"India has a 50% chance of suffering a painful downturn in 2008-09, a 30% chance of a mild downturn and only a 20% chance of continuing with rapid 9% growth," says Swaminathan S. Anklesaria Aiyar, a well-known Indian economist and columnist. Aiyar says he limits the chance of a painful downturn to 50% because, like many other advocates of the so-called "decoupling" theory, he sees a U.S. slump impacting India to a lesser extent now than it might have in earlier years.
Aiyar cites the International Monetary Fund's World Economic Outlook (October 2007), which has marked down its global growth projection for 2008 by almost half a percentage point to 4.8%, while that for the U.S. is down a full percentage point to 1.9%. It is less harsh on prospects this year in Asia, where it says "growth may moderate somewhat;" in 2007, China and India posted 11% and 9% rates, respectively.
But "it could be extremely painful" if India were to slow from 9% to 7% this year, says Aiyar. He recalls how a similar two-percentage point drop in India's growth rate in the years following the 1994-1997 Asian financial crisis flattened industrial growth. "Exports collapsed, any number of plants set up with a view to exporting in effect went bust, and the banks lending to them went bust." However, he sees Indian companies much more resilient to a downturn these days, with lower borrowing costs and healthier debt-equity ratios.
Ruchir Sharma, the New York City-based head of global emerging markets at Morgan Stanley Investment Management, says he doesn't buy the theory that India's growth rate could dip by two percentage points. He is "bullish on India" this year because he sees "quite a large opportunity" in investing there relative to his capital pool. Sharma oversees equity investments totaling some $35 billion in emerging economies, of which India accounts for a little less than $5 billion.
In terms of absolute allocations, India shares second place along with Russia and Brazil in Morgan Stanley's emerging market investments, after China, says Sharma. On the question of increasing allocations to India this year, he says his fund is already "overweight" on India with more than a tenth of total funds invested there.
Indian finance minister P. Chidambaram has also fueled optimism by hinting at income tax cuts when he unveils his annual budget in February. Chidambaram is encouraged, says Aiyar, by the dramatic growth in direct tax collections. They jumped 40% in 2006, and are expected to be 42% higher in 2007, or by Rs. 90,000 crore ($24 billion).
Interestingly, the higher tax collections are driven not just by better compliance and improved tax administration, says Aiyar. He is convinced that many businesses are bringing onto their books a lot of "black" money -- or funds that are not accounted for -- with the lure of initial public offerings. "The IPO price is a certain multiple of the book profits," he says.
A "Sticky Wicket"
Aiyar, however, sees danger on the inflation front led by higher wheat prices. He says Indian wheat prices are half the prevailing global level of about Rs. 20 a kilo (53 cents). "In a relatively open global economic system, you can't keep this up for very long," he says. In fact, he notes, it makes sense for the ruling Congress-led alliance to call for mid-term elections this year; it may face "a sticky wicket in 2009" when the next general elections are due, he adds.
Sharma believes that inflation triggered by higher food prices could puncture the promise of rapid economic growth continuing in India. "If the central bank were to raise interest rates more aggressively to curb food inflation, that would concern me a lot," he explains.
The asset growth of India's banks could be constrained in 2008, largely because of a deceleration in mostly retail credit demand, says Abheek Barua, chief economist at HDFC Bank in Mumbai, adding that interest rates on retail loans like mortgages and auto finance have risen an average three to four percentage points during the past year. "The interest rate signals we continue to get from the Reserve bank point to a tight policy."
Sharma, however, believes that "there is scope for monetary policy to ease." He says most other central banks in developing economies are facing pressures to either increase interest rates or stop cutting rates. India has already had its "inflationary scares" in early 2007, he notes.
But Barua sees growth plans and capacity expansion at Indian companies facing challenges in accessing overseas credit with "the very large-scale credit contraction in the Western markets." He says he notices "significant levels of risk aversion from banks in the developed world." But he sees respite in "institutional changes" such as a policy commitment to develop India's corporate bond market.
Aiyar is encouraged by progress elsewhere, such as with rural telecom penetration and a government program to connect India's villages with motor-friendly roads. "You have to create conditions where entrepreneurship and new business can prosper, and that requires connectivity, which at long last is coming," he says.
Arindam Sengupta, resident editor of The Times of India newspaper in New Delhi and an avid watcher of the political scene, says he is worried about "uneven growth" in the medium and long run. He says the central Indian states of Madhya Pradesh, Uttar Pradesh and Bihar have seen less growth than others. "There are swathes of the population that have been left out of the success story and that leads to social tensions," he says. "This expresses itself in Naxalism [a radical left-wing political ideology] and insurgency."
Sengupta says international investors no longer need to be worried by the dynamics of India's coalition politics that sometimes see the Leftist parties strike discordant notes. He reads intermittent objections from the Left to market-friendly proposals as a "branding exercise" that the Left needs to secure its identity. "Overall, there is no argument on that front," he says. "India is on the path of the market economy, and the Left has agreed."
Most Popular Stories
- NSA Defends Global Cellphone Tracking Legality
- Top Websites for U.S. Hispanics
- Ad Counts Rise in 2013 for Hispanic Magazines
- Networks Vie for U.S. Hispanic TV Viewers
- Saab Gets Back into the Game; U.S. Auto Sales Soar
- Apple Activates Customer-Tracking iBeacon
- A Biography of Jonathan Ive, Apple's Creative Chief
- Dell Offers Undisclosed Number of Employee Buyouts
- 2013 Tech Gift Guide: iPad Mini Still Hot; Chromecast a Great Low-Cost Option
- Apple Wants Samsung to Pay $22M for Patent Dispute Legal Bills