May 15, 2008|
Indian deficits, Chinese woes & more
Capital inflows - Save up for a rainy day
The recent economic buoyancy had provided the Indian economy an excellent opportunity to correct the underlying deficit levels, besides building a buffer for future down cycles. The same was certainly well executed during the erstwhile upturn of the early and mid-1990s, resulting in reduction in the deficit and public debt levels. In the current cycle, however, India is probably the only emerging market that has witnessed a relatively smaller correction in its deficit over the last five years.
India's deficit is the highest among those in major emerging markets and about 2-3 times those of major developed economies as a percentage of GDP. Although there has been some improvement in the fiscal deficit trend at the margin, there is little evidence that the government is implementing any major structural reforms to reduce revenue expenditure, which we believe is critical to achieve a sustainable reduction in the deficit.
Typically, the cost of a high fiscal deficit would have been higher real interest rates. However, India has witnessed an unusually low real interest rate at the time when its fiscal policy has been expansionary, as reflected in rising public debt to GDP. The key to lower-than-warranted real interest rates is the supply of global liquidity in the form of portfolio, private equity and debt inflows. About 85% of the total US$ 183 bn capital flows that India has received over the past four years have been in the form of non-FDI flows.State of India's public finances
Moreover, the current high level of unproductive government expenditure and public debt is weighing on the long-term growth potential. The government's spending on productive areas such as infrastructure, education, health and welfare has been constrained by high levels of non-development expenditure and a high level of debt.
The government's development expenditure has averaged 15% over the last five years, declining from 17% at the commencement of the liberalisation process in FY91 (Source: CMIE). Thus there is dire need for the government to act prudently and save up the capital inflows so as to make the deficit and debt levels bearable during the down-cycles.
Cheap manpower - Reverse outsourcing
Companies like Ever-Glory International symbolise China's world dominance in manufacturing cheap clothes, shoes and toys. With US$ 70 m in annual sales, the company has won customers including Levi Strauss and Tesco. However, with rising labor costs and the Yuan's appreciation against the dollar threatening profits, the company like many of its peers, is considering moving from China's Pacific coast to the interior to take advantage of a government program to entice businesses into lower-wage provinces.
What is even more surprising is that the outsourcing hub for manufacturing industries is now considering outsourcing the same from countries like India and Vietnam. In fact, with Vietnam, India and other Asian nations offering lower cost options, thousands of Chinese companies, accounting for nearly 30% of the country's exports are facing the pinch of labour costs. To put things in perspective, Chinese unskilled workers earn US$ 150 a month, against US$ 104 and US$ 87 earned by Vietnamese and Indian workers respectively.
The labor-cost comparison became even more favorable for Vietnam and India in January, when a new Chinese labor law required companies to pay minimum wages and severance pay. According to the Federation of Hong Kong Industries, the law contributed to a 22% increase in labor costs.Chinese scare for Indian IT
Satellite mapping to ascertain land titles
Last month, India put 10 satellites into orbit in a single mission, creating a new world record. Among them was Cartosat-2A, an indigenously developed remote-sensing satellite that has already begun beaming high-resolution pictures of the Indian hinterland, setting the stage for what may be a revolution in the nation's financial sector.
Indian scientists will be able to effectively use images from outer space to map and combine satellite pictures of landholdings with field surveys and create a unified register of property titles. This is expected to improve the collateral value of land and enhance its credit purchasing power. According to IMF's former economic counselor Dr. Raghuram Rajan, "Land is probably the single most valuable physical asset in the country today. Unfortunately, the murky state of property rights to land makes it less effective as collateral than it could be."
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