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See: India has many people. That requires consumers



By Andy Mukherjee

The old belief of analysts in India is that the economy is limited by supply. Demand is not even worth a footnote, while the temporary pressure on the onion market is worthy of obsession because it can be inflationary.

It is increasingly clear that this display is outdated. In October, inflation increased more than expected to 4.62% due to, yes, a shortage of shallots. But core inflation, which eliminates volatile commodity prices, slumped to 3.4%, the lowest since the current price series began in 2012.

One explanation is that people have less money to spend on other things after buying vegetables. However, as Mark Williams, chief Asian economist at Capital Economics said, a 1.1 percentage point decrease in core inflation over three months is rare. "This weakness is not solely because spending is diverted," he said in a research note.

That's a fun request. Until around 2012, temporary supply shocks dominated. The starting point for production and transportation is hydrocarbons, and India needs to import most of its crude oil. The government also has to pay farmers to feed 1.3 billion people. Because of the large dominance of food and fuel in consumption, price stability is mortal: Several months of high inflation can drastically affect consumer expectations.

The difference between headlines (runaway) and core inflation (soft) will usually be closed with the core moving towards the main indicator. But something has changed. Major figures dominated by supply are now more likely to shift to core figures led by demand, JPMorgan Chase & Co. research has shown. Slack in the economy – which is plentiful – has become far more important than temporary disruptions in commodity supply.

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Therefore, although consumer prices have risen more than the central bank's 4% target for the first time since mid-2018, the new consensus is that the economy is bound by deflation. That is the reason most observers ignore the October inflation rate because of all kinds of speed limits for the central bank's interest rate cuts.

Whether a reduction of five levels this year will lift demand is a different story. Banks do not pass lower borrowing costs on the phone. In August, their weighted average loan costs nearly doubled the Reserve Bank of India's repurchase rate. The spread of this record is a crisis-like situation, said Credit Suisse AG strategist Neelkanth Mishra.

This is also a supply-side obstacle, except it is more durable. The missing input from the production process is trust. In September last year, when I called the fall of the IL&FS Group financiers as a mini-Lehman moment in India, loans by shadow banks grew by 24%. Now it collapses to 7% because everyone is worried about who will go bankrupt next. Sources of funds for non-bank investors have dried up. Meanwhile, state-run banks are flooded with bad corporate loans worth $ 200 billion, no matter how cheaply the governments that are short of money are trying to recapitalize them.

Sonal Varma of Nomura called it "a threefold balance sheet problem" shared by banks, shadow lenders and India Inc. In his forecast, GDP expansion may have slowed further to 4.2% in the September quarter from a six-year low of 5% in the previous three months. The potential growth rate, he said, is around 6.5%. The longer the deleveraging cycle lasts, the greater the risk that this potential can recede further.

How fast an economy can grow is measured from the supply side – by slapping labor input and joint capital and productivity growth. But this is where demand arises as an obstacle. Consumer spending fell in real terms in 2017-18, the first decline in four decades, Business Standards reported Friday, citing an unofficial official survey. As Rathin Roy said of the New Delhi Institute of Public Finance and National Policy, the economy is growing by producing what is consumed by 150 million high-income people. When it comes to cheap clothes that Indian workers can make for their more than one billion citizens, Bangladesh does a better job.

India balked at the last minute of joining the 16 countries in the Regional Comprehensive Economic Partnership trade agreement because it could not compete with China in making everyday goods. Roy's call for meaningful minimum wages for workers in all rich and poor Indian states shows a reasonable way to create sustainable demand. Make everything good enough for the swollen home market, and eventually India will supply them to the world.

Meeting the needs at the bottom of the broad socioeconomic pyramid will reduce concessions. In a growing market, entrepreneurial confidence comes not from deadly innovations but from knowing that producers can sell what they produce. India is not demanding for hurting everyone.


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