Is India heading to pre-2003 level of growth? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is India heading to pre-2003 level of growth? 

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In this issue:
» Time govt. rolls out reforms: SEBI
» Infra spending is not the best way to boost growth?
» Will the Euro die this week?
» China's first 'junk bond' market opens for business
» ...and more!

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About a fortnight ago, India shocked the investor community with a GDP growth number of 5.3%. Though everyone was expecting a slowdown, no one was prepared for a nine year low in the growth numbers. Therefore, it was not very surprising that nearly every major research house started to revisit their estimates for the economy. And they all started coming with their own 'new normal' numbers which ranged between 5 to 6%. The latest to join the bandwagon is Morgan Stanley. In fact its head of emerging markets, Mr Ruchir Sharma, has gone two steps ahead and has stated that the stellar rates seen in the recent past was a fluke.

In an interview to a leading daily, Mr Sharma has stated that the 8-9% GDP growth rates seen between 2003 to 2008 were nothing but a fluke. They were a function of global factors. The most important of these was higher liquidity. As most developed countries were printing money, a large part of this money had flowed freely into the emerging markets including India. This had led to an increase in the prices of all the asset classes leading to the kind of economic growth that we had grown used to seeing. However, in his opinion, this growth was not driven by the internal factors. Which is why, as liquidity has started to dry up, these emerging market countries are seeing their growths slow down. And therefore, India's growth would pretty much mirror its pre-2003 levels in the times to come. In his opinion, the only way to get out of this mess is for the government to introduce reforms at a fast rate.

We do agree with Mr Sharma on the need for speedy reforms. However, we do believe that the view being taken of India's above 8% growth rates being a fluke is a bit too pessimistic. It is true that government inaction and policy paralysis has hurt the economy. But stating that the growth rates were just a fluke is unfair. The companies have witnessed stellar growth in their revenues and profitability during the same period. India did see demand for its goods and services, both domestic as well as export, surge up during the same time. The thing is that India was on the path of growth. The reforms made earlier could drive the growth thus far. What is needed now is a boost for the next leg. And that would come only through proactive action and decision making by the government. Once that happens, we would go back to the above 8% growth rates that we saw in the past few years. The glitch is only for short to medium term. The long term story for our country still remains intact.

Do you think that India's above 8% growth rates were just a 'fluke'?? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:15  Chart of the day
The theory of substitutes comes to our mind when we glance at the demand figures for vehicles, run on the low-cost fuel Compressed Natural Gas (CNG). Or we look at the rush of customers in installing kits to run their cars on CNG. The reason for customer preference for CNG is not very hard to understand. The way petrol prices have revved up in the past year has been ridiculous. And in all likelihood it would tend to head only northward in the future as well. Customers are left with no choice but to look beyond petrol cars. Running cost of a car is way cheaper, almost 50% and 60%, in case of diesel and CNG respectively as compared to petrol. Besides being fuel efficient, CNG cars are eco-friendly as well. And all this is transforming the whole automobile industry. Due to easy availability of diesel across India, initially diesel cars became the obvious choice of the customers. Now the demand for the CNG cars is picking up.

The need of the hour is the access to CNG by the whole automobile market. At present, CNG is available in only 35% of the auto market. With gas companies planning to put more infrastructure in place, demand for CNG cars would only go up. Auto companies would do well if they start planning to offer more CNG variants for their cars in the future.

Source: Business Standard

Editor's Note: Thank you for all the feedback that you have shared with us in the past on this "Chart of the Day" feature. Taking a cue from this, we are now starting to collate our most popular charts in a new section on Equitymaster. We invite you to visit this new section, and share the charts you like with your friends!

Policy paralysis is most likely to be the UPA government's sole claim to fame. True, the Prime Minister recently decided to put an end to this perception. He emphasised the need on infrastructure to bolster growth. But it seems to be more of talk and less of action. The Pensions Bill which was slated to see the light of the day has been put on the backburner as various parties oppose it. Never before has the UPA government's ineffectiveness been more apparent than it has now. But whatever the case, implementing reforms is the only way to take growth a notch up. And also change the negative perception that India has been attracting. The Chairman of SEBI, Mr U K Sinha also opines that pension sector reforms, along with similar moves in other segments within the financial sector such as insurance, could help revive the faltering investor sentiment and economic growth. As mentioned before, there is only so much blame that can be attributed to the global economic crisis and high interest rates. The government needs to assume some responsibility quickly as well.

