Is India the New China?
June 3, 2016
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
A “slow-growth trap.” That’s how the Organization for Economic Cooperation and Development (OECD) described the global economy yesterday in its latest Global Economic Outlook. The group sees world GDP advancing only 3 percent in 2016, the same as last year, with a slight bump up to 3.3 percent in 2017.
Catherine Mann, the OECD’s chief economist, urged policymakers around the world to prioritize structural reforms that “enhance market competition, innovation and dynamism,” as monetary policy has been used alone as the main tool for far too long. The longer the global economy remains in this “slow-growth trap,” Mann said, the harder it will become to revive market forces.
This is precisely in-line with what I, and many of my colleagues, have stressed for months now. To push the economy on a high-growth path, we need structural fiscal reforms, both here and abroad. One need only look at the global purchasing managers’ index (PMI) to see that manufacturing conditions have been slowing for the past several years since the financial crisis. The PMI in May registered a 50.0, which Markit Economics describes as “lethargic” and “low gear.”
U.S. manufacturing also saw further weakness in May, with its PMI reading falling to 50.7, more than a six-year low. The eurozone’s PMI fell to 51.5, a three-month low. Meanwhile, the Caixin China General Manufacturing PMI came in at 49.2, still below the neutral 50 threshold.
It’s clear that policymakers need to address slow growth with smarter fiscal policies, lower taxes and streamlined regulations. Zero and negative interest rate policies are taking their final gasp as far as what they can accomplish.
One of the bright spots continues to be India, whose own manufacturing sector expanded for the fifth straight month in May. The country’s GDP advanced an impressive 7.9 percent in the first quarter, following 7.3 percent year-over-year growth in 2015. This helps it retain its position as the world’s fastest growing major economy. Credit Suisse ranked India first in April’s Emerging Consumer Survey 2016, noting that “Indian consumers stand out among their emerging market peers with higher confidence about their current and future finances and relatively lower inflation expectations.”
Many analysts are referring to this as the “Modi effect,” in honor of Prime Minister Narendra Modi, elected two years ago on promises to reinvigorate business growth by cutting red tape and increasing infrastructure spending. Modi, who is scheduled to visit Washington next week, has had limited success at this point. But to be fair, India’s challenges run deep, and it will take quite a bit longer to make substantial changes to the country’s notorious regulations and corruption.