Global slowdown presents mixed bag for India

How a global slowdown could help, and hurt, India

For Indian policymakers surveying the global economy, there are both risks and opportunities. More than most countries, India stands to gain from developments that seem to be underway; but it would require clever and timely policy reform at home to have that happen. The International Monetary Fund, meeting earlier this month, determined that global growth would be somewhat slower than expected - with the United States increasingly looking like the only bright spot among the largest economies. Indeed Germany, till recently an engine of growth for Europe, has seen its exports crash and may even be on the brink of a recession. Industrial output has shrunk more than it has for five years. The German government has cut its forecasts for growth this year and the next by over half a percentage point in each case - from two per cent to 1.3 per cent in 2015. Pressure will increase on Germany to spend more - it now runs the world's largest current-account surplus.

But perhaps the real jolt for the world economy is China. The China Iron and Steel Association reported recently that a growth trend uninterrupted since 2000 has reversed: in the first two-thirds of 2014, China's consumption of steel had actually decreased. Power consumption, another index often used to measure economic activity, has also contracted in some recent months. Most importantly, given the centrality of construction to China's boom, sales of houses and starts on new homes have all declined - down over 10 per cent since the beginning of this year. The Chinese government has paid lip service to the idea of ending stimulus packages to infrastructure, and pushing domestic private consumption demand instead. But the political pressure to keep the growth number high has meant that, repeatedly, small stimulus packages are on offer. The rebalancing of the Chinese government away from a high-investment path is perpetually being postponed.

Taken together, the weakness of Europe and the slowing of China mean that India's export markets will struggle - but the prices of commodities it imports will decrease, too. There is a crucial window of a few years, in which low prices for minerals and petroleum products may permit crucial structural reform at home. Indeed consumer price inflation has already ducked below 6.5 per cent - in other words, below its post-independence average. The sense of prosperity created by this, and by other positive supply shocks, allows for structural change to government policy and for Indian companies to repair their balance sheets. The problem, however, is that the export pie will become smaller. China, for example, managed to grow over the 2000s as an export powerhouse on the back of a booming world economy. India will need to be extra competitive, for it will need to win export orders in a global economy that is slowing relative to a decade ago. In order to make that happen, structural reform will have to be deep and painful - taking advantage of the respite offered by cheaper commodity prices. Policymakers in New Delhi cannot afford to waste the opportunity provided to them.