Sunday, December 11, 2011

India "Time of Reckoning" as its Economy "Explodes"

For at least two years in a row, BRIC has, in the words of SGS's Albert Edwards, stood for Bloody Ridiculous Investment Concept, not an acronym for populous emerging markets of Brazil, Russia, India and China as Goldman Sachs' Jim O'Neill saw it ten years ago.

In fact, O'Neill has himself expressed disappointment in India, one of the BRICs, a designation that has boosted foreign investment in India and helped accelerate its economic growth since 2001.

"All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," said O'Neill as quoted by Reuters.

Noting India's significant dependence on foreign capital inflows, Jim O'Neill went further and raised a concern about the potential for current account crisis. "India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'". "India's inability to raise its share of global FDI is very disappointing," he said.



United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively. Stocks in all four countries have underperformed relative to the broader emerging markets equity index, as well as the markets in the developed nations. Pakistan's KSE-100 has significantly outperformed all BRIC stock markets over the ten years since BRIC was coined.



As India's twin deficits continue to grow and the Indian rupee hits record lows relative to the US dollar, there is pressure on Reserve Bank of India to defend the Indian rupee against currency speculators who may precipitate a financial crisis similar to the Asian crisis of 1997.

In addition to Jim O'Neill, a range of investment bankers are turning bearish on India. UBS sent out an email headlined "India explodes" to its clients. Deutsche Bank published a report on November 24 entitled, "India's time of reckoning."

"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."

India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.

Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.

As explained in a series of earlier posts here on this blog, India has been relying heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its rising current account gap. Those flows are called "hot money" and considered highly unreliable.

Indian policy makers face a significant dilemma. If they do nothing to defend the Indian currency, the downward spiral could make domestic inflation a lot worse than it already is, and spark massive civil unrest. If they intervene in the currency market aggressively by buying up Indian rupee, the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis Goldman Sachs' O