India, the Next China?
By Staff News & Analysis - March 09, 2015

India is on course to complete a remarkable turnaround … India could achieve growth of up to 8pc a year for the next decade, amazing for an economy which already accounts for 3pc of global GDP. – UK Telegraph

Dominant Social Theme: India rising.

Free-Market Analysis: China, Brazil and now India. Among the BRICs, only Russia and South Africa receive a measure of bad press. Russia a great deal of it, to be sure.

But this is surely another meme in the making, one brought to us by the miracle of central banking that has lifted China out of poverty, raised up Africa and is now setting to work on India. The meme has to do with the miracle of capitalism and how it can provide prosperity for whole countries, no matter how big.

We saw this meme being offered late in January, as well, when we analyzed a news report claiming that India was the world's second most trusted nation. From the report:

India world's second most trusted nation, says survey … As the world's rich and powerful gather in the Swiss resort of Davos, a study by public relations firm Edelman has found that general level of trust in institutions among college-educated people around the globe are at levels not seen since 2009 in many of the markets it surveyed. Trust in institutions in India has improved sharply in 2015.

India a 'Trusted' Nation?

We wrote:

We're supposed to believe that public opinion, so realistic about India in the past, has embraced a kind of cock-eyed optimism. Is Modi the cynosure of this newfound confidence in Indian affairs? In fact, we've followed Modi since his tenure as the head of the Indian state of Gujarat, which he tried to turn into some sort of pan-global "special zone" by giving away large chunks of real-estate and commodities.

It was no doubt Modi's global globetrotting that attracted international attention to him, and subsequently led to his current position. But that surely doesn't explain this larger Indian conversion. Nonetheless, the article touts this result in the most confident terms …

Modi is the new Prime Minister Narendra Modi; we first became aware of him a few years ago when we watched a YouTube video praising Gujarat and promising incredibly ambitious social engineering projects encompassing whole cities.

The idea, as we recall, was that multinational corporations were to be married to the state purse. If Western corporations descended on the region, they'd lack for nothing.

Now, somehow Modi has been positioned as an anti-corruption "new broom" – someone who is going to change the internal and external business relations of India.

We're not quite sure how this fits in with his previous campaign promising parts of Gujarat to the highest bidder, but that's the message anyway. More:

Whatever you think about India – and it's been in the news for good and bad this week – you can't ignore it. Years of playing bridesmaid to China look like they are coming to an end. On current trends, the South Asian giant will soon be the world's fastest-growing major economy and its most populous country.

It has certainly been the stand-out stock market in the past year, with Bombay's Sensex index up more than 35pc, outpacing even the red-hot markets in the rest of Asia such as Shanghai's A-shares (up 19pc), Indonesia (26pc) and the Philippines (21pc). It has been a remarkable turnaround story when you consider that two years ago everyone was agonising about years of sub-par growth and a potential balance of payments crisis.

Is it really so remarkable? Over and over, we see this sort of story play out. The most prominent example is the US itself where an entire nation was once seen as so prosperous that books were written to describe its condition. We reminded readers about the foremost trumpeter of US affluence back in the summer of 2014:

John Kenneth Galbraith … found his voice in the 1950s and 1960s writing such books as American Capitalism (1952), The Affluent Society (1958) and The New Industrial State (1967) … Of course, little more than a decade after the publication of The Affluent Society the US government was so broke it had to abandon what was left of the gold standard, the price of gasoline galloped upwards and soon enough interest rates hovered close to 20 percent. So much for the Affluent Society.

Fed Money Pumping Brings Results: The Affluent Society Returns – For Now

The same sort of narrative accompanied Japan's rise and fall. It is now taking place in China. We recall that, for a while, Brazil was seen as a tremendous success story – until too much money printing caught up to it.

For it is always money printing … most prominently so. The 1960s saw a tremendous amount of currency debasement in the US – so much so that the country finally had to go off the gold standard because it could not honor its debts.

