The major barrier to India's 9% GDP growth...

Jun 22, 2010

In this issue:
» The G20 meeting and its implications
» What the revaluation of the Yuan means
» PM highlights the importance of food security
» IT firms are employing a unique hiring strategy
» ...and more!!

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India has recovered well from the global financial crisis. This is evident from expectations that the Indian economy will post a healthy growth in GDP this fiscal. This may not be as good as the 9% plus growth that the economy had been recording pre-crisis. But the Finance Minister is confident of India reaching the magic double digit growth rate soon. However, Jim Walker, founder of Asianomics, thinks otherwise.

He believes that India has the potential to achieve 5-7% GDP growth easily. But Walker is skeptical about a sustainable 9% growth. This is simply because of many issues relating to lack of infrastructure. Private capital investment has also yet to make a comeback in a big way. More importantly, a high fiscal deficit has the potential to play a major spoilsport to India's growth plans.

What worries Walker is that there has not been much structural improvement over the last decade in debt levels. He opines that the so called 'structural improvement' in the government's deficits was because it hadn't given any pay rises to civil servants for long. What has changed dramatically is that people are now beginning to perceive the importance of debt levels. When India was growing robustly, the high deficit was overlooked. But the global crisis and the debt fiasco in Europe has changed all that. The limelight has shifted to the amount of debt that households, companies and government now have on their books. India's government especially will have to do more to seriously bring this deficit down going forward. Only then can a sustainable 9% growth look more realistic.

 Chart of the day
It's been quite a while now and India's consumer prices have stubbornly refused to come down. As today's chart of the day shows, consumer prices in India in the month of April this year are miles ahead than its peers. Indeed, the monsoons will play a crucial role in easing off some of this burden. Not surprisingly, prices in Europe and the US have been much lower. But this could pose a much bigger problem in the longer term if their governments do not exit stimulus measures at the right time. What is the right time will be anybody's guess.

Data Source: The Economist

The European debt crisis has been done and dusted. The Yuan revaluation saga has been discounted by the markets as well. Thus, the next important trigger for global financial markets is most likely to be the G20 meeting. Taking place in Toronto, Canada late this week, there are indications galore that the summit may turn out to be a bit stormy. Three of the biggest economies of the world viz. US, Euro region and China are all grappling with problems of their own. Jobless recovery and poor housing market despite record low interest rates is keeping the US worried.

And this is forcing the Fed to persist with loose monetary policy. However, a similar measure appears anathema to Germany in the aftermath of the entire PIGS debt imbroglio. China, on the other hand, is giving jitters to both as it vows not to let Yuan appreciate, which some believe is undervalued to the tune of 40%. Although it has taken steps to rectify the situation, not many are willing to read too much into it. Thus, rifts are visible in ample measure amongst all the three economies. What more, if the global economy were to sputter yet again, a lot of these nations may not be able to loosen their purse strings as they did before. All in all, a very stern test awaits global markets as the day of the summit draws close.

What happens when the biggest exporter stops selling and the biggest importer stops buying? The inter-linkages of global trade go for a toss! Similar seem to be the implications of China's decision to revalue its currency. The rising Yuan will boost the purchasing power of Chinese consumers. At the same time Americans will be reluctant to import goods that are no longer cheap as before. What this means is that the debt-laden Americans will have to borrow less to consume less. Also the Chinese will have to concentrate on their domestic consumption story. Global trade will still sustain on the basis of ability of economies to buy and sell surpluses. However, global growth will no longer be excessively dependant on the fate of a few rich economies. Having said that the de-pegging of the Yuan is China's latest attempt to save its export driven economy from going bust. The extent to which it benefits the global economy remains to be seen.

When we talk of 'growth' in the Indian context, we usually understand 'economic growth'. But there's another growth rate which will determine India's future. The growth rate of its population. And the biggest challenge is to ensure food security for all of them. India commands over 2% of the Earth's land area and about 4% of its fresh water resources, but feeds about 17% of its population, putting tremendous pressure on natural resources. As Prime Minister Manmohan Singh said recently, "We must endeavour to raise our agricultural growth rate from around 2% per annum to 4%." He stressed that modern technology had to be used to increase farm yields and called for reforms that will benefit small-scale and marginal farmers. Since land and water resources do not grow, agricultural growth must come from productivity. We couldn't agree more, but the challenge will be in the actual implementation at a time when food routinely rots in the storages in various parts of the country.

