Japanese investment in India is nothing new. A classic case is that of Japanese carmaker Suzuki Motor's stake in Maruti Suzuki, which sells half the cars bought in India. And so it should come as no surprise if Japanese steel makers are also planning to follow suit. At present Japan is beset with a host of problems not least of which is a shrinking domestic market and increasing competition. And so Japanese companies are looking to capitalise on growing steel demand overseas and India seems like the most likely choice. The reasons are not hard to find. Besides the fact that India is among the fastest growing among the emerging economies, a growing auto market, emphasis on building infrastructure by the government and new housing construction are some of the factors that will further bolster the rising demand for steel. And this seems to have increased India's attractiveness in the eyes of Japanese steel makers. What is more, as reported in the Wall Street Journal, CLSA expects steel demand to rise by 10% in FY12 and will pick up to 12% subsequently.
However, Indian steel makers are among the lowest cost producers in the world and for Japan to have a competitive edge it will have to invest in manufacturing capacities in the country if it wants to compete on a level playing field. Secondly, Japanese players may have to contend with a problem of oversupply which could arise if both Indian and Japanese players choose to increase capacities. Whatever be the case, Indian steel companies will have to gear up for some competition in the years ahead.
No respite on the deficit front
FY09 saw India's fiscal deficit zoom to 6.2% of GDP. This deficit is expected to widen to 6.8% of GDP in FY10. What with interest payments, salaries to government employees and subsidies eating away into its revenues and the government introducing stimulus measures to spur the economy, the surge in fiscal deficit is hardly surprising. Interestingly, as reported in the Wall Street Journal, the Finance Minister Pranab Mukherjee expects to cut fiscal deficit to 5.5% next fiscal year and then shrink it to 4% a year later. But this could prove to be challenging. For starters, what the government needs to focus on is the curtailment of expenditure (especially on the revenue front), a fact which has not been witnessed in previous fiscals and which seems unlikely in near future as well.
Ideally for an emerging economy like India, spending on social sectors such as education, agriculture and healthcare is of paramount importance. The problem is that while the Indian government may not curtail this spending, the strained fiscal position does not leave it much headroom to increase this spending either. Of course, tax revenues will provide respite but from a longer term perspective it will be important to reduce the expenditure by improving productivity and efficiency. Therefore, while the government's aim to bring this fiscal deficit down is certainly a step in the right direction, it remains to be seen how it chooses to go about it.