GDP growth in the country for 4QFY12 slumped to a 9 year low of 5.3%. The Prime Minister Manmohan Singh believes that investing in infrastructure projects will once again put the country on the correct growth path. But this is not a sustainable solution. Throwing money at the problem may give the illusion of creating wealth in the economy. However increased government spending will just increase bond yields and further weaken the deficit. Without proper reforms infra projects are just going to feed corruption and line the pockets of the wealthy. The biggest corruption scandals over the past decade have involved some infra project or the other. Our next door neighbours also have a similar problem. China is seeing the after effects of unchecked infra investments. Banks are stuck with bad assets, a number of projects are economically unviable and the corrupt have only grown richer. Without speedy reforms 8-9% GDP growth seems to be a long shot.

An election in faraway Greece is hardly something to keep policymakers across the globe awake at night. After all, the tiny nation forms just about 2% of the Euro zone's economy. But this time it's definitely different. With the second Greek elections in as many months only a week away, not just Europe but the whole world is on tenterhooks. This is because the elections will decide not just the fate of the new Government but whether the country continues to remain a part of the Euro Zone.

Surely, shock waves would be sent across the world if Greece decides to sever its ties with the European Union. In fact, the aftermath of such a possibility is so complex that no one has been able to get a firm grip on the same. What is almost assured though is a big setback for the Euro currency. Besides, borrowing costs for other peripheral nations like Spain and Italy could go soaring into the stratosphere, bringing them to the brink as well. As for India, it will not be spared either as the reverberations are bound to be felt here as well. All in all, brace yourself for some really rough ride. The weather is about to get extremely turbulent.

Necessity may be the mother of invention. But it is the intensity of demand that makes a product saleable. Even if it is something as despicable as junk bonds. As the name suggests, the credit rating of these debt papers is so poor that sane investors may want to junk them. But in a market where the yields for such papers are abnormally high, there could be takers. Especially, when there is acute shortage of capital amongst corporate issuers. The Shanghai exchange has approved seven Chinese companies to issue junk bonds via private placements to qualified investors. Chinese banks are known to be partial to the PSUs in terms of lending. Thus cash starved private companies are left with little resort. Investors in China too find junk bonds a valuable extension to the debt market. However, we believe that capital allocation in China could not be more distorted. While Chinese banks continue to fuel asset bubbles, private entities will continue to bleed. The rise in appetite for junk bonds will divert capital away from important projects. With such an anomaly, the Chinese economy is bound to come crashing down. We hope the regulators, financers and investors in India don't get carried away with such trends.

In the meanwhile, after opening the day in the green, the Indian stock markets continued to trade in the positive zone. At the time of writing, Sensex was up by 79 points (0.5%). Stocks in the consumer durables and power space are witnessing maximum losses. Among the stocks leading the gains were Sterlite Industries and Tata Power. The other major Asian stock markets have closed the day on a high note as well with Hong Kong and Taiwan leading the gains in the region.

04:50  Today's investing mantra
"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy" - Peter Lynch
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9 Responses to "Is India heading to pre-2003 level of growth?"


Jun 14, 2012

Mr.Ruchir Sharma is right to a greater extent, we can be proud of our economy, only if our exports exceed our imports. There will be trade surplus and current account surplus. We are always on the other side. Secondly we always wanted participation of foreign funds under the name of development. They will come only if they can profit out of us, that has led to easy money, wide spread corruption and siphoning of our wealth. Economics and politics mismatch was another hurdle.Our economy is now totally dependent on borrowed money and ultimately there is always a risk, when you do so.



Jun 13, 2012

It is unfair to call Indian Growth a fluke. Despite Government inaction post 2003, the Indian companies & many of them world class did better than their counterparts in the world. As a matter of fact after 2008, I have lost faith in the Morgan Stanleys of the world.
Yes, the present Government is not only ineffective & incompetent but good at giving false hopes. The remote control has lost the direction and we do not see a leader who can give an appropriate political direction. Mr.Narsimha Rao was maligned but it goes to his credit that he could give Mr. Singh full backing and that is how India staged first reforms and came out strong.
So long as the feudal mindset of the Indians will not change, we shall not progress at a rate when the growth can be all inclusive and garibi is really Hataoed and not merely a slogan for 40 years.