With new contracts being awarded and deals in the pipeline, Indian IT firms are in desperate need for manpower. According to NASSCOM, the industry will hire around 90,000 employees this year, more than 4 times the number hired last year. The limited talent pool, however, has forced companies to employ new strategies to attract staff. Infosys and MphasiS are some companies trying to re-hire employees who had left during the crisis. They recently launched initiatives such as "Green Channel" and "Homecoming" for this purpose. Firms do not have to spend additional time training or interviewing these employees. They can directly be put on projects. With most IT companies having announced wage hikes, this is a profitable option for ex-employees as well. A win-win situation for everyone concerned.

Indian generics players had over many years received flak from global pharma companies. Because then, Indian companies were unpopular for launching cheaper generic version of drugs and thwarting sales and profits of Big Pharma.

Now Indian pharma is receiving flak of a different kind. This time it is from the Israel based Teva, which is the world's largest generics company. Teva has made allegations against the industry practices in India and China. What is more the company's CEO has stated that Indian and Chinese drug companies were cutting corners. And so he wants the European authorities to conduct raids on the facilities in both these countries. Interestingly, since competition in generics is so intense, Teva has also been sourcing from Indian companies. Therefore, such a comment from the generics behemoth is indeed surprising.

Having said that, one cannot deny that Indian pharma companies have been caught on the wrong foot many times by the US drug regulators. One needs to look no further than Ranbaxy and Sun Pharma in this regard. But to paint everyone with the same brush may not be the right thing to do.

In the meanwhile, after a strong trading session yesterday, Indian markets languished in the red for most part of today's session. At the time of writing, the BSE-Sensex was trading lower by 56 points (down 0.3%). Stocks from the metals space, which were the biggest gainers yesterday, topped the list of losers today. FMCG and healthcare stocks, however, found favour.

 Today's investing mantra
"When the price of a stock can be influenced by a 'herd' on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical." - Warren Buffett

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6 Responses to "The major barrier to India's 9% GDP growth..."

Kunal Kundu

Jun 23, 2010

Wanted to point to the inflation chart. I have always beleived that the Chinese numbers are suspect. The latest in the list is the official inflation number. While by now the official Chinese CPI is a little above 3%, the diffference between Chinese nominal GDP growth and real GDP growth (a proxy for inflation) during Q1, 2010 is a little more than 11%, a far cry from the official figure. No other country shows the kind of variation that the Chinese data shows.

With regard to the storyline, I fully endorse the view. I would also like to draw the attention of the readers to a couple of my articles published by Financial Times. These are 'India to face strong headwinds' dated 4th June 2010 and 'Opinion: More hype than reality' dated 2nd March 2010.



Jun 22, 2010

Everyone talks about change, but have we thought of persons willing to change. There should be an entire cross sectoral change. By just changing one part of the problem, we are heading only towards an other problem.

Would suggest small prototype models of end to end growth in different parts of the country that shows clear benefits to the masses, who can then adopt and implement them. Selfsufficiency model with win win dependencies would definitely help the market to go out of gear and beneit the actual masses. This is definitely a dream but one day will happen.


Suresh Aithal

Jun 22, 2010

I Agree with Our Honb'le Prime Minister "more than that, new technology has to be used for increasing agricultural production".But He Should see that Marrying 1-5 having 5 each child by Muslim's can we control our Population? First Make a Law for this. Facilities will be given for Having one wife one child. Other wise 12% growth is not sufficient to feed all of them .


Adi Daruwalla

Jun 22, 2010

I agree with our Prime Minister that, new technology has to be used for increasing agricultural production. But through a forum someone needs to inform our honurable Prime Minister that, water resources can grow. It is in our hands to grow our artificial water resources. Someone needs to highlight to our honourable PM how, SSNNL project has been a "Campaign or Project riddled with corruption" and that farmers after paying money have been denied water for the last 7 years.



Jun 22, 2010

Can't understand when you said "...the de-pegging of the Yuan is China's latest attempt to save its export driven economy from going bust." Stronger Yuan will make chinese exports more expensive to consumers and this will in fact put pressure on chinese exporters. Your opposite view is baffling.


Girish Sumaria

Jun 22, 2010

Why cannot we talk and act in order to control our population instead of expecting water bodies, farms, farmers and rain god to play magic for the Indians? Why cannot we educate those Muslim and North Indians about the impact of the huge population on their life and needs?

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