Slower than expected but faster than the rest…the IMF needs to look more closely at India

As a wise man once said, there aren’t any fleas on a dead dog, but when the dog is an economy it’s even less informative to count the fleas than to check for vital signs of life. That’s a lesson the IMF might usefully have taken to heart when it laconically reported last week that India’s economy was “growing more slowly than expected”. Well, I suppose it depends what you mean by “expected” and how fast “slowly” can be before it speeds up. But rather than counting the fleas, lets take a look at some of the vital signs of India’s economy instead…lets take a look at it’s Industrial Output.

First though, a bit of context: in July of this year the US industrial sector suffered its first contraction since 2009 (when you could still buy VHS tapes). And more importantly, the PMI index (a key pointer to trends in manufacturing and service sectors) fell to 44.9 in the US last month: given 50 is the PMI threshold separating expansion from contraction, the US manufacturing sector is now officially in decline and it is impossible to rule out Donald Trump’s trade war with China as its root cause. America’s yield curve promptly inverted (again): a sure sign that bond investors fear a recession is on the way.

So that old American dog looks far from healthy at the moment, although it does (to be fair) have a few more fleas than it’s UK counterpart…

Industrial production seems to be dying on its knees in the UK with Rob Dobson, a director at the influential HIS Markit agency certainly declining to mince his words: “The UK manufacturing sector is suffocating under the choke-hold of slower global economic growth, political uncertainty and the unwinding of earlier Brexit stockpiling activity…Production volumes fell at the fastest pace in seven years as clients delayed, cancelled or rerouted orders away from the UK.”

And unlike the States, the UK is now facing a double whammy in the shape of higher than expected inflation: in July the rate broke through the Bank Of England’s target of 2%, almost certainly because of the higher prices caused by a sharp decline in sterling’s value against the Euro and the Dollar (Brexit again I’m afraid).

On proper reflection the IMF might think these two old colonial dogs are probably better targets for its gloom.

Certainly over in India things couldn’t be more different. Industrial production on the subcontinent rose by 4.3% in July, much improved from the June figure of 1.2% and consumer inflation rose only very marginally in August to 3.2% (from 3.15% in July): well within the Reserve Bank’s target of 4% (unlike the UK counterpart). And, equally importantly, these promising trends continue to be underpinned by a range of measures introduced by the Modi Administration to improve capital fluidity and promote Foreign Direct Investment. The Reserve Bank is also set to cut base rates further having already announced a 110 basis point relaxation earlier this year.

On the subcontinent the manufacturing, mining and energy sectors (dynamo components of India’s rapidly expanding industrial base) have all reported better than expected figures in July at 4.2%, 4.9% and 4.8% respectively. Those are figures most western economies would die for.

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Executive Overview

I’m always wary when economic analysts report “slower than expected” growth because, as the article says, it depends what “slower” means and it depends what your expectations were in the first place. In that light I too found the IMF analysis last month to be particularly muddle headed.

The fact is that the key economic drivers of India’s economy, and particularly its industrial sector, are all outperforming their equivalents in the West and in comparison with the subcontinent the US and the UK are both languishing in the doldrums at the moment.

I’m sure the Fed and the Treasury would each give their institutional right arms for the “slower than expected” growth India is experiencing at the moment.