The relatively independent Modi’s strategy and current India have attracted the world's attention for its future development potential. India, blessed by Modi's strategy, is now more ambitious than ever. However, will such ambitions be implemented smoothly? Will India emerge as the world's seventh most powerful country in the future, as it expected in its Vision 2030 -- “Let India become the new world's factory” and the “US$ 5 trillion economy”? Looking at the comments and reports, one can conclude that there are plenty of people who believe that India can achieve this scenario in the future, but it may not be the case. The reason is that the barriers posed by global overproduction (the concept of "overproduction" can be found in the book "Crisis Triangle") are grossly underestimated, and India's economic growth is extremely difficult to overcome the huge barriers of regional competition in the Pacific and Indian oceans.
India's economic performance is now worryingly poor.
The first is a marked slowdown in economic growth. In recent years, India's economic growth record has been very good. Since 2014, India's economic growth rate has exceeded that of China, maintaining at around 7-8%. However, the "India model" that emerged from the "China model" also has major problems. India's economy has been in significant decline since 2019, with economists predicting economic growth of 5% in the 2019 fiscal year ending March 2020, the third consecutive year of slowing growth. With economic growth of 5.8%, 5.0% and 4.5% in the first three quarters of 2019, India's economy has plunged to its lowest level since 2013. Although some analysts believe India's economy will rebound to 6.2% in fiscal 2021, it is clear that such a rebound, if it happens, would fall far short of India's economic growth forecasts.
Second, the rising price level affects consumption in India. What makes the India model slightly better than the China model is that it is built on the basis of "production + consumption", unlike the "China model", which is basically pure production oriented. However, this feature of the India model has higher requirements for inflation control, as the higher prices will seriously affect consumption in the country. According to the Central Statistics Office of India, inflation is spiraling out of control. India's CPI rose much faster than expected in December 2019, to 7.35% from 5.54% in November. Indian food prices rose 14.12% in December, of which vegetable prices rose 60.5%. The CPI rose well above the median of 6.7% in a Bloomberg survey. It was India's largest increase since July 2014 and the first time since July 2016 that the CPI has exceeded the 2-6% target range of the Reserve Bank of India. Consumption accounts for about 60% of India's GDP, so rising prices will inevitably lead to layoffs and debt problems in the country. It is reported that India's private consumption growth slowed to a five-year low of 3.1% in the third quarter of 2019. The rapid rise in inflation has also limited the monetary policy effectiveness of the Reserve Bank of India, suggesting structural problems in the country’s financial sector.
Third, India's manufacturing sector faces huge challenges. Five years ago, India came up with the slogan "Make in India", which was an initiative for India to participate in globalization and develop its manufacturing industry with abundant labor resources. Yet the "Make in India" initiative seems to be falling through. India's industrial production growth has fallen to its lowest level in a decade, figures show. In 2019-20, India's manufacturing sector was depressed, hitting a 15-year low, with industrial growth estimated at 2%, down from a low 6.9% in 2018-19. At the same time, annual growth in India's construction industry was less than 3.2%, compared with 8.7% a year earlier, which of course implies a sharp contraction in the construction sector.
The fourth is the obstacles to the debt and capital environment. In its annual economic report, the IMF stated India was the most indebted of the emerging markets, with general government debt rising to 68.1% of GDP in fiscal 2019, the highest level in three years. According to the latest data from the Reserve Bank of India, India's public debt has reached about US$ 1.4 trillion by 2019, but its foreign exchange reserves are only about US$ 401.776 billion. It is clear that the devaluation of the Indian rupee would be inevitable without the strong support of Indian exports and the inflows of foreign exchange. The devaluation of the Indian currency, which would hamper foreign capital access to Indian markets, is one of the fundamental flaws in the India model.
As our previous research has pointed out, India's development of manufacturing as a latecomer will face a very unfavorable factor -- In a world with overproduction, "Make in India" will face not only competition from "Make in China", but also competition from the world. Therefore, in a world with overproduction, the advantage of India's large and young labor force cannot be overestimated.
What can be contrasted with this is the intense competition from across regions.
While India's economy continues to slide, data from the U.S. Census Bureau showed that Asian exports to the United States were up significantly from June 2018 (a month before the trade war began), with Vietnam surging 51.6%, Taiwan 30%, Thailand 19.7%, Indonesia 14.6% and Malaysia 11.3%. In addition to the Pacific Rim countries, on the Atlantic side, exports from Mexico to the United States have soared 12.7%. Mexico, like Canada, is now one of the top two trading partners of the United States. Some people may think that this phenomenon has something to do with the U.S.-China trade war, China's export restrictions, and the United States' seeking to replace imports. Then let's look at the economic growth of these cross-regional competitors for a more comprehensive analysis and deconstruction.
According to data released by the General Statistics Office of Vietnam, Vietnam's GDP is expected to grow by 7.08% in 2018, exceeding the parliament's target of 6.5% to 6.7%. It was the second consecutive year since 2011 that Vietnam's economy has grown by more than 7%. In 2019, Vietnam's import and export volume is expected to reach US$ 516.96 billion, of which exports are USD 263.45 billion, an increase of 8.1%; imports are US$ 253.51 billion, an increase of 7%, according to the General Statistics Office of Vietnam. The World Bank report stated that Vietnam's economic prospects are good in the short to medium term, with the growth of around 6.5% in the next few years. Thailand's economic growth slowed slightly in 2019, with Thailand’s Ministry of Finance lowered its 2019 economic growth forecast to 3.8% from 4.0% in January as exports weakened and rising protectionism curbed global trade over the past year. In the face of similar external factors, the decline of Thailand's economic growth forecast is relatively conservative. As for Taiwan's economy, its GDP grew by about 3.2% in 2018, 2.86% in 2017 and 1.41% in 2016. Malaysia's economy is expected to grow by 5.4% in 2018. In 2019, Malaysia's Ministry of Finance had predicted that the economic growth rate in 2020 would reach 4.9%. Generally speaking, while the world's leading exporters (supply side) have been affected by the external environment, hampered by the world's conservatism and rising sentiment, and also suffered a slight slowdown in economic growth, the economic performances of countries around the Pacific rim and the Atlantic, such as Mexico, were still significantly better than India.
Therefore, the real problem and challenge for the Indian economy lie in intense regional competition. This is also the biggest pitfall of the India model. Today, China's imports and exports still remain at a relatively high level. The total value of China's imports and exports of goods in 2019 was RMB 31.54 trillion (US$ 4.6 trillion), an increase of 3.4% over 2018. In addition, the production capacity of Indian major competitors has increased dramatically. Under these circumstances, the problem of overproduction in the world will become more serious and the competition will become more intense. In this case, India's economic growth and its capital-driven model that emphasizes production expansion will inevitably be greatly affected and impacted. External factors will have a significant impact on the success of the India model.
It is still difficult to say whether India will be able to ride out the crisis and return to high growth in the future. To a large extent, this depends on the policy adjustment of the Modi’s government, and also depends on whether the major import countries implement monetary easing and artificially expand demand. In general, the challenges posed by overproduction are global, and global overproduction inevitably affects India's rising ambitions. In addition, estimates of various factors such as labor, cost, market size and technological progress in India cannot be overestimated. These factors are variables in the framework of time and regional competition and may not be decisive positive factors. The likelihood that the Indian economy will continue to be affected and impacted by external factors for some time to come is high, and it is likely to become a global risk factor rather than a comprehensive and positive market factor.
