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Is the 'India story' attractive? - Views on News from Equitymaster
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  • Sep 30, 2005

    Is the 'India story' attractive?

    In his speech at the Indian Merchants Chamber recently, the Reserve Bank of India (RBI) deputy governor, Mr. Rakesh Mohan quipped, "India along with China has emerged as the engine of global growth. The opening up of the Indian economy has not only allowed it to reap benefits of globalisation but India is also contributing to global growth. Thus, it is essential to realize India's potential in a globalised world." While we do agree with Mr. Mohan, we also believe that it is essential to not look at India's growth in isolation but also pit it against that of its peers in the emerging world as well as the developed world. The same is pertinent because one needs to evaluate India as an investment destination from a global perspective.

    India vis--vis developed economies

    A comparison of India against some of the developed nations of the world puts forth some figures that projects the country in favourable light. The International Monetary Fund's (IMF) World Economic Outlook (September 2005) suggests that developed nations like UK and France also suffer from current account deficits that are almost at par with that of India (as a percentage of their respective GDPs). Not to mention the US that alone accounts for 70% of the world current account deficit (6% of its GDP). Also, India compares very favourably in terms of savings and investment rates. It would be interesting to note that the rate of unemployment in India is considerably lower than that of France and Germany, thanks to the phenomenal growth witnessed in IT enabled services (ITES).

    Thus, while it is comprehensible as to why India scores over some of the most developed nations in the world in terms of investment destination, it is also worth noting that in each of these parameters India comes a distant second to China.

    India, China Vs. Developed world
    FY06E USA UK Japan France Germany India China
    Current account as % of GDP -6.1 -1.8 3.0 -1.5 4.4 -2.0 5.6
    Savings as % of GDP 13.7 15.1 27.6 18.8 20.8 25.7 43.2
    Investments as % of GDP 19.8 16.9 24.5 20.3 16.4 19.8 36.5
    Unemployment rate (%) 5.2 4.8 4.1 9.6 9.3 7.8 4.0
    Source: IMF World Economic Outlook, Sept 2005

    India vis--vis other emerging economies

    The developing nations compare very favourably in terms of debt burden as against the advanced economies. The average level of public debt was 68% of GDP in case of advanced economies against 60% in the case of developing economies. However, given rising burden of crude prices and dependence on imported crude (70% in case of India), the competitive edge may soon cease to exist.

    Also, if we were to track India's macro-economic position vis-a-vis some of the other emerging economies, the negatives largely outweigh the positives. India is the only nation (amongst the Asian giants) having a negative balance in the current account (although the same was in surplus until early FY04) and the risk of inflationary pressures weighing heavy on interest rates loom large. In fact, India's share of world exports has secularly declined over the last three decades and currently accounts for 0.8% against 2% in the 1970s (Source: RBI). When it comes to the rate of unemployment, even China scores over India despite having a larger population base.

    Developing Asian economies
    Current account as % of GDP Annual % change in inflation Unemployment rate %
    FY04 FY05 FY06E FY04 FY05 FY06E FY04 FY05 FY06E
    India -0.1 -1.8 -2.0 3.8 3.9 5.1 11.1 9.7 7.8
    China 4.2 6.1 5.6 3.9 3 3.8 9.8 4.7 4.0
    Malaysia 12.6 13.5 12.4 1.4 3 2.5 4.5 3.9 3.0
    Korea 4.1 2.0 1.5 3.6 2.8 2.9 3.5 3.6 3.3
    Singapore 26.1 25.7 22.7 1.7 0.7 1.7 4 3.6 3.4
    Hong Kong 9.8 10.3 10.2 -0.4 1.0 1.3 6.8 5.7 4.6
    Source: IMF World Economic Outlook, Sept 2005

    To sum up

    India's strengths

    Low debt: The levels of public debt in India continue to be lower than most developed and developing nations. This is primarily because of lower levels of credit penetration. For example retail credit is just 7% of the GDP of the country against an average of 30% to 35% amongst the South East Asian nations. Also, mortgage as a percentage of GDP is barely 3% against 51% in USA and 54% in UK.

    High levels of savings and investment: Levels of savings and investment continue to be higher in India as compared to the developed world. This lends intrinsic strength to the economy and reduces dependence on foreign capital.

    India's weaknesses

    Unemployment: Despite the fact that the service sector (that accounts for approximately 56% of India's GDP) has shielded the growth of unemployment in the country by accommodating a large chunk of the employable youth, the levels of unemployment and more importantly under-employment (or disguised unemployment) remain a concern. The software sector (including ITES) alone employs more than 1 m people and has registered a compounded annual growth (CAGR) of nearly 32% in employment in the last decade. The sector has also provided indirect employment to 2.5 m people. However, given the accelerated rate of growth in population, creation of more employment opportunities seems imminent.

    Fiscal imbalance: It is very unfortunate that India's current account balance is steadily moving into deficits. Also, we as country heavily rely on foreign remittances to keep the deficit figure lower. Coupling this with the energy crisis, the FRBM target (of bringing the fiscal deficit to zero by FY09) appears far-fetched.

    Inflationary pressures: Although the government has projected the inflation levels to hover around 5% to 5.5% in FY06 due to adequate liquidity in the system, any additional government borrowing (over the budget requirements) may suck out funds and pressurise an upward movement in interest rates. This in turn will have a cascading effect on inflation.

    While we believe that the India story is far from being over, we are concerned of the nation's imbalance in its positioning amongst the emerging nations. Thus, one needs to take a cautious stance before getting carried away by the 'India shining' story.



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