The Fastest Growing Asian Economies Of 2020
The New Year festoons were still billowing in the breeze in most parts of the world when a United States drone blew up an Iranian cavalcade at Baghdad airport, killing Qassem Soleimani, who was among Iran’s most powerful generals, The following day crude oil prices jumped $3 a barrel and prices of safe haven gold hit a seven-year high. In India, the benchmark Sensex of the Mumbai Stock Exchange skid by 1.9 per cent, as did the National Stock Exchange index, Nifty. A sense of déjà vu must have gripped a world that had witnessed the US-Iraq war and its calamitous denouement, plunging the first decade of the millennium into what seemed then, to be a recessionary cloud with long tentacles.
Five days later Iranian ballistic missiles struck US bases in Iraq, escalating anxieties about stability in West Asia and the sanctity of its energy reserves. The 2020 cloud passed swiftly however, as statements emanating from both the US and Iran suggested that another war was not the diplomatic intention. The decision to take military action against Iran hastened impeachment proceedings against President Donald Trump, telling the world that the Democrats and many Republicans were not on the same page as him.
Meanwhile Iran’s Foreign Minister Javad Zarif, arrived in New Delhi for the Raisina Dialogue amidst the protests over the deaths from the Ukranian aircraft that had been inadvertently shot down in Teheran. Even as India celebrated the advent of spring in its Lohri, Pongal and Makar Sankranti festivities, came Zarif’s announcement that Iran was “interested in diplomacy”. It was of course, sheer serendipity that on that very day the US President signed a trade deal with Chinese vice premier Liu He, to end two-year-long trade tensions between the two nations.
Even though the Chinese were less exuberant over what Trump described as “the biggest deal anybody has ever seen,” the event brought hope in a world that had grown increasingly more protectionist over the decade gone by.
As World Trade Organization (WTO) Director General Roberto Azevêdo, informed members recently, “Historically high levels of trade-restrictive measures are hurting growth, job creation and purchasing power around the world.” A recent report by the WTO said that by the end of 2018, as much as $1.5 trillion of the total world imports of $ 19.5 trillion had been impacted by trade restrictions."
As of mid-October 2019, this trade coverage was estimated at $1.7 trillion, suggesting that the stockpile of import restrictions has continued to grow,” Azevêdo said. All domestic policy measures of the emerging economies, that have rapid growth stories to tell, bounce on this world order.
Slow Growth & Challenges
On January 8, even as the Iranian missiles were striking US bases at Iraq, the World Bank published a report titled Global Economic Prospects: Slow Growth, Policy Challenges. The report predicts that global economic growth would “edge up” to 2.5 per cent in 2020 and trade recover gradually. It says while growth in the “advanced economies” would slip to 1.4 per cent with a slide in manufacturing, growth would accelerate in emerging markets and developing economies.
South Asia is among the regions expected to witness an acceleration in economic development, growing by 5.5 per cent, spurred by a “modest rebound in domestic demand” and “economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh, and Pakistan.”
The country responsible for most of these “infrastructure investments” (better known as the Belt and Road Initiative), namely China, is expected to witness a “moderate slowdown” in its GDP to 5.9 per cent in 2020 “amid continued domestic and external headwinds, including the lingering impact of trade tensions.” Economic growth in East Asia per se is expected to hover around 4.9 per cent as the economies of Cambodia, the Philippines, Thailand and Vietnam, reap the benefits of improved domestic demand, low inflation and robust capital flows.
The fastest growing economies of South Asia, going by World Bank estimates, will be Bangladesh (growing at 7.2 per cent in FY 2020 and then 7.3 per cent in FY 2021), India (spinning at five per cent in FY 2020 and then at 5.8 per cent in FY 2021), Sri Lanka (growing at 3.3 per cent) and Pakistan (which is expected to see growth bottom out at 2.4 per cent in FY 2020, before rising by three per cent in FY 2021). (Please see chart alongside).
Indian industry seems to repose faith in these projections. “The year 2020 would see our growth inching up from the current levels as economic recovery starts, though we will continue to face headwinds on account of global developments,” says Sangita Reddy, President of the Federation of Indian Chambers of Commerce and Industry (FICCI) and Joint Managing Director of the Apollo Hospitals Group. Reddy concedes though, that China too would “continue to grow at a fast pace” and would “remain an important player in the region”.
The Numbers Riddle
How sacrosanct are these numbers in deciding the health and wealth of an economy? India has had that “fastest growing large economy” tag for a while, but had it translated into investments, jobs and well-being of the 1.3 billion people who call this end of the sub-continent their home?
As professor (Economics group) at the Indian Institute of Management, Calcutta, Partha Ray, explains patiently, “While growth matters for any economy, growth fundamentalism is not warranted. After all, growth is hugely dependent upon the initial condition. Illustratively, the seven per cent plus growth rate of Bangladesh may not be comparable to India’s five per cent because of the inherent difference in their sizes.” As a matter of fact, at a size of $274 billion in 2018 (World Bank data), India’s eastern neighbour had an economy that was almost a tenth of India’s in terms of the value of the GDP (estimated at $2718.73 billion by the World Bank in 2018).
“In fact, when advanced economies grow at 1.5 per cent that becomes quite respectable,” points out Ray, “After all, in terms of GDP at market exchange rate, India was a $2.7 trillion economy, against a $20.5 trillion US economy, or a $13.6 trillion economy of China in 2018.” Ray points out that while policy measures may be a determinant for enticing foreign direct investment (FDI) into an economy, foreign portfolio investment (FPI) “could be much more fickle and could be influenced by the mood swings of the global capital market”.
