hope for the petrochemicals industry – India.

(See the above table for forecast Indian demand growth rates for polyolefins, which were made public at the Asia Petrochemical Industry Conference in Taipei, Taiwan, last month. We will be revisiting these estimates.)

The evidence that India’s growth model was built on shaky ground has also been around for a long time.

As fellow blogger Paul Hodges points out in this post, it has always been a fallacy to argue that India will quickly turn into a Western-style middle-class country.

Why? Because:

* India remains one of the world’s poorest countries.

*As we again warned in chapter 6 of Boom, Gloom and the New Normal, most analysts have wrongly interpreted high levels of income growth to mean India will rapidly become a Western middle class country.

*Most analysts reached this conclusion because India’s average per capita income had been growing fast, in percentage terms, as economic reforms took place. It was up 12% in 2012 after 14% growth in 2011.

*But, and this the crucial issue, average per capita income is still only Rs 57k/year ($1040).

What is wrong with India is that far too much wealth is concentrated in the hands of far too few people.

Plus, flawed politics (what country doesn’t have flawed politics?) make it difficult for India to achieve the social and economic reforms essential to adequately even-out the benefits of growth.

A huge issue has for a long time been weak foreign investor confidence. Foreign investment is vital for solving India’s infrastructure impasse.

India’s economic weaknesses have been further exposed by the recent acceleration in foreign capital flight.

Part of the reason for this increased outflow is indications from Ben Bernanke that the US quantitative easing programme could soon be curtailed. There has been a retreat from emerging market equity markets in general.

“From 20 May up until last week, around $10bn poured out of the country, partly thanks to Ben Bernanke’s comments,” said a Mumbai-based chemicals trader.

But he believed that the speeding-up of capital flight was also been driven by “India’s people and policies being at a crossroads. Nobody knows what direction we should take.

“The overseas investment community had already been scared-off by mindless policy decisions on taxation – for example, the Vodafone case.

Last week, the value of the Rupee fell to an all-time low against the US dollar.

“The Reserve Bank of India (RBI) has been under pressure from the entire business community to lower interest rates and was expected to respond positively in June or July,” the trader continued.

“But now, because of the risk of a further outflow of dollars and the impact that this would have on inflation and the current account deficit, the RBI will find it a lot harder to lower interest rates.

“This is likely to mean no respite for Indian corporations that are paying a Benchmark Prime Lending Rate (BPLR) of 15%, even in a downturn.”

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