Sunday, June 6, 2010


The economic face of India has been changing over the last couple of decades. The mind set of the politicians and entrepreneurs have switched from a licensed, inward looking, risk adverse past to an economy that has global aspirations, a higher risk appetite and entrepreneurs that are willing to embrace competition. Capital has lost its nationality and is in abundance. In the past the capital markets had a narrow investable universe. Currently there are more than 170 companies with a capitalization of over US$ 1 billion.

Infrastructure is getting a boost through a mixture of Government and private spending. India’s road network is the world’s second largest, but in need of further upgrades. Power outages are common in Indian cities. India plans to spend nearly US$ 500 billion on infrastructure over the next 5 years. Power generation should increase 14% annually over that span. India’s ports and railways are getting a face lift. India is a nation of savers – about 37% of GDP is saved. Savings can be a big positive in a weak external funding environment. Currently infrastructure development is being done by funding from banks, where deposits are more short term. Hence there is an asset-liability mismatch. In future, insurance and pension reforms will fund infrastructure development. Private Equity funds will also remain active.

India’s fiscal deficit is about 6.7% of GDP, which is a scary number. However, India’s recently the 3G auction garnered Rs 67,700 crores for the Government. If the Government just disinvests 10% of the listed companies it will result in US$ 27.79 billion. The tax reforms of GST will curtail Government revenue leakages in the system. The Direct Tax Code will also simplify direct taxes. The Unique identity card will further reduce outflows into the parallel black economy.

India has a sound banking system. The Capital adequacy is comfortable, NPA’s are mostly falling, the banks are better capitalized and the return on equity is higher than others in this region. Consumer loans are only about 10% of the GDP. 35% of the savings are in property and gold, and the balance in bank fixed deposits. There is very little in equity. However insurance and pension reforms are gaining momentum and this will help in channelising retail savings into equity.

India’s GDP grew at 8.6% in the last quarter resulting in an overall annual growth of 7.4%, one of the highest in the world. Domestic consumption continues to be a big theme. The contribution of domestic consumption to GDP remains stable between 65-70%. India’s population is young and likely to continue that way for many years. The growing middle class will keep the economy on an upswing. Rural consumption is on the increase due to National Rural Employment Guarantee Scheme, rising minimum support price putting more funds in the Indian farmer’s pocket and the loan waiver scheme. The VI Pay Commission has resulted in an additional outflow of $250 billion – all of which has resulted in increased domestic demand.

India’s service industry remains robust. Our IT industry has developed a strong IT global delivery model which results in win-win situation to the customer and the Indian service provider. Indian Pharmaceuticals are moving from confrontation models to collaboration. Indian Auto sales are robust with both Maruti in the car segment and Hero Honda in the 2 wheeler segment reporting record sales in May. Even the Tata Motors, India’s largest truck manufacture reported a 41% increase in sales in May.

India is not totally isolated from the global contagion and will also be affected by FII flight to safety. Aggressive rate hikes by the RBI will also stall growth. Rampant inflation is also a huge fear.

However, in 10 years India’s economy will be bigger than UKs and in 20 years bigger than Japan’s The JAGGERNAUT THAT IS INDIA – OVER THE LONGER TERM - IS UNSTOPPABLE.

1 comment:

  1. India Holding Up the Best of the BRICs