This will help India's growth match that of China...

Jul 21, 2010

In this issue:
» Global steel production has done well so far
» US will continue to print money, says Marc Faber
» How ready is India to host the Commonwealth Games?
» No policy yet on decontrolling diesel
» ...and more!!

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There are various challenges that India needs to address. Especially if the economy has to grow at a sustainable and strong rate going forward. Strong infrastructure is certainly one of them. But the other equally important propeller is agriculture. After all, 60% of India's population thrives on agriculture as its source of livelihood. And so the importance of the farm sector cannot be undermined.

The government's cabinet secretary has recently reiterated that reaching double-digit growth is largely dependent on the farm sector achieving 4% growth. In fact, he is of the view that bolstering farm output is the key to India matching China's growth rate in the future.

The importance of agriculture over the years was relegated to the sidelines. This was because strong growth in services and manufacturing hogged the limelight. But it became the focal point last year when poor monsoons wreaked havoc on crop production. And pushed up prices of food items. And so, it has become imperative that for India's growth to be sustainable there will have to be strong contribution from all the three sectors. These being agriculture, manufacturing and services. Infact, the government opines that agricultural growth of 4%, industrial growth of 12% and services expansion at 10.5% was the combination needed to reach the goal of double digit growth.

Specifically on the agricultural front too, efforts will have to be made to reduce farmers' dependence on monsoons. This would mean introducing irrigation techniques and rain harvesting methods. So that a bad year in monsoons (like the one witnessed last year) will not greatly thwart agricultural production. The government's intention to increase farm output and focus on inclusive growth is all very well. How it proposes to carry this out is what will test its mettle in the long term.

 Chart of the day
India maybe lagging China on many fronts. But this is likely to change soon. As today's chart of the day shows, as per estimates of the Economist Intelligence Unit, India's real GDP growth will match that of China by 2013. What is more, in previous years the gap was apparent between the two BRIC nations. But going forward there is not expected to be much to choose from between these two Asian giants. India will have to make sure that infrastructure and agricultural production is ramped up to move in tandem with China. China on its part will have to reduce its dependence on exports and focus more on domestic consumption.

Data Source: Economist Intelligence Unit

In a period when commodity prices have taken a hit, this might sound as welcome news for steel manufacturers. Global crude steel production has risen by around 28% YoY in the first six months of 2010. But the bad news is that a large part of this growth has been front-ended. This is to say that production has slowed down in the latter period of the first half. For instance, steel production dropped in June as compared to May. This was as steel mills worldwide scaled back their production in response to some weakness in demand.

What is more, industry observers are expecting production cuts to continue going forward. China, which was the savior for the industry all these years, is itself slowing down on its consumption. And that's going to weight heavy on the industry. Uncertain times indeed for the steelmakers!

Data Source: World Steel Association

It is perceived that fiscal and monetary policies are the two levers with which growth in an economy can be regulated. But we believe that most of the developed economies have pushed the fiscal knob to its maximum permissible limit. Little wonder most of them are singing the austerity tune these days. So does this mean that the Governments have finally decided to go slow on spending and are looking to cut their fiscal deficits? Certainly not believes Marc Faber, one of the top big picture guys in the world right now. "I am not a great believer in this austerity that they are proclaiming", Faber said recently in an interview. He further adds that even if Governments cut deficits, it is most likely to be offset by a very expansionary monetary policy. In other words, the US Fed and other central banks will print so much money that nominal interest rates would continue to remain low. This in turn could force people to spend and invest and thus push up economic growth. However, this is not going to solve any of the long term problems. Very likely, we could end up with an even bigger recession few years down the road. Thus it looks like there are no easy solutions in sight.

China has historically been known for its cheap (and thus low on quality) manufactured goods that seem to reach almost every corner of the planet. It now looks like India may be all set to achieve a similar distinction. Not for its products though, but for its infrastructure. As per reports in the Mint, many Commonwealth Games venues in New Delhi are far from finished with just a few months to go before the games begin. Many others are falling apart under the force of just a few weeks of rain. A shooting range built for the Games, and inaugurated two months ago, was extensively damaged by heavy rains recently. At another complex, rains felled the false ceiling. Many other venues have sprung leaks all over. Some experts are of the opinion that the government's modus operandi of giving contracts to the lowest bidder is what is causing these problems of quality. The last thing India needs is attaining a double digit GDP growth with such shaky foundations to boot.

Petrol prices have been recently moved to a market price mechanism. But question marks remain over diesel prices. While prices were increased by Rs 2, the heavily used transport fuel remains government determined. As reported by a leading business daily, the policy makers have not thought about decontrolling LPG, kerosene or diesel as of now. They have to look at a lot of things, like its effect on consumers, before they can go ahead. Of course, the recent nationwide strike would have also given the government second thoughts. In our view, the political backlash and a higher global crude oil prices will test the resolve of the government over this issue. After all, the economics of reducing subsidies is one thing, the politics is quite another. Often politics wins.

India has a reason to cheer. India's exports grew by over 30% YoY for the fifth straight month in June. Data showed that sectors like engineering, chemicals, pharmaceuticals and iron ore have witnessed impressive growth rates. But is this growth sustainable? Will it continue at this pace for the rest of the year? Industry experts are skeptical of this. They feel that exports have started to turn around for the better. However, there is a slowdown in China who has decided to cut down on its production this year. Such decisions will hurt China's demand of goods from India, especially for iron ore. To add to this, uncertainty linked to the Euro zone continues to worry exporters. A number of exporters are complaining about not getting payments from buyers in Europe on time. Now that government spending is cut in parts of Europe, it could result in a further fall in demand. All in all it looks like India will have to hold off its celebrations. At least for the time being.

In the meanwhile, Indian markets traded well above the dotted line throughout today's trading session. At the time of writing, the BSE-Sensex was trading higher by around 83 points (up 0.5%). Gains were largely seen in metals, auto and oil & gas stocks, while healthcare and banking stocks were at the receiving end.

 Today's investing mantra
"Spend at least as much time researching a stock as you would choosing a refrigerator." - Peter Lynch

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4 Responses to "This will help India's growth match that of China..."


Jul 21, 2010

The chart of the day in which it is mentioned that India's growth matches that of china by 2014.It may be so because china's %change of real GDP growth is seen falling rather India's growth increasing.



Jul 21, 2010

Every where in this country, Govt spendings are
going in vain.As far as Govt spendings are concerned,
simply mis managed, wasted, in dulgence of leakage is
predominant.Day after day, sitution is going out of
control.Will the top political,legal,administrative
leadership awake and be prepared to meet the challange to put the nation in right path of progress and welfare
of all its people


Dr. Atul Tiwari

Jul 21, 2010

Porblem is not uncontrolled market in India. See when fuel prices will change monthly, then same will not be reflected in market. IE- An auto driver who raised its rate from 25 to 30/ will not decrease it revrsal of fuel cost. In same way a kirana man will not decrease the price of goods & its not possible also. If fuel price dcreases for .50np after being raised Rs 2/ how one will calculate each time / what he will do with old stock purchased at a higher price on 26th day of month. In china, first - market is well regulated, second- law of land is respected & feared 3- contracts are awarded on quality cum cost basis (not only cost). So lastly its political & administrative will whci controlls the inflation, not only the market factors.



Jul 21, 2010


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