Yet the numbers do matter somewhere. As Sangita Reddy points out, “Growth numbers are an important variable often looked at first by the investors when they decide to invest in a country. The current as well as future growth projections of a country are the most important factor that drives the flow of foreign investment into a country.” She concedes that political stability and the overall business climate were also “crucial variables that help investors to take a decision” on investment.
“For instance, in case of India, consistent high economic growth has been a key factor that has helped the country emerge as one of the main investment destinations in Asia,” she tells BW Businessworld. “We have been able to draw FDI worth about $240 billion between FY15 and FY19. Along with this, our government has made concerted efforts to improve the overall business environment, which too has helped the country in attracting FDI,” she goes on to say. “Besides, the recently released list of infrastructure pipeline projects worth Rs 102 lakh crores will also serve as demand booster and will help in triggering both domestic as well as foreign investments,” says Reddy.
Reddy, speaking for one of India’s largest industry clubs, vehemently reposes faith in India’s growth story. “India is set to be among the leading global economic powers by capitalising on the opportunities provided by the changing world, especially in the sphere of science and technology,” she says. “In the volatile conditions that we are experiencing these days, it becomes extremely challenging to come out with right growth projections for any economy,” she says.
“We have seen leading multilateral organisations like IMF revising their growth projections several times during the past year. Though current geo-economic and geo-political situation do have an impact on the growth of an economy in the near to medium term, structural factors have a bearing on long term growth,” says Reddy.
Ranen Banerjee, Leader - Public Finance and Economics at Pricewaterhouse Coopers (PwC) India says, “While the Indian economy has grown slowly in comparison to other countries in Asia in 2019-20, the underlying potential for growth is immense. The large consuming population still exists and there are significant infra and digital gaps that can absorb significant capital deployment.”
Reddy too reposes faith in the strength of India’s “young working population, a huge consumer market, a growing middle class with rising disposable income levels and a strong entrepreneurial class”. She says these factors would continue to drive consumption and investment levels in the country. “Fast digitisation and growth of startups can be seen as other positive factors that will lend support to India’s growth going forward and hence, India is expected to rank amongst the fastest growing economies not only in Asia, but across the world in the coming decade,” says Reddy with confidence.
The India Story
Yet at FICCI’s Telangana State Council meeting in Hyderabad, Reddy had said, “What is scaring every corporate and every Indian in the face is a combination of slowdown in consumption, which is at the core of a lot of our problems, arising from an overall lack of growth prospects or loss of jobs, certain amount of uncertainty, besides the invest climate looking weak.” Her’s was not the only industry voice expressing concern about an economy in which demand refused to pick up.
At a meeting convened by Union Finance Minister Nirmala Sitharaman with industry leaders in August, the then president of the Associated Chambers of Commerce and Industry (Assocham) B K Goenka, had sought a “quick-fix” stimulus package to “initiate” an investment cycle. Multilateral and credit rating agencies had begun to peg down their growth estimates for India.
Then on September 20, the finance ministry responded to the sliding growth indices by announcing reliefs for many sectors of the economy, particularly laggards like real estate. Sitharaman cut the corporate tax to 25.17 per cent from 30 per cent, amidst applause from industry fora.
Exactly three days later, an ADB report said FY 2020 may actually bring happy tidings for India. “India will remain as one of the fastest-growing economies in the world this year and next year as the government continues to implement policy reforms and interventions to strengthen economic fundamentals,” ADB Chief Economist Yasuyuki Sawada said. The bank pegged up its growth estimates for India to 7.2 per cent for FY 2020 from seven per cent assessed in July. (Please see chart alongside).
The third quarter of FY 2020 was just about beginning to show signs of a revival in demand through higher tax receipts, when the consumer price index (CPI) for December came to light. Prices of food, especially vegetables and the pungent onion, had been creeping up since August, but the December CPI of 7.35 per cent still came as a surprise – being the highest since July 2014.
The lack and loss of jobs and near absence of investment in manufacturing had been attributed to a decelerating pace of consumption. Erratic rains and floods in the rural hinterland and the crop losses from it, had apparently kept farm folk away from fast moving consumer goods (FMCG). The saving grace all through 2019 had been low food prices and low inflation rates based on the CPI, prompting the central bank to announce a series of rate cuts to infuse more liquidity into the financial system.
The 7.35 per cent inflation implied that the Reserve Bank of India may not now have much headroom for maneouvring the repo rates to bring down the cost of capital for industry and investors. Vegetable prices in December were 60.5 per cent higher than in the same month a year ago. Onion prices were 45.34 per cent dearer and prices of pulses had gone up by 15.44 per cent in the course of a year. Newspapers devoted column space to speculations about a phase of low growth and high inflation.
Both industry and policy watchers, though, seem undaunted by these indices. Banerjee at PwC India says, “The effects of various reforms announced by the government as well as the rate cut transmission will continue to be realised over the next couple of years. While the first half of FY 2020-21 will continue to be challenging, we expect the uptick to begin in the second half.”
He points out though, that the “short term performance” of the economy, would indeed, depend on developments on the external front viz. the second phase of the trade deal between the US and China, geopolitical developments in the Middle East, politico-economic decision making in the US with the backdrop of the Presidential elections and the nature of Brexit maneuvered by the British PM.”
Perhaps the FICCI president’s confidence in the economy is not unjustified either, when she says, “We have set a target of becoming a $5 trillion economy by 2024-25 and doubling the same to $10 trillion by 2030. The government is all geared towards realising this goal and is taking several measures for the same. These will bring positive results in the coming decade which will continue to drive India’s growth going forward.”
With industry and economists on its side, governments of the fastest growing Asian economies need scarcely fear the “headwinds on account of global developments” – least of all India.
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