Mudit Khetan

Jun 13, 2012

The growth potential of any person or country is not dependent on the external factors as much as they do on the inner core strengths. A person/country with conviction, innovative mind set and creative thinking can turn hostile (not merely adverse) conditions into favourable ones as has been done numerous times in the history - take Israel or Mahatma Gandhi or Japan (after II WW) or more recently Narsimha Rao/Manmohan Singh in 1991.
in case of countries as large and diverse as India, what matters is how many of the so called reforms are being discussed openly in public. Whatever discussions are taking place among the political parties are behind the scenes and more of a political bargain in nature. The UPA ministers should come out in the open on national TV (doordarshan) and must challenge the opponents of GST, Pension, Banking, Insurance and Retail FDI reforms with facts and presentations. These debates should be convened in such a manner that even a lay person is also able to understand the implications on his/her life. Similarly the opponents must also present their facts, doubts and apprehensions in public in response to the government's claims and should also suggest alternative paths. Opposition for the heck of it and less discussed reforms both are equally disastrous for India in short, medium and long term.
We can also set a precedent in the world for having taken the lead in formulation of economic policies by wide-spread public discussions. The voters would actually come to know who has their real benefit in mind and intentions and the consensus that will emerge will also be much more lasting than the 5-year term of the incumbent governments.


B K Nandi

Jun 12, 2012

Pre-2003 growth was not totally fluke. Central Government then did some work. We saw some development work and some proactive policies. Next government stopped the growth related activities, was busy in distributing ministries to loyalist depriving right persons. PM selection was most wrong choice, PM position is made CEO PM, without any leadership character. FM and PM competes in in misguiding Indians. If same growth of pre-2003 comes back, I would say it would be by fluke.


Raghvinder Joshi

Jun 12, 2012

I might as well add some sarcasm to the sad state of affairs. 1. Mr Manmohan Singh can do something about the economy only if it goes to 1990-91 levels. So he is working hard on that. 2. The planning commission has already started spending on infrastructure; by building a toilet fo Rs. 35 lacs. Never mind that the access is limited to only Dy Chairman and his brilliant team.



Jun 12, 2012

Policy paralysis with 2014 in sight all parties need something to promise the electorate (asses) if everything is done now itself what will they have to promise then. So the policy paralysis and putting essential bills in back bunners. Regarding the American firms giving great talk about the Indian Market. What have they to say about America and Europe?
In fact they are good at bull shitting and the sorry part is we Indians are enough to show our country in a poor light. If the growth figures are a fluke then it needed so many years to come out in light.


C A Colaco

Jun 12, 2012

It appears that 8% growth of the past is largely a fluke and the effect of a low base.
However, from where we are now, achieving high growth rates going forward will be much more challenging and will call for a step change in governance.
It will also require a greater role for leadership having domain knowledge both in the government and in the the corporate world.


g r chari

Jun 11, 2012

I think Mr. Ruchir Sharma rightly called the growth of Indian economy a "fluke" as external factors or forces along with non-interventionist policy of the govt. helped India manage a growth rate in excess of 8%. But when the external forces withdrew, the "thud" in the fall in growth rate which we now hear has sounded like the fall of a Big Bull. I feel India's real growth story will happen only when the govt. let's go it's strangle-hold in managing (sorry, mismanaging) the economic affairs of the nation and concentrates its energies & scarce resources of the country in improving infrastructure, education, health and other causes (apart from providing good governance) which promote social integration of the country. It may be politically expedient to provide for subsidies & freebies to win votes but it will be at the cost of robbing the nation of the productive power of its young populace.



Jun 11, 2012

Ruchir Sharma is bang on target; the so called growth rates are not only a fluke but most suspect they add up only by finagling data; else how do you explain the increased nos in BPL; also even the much touted growth figures are largely on account of extractive industries such as mining and construction and anyone who can read knows what this means!!

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