X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
External account - Gaining strength? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Feb 27, 2006

    External account - Gaining strength?

    In the last year's outlook for the external sector, we had mentioned that India, China and the Russian region would continue to be major contributors to global economic growth. This is exactly what has happened, with developing Asia, apart from the US, providing the major fillip to world output. In contrast, the significance of the Euro area and Japan in driving economic growth in periods of cyclical upswings seems to be reducing. In particular, the Euro area is showing an increasing likelihood of slipping into the contraction mode. Therefore, it does appear that the onus of carrying forward global expansion has fallen on developing Asia in general, and India and China in particular.

    Let us read a little bit more into this performance and analyse the implications thereof, going forward.

    Global performance

    Developed markets
    After turning in a fairly robust economic performance in 2004, the US slowed down in 2005 (estimated). Nonetheless, it is still estimated to clock a 3.5% growth, being the major driver of the increase in global economic output. Thus, it is very clear that, despite all the hullabaloo about the 'BRIC' countries and emerging markets, the US remains, in every sense, a global superpower upon which global economic growth is dependent. The growth forecast for the US remains relatively stable in 2006, with only a minor 20 basis points reduction in estimates.

    The Euro zone saw a relatively subdued performance in 2005 as compared to 2004. However, in 2006, the growth forecast is significantly higher than in 2005, possibly driven by better economic prospects for the major German economy, the largest economy in the Euro zone. Japan also grew, albeit at a slower pace, in 2005, and is forecast to maintain the same rate of growth in 2006, undoubtedly an encouraging sign for the global economy.

    'Emerging' stars
    Despite the good performance of the key US economy, most of the laurels in 2005 went the way of 'emerging Asia'. This was led by India, China, India and Russia. The growth forecast for 2006 is also strong in these regions, particularly in India and China, driven by increased domestic consumption and investment-led demand respectively. However, the major concerns that could impact growth would be higher crude oil prices and higher inflationary expectations, leading to higher interest rates in the US. The revaluation of the Chinese currency, the Renminbi (RMB), is expected to only impact the global economy over a period of time, given the measured approach taken by the People's Bank of China to move towards a managed float.

    On an overall basis, global economic growth is expected to hit 4.3%, both in 2005 and 2006.

    GDP growth (%) 2003 2004 2005E 2006E
    US 2.7 4.2 3.5 3.3
    EU 0.7 2.0 1.2 1.8
    Japan 1.4 2.7 2.0 2.0
    CIS countries 7.9 8.4 6.0 5.7
    Developing Asia 8.1 8.2 7.8 7.2
    China 9.5 9.5 9.0 8.2
    India 7.4 7.3 7.1 6.3
    Russia 7.3 7.2 5.5 5.3
    World 4.0 5.1 4.3 4.3

    Source: World Economic Outlook, September 2005; IMF

    India Performance Vs Hype
    India's current account continued to remain in deficit during 1HFY06 (April - September). It should be noted that in FY05, the current account turned negative for the first time after three years of surplus. This continued in FY06, with the deficit ballooning to as much as almost US$ 13 bn, as compared to just US$ 485 m in1HFY05. This huge increase has been buoyed by strong import growth (both oil and non-oil, which is primarily dominated by capital goods). Between FY02 and FY04, despite a trade deficit, the invisibles (net) always overcame the deficit to maintain a surplus in the current account, driven partly by software and ITES exports. In FY05 however, this was not the case and this trend has continued in 1HFY06.

    The growth in imports was a massive 48.5% in FY05 and 38.3% in 1HFY05. Compared to this, the increase in imports has been to the tune of 48.4% in 1HFY06, despite the high base. Petroleum, oil and lubricants (POL) imports have increased in 1HFY06 by 42.9%. This was driven by an over-40% rise in the average price of the Indian basket of crude. In fact, for the period April 2005 to January 2006, POL imports have increased by 46.9%.

    As regards the capital account, the surplus grew by as much as 162% in 1HFY06 to US$ 19.5 bn as compared to US$ 7.4 bn in 1HFY05. The major drivers of this increase have been non-debt creating foreign investment inflows, particularly foreign institutional investor (FII) inflows. In fact, FII inflows were higher in 1HFY06 by 1,150% over 1HFY05. The increase in interest rates in the US does not seem to have deterred the Foreign Institutional Investors (FIIs) inflows at all, rather they have increased at an astonishing pace and stood at US$ 4.2 bn in 1HFY06 as compared to a mere US$ 339 m in 1HFY05. An increase in inflows of commercial borrowings and short-term credits on account of lower interest rate spreads on external borrowings and higher import financing requirements was also seen. Thus, this expansion resulted in an overall surplus in the balance of payments (BoP).

    FDI flows increasing in future?
    The foreign direct investment (FDI) inflows (net) into the country stood at US$ 2.3 bn in 1HFY06 as compared to approximately US$ 2 bn in 1HFY05. Thus, this is undoubtedly an encouraging sign, although the absolute amount may not be as much as what needs to be brought in, particularly in a capital-scarce country like India. It is likely that the full year FDI figures will be higher than the FY05 figure of US$ 3.2 bn.

    Going forward, with big-ticket investments, such as the US$ 12 bn mega-plans of Korean steel giant, POSCO, and a similar big-ticket FDI from Mittal Steel, these are the kind of inflows that India needs in order to sustain a decent rate of economic growth. FDI inflows not only provide strength to the capital account, but also lend stability due to their longer-term nature.

    Outlook
    Going forward, India, China, Russia and the rest of 'emerging Asia' are expected to continue to drive global economic growth. However, it needs mention here that the global economy is still over-dependent on the US, and thus, any slowdown on that front could witness negative after-effects globally. Due to the deficit in that country, an upward interest rate bias has already begun, with the Fed rate touching 4.5%, the fourteenth successive increase after it had hit 1% in June 2004. Further increases to a possible 'threshold level' could result in US assets becoming more attractive, an appreciation of the dollar and foreign inflows slowing down to emerging markets. The revaluing of the Chinese Renminbi (RMB), though having started, is expected to have an impact only over a period of time, since the People's Bank of China has adopted a measured approach, using a restricted price band of +/- 0.3%.

    In order to maintain a strong rate of economic growth, the rate of investment in the economy needs to increase as a percentage of GDP. While big-ticket FDI inflows, such as POSCO, are on the anvil, more such investments need to be made. India is not too dependent on exports, which accounted for 11.8% of GDP, with international trade accounting for 28.9% in FY05. We believe that the major impetus for India's economic growth will come from domestic demand, with select stories, such as outsourcing, driving exports. The continuation of reforms, particularly on fronts such as infrastructure, will be crucial to the sustenance of India's strong economic growth.

     

     

    Equitymaster requests your view! Post a comment on "External account - Gaining strength?". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS