We are indeed living in heady times. The BSE-Sensex has crossed the 8,00 Foreign Institutional Investors (FIIs) fund inflows continue to be positive with no signs of stopping. The Indian economy has been amongst the fastest growing in the world, recording a growth rate of 6.9% in FY05. Increasing purchasing power, a massive 300-million strong middle class, a flourishing services sector, strong corporate performance and booming stock as well as property markets - all hunky dory, right!
Well, we thought it would be appropriate to dwell a little bit on our flaws/the risks facing India's long-term sustainable growth and development. Enough has been said and written ad nauseum about the positive factors. Please note, we say at the risk of repeating ourselves that we are not bearish on the 'India story'. We are very positive on the prospects of India Inc, but would rather be a little realistic and take note of the negatives that are currently plaguing our economy and affecting our ability to grow at a sustainable 8%-plus per annum, rather than the 6% to 7% that we have managed currently.
Issues that require focus
Infrastructure: This is hardly something that anyone does not know. Our infrastructure is terrible, to put it mildly. Be it roads, railways, airports, ports, power, connectivity, they are all in poor shape at present. The massive traffic snarls of Bangalore are only too well documented by names such as Mr. Narayanmurthy, Mr. Nandan Nilekani and Mr. Azim Premji, all legends in the Indian software industry. Being the 'IT capital' of the country, such poor infrastructure is a matter of shame. Mumbai, the country's financial capital, continues to suffer from terrible roads. The poor state of infrastructure was most tellingly exposed sometime ago when nature's fury struck in the form of the rain deluge that hit the city. Healthcare and primary education are also issues that need urgent attention.
The country's power situation is not much to write home about either. The poor economics in the form of subsidised tariffs adopted by earlier governments have led to the State Electricity Boards (SEBs) suffering huge losses. Transmission and distribution (T&D) losses are at unacceptably high levels (between 18% to 62%) compared to international standards. The quality of power supplied and frequency is very poor and frequent load shedding is the norm in most areas of the country. This is a huge impediment to growth, as it raises the cost of doing business, making firms uncompetitive and hinders foreign direct investment (FDI), something that is desperately needed in industries like telecom in order to invest for future growth.
Job creation: Given India's huge population and more importantly, the demographics, where a majority of the population is under 30 years of age, job creation is crucial. This is one area that is in desperate need of attention. In 1999-2000, India's unemployment rate was estimated at 7.3%. However, if we take into account 'disguised unemployment', where, for example, in a farm, a greater number of people are working in it than is actually required, the figure could even run into double digits. Given the widening gap between the rich and the poor, this could cause serious social unrest and hamper our economic progress.
'Left' politics: These days, it just seems that whatever the government wants to do, be it divesting part of its stake in PSUs or increase fuel prices, the 'Left' parties act as impediments. It is ironical and hypocritical on the part of the Left, as they themselves divest their stake in public enterprises in their home states but disallow it at the Centre. China, a communist state, has actually announced plans recently to divest part of its stake in PSUs and raise US$ 280 bn and the Left continues to dither on this count.
Crude prices: Crude prices have hit all-time highs, even coming close to US$ 70 a barrel. This is due to reasons such as a spurt in demand from countries like China and India as also speculation by financial investors, due to an abundance of global liquidity, caused by all-time low interest rates around the world and an increase in risk appetite. This has the potential to drive a hole in he country's fiscal position and is inflationary. It acts as a tax on growth, since higher oil demand in order to fuel growth also causes a rise in prices. As a result, this could slow down overall growth. But this has not affected the markets, not just in India but all other emerging markets as well, mainly due to the global liquidity being poured in stocks and property markets, boosting them and, in some cases, creating an unsustainable, bubble-like situation.
Fragile global economy: At present, the global economy appears to be on fragile ground. It is overly dependent upon US growth, as the debt-ridden consumer gets increasingly stretched. Rising interest rates over the longer term could hit the consumer hard. Emerging markets around the world are at the centre of stock and property market bubbles. There is clearly a limit to this huge surge in global liquidity and what the trigger could be is anyone's guess. Once that happens, FII money could flow out of the country, leaving markets badly hurt. We are not saying that this will happen for sure and when it could happen, just that it is a possibility and the longer this liquidity continues to flow into stock and property markets, the more it will be a bubble-like situation. What could happen when such a bubble bursts is anyone's guess.
Clearly, the euphoria that foreign investors are showing investing in India might not be entirely justified, given the above factors. It is undoubtedly correct that India would provide them with better returns compared to other parts of the world. But then, as we know, FIIs are generally 'fair weather friends' and at the slightest sign of danger, could flee to perceived safer havens.
Our main point is that while India is indeed expected to show a better economic performance than most other countries, investors need to consider the above points as potential risks or 'party-poopers' before investing money. A bottom-up approach would work in such a scenario and, as always, look at the stock markets as a long-term investment avenue, rather than a chance to speculate, which, at these levels, is getting riskier with every trading session.