Friday, May 25, 2012

The India Story is Deteriorating

From the FT:
India’s economy has been slowing for more than a year as corruption scandals involving senior members of the Congress-led coalition government have paralysed parliament and blocked key reforms to boost investment.

India’s macroeconomic landscape has deteriorated further since the start of the year. New Delhi’s fiscal and trade deficit have ballooned to 5.8 per cent and 9.9 per cent of GDP respectively, while inflation has shot back into double digits.

The Indian rupee also weakened to a record low against the dollar this week, which is likely to fuel inflation further in coming months.

Meanwhile, industrial output contracted 3.5 per cent in March 2012 and exports have been declining consistently, as demand in Europe for cheap Indian goods has dropped.

This is a huge story.  Back in 2009, I noted that foreign economies would help to lift the world economy out of recession.  
There's a great myth that goes around the Internet: the US doesn't make things anymore. If that were true, then we would have exported $1.8 trillion dollars of goods in 2008. And in 2008, we exported $108 billion of foods and beverages, $388 billion of industrial supplies, $457 billion of capital goods, $121 of automotive products and $161 billion of consumer goods. In other words, exports account for about 13% of GDP. And they may become far more important to US growth:
In the process of gorging on overseas goods and services, the US by happenstance fired up emerging economies such as China, Korea, Taiwan, India, Brazil and Mexico to build their productive capacities and spawn their own middle classes and consumer cultures. Paulsen has long called this trend the US's "emerging-market Marshall Plan."
As US consumer spending slows we will import less, thereby lowering the total amount of imports in the trade deficit formula. At the same time, Emerging economies have seen a growing middle class which will want to buy more goods and services. And some of those will come from the US.
This has occurred over the last 3 years, as US exports have been a bright spot in the expansion.

However, that story is now changing.  As the above story notes, India is having serious problems that will hamper growth going forward.  That means that overall, the world economy has a big problem.