Japan debased its currency significantly in the 1980s, leading to an explosive real estate market that once saw the palace of the emperor and its grounds valued at more than the entire state of California.

Africa is currently getting the same treatment, a meme we have labeled Africa Rising. Somehow we are supposed to believe that Africa's corrupt and authoritarian regimes are transforming the continent into a capitalist light on the hill.

There are so many fulsome articles being written about Africa's capitalist progress that we've lost track. However, we've noticed lately that the stream of praise has died down a bit. Perhaps reality has mandated that those engineering these miracles promote India, as well?

India's stars are better aligned than they have been for many years, with a reformist government, positive demographics, a newly credible central bank and a large dollop of luck in the form of a plunging oil price – India is one of the world's biggest beneficiaries of cheaper commodities. The recent highlight has been the announcement of the newish BJP government's first budget, much anticipated and largely delivering what investors hoped for.

It is certainly possible that lower energy prices will prove a sustained boon to the Indian economy. But we have a difficult time believing that the world's current asset inflation will continue for more than a couple more years if that. Another global slump will surely have an impact on the double digit growth rate that this article is predicting as a possibility for India.

The article plunges on, however, stating that for India to preserve and expand its newfound prosperity, it will need to "make progress in four areas."

First, like China, it must find work for its urbanising, better-educated millions.

Second, it needs to reform a Byzantine and ineffective tax system.

Third, India needs to get to grips with its dreadful infrastructure.

Fourth, it must balance the books which have been in deficit for many years.

The article also notes that two-thirds of India's population is under 35, which means the country could be on the verge of "an explosion in consumption and growth."

From our perspective, none of this is especially convincing. Call it a kind of directed history if you want. Japan didn't boom in the 1980s because of a population explosion. It expanded because of Keynesian yen dumping. And China's population was very large during Mao's regime. It was only when the printing presses went to work that the Chinese "miracle" began to flower.

Of course, money printing can only take you so far – as countries find out over and over again. Europe, the US and Japan continue to struggle with overprinting created by rates hovering at the zero-bound.

In India, the country's new central banker has received a great deal of credit for bringing India's 11 percent price inflation rate down to around 5 percent. However, a 5 percent inflation rate is still pretty high, considering those are government numbers.

In mid-January came the predictable headlines: "India Surprises Market With a Rate Cut

Move by RBI Comes as Inflation Cools." The Wall Street Journal reported as follows:

India's central bank surprised markets with a cut to its key lending rate Thursday, stepping back from its inflation-fighting stance in a bid to help bolster sluggish growth in Asia's third-largest economy.

The Reserve Bank of India's move to lower the interest rate it charges banks by 0.25 percentage point to 7.75% was the first rate reduction in nearly two years. Central bank Gov. Raghuram Rajan, who has faced growing pressure to lower borrowing costs, said he made the move amid signs that India has been winning its long battle with inflation in recent months as oil and food prices have slid.

India's main stock index jumped more than 2%, and the rupee strengthened against the dollar on the announcement. Lower lending rates provide a new weapon in Prime Minister Narendra Modi 's drive to pull India out its worst economic slowdowns in decades.

Mr. Modi and his Bharatiya Janata Party rode to power in May on a pledge to revive investment, boost manufacturing and provide more jobs to younger Indians. But progress has been slow, and his government has so far introduced only modest changes.

This is the recipe for 21st century growth. Print, baby, print. Notice the stock market reacted to the news by jumping 2 percent. The monetary system in place now doesn't much benefit entrepreneurs or industry, but it sure seems to boost equities.

In the US, we call that the Wall Street Party – one that is turning into a financial fiesta worldwide. There's no real reason to believe that India will be any different. Maybe we'll read lots of articles about India's industrial "progress" but if people take the time to look they may see that most of the progress has taken place on stock indexes.

After Thoughts

In the 21st century, the miracle of modern capitalism revolves around equity inflation.