Can India ever become a superpower?

Mar 10, 2012

In this issue:
» Is there another oil shock on the cards?
» Property developers in China facing tough times
» RBI cuts CRR by 75 basis points
» China's appetite for steel is reducing
» ...and more!

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China's sheer size and explosive growth has certainly marked it as a superpower in the making. Not that India is far behind, in terms of growth at least. Notwithstanding the current slowdown, India performed remarkably well in the three years before the global crisis. And even though growth slowed down a bit post the crisis, it was still quick to recover. Many Indian companies have made a mark in the international arena as well. And overall, personal incomes of India's population, especially the middle class, have swelled leading to a consumption boom. Plus, there have been increasing voices that it is just a matter of time before India overtakes China in terms of economic growth rate. But can India really upstage China? More importantly, does it have what it takes to become a superpower?

A study conducted by the London School of Economics (LSE) does not think so. The LSE study which encompassed experts in the areas of India's economy, defence, government, culture, environment and society, advises caution in assessing India's claim to superpower status. It states that there are various hurdles which India still needs to deal with. These include the challenge of the Naxalites, the degradation of the once liberal and upright Centre, the increasing gap between the rich and the poor, the trivialisation of the media, the unsustainability of present patterns of resource consumption in an environmental sense, the instability and policy incoherence caused by multi-party coalition governments among others.

Some of these are certainly major issues. For starters, on the income front, although India continues to make headlines on account of a rise in the number of billionaires, it also ranks among the top slot in terms of those having high levels of poverty. Focus on caste continues to exist and there has been too much weightage given to caste politics as well. Then comes the issue of rampant corruption, the elimination of which seems quite a tall order indeed. Security is also an issue.

However, all is not lost. Superpower or not, India still has tremendous scope to grow and the quality of many of its companies is still superior to that of China. What the government needs to do is focus on reforms that will bring in investments and create a climate for sustainable growth in the future.

Do you think India has what it takes to become a superpower going forward? Share your comments with us or you can also comment on Facebook page / Google+ page.

 Chart of the day
Today's chart of the day shows the Economist's GDP forecast for various countries for CY12 and CY13. China and India still top the list although India's growth for CY12 has been pegged at 6.9%. That said, growth is expected to bounce back in CY13 and match that of China for that year. The outlook for the Eurozone continues to remain bleak as the region struggles to deal with the debt crisis.

Data Source: The Economist

As the stock market closed for the week and people rushed home to plan for the weekend, the Reserve Bank of India (RBI) was busy working. In a surprise move the RBI decided to cut the cash reserve ratio (CRR) ratio by 0.75% to 4.75%. The CRR is the percentage of the deposits that a bank must keep as cash with the central bank. This unexpected move came in a week before the scheduled monetary policy update. So will next week's policy review be a non event? Or is there further monetary easing in the offing? Well, we believe the RBI may wait for the Union Budget to be released before it makes any concrete decisions.

Tight liquidity was the major reason for the central bank's timely move. This CRR reduction is expected to inject around Rs 480 billion of liquidity into the banking system. This will provide the much needed relief given that advance tax payments are expected to be around Rs 400-600 bn. Credit demand is also expected to pick up towards the end of the fiscal as banks try and meet their year-end targets. The RBI is clearly worried about the slowing growth and tight liquidity. We await the next policy review to unearth more details on its future outlook.

It happened in 2008. Then in 2011. And now, it is threatening to take place in the current year as well. We are talking about another oil shock. The crude oil is tantalisingly placed above US$ 120 currently and many feel that this is the threshold that separates an oil shock from the absence of it. Thankfully though, the rise this time has not been as sudden as in the previous two oil shocks. But policymakers across the globe may want to get complacent at their own risks. There are quite a few dangers lurking out there. None so potent than an attack on Iran or the country's own attempt to choke off strategically important supply points.

Another risk is the Euro zone's reluctance to loosen monetary policy further in response to the sharp hikes in crude prices. This could easily derail its attempts at economic recovery and also perhaps push the entire global economy on the edge of a cliff. Then there is the biggest cat in the bag we believe. The US of A. It is imperative that the leadership of the country keep a calm head in the event of a price rise. Taking actions like cutting petrol taxes and releasing strategic reserves may certainly help in the short run. But it will do no good in the longer term scheme of things. Thus, as the Economist points out, odds of averting a 2012 oil shock depends mainly on the US keeping its cool. Any signs to the contrary and we could be asking for trouble.

Lower demand. Higher funding cost. And operating in an environment that is marked with liquidity tightening. We are referring to the property developers in China. The sector that was red hot just a few years ago, is now facing tough times. The government's moves to control property prices have severely hurt the prospects of several land developers, particularly the smaller and more regional players in the market. So much so that they are now very close to their downgrade thresholds as per the ratings agency Standard & Poor's (S&P). The agency has stated that the low to mid size companies may have trouble in accessing credit in the market. However, this bodes well for the larger developers. Land prices have come down in recent times. As a result, the larger players would be able to acquire more land bank at cheaper rates. At the same time, their better fundamentals would also give them access to cheaper bank funds.

Steel is a very integral ingredient in the building of an economy. Since the level of economic activity is closely linked to steel consumption, it often serves as a good barometer of economic growth. It is worth noting that the Chinese real estate sector is the single biggest driver of global demand for raw materials. China in totality accounts for a massive 40% of the global steel demand. Half of this is consumed by its real estate sector alone. In the last one decade, steel demand in the dragon nation has grown at a rapid pace of 15% annually. Owing to these reasons, the Chinese steel demand is watched very keenly. Any adverse changes therein would have repercussions for international steel prices and the global economy in general.

Now there is some bad news. It is expected that Chinese steel demand would slow down this year. This is on the back of waning construction activity in the country. Even last year steel demand had grown at a modest pace of 8%. A Chinese industry body fears that this year the same could go down to 4%. What will be the consequences of this slowdown? It will certainly hurt a lot of iron ore miners and steel producers as lower demand will also accompany prices falls. Coking coal prices will also come under pressure. But apart from the bad news, there may be some relief as far as commodity prices are concerned. If that could ease inflationary pressures in India and reverse the interest rate cycle, our economy would certainly get lifted out of the lull.

All major global stock markets with the exception of Japan closed the week on a negative note. The US stock markets were down 0.4% during the week. Worries that successful completion of Greece bond swap would trigger insurance payments by banks and financial institutions that sold credit default swaps (CDS) overweighed markets. However, the employment data showed signs of job creation and economic recovery in the US. Overall 227,000 jobs were added in the month of February 2012 with the unemployment rate being 8.3%.

The Indian stock markets were down by 0.8% after witnessing high volatility during the week. Markets see-sawed on the repercussions of key events like election results and Greece rescue plan that culminated during the week. Further, in an unexpected move, at least in terms of quantum, the Reserve Bank of India (RBI) cut the Cash Reserve Ratio (CRR) by 75 bps on Friday. The move will inject Rs 480 bn into the system. Unexpected rate cut is expected to drive the markets next week. Further, with the Union Budget 2012-13 scheduled to be announced on March 16, next week's session is expected to be equally volatile.

Amongst the other world markets, Japan was the only one to close in the green. France was down 0.4% while Hong Kong was down 2.2% during the week.

Data Source: Yahoo Finance

 Weekend Investing Mantra
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring." - George Soros

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12 Responses to "Can India ever become a superpower?"


Mar 10, 2012

It surely can only if there is a political will to administer the required changes which is known.

Like (1)


Mar 10, 2012

NEVER.....I AM 50 NOW ........

Like (1)
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