The indices, having sprinted at a scorching pace for a better half of the year, have, of late, been witness to apathy of investors, domestic and Foreign Institutional Investors (FIIs) alike. Given the unjustifiable valuations, while the correction was not entirely unforeseen, apprehensions seem to have got further heightened by the negative sentiment across global markets. However, if one were to go by the recent reports on India's growth and 'structural shift' to the cadre of leading economies, the same seems paradoxical.
The Indian economy has blazed its way to the top of the growth charts once again. Last week, it was reported that the economy grew by an estimated 8.1% in the first quarter of FY06. Only China is growing at a faster clip. India and Japan are, perhaps, the only two major economies doing better than what was expected of them earlier in the year. The recent growth spurt has ensured that India's share of world output has increased - from 4.3% in 1990 to 5.8% in 2004. Over the past two years, according to the International Monetary Fund (IMF), India has accounted for 20% of Asian growth and 10% of world growth.
However, the 'spillover effect' of India's growth remains limited. Despite the success in outsourcing and the gush of foreign money flowing into the local equity markets, India is not an engine of global growth yet. India's numbers seem dwarfed when compared to that of China's (accounted for 53% of Asian growth and 28% of world growth). Despite having a current account deficit, India does not import enough to make a significant change in the economic fortunes of other countries. To put things into perspective, India's surge in imports in FY04 added a modest 0.1% to 0.4% to the growth rates of select Asian countries. Contrast this, once again, with China. Its gluttonous appetite for imports has lifted the fortunes of many regional economies, including recession-stricken Japan. Also, exports accounted for a meager 12% to 15% of India's GDP in 2004.
It may, nevertheless, be heartening to note that the IMF (in its latest World Economic Outlook) has reinforced its belief that in certain parameters India is due for a quantum leap. It estimates that between FY05 to FY10, Indian exports will more than double and imports will nearly triple. This belief is of course grounded on the fact that the government seems committed to finally cut loose from its isolationist past (considering the spate of regional trade agreements and oft-repeated goal of cutting tariffs).
However, between vision and reality, lies a pile of structural impediments - from rigid labour laws to sectoral restrictions on foreign direct investment (FDI). In fact, we could actually enlist some of the key challenges that could drive the country farther from its goals.
Infrastructure gap: Prime Minister, Mr. Manmohan Singh, often talks about the need to invest US$ 150 bn to upgrade India's infrastructure. On the contrary, economists advocate the necessity for India to more than double its commitment to infrastructure - from the current 3% of GDP to around 8% of GDP. Considering this, it is estimated that the total cost to build new roads, ports and power plants will sum up to Rs 27,600 bn (US$ 590 bn). Thus, it is pertinent that the infrastructure 'gap' be accurately gauged and bridged.
Rupee depreciation: India's fiscal deficit (approximately 8.3% of GDP) continues to remain high and poses a restriction to the public financing of development of basic infrastructure in the economy, in the coming years. Rating agencies such as S&P have also cited the growing fiscal deficit as one of the major constraints for upgrading the sovereign rating for India. These factors coupled with the net outflow of foreign money over the past couple of weeks, has led to the consistent weakening of the rupee against the dollar. This, although benign for the country's exports, is set to prove detrimental for India's burgeoning import bill.
Energy crisis: India imports 70% of its domestic oil requirement. World crude oil prices have risen more than 40% since early January, but the Indian government has raised fuel prices by only 14%, the rest being subsidised. Such subsidisation at the cost of the oil companies does not only mean burning a hole into the government's pocket but also encouraging inefficient wastage of precious fuel.
Interest rates: The US markets have become jittery ever since the Federal Reserve has issued signals of continuing its interest hike campaign. However, it needs to be realized that the same also signifies caution for the Indian markets. A steadier rise in the Fed rates will not only trigger inflationary pressures in the country but also suck out a large chunk of foreign money that has flown in, in the recent past.
The above facts provide enough food for thought for an investor to reflect upon before getting excited about 'hot' investment ideas by way of tips or hearsay. Despite this, can one blame the markets for getting irrationally apprehensive? Are the apprehensions truly unfounded? One needs to ponder!