Devaluation of the Indian Rupee

The Indian Rupee has fallen in value against a basket of currencies since independence in 1947. In recent years, the Indian Rupee has continued to depreciate in value. Indian Rupee value against US Dollar In 1990, you could buy $1 for 16 Indian Rupees. By 2013, the value of a Rupee had fallen, so that …

Read moreDevaluation of the Indian Rupee

Threats and opportunities of Chinese growth on UK economy

Readers Question: Hello I recently saw a programme How China Fooled the World – with Robert Peston and I was wondering what threats and opportunities does the growth of economies like China and India provide to the UK economy?

According to the IMF, in 2010, the Chinese economy was $5,878 billion – second only to the US economy. If we use GDP at purchasing power parity (PPP), the size of the Chinese economy is estimated to be even larger, at around $10,119 billion.

China also has a growth rate, averaging close to 10% a year. Even if there is a slowdown in this record rate of economic growth, China is forecast to become the dominant world economy within 10 or 20 years. India is another sleeping giant. Although India’s growth rate is slower than China it is the second most populous country and is still catching up with the rest of the world.

Opportunities of Chinese / Indian growth on UK economy

Low cost of manufactured goods. One major consequence of economic growth in China is that the UK has benefited from lower prices of many manufactured goods, imported from China. If you have ever wondered how Pound shops can sell so many goods for £1 – the answer is directly importing from China. China’s success in keeping costs low has created a downward pressure on prices. This helps to keep inflation in the UK low and improve living standards for UK consumers.

Growing consumer class. So far China’s growth has mostly concentrated on export led growth, leading to a large current account surplus. However, the next stage of Chinese economic development will likely see a growing consumer class who wish to purchase more luxury goods and services. This provides a significant opportunity for UK exporters of goods and services. Because of the size of the Chinese economy, there is strong latent demand. This could benefit UK exporters of  high value added goods, such as nuclear technology, chemicals, cars (see: what UK exports). Also, there will be growing demand for UK services, such as university education / learning English. So far China’s growth has been somewhat one-sided – we have seen UK manufacturing firms squeezed out of business, but the other side of the equation is that British firms will have a strong growing market in China.

Lower costs of production. Another big advantage of the development of the Chinese and Indian economy is that it provides UK firms with potential lower costs of production. For example, many UK service centres have been shifted to English speaking centres in India. This dramatically reduces labour costs, leading to lower costs for telephones e.t.c. Also, an English firm which innovates a new product can use the low cost manufactured process of China to bring the product to the market at a competitive price. This is speeding up the globalisation of production. Increasingly we see a product produced in different sections of the world. e.g. the most famous is probably ‘Apple – designed in California, produced in China.’

Alternative to US / Europe. Traditionally, the UK economy has been reliant on exports to the EU and US. With the EU and US economy relatively stagnant, growth in exports to non-EU countries suggests the economy will become more diversified and less reliant on the EU trading block.  (see: UK exports to non-EU countries)

 

Threats of Chinese growth

Increased competition for raw materials. Chinese growth has come at a cost of seeing rising price of raw materials. For example, during the recession of 2008-13, we saw periods of rising oil prices. This is unusual – usually during a recession in the West, oil prices fall. But, due to the growing demand from China and Asia, oil prices have been rising. This has squeezed living standards in the West. We faced both recession and rising prices. As the China and India economy grows, the pressure on raw materials is likely to exacerbate.

Read moreThreats and opportunities of Chinese growth on UK economy

Indian economy in 2014

I have quite a few readers in India, so I’d like to have a brief look at the Indian economy and it’s prospects for the coming year. After spending so much time looking at the (rather depressing) economics of austerity in Europe and UK, it makes a welcome change to look at a developing economy with a different set of challenges and problems.

China_india_gdp GDP per capita (in 1990 Geary-Khamis dollars) (data range 1950-2003)

Indian economy in summary

For those not familiar with the Indian economy. In the post-independence era, 1947 – 91, India was a mixed economy with a high degree of state intervention – including nationalisation and price controls. The economic performance was mixed but generally disappointing. Since 1991, the economy has pursued a general approach of free market liberalisation and greater investment in infrastructure. This helped the Indian economy to achieve a rapid rate of economic growth and economic development. The economy has become more open, with significant growth in exports and imports. The economic growth has led to a boom in investment, real estate and a growth of the financial sector. To many, India is the second China and the economy has the potential to become one of the largest in the world.

However, at the present time, the Indian economy faces several challenges.

  • In the past couple of years, there has been a fall in the rate of growth causing concern that the period of high growth is coming to an end. (growth fell to a low of 4.4% in 2013 – bear in mind, India’s rising population mean GDP per capita is less impressive than just real GDP growth)
  • India has struggled to keep inflation low. In 2013, inflation was nudging near 10%, hurting the living standards of the poor who are particularly vulnerable to the price of food. High inflation is also harming confidence for investment.
  • Current account deficit. India’s growth has been at the cost of a persistent current account deficit (which reached over 6% of GDP in 2012). India needs to import crude oil, machinery and many other raw commodities. Its export sector has struggled to match the growth of imports.
  • Rupee devaluation. The large current account deficit has caused the Rupee to fall, despite very low-interest rates in the US and Europe.
  • Inequality / poverty. Parts of the Indian economy have made rapid growth, but it has proved difficult for the fruits of economic growth to filter through to all areas of the economy, especially isolated rural areas where there is poor infrastructure.
  • Government budget deficit. Despite years of economic growth, the government has found it difficult to balance the budget. The budget deficit is 4.8% of GDP in the year 2012–13. Public sector debt is 68.05% of GDP, one of highest for a developing economy. Tax collection is still limited by tax evasion and corruption (tax collection only accounts for 9% of GDP – one of lowest in the world). The government is committed to reducing the budget deficit, but this may be at cost of social welfare programmes.

More detail on the Indian economy

Economic growth

Indian economic growth is predicted to be around 5% by March 2014. From European standards, this sounds very impressive. But, is much lower than the rate of nearly 10% achieved in much of the recent decade. Growth of 5% reflects the fact there is much spare capacity and scope for improvement. Without a high rate of growth, the concern is that it will lead to unemployment and discourage future investment. Politicians have been predicting upturns in the rate of economic growth for a long time, hoping it would come in the next quarter. Unfortunately, this has raised and then broken expectations. However, growth did finally pick up to 4.8% in Q3 2013. (higher than previous quarter of 4.4%)

Inflation

Inflation is a real problem for the Indian economy. It has proved stubbornly high. Inflation reached 11.24% in November 2013 – the highest for years. Inflation did fall back to 9.92% in Dec, but there is concern about the stubbornness of high inflation, despite the relatively sluggish growth. The chief of the Reserve Bank of India, Raghuram Rajan has made control of inflation his highest priority and has increased interest rates twice since his appointment in September. Rajan argues that price stability is key to India’s long-term prosperity. However, the concern is that inflationary pressures tend to be due to supply side factors (e.g. rising vegetable prices) and the use of monetary policy may be limited in solving this. For Rajan to tackle cost-push inflationary pressures using interest rates may damage prospects for growth without tackling the underlying inflationary causes. To tackle supply constraints which are behind the cost-push inflation will prove much more difficult.

Read moreIndian economy in 2014

Indian Economy 2012

An Overview of the Indian economy in 2012 and its prospects for the future. (Depressed by events in Europe, a look at an economy with a very different economic outlook). Summary In the past few years, the Indian economy has been growing rapidly – (e.g.  8.5%2010-11). However, this growth has led to an increase in …

Read moreIndian Economy 2012

Item added to cart.
0 items - £0.00