Political India: Engaging America

Exerting additional downward pressure on an already-muted rate of economic growth in the United States economy the U.S. Commerce Department cut third quarter growth estimates for 2011 from 2.5 per cent to 2 per cent.

The bad news on the growth front compounded Monday's failure in the Congressional supercommittee on deficit reduction, as a gridlock over tax increases and cuts to welfare programmes forestalled a deal on spending cuts to the tune of $1.2 trillion.

In a statement the Commerce Department's Bureau of Economic Analysis (BEA) said that real gross domestic product increased at an annual rate of 2 per cent in the third quarter of 2011, that is from the second quarter to the third quarter, as per a second estimate of the BEA.

In an “advanced” estimate of the growth rate issued in October the BEA had noted that the increase in real GDP was 2.5 per cent; yet it justified the estimate downgrade because “The GDP estimates released today are based on more complete source data than were available for the ‘advance' estimate issued last month.”

Sector level

Deconstructing the various components of the latest growth figure, the BEA said that the rise in real GDP in the third quarter “primarily reflected positive contributions from personal consumption expenditures non-residential fixed investment, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and state and local government spending.” Imports, the BEA added, increased during the period.

At the sector level, final sales of computers were said to have added 0.22 percentage points to the third-quarter change in real GDP after adding 0.07 percentage points to the second quarter change. Similarly, motor vehicle output reportedly contributed 0.18 percentage points following a negative figure of 0.10 percentage point in the second quarter change.

The 0.5 percentage point drop in the most recent estimate of the third quarter increase in real GDP implied that GDP was $15 billion lower than the advance estimate and this lower value primarily reflected downward revisions to private inventory investment, non-residential fixed investment, and personal consumption expenditures, the BEA said.

A recent report by the Organisation for Economic Cooperation and Development has suggested that while India’s growth record in recent years was unprecedented, a focus on labour markets and agricultural growth could spur the country to a better poverty alleviation record.

The report, “Perspectives on Global Development in 2012: Social Cohesion in Shifting World” noted that China stands out for its remarkable rise in its private and public savings rate, from 33.3 and 5.7 per cent of GDP in 1992 respectively, to 44.7 and 6.2 per cent in 2008.

However the report also said “China is not alone,” in particular adding that “India possesses high and rising levels of national savings, which include rapidly growing corporate savings.”

Suggesting that these funds could be channelled into areas such as poverty alleviation the OECD report added, “Higher savings endow converging countries with a greater capacity to confront the major challenges of investment in human and physical infrastructure.”

The study delved deep not only into the economic dimensions of development but social aspects too. For example, touching upon the relevance of India’s caste system on development outcomes, the study quoted samples from several Indian rural villages showing that “Low-caste households living in low-caste dominated villages have a higher income than those in villages dominated by a high caste.”

The OECD also praised India’s overall development model and drew attention to the structural factors underlying its recent decades of rapid economic growth. In its report the OECD said, “With sustained high growth over several decades the depth of structural change in large Asian economies such as India is remarkable and without historical precedent.”

Citing the rapid rise in labour productivity as a key factor driving this growth the study noted that in the case of India structural transformation in labour markets had made the services sector a key source of employment unlike China, where manufacturing appeared to dominate.

While this labour reallocation in India had resulted in an average annual productivity improvement of 0.9 per cent, the OECD said, “Labour has also moved from formal to informal employment, which offsets the positive impact on productivity.”

Further in comparative terms China appeared to have better realised the link between poverty alleviation and agricultural growth, while India’s modest achievements in poverty reduction may be associated with the relatively poor performance of its agricultural sector, the report noted.

The International Monetary Fund this week said that India would have a year-on-year projected growth rate of 7.8 per cent in 2011 and 7.5 per cent in 2012, even as it warned of overall slowing global activity, renewed financial instability and an uneven post-recession expansion.

Releasing its semi-annual World Economic Outlook report on Monday, the IMF said that in India, growth was forecast to average 7.5-7.75 per cent during 2011–12 and while economic activity driving this growth would be led by private consumption, “investment is expected to remain sluggish, reflecting, in part recent corporate sector governance issues and a drag from the renewed global uncertainty and less favourable external financing environment.”

The IMF argued that a top challenge for policymakers in India would be to dampen the rise of inflation, which is currently running close to double digits and has become generalised. The WEO noted that despite policy tightening, real interest rates in India were still much lower than pre-crisis averages, and credit growth was still strong.

Commenting on its macro assessment of the ongoing global recovery the IMF suggested that some elements of this bounce had been anticipated while others had not. For example it said that while the strong cyclical rebound in global industrial production and trade in 2010 was “never expected to persist,” in crisis-hit advanced economies, especially the United States, the “handover from public to private demand” was taking longer than anticipated.

Further sovereign debt and banking sector problems in the Euro area were much more tenacious than anticipated and similarly the disruptions resulting from the East Japan earthquake and tsunami, as well as the spreading unrest in the Middle East and North Africa region and the related surge in oil prices, “were major surprises.”

Possibly hinting at the market turmoil linked to the unresolved debt-limit negotiations between the White House and the U.S. Congress, the Fund cautioned that policy indecision has “exacerbated uncertainty and added to financial strains, feeding back into the real economy.”