 "<b>Abheek Barua:</b> RIP emerging markets?")
Here’s some good news! Emerging markets (EM) have seen a cyclical recovery over the last few months. And no, it’s not just India that’s doing all the heavy lifting. China, for one, seems to have responded to monetary and fiscal stimulus. A bunch of indicators of real activity show improvement. China’s central bank has incidentally cut its policy rate six times since 2014 and flooded the market with liquidity. The government has backed its commitment to arresting a recession through fiscal measures by ramping up infrastructure investments. For those who trust the official figures, China’s gross domestic product (GDP) growth should have bottomed out in the 6.5-7 per cent range this year. These are possibly the rates that are expected to clock in the medium term as well. Those who tend to discount these growth numbers by a (ahem!) fudge factor would predict lower levels of growth but the fact is that these are stabilising in their projections as well.
However the two economies in the EM pack that are really moving the needle are Brazil and Russia. Brazil, one of the heftier members, seems to have arrested its recessionary spiral largely through to the market-friendly policies introduced by its new president Michel Temer. These consist essentially of fiscal discipline, privatisation and deregulation, the very antithesis of his predecessor Dilma Rousseff’s muddle-headed socialism. Consumers still seem wary but business investments seem to be picking up as the corporate sector regains confidence. Investment grew for the first time in 11 quarters in the second quarter this year.
Russia, too, seems on the mend. As in Brazil, consumers remain despondent but a weak rouble and soft financial conditions in general are helping the industrial sector. The recent increase in oil prices should certainly help its case. Economies in emerging Asia, too, seem to have unknotted the apron strings that tied them to China. Domestic growth is picking up, compensating for the drag from exports, helped in good measure by an expansionary fiscal policy.
So far, so good. The problem, as the influential think tank Capital Economics argues (‘The End of the Golden Age ’, Emerging Markets Economics Focus, October 13, 2016) is that there might not be much acceleration in growth going forward. Emerging economies might have climbed out of the ditch they found themselves in last year but from here on, it might be a slow grind. Going by Capital’s estimates and projections, aggregate EM GDP grew by 2.9 per cent in 2015. In 2016, they predict growth of 3.3 per cent and 3.8 for 2017. But that, alas, is the average growth rate that these economies are likely to eke out for the next decade or so. This is a good two percentage points lower than the six-per cent rate they averaged in the past decade and a half.
Thus emerging markets are going the way of the developed world. As with the US and parts of Europe, a slow recovery is under way but the peak doesn’t seem too far off. The days of turbo-charged growth for the New Economic World that helped shore global growth averages are over if Capital Economics.
There are common themes underpinning the dismal growth outlook for both the developed and emerging world. This has to do with reduced growth potential, the result of factors such as diminishing productivity growth, a glut of savings and an unfavourable shift in demographics. While this malaise is somewhat easy to diagnose, the remedy is somewhat unclear and it could take years before economies manage to shake the problem off. Take demographics. Going by United Nations projections, the working age population in the EMs grew by 1.7 per cent since 2000. In the next 15, this is likely to drop to one per cent driven in large part by the adverse shift in China and emerging Europe.
These economies saw a rapid growth in productivity in the 1990s and 2000s, largely by integrating into the global economy. The process of opening up their economies through changes in trade and investment policies resulted in a sharp increase in worker output per capita. Unfortunately, the process of integration happens just once. Once you are an open economy, you’ve got the bang for your buck. You can’t open up again. Additionally, there is another problem for the historically labour surplus EMs. Automation might be undermining the traditional advantage in labour-intensive industry such as mass manufacturing, and while this might not result in an immediate outflow of capital, fresh investments that earlier sought low-cost manufacturing and service hubs could be tardy.
Illustration by Binay Sinha
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There could be two ways of thinking about the implications for India. Those who wish to emphasise the similarities with other EMs would advise that India’s growth prospects be viewed against a larger backdrop. Indeed, India is similar to its peers in a number of ways — it has a shrinking fiscal space, faces threat from automation, and productivity growth has been soft. All these could keep a lid on long term growth.
Others would perhaps make a case for taking a more nuanced, differentiated approach to EMs rather than putting them through a cookie cutter. If that’s the perspective that you take, you might take comfort from the fact that India does have some features that are different from its peers. Its demographics are at least moving in the right direction. There is scope both for more internal reform and openness that could potentially boost productivity.
That said, people like me, who make a living from forecasting stuff such as growth rates, might want to kick the habit of pushing up growth forecasts incrementally as we predict further and further into the future. If the golden era of the EMs is over, that should affect the prospects for India as well. Eight per cent growth could well turn out to be the new normal.
The writer is chief economist, HDFC Bank