Can the consumption story bail out India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can the consumption story bail out India? 

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In this issue:
» US policymakers' wrong approach to counter Chinese threat
» Indian start ups creating jobs in the US
» Is US going the Greece way?
» Indian entrepreneurs go shopping for Australian assets
» ...and more!

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It is not difficult but rather impossible to find any positive cues about the Indian economy these days. Pick up any business daily and statistics about how swiftly the economic variables are deteriorating stare at you. Add to that shocking revelation of graft in the political and corporate world. Most of us have already given up hope on the recovery of US or Europe. But that China too is steadily losing its resilience to global slowdown is a painful fact.

In the midst of this a Boston Consulting Group report comes as a breath of fresh air. It emphasizes on the fact that 6.5% GDP growth rate for India is not bad. Especially because the number though far from double digits is sustainable for next few decades. We completely agree that consistent 6.5% GDP growth rate for few decades is commendable by any yardstick. And if that were to come true, India undoubtedly is the place to be for long term investors.

The BCG report bases its conclusion on the fortune of Indian economy on its consumption pattern. That the consumption story is a pillar of strength for the Indian economy is common knowledge. What gives it weight is the fact that most of the consumption is without leverage. As also the fact that household consumption is growing without any compromise in savings rate. In fact BCG expects even the Chinese economy to steer its wheel towards consumption growth going forward. That is after having focused on big ticket government investments over the past decade.

But will consumers in China and India help their respective economies easily tide over a global slowdown? Well, BCG expects them to spend a combined total of US$ 64 trillion on goods and services in the decade leading up to 2020. No doubt that itself could stoke a healthy growth rate in both the Asian economies. But disproportionate growth rates across geographies and social classes are a big worry. One that could paralyse the consumption story in both the economies. Recent instances of labour unrest in China and India point in this direction.

Thus the consumption story is certainly the most sustainable growth driver for Indian economy. But the same cannot live up to its potential unless government policies ensure that income levels grow more equitably.

Do you think the consumption story will bail out Indian economy from global downturn? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
While economists and the central bank have expressed worry over the government's borrowing programme, the policy makers have shown no remorse. On the contrary they claim to be holding the country's public debt at a healthy share of GDP (Gross Domestic Product). This is especially when compared to their peers in the West. It is true that India's public debt has fallen from 57% of GDP in 2007 to 51% of GDP in 2012. However, as seen in this chart, all this while the debt per person has risen incessantly. This means that India's public debt is growing at a faster rate than the growth in population. This is certainly not a healthy long term trend.

Data source: Economist

As things stand today, China is perhaps the only nation capable of giving the US a run for its money. Little wonder then that calculations are underway at a frenetic pace on how to stop the Chinese juggernaut from snatching away US' crown.

An article in Businessweek points out how the US policymakers seem to be taking the wrong approach to counter Chinese threat. As per the article, the US principles of free market economy may not work against China. This is because the latter is a nation built entirely on state capitalism. You see free market principles require both parties to co-operate with each other. China though is far from achieving this kind of reputation. It believes mostly in a win-lose system. What then should the policy prescription be for United States? The article argues that it is time the US moved towards a mix of capitalism. In other words, its companies could operate as before but with inputs and direction provided by the Government.

This is certainly easier said than done we believe. Just as China will find it difficult to move towards a free market system so will the US struggle to adapt to this new policy prescription. We believe the US economy is better off sticking to its current policies provided it strives to uphold the principles of free market system that seemed to have been compromised a great deal in recent times. As for China, the odds seem to be stacked heavily against the dragon nation as state controlled economies is not the most efficient way to sustainable wealth creation in the long term.

US regulators may continue with their positive statements on the state of the economy but things are getting bad. This is visible in the number of new start ups by immigrants in the country. A recent study by Koffman Education states that the proportion of immigrant start ups has slipped to 24.3% from 25.3% in 2005. Interestingly, the troubles in the country have not hampered the business interests of immigrants from India and China. As per the same study, the number of startups by Indian immigrants has actually gone up during the same period. The Indian interest lies more on the technology side. In fact, currently nearly every third tech start up in US is by an Indian. So the US could continue to blame India for 'stealing' US jobs but the truth is quite different. Indian start ups are actually creating jobs in the US. It is just something that their regulators and politicians have chosen to ignore. Rather than coming up with protectionist measures they need to come up with policies to promote investment interest in their country.

Massive debt pile-up in Greece has been one of the major reasons for the mess Europe is in. As the country teetered on the edge of bankruptcy, it set in motion the deepening of the crisis in the Euro region. Europe is not out of the woods yet. Far from it. What is more, it is highly likely that another country outside Europe could meet with the same fate as that of Greece. Indeed, Bill Gross, founder of the world's largest bond fund Pimco opines that the US will go the way of Greece if it does not get its fiscal house in order. He believes that the US must cut spending or raise taxes by 11% of GDP over the next 5 to 10 years in order to preserve its role as financial safe haven. Currently, debt in the country stands at around 8% of GDP which by all means is highly worrying. So far US' response to the crisis has been largely uninspiring to say the least. More and more of quantitative easing has not spurred growth the way the US Fed had envisaged. And despite evidence highlighting this, the US has not learnt from its mistakes. Therefore, unless the country comes out with a more meaningful strategy, going down the Greek roads will hardly be surprising.

Australia, a country as big as a continent! Tucked away from rest of the world, this country is endowed with a bounty of natural resources. While several other developed economies are going through testing times, the sailing has been relatively smooth for this country. It is one of the only eight countries that still enjoy a triple A (AAA) rating with a stable outlook. Despite its size, Australia ranks 52 in terms of population. However, its economy is set to overtake Spain this year to become the 12th largest economy.

Given these facts, it is no wonder that a lot of foreign money has been pouring into this safe haven. In fact, Indians too are queuing up to grab a pie of this resource-rich country. Several Indian entrepreneurs have purchased assets in the Australian hotel and mining industry. It is worth noting that Indians have traditionally preferred to invest in Britain and North America. However, owing to the poor economic prospects of these economies, investors are looking for relatively safer avenues. Moreover, Australia is soon set to launch 'significant investor' visa programme to attract rich Asians to invest in the country. This, we believe, will boost investments in the country even further.

After starting off in the positive, profit booking in commodity, auto, banking and engineering stocks led the indices in Indian equity markets closer to the dotted line post noon. The BSE Sensex was trading marginally higher by around 8 points at the time of writing. Other Asian indices closed a mixed bag today while Europe also opened on a negative note.

04:50  Today's Investing Mantra
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    Equitymaster requests your view! Post a comment on "Can the consumption story bail out India?". Click here!

    1 Responses to "Can the consumption story bail out India?"

    Gangadharan Nair

    Oct 4, 2012

    Even though India is having 18% of World population, our economy is only 1-2% of World economy. More over any change in consumption affects only 2-3% of Indian population. Out of 1.21 billion population 80% people do not earn more than Rs.25/- per day. For them nothing is affected. So consumption is NOT an issue for the majority of Indian population.

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