|»5 Minute Wrap Up by Equitymaster|
On This Day - 24 JULY 2012
Is India a bubble waiting to burst?
In this issue:
Put this in India's context. It goes without saying the economy has slowed down in the past one year. But the stupendous rate at which India has grown in the years prior would leave no doubt in many minds that the country will not meet the fate that has befallen its developed peers. But Andy Xie thinks different. He believes India is a bubble waiting to burst. The prime reason he cites is that a lot of hot money has flowed into the country and has created a bubble. The problem is also that the money has not been used to build infrastructure, which can sustain the economy. He also believes that one should not be deceived by the high returns and capital in the nation because they will vanish without strong support from the industrial sector.
Indeed, if the bubble in India bursts, the shock will be immense and so will the impact. Though on hindsight, none of the factors that propel this crisis will be surprising. Indeed, lack of adequate infrastructure has been plaguing India for a long time now. And we all know that its current problems are on account of a bloated deficit and lack of reforms.
It all depends on how the government chooses to tackle these problems. Growth is yet not an issue because the country is still doing better than its developed peers. But if the government swings into action and takes important measures to bring debt down and ramp up infrastructure, not only will a crisis not take place, but the possibility of an 8% GDP growth on a sustained basis could be well within reach.
India certainly cannot be faulted for the latter. Its currency isn't as rigid as say like China. But it could certainly do its economy a world of good if it keeps debt under control. Its fiscal deficit condition is nothing to write home about, causing inflation and slowing down growth due to crowding out of private investments. Thus, unless it brings the deficit under control, the long term sustainable growth isn't 8%-9% as we have come to expect. It is more in the region of 6%-7% we believe. And this seems to be true for all the BRIC nations.
A recent survey of job trends across states has challenged the conventional wisdom. That pro-worker policies protect jobs and ensure higher employment has been proven to be false assumptions. None of the communism inclined states like Kerala or West Bengal have achieved much in job creation. On the other hand, the more reformist states like Gujarat have sprinted ahead. However, labour reforms cannot just suit the need of workers. They must meet the requirements of companies and investors as well. The overall ease of doing business needs to be conducive for entrepreneurs and investors.
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