India, rags to riches in one generation! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India, rags to riches in one generation! 

A  A  A
In this issue:
» Indian economy affluent or middle income forever?
» US objects to Chinese protectionism
» Citigroup hikes executive pay by 50%
» Affordable housing in India a distant dream
» ...and more!

Not many of us would have vivid memories of the global economic scene during the ten year period between the year 1965 and 1975. But these were the years when countries like Brazil and Morocco were in rip roaring form, growing their economies by 10%-12% each year. However, here comes the shocker. For the ensuing 30 years, while Morocco grew at an annualized rate of 0.1%, Brazil's per capita income in 2005 was actually lower than in 1975!

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The purpose of this short discourse on economic history was to highlight the fact that India today stands at the same crossroads as the above mentioned economies once did and the things that it will need to do to not fall in the same trap, that is remain a middle income country forever, is the central point of a report known as the India 2039 study.

The action plan that has been suggested though has an all too familiar feel to it. Proper management of cities, transformation of education system, a relentless focus on technology and a decentralized administration system are the main roadblocks that could hurt India's prospects forever. However, once these issues are properly tackled, India has a very strong chance of transforming into an affluent nation in the next thirty years or in other words, in one generation itself. The writing is clearly on the wall. Policymakers are advised to get smug at their own peril. Start planning for the next phase of growth or face a perpetual stagnation.

A lingering deficit
Image source: The New York Times
In an important development that can have far reaching implications on world trade and may even slow global economic growth, The New York Times has reported that the US and the European Union have filed a complaint with the WTO (World Trade Organisation) alleging that China is deliberately trying to limit exports of certain commodities like bauxite and zinc of which it is the largest producer, to give its exporters that use these materials an upper hand. These allegations are likely to further dent China's reputation as a strict enforcer of WTO rules, doubts over which have been regularly surfacing ever since the dragon nation joined the WTO in 2001. "China is not only continuing but accelerating many of the protectionist approaches they've taken in the past to promote economic development", is how the article chose to put it across.

Not the ones to take a backward step, the Chinese authorities have hit back saying the relevant policy on exports has been implemented to protect the environment and natural resources. It has also said that it will file its own complaint against the US, challenging the latter's ban on poultry imports from the dragon nation. Indeed, the fallout of the global economic recession is having a nasty impact on trade relations.

The one lakh lucky applicants who had applied for an ownership of the world's cheapest car, the Tata Nano will finally be able to paint the town red in their prized possessions. Tata Motors, the car's manufacturer announced yesterday the final results of the lottery based selection process, where in from a total list of 2 lakh odd applicants, the first 1 lakh owners of the Tata Nano have been selected. As per a leading daily, deliveries are set to begin from July and the first 1 lakh cars are expected to be delivered by the last quarter of 2010. Get set to see the cute little car making its way out of traffic snarls with relative ease!

The world's largest economy is still reeling under pain and looks far from recovery. The umemployment rate in the US, already at an alarming high of 9.4%, is suspected to rise to 10% in the next few months. Despite the gigantic economic bailout of US$ 787, the government could not curb the job-loss from reaching a 25 year high. Tremors of this might be felt in the Indian economy as well. We keep our finger crossed for what Obama has to say.

‘Because everybody else is doing it’. Nowhere else is this phrase more venerable than at Wall Street. Thus, recently when Goldman Sachs announced that it would pay record bonuses to its employees, other banks must have itched to follow suit. Agreed that the likes of Citigroup cannot dole out hefty bonuses on account of government restrictions, but it can indeed raise base salaries and this is exactly what it is doing. As per Bloomberg, the troubled financial giant will raise base salaries by as much as 50% to help compensate for a reduction in annual bonuses! Old habits indeed die hard.

With economic growth slowing down, consumption took a hit. This forced retailers to put their expansion plans on hold. However, in recent times, mall rentals have fallen up to 50% as compared to their peak in FY08. This has reignited retailers' thoughts of expansion. Furthermore, the consumption is also showing signs of picking up, further easing liquidity worries. Consequently, the retailers (large ones like Future Group, Aditya Birla Retail, Reliance Retail, Tata's Trent, and RPG Group's Spencer's) are all set to expand retail footprint and are outlining aggressive plans to open hypermarkets in the country. If the ambitious plans go as per schedule, in a year India may see around 75 new hypermarkets, nearly half of the current count.

For all the economic progress India has made in the recent years, owning one's own home remains a distant dream for most Indians. It seemed that the economic slowdown might finally make housing affordable to a larger section of the people. But has it really? One person who knows a great deal about housing doesn't think so.

Mr. Deepak Parekh, chairman of HDFC, says, "Affordable housing is not about box-sized, budget homes in far-flung places where there is no connectivity to work places and little surrounding infrastructure. Affordable housing has to be able to cut across all income segments and has to make economic sense in terms of proximity to work place." He suggests that fundamental solution to the problem lies in simplification of the process of land acquisition and conversion of agricultural land for urban use. The government would do well to listen to Mr. Parekh. That's easier said than done given the political interests that surround matters of urban land.

As the Indian government plans to raise a record US$ 74 bn to plug the deficit gap, international investors are highly reluctant to fund any of this. An international bond fund manager recently said, "Indian bonds are surrounded by deep fundamental risks like the deficit, inflation and the huge supply. There's no reason for us to have them in our portfolio." Thoughts like these could put a spoke in the wheel of the government's reform bandwagon. But then, we believe that these investors are thinking on the right lines. After all, like a company having strained balance sheet is shunned by investors, this can also apply to countries in general. We hope both the PM and the FM are keeping a close tab on this!

The BSE-Sensex edged higher by nearly 1% today, but not before enduring a negative start and moving around the break even for most part of the morning session. Strong buying later in the day finally saw it closing comfortably in the positive. Most Asian indices also ended the day in the positive. European indices are also trading strong currently.

04:51  Today's investing mantra
"Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error." - Warren Buffett
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2 Responses to "India, rags to riches in one generation!"


Jun 26, 2009




Jun 25, 2009

What happens if the US is shunned by investors because of its strained Balance sheet? I cannot understand how world money keeps following the US time and again.Can it ever recover to justify its growth in future. A 300 mill population of which 90% is in some form of debt..and we expect US to lead world economy recovery? Is this possible with a 67 trillion and rising debt? Will be a miracle and something to teach at all Govt schools forget Harvard.

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