|»5 Minute Wrap Up by Equitymaster|
On This Day - 25 NOVEMBER 2014
Our 'US$ 10 trillion' dream will not come true unless...
In this issue:
Take the PwC report on India becoming a US$ 10 trillion economy for instance. Now the size of India's economy at the end of 2013 was about US$ 1.87 trillion. Expecting it to reach US$ 10 trillion (grow 5 times) is certainly not an impossible dream. However, hoping that the dream will be realized with over ambitious targets can lead to varied misconceptions.
The report expects India's GDP to cross the US$ 10 trillion mark by 2034. Two decades is a long time you would say. However the base assumption for this prediction is that the economy will grow at an average rate of over 9% per annum. The argument that if China could do this, why not India, also does not work here. For China's government enforced infrastructure spending and export driven model had a huge role to play in its growth. China managed to piggy back on the growth in the US and Europe during their heydays. India's growth, however, will be contrasted by a slowing global economy for a long time to come.
Most importantly, the 9% GDP growth estimate relies heavily on job creation. It expects the economy to create 10 to 12 million jobs every year. Given that the country currently produces 5 million graduates every year, 50% of which are found unemployable, the target seems ridiculously steep! The fact that the share of unemployment is highest amongst the more qualified population in India is most worrisome. And without enough efforts to adequately skill India's educated youth and make it employable, the higher GDP growth is never going to come.
Plus in its hurry to accelerate growth, the Indian economy will have to confront some herculean challenges. As Vivek Kaul has aptly put it in the Daily Reckoning, the quality of assets in PSU banks in India is itself a ticking time bomb!
Thus investors should read these predictions about the Indian economy while remaining aware about the challenges ahead. Buying stocks based on feel good assumptions could be fraught with risks. And giving in to the greed of participating in India's 10 trillion dollar growth story without paying heed to valuations, could do irreversible damage to your portfolio.
Thus, the India versus China Megatrend, going forward will depend on how each of the economies bring in reforms to correct their respective drawbacks. Putting in place policies to make India's manufacturing sector more attractive than China's can be the easiest way to tilt the balance in India's favour. And the 'Make in India' drive is indeed a good start.
For a country that prides itself on its engineering and scientific talent, it is shameful that India spends just one fifth of the amount spent by China on R&D. In the 21st century, economic growth will be largely driven by intellectual assets. Research has shown that countries with strong IP laws attract more FDI & produce more patents than ones which do not. India has a long way to go when it comes to encouraging and protecting intellectual property. Although we have taken some steps in the right direction, a lot more work needs to be done. Without enforcing strong laws which promote and protect IP rights, the government's 'Make in India' campaign is unlikely to be a big success we believe.
The economies of Europe and Japan, China's large trading partners, are in dire straits. Japan is already in recession and Europe is barely registering positive growth. Thus, their central banks have responded with heavy doses of money printing. This flood of money has had the effect of suppressing the Euro and the Yen. To understand just how much these currencies have fallen recently; consider this. Against the US dollar, the Yen is trading at a seven year low and the Euro is trading at a 2 year low. In such a scenario, it will be extremely difficult for China to devalue its currency.
If it does so, it will effectively be declaring a currency war. This would be a zero-sum game. There are no winners in such battles. We believe if China goes down this road to boost GDP growth, it will be playing with fire.
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