Global headwinds will drag us down to 6-7% GDP growth

Brexit and Donald Trump’s election as US president signify deep structural issues that cannot be resolved by curbs on migrants, imports or any quick fix. The ele phant in the room is falling Western productivity .This means slower growth, which economist Larry Summers calls secular stagnation. Slower growth, combined with winner-takes-all trends (think Facebook, Amazon, Twitter) imply stagnant wages, job losses at low-to-middle levels, and hence a cry for de-globalisation.

India will be dragged down by this megatrend.Too many analyses focus on local Indian issues.But India is no longer as self-sufficient as before.The Economic Survey shows that the share of international trade in Indian GDP more than doubled to a peak of 55% in 2008 before slowing to 40% today, which is still higher than China’s ratio. India is integrated with the global economy as never before, and will be hit by global headwinds as never before.

So, I predict that the new normal for India’s GDP growth will be 6-7%, not the 8-10% optimists predict. In some years growth will exceed 7%, but fall well below in others.

The world’s top productivity guru, Robert Gordon, exposed the depth of the underlying problem in his book, The Rise and Fall of American Growth, whose logic applies equally to the EU, Japan, and even China. US productivity growth is down from 1.7%year to 0.7%year, with no structural recovery in sight. Meanwhile growth of workers in the US is slowing, while the absolute number of workers is going to fall for decades in Germany, Japan and China.

GDP growth is simply the sum of worker growth and worker-productivity growth. If both are slowing or falling for deep structural reasons, growth will inevitably slow too. This problem cannot be resolved by quick fixes, and perhaps has no solution. Gordon notes that productivity and GDP growth were close to zero through most of history before rising with the Industrial Revolution. Electricity and the internal combustion engine were huge productivity enhancers, whose full effect lasted till the 1970s. Productivity peaked in 1972, and then tapered.A brief revival in 1994-2004 (thanks to the internet, cellphone) was followed by a resumption of low productivity growth.

No new productivity enhancers are in sight, and anyway such enhancers can take decades to have their full impact (electricity took a century to reach all places and applications). So productivity will remain depressed in the foreseeable future.In the West, stagnant worker incomes were for some time offset by a borrowing spree that raised spending, but that bubble burst in 2008.

Lower productivity means that the investment produces less. So there are fewer good investment opportunities. Besides, the big winners today are new-age companies (like Facebook and Google) with little need for employees or investment. This has sparked the Brexit-Trump worker revolt in the West. India is having its own much smaller revolt though job quota agitations by once-dominant rural castes (Patels, Jats, Marathas, Ahoms).

Productivity in developing countries like India is still way behind Western levels, so they have huge potential to raise productivity by simply catching up with the West (as in internet-based companies). India’s working-age population is rising even as it falls in the West. So India will fare much better than Western countries. It will nevertheless be dragged down by global slowing.

All miracle economies in Asia with GDP growth above 7% had export growth above 15%. Domestic demand was never enough to sustain fast growth, so buoyant external demand was the key to the miracle. But India’s exports fell for 19 months in a row after January 2015, and have barely recovered since. Exporters say the rupee is too strong. But the RBI says the current account deficit is barely 1%, suggesting a properly priced currency .

The Trump era promises more import and visa barriers, and other trade threats. Trump wants US companies to close plants abroad and return home.This may yield some short-term gains. But it will worsen, not improve productivity . The underlying problem will remain.

If the new normal is slower growth in the West, this will hold for India too. Optimists will argue that fear of Trump has been overdone, that the gridlocked US system will check major Trump excesses like an open trade war. Let us see.

If global headwinds end, India can accelerate.But as long as the headwinds blow, India’s new normal will be 6-7% growth. This could still be the fastest among major economies.

What do you think?