News: Indian economy has the potential for ‘red-hot’ growth

(DNA 24/12/2006) Hong Kong - When Credit Suisse’s chief Asia (ex-Japan) economist Dong Tao wrote his recent Asia Outlook report, he says he didn’t realise that projecting India’s GDP growth to be marginally ahead of China’s in 2007 - for the first time in over 20 years - would be a hot topic of media discussion.

“But in fact,” Tao said in Hong Kong on Thursday, “that bit of information has more press value than financial analysis value.” The fact of the matter, he emphasises, is that India and China are two totally different animals. And, besides, the fact that they are both large emerging economies in Asia, there aren’t many things you can compare.

“Therefore, I don’t want it to sound like India is going to beat China and become the world leader in economic growth,” caveats Tao. “In fact, both of them will do well in 2007, with very little to separate them.” And the reason China will record a marginally slower growth rate than India is that its government is holding back the economy, and is particularly trying to squeeze the bubble in the property market.

But having said that, the Credit Suisse Emerging Markets Quarterly report notes that India has the “potential for red-hot growth”.

“This is the first time in a long time that infrastructure investment in India will have a very big lift,” explains Tao. “Finally, the government has realised the significance of building railways, freeways and power stations.” Sure, India will face problems, but even if authorities can deliver 50-70% of their promises, “it will be a great job,” he reckons.

Additionally, what’s driving the India growth story is private consumption, which in turn is driven by wage growth. “India’s domestic demand story is one of the best news for 2007.” Equally important, says Tao, is that India is much less exposed to the vicissitudes of global economic growth. Even if the global economy slows down a tick, it will affect India much less than China, he adds. But isn’t monetary policy in India going the other way - to cool things down - as evidenced by the recent hike in cash reserve ratio (CRR) by 0.5 percentage points, and an anticipated rise in interest rates in January? “We do anticipate that there will be a tightening in January,” says Tao. “But the overall tightening will be very measured, and it’s not going to cool down the economy significantly.”

Were India’s fiscal consolidation measures on course? “Whether they will be on target is a matter of debate, but we anticipate an improvement.” In any case, he adds, the overall fiscal target is “quite ambitious”, and may be difficult to reach. But there’ll likely be “some improvement - maybe even meaningful improvement.”