- (march 2012)
Another great illusion?
Last year i predicted that the Chinese bubble will burst soon, and that
it's unlikely that China will become the biggest economy in the world any
time soon, contrary to what most analysts predict (See The great illusion?).
Now it looks like India might also disappoint, although for completely
different reasons. The closer we look, the more Indian ills look like a scary
combination of European ills and American ills. Start with the budget deficit:
India's economy needs to grow frantically just to pay its debt, which is about
8.5% of GDP. Defense spending increased 10% last year and this year should
grow even faster. At the same time, growth is projected to slow down to 6-7%.
That sounds a lot like the problem the USA is facing with colossal defense
spending that is not justified by the facts on the ground (who's planning to
invade the USA? who's planning to invade India?)
On top of defense spending, the Indian government also spends billions to
provide subsidies to the oil industry and to farmers. Just like the USA.
Finally, the Indian parliament resembles the fractured and paralyzed
parliaments of Italy and Belgium, in which the governing party is tamed by
the tiny allies that it needs in order to claim a majority.
Just like Europe, the balance sheet and ridiculous bureaucracy are scaring
away foreign investors. India is famous for a dumb and gargantuan bureaucracy,
which was never truly reformed when it moved from pseudo-communism to
free-market capitalism, and that bureaucracy recently has been at work to
make it difficult for anybody to do business in India. (And even for tourists
to visit it: India is the only country in the world that forbids tourists from
reentering India for two months).
The social and political problems of India have long been ignored by the
world as remote and passing nuisances. The truth is that many more people
are killed by terrorists of various factions in India than in the other
emerging powers. The truth is that India still has a caste-based system that
has created incredible social injustice. The truth is that India, unlike China,
Brazil and Russia and virtually any other emerging country, is a federation
of linguistically and ethnically different states, a fact that could potentially
derail the union. The truth is that it is
the largest Muslim country in the world (or second largest after neighboring
Pakistan), a fact that constitutes a perennial threat to its identity.
The truth is that, unlike China, Russia and Brazil, who are unlikely to go
to war with any of their neighbors, India is in a constant state of alert
along the border with Pakistan, a nuclear enemy.
The truth is that corruption in India is more widespread than even in Russia
(see for example for example).
The truth is that this year
27 million babies will be born in India (versus 10 million in China and 4
million in the USA): India needs to create an improbable number of jobs to
improve the conditions of its population, or even to keep it where it is
and avoid social unrest.
The closer one looks, the less reassuring India looks as a place to invest
This would matter little if growth were still exponential and business
opportunities were popping up everywhere. However,
just like China, India is vulnerable to oil prices
and to prices of commodities in general.
Those prices are unlikely to come down any time soon, now that the
US economy is picking up steam.
Last but not least, India may have run out of Western customers willing to
offsource jobs to cheaper English-speaking countries (i.e., to India) and may
have to rely on its own domestic market. That market is, in theory, huge.
Alas, the World Bank estimates that 300 million of them live under the poverty
line, and the others have an average salary which is below $1,000 a month
(see this survey).
TM, ®, Copyright © 2012 Piero Scaruffi All rights reserved.
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- (march 2012)
Population, inflation and wealth.
The West had nonstop inflationary pressures when all the Western countries were booming after the end of World War II.
Today the whole world (except the West) is booming but the inflationary
pressure is minimal (and virtually non-existent in the West).
One reason is that between the 1950s and the 1980s the West was a closed world
with limited labor supply. As the demand for labor increased, so did prices.
We could not offsource shoes or software to the communist world or to the third
world, therefore the prices of shoes and software kept skyrocketing.
The reason why today there is virtually no inflation is that we now have an
unlimited labor supply: 1.5 billion people in the Indian subcontinent alone.
The price of commodities is in fact increasing, as one would expect in a booming
world, but the low cost of labor in places like the Indian subcontinent has
largely offset the inflationary pressure due to the rising prices of raw
The main beneficiary of this low inflation is, obviously, the rich world:
the West. Despite our crappy economies, we can still find cheap goods in the
stores that help even the jobless get by. Imagine if shoes cost ten times more
(as they used to cost before the fall of communism) and if tomato pickers
demanded three times the salary they get now (as they should, given that
nobody in the rich countries wants to spend summer picking tomatoes).
Our money buys a lot, even if many of us don't have much of it.
Hence: every child that is born in India contributes to MY wealth.
Every child born in India adds one to the labor supply which keeps prices low which mainly benefits me.
That child will have to work for almost nothing, competing with 1.5 billion people in his subcontinent alone, whereas i will be
able to buy the product of his work with my pocket change.
We have to be grateful to all the large families of India, Pakistan, Bangladesh, etc.
When their population stabilizes, prices will start going up (as they will soon do in China) but then hopefully the Arabs and the Africans
will take their place.
When the population of the entire world will stop growing, well... i'm glad i won't be around anymore. I suspect there will be an enormous
competition for resources and skyrocketing prices.
But that's many decades away. For the time being the West should
thank the Christian and Islamic fundamentalists for preaching against condoms
and against abortion in developing countries.
TM, ®, Copyright © 2011 Piero Scaruffi All rights reserved.
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- Articles on India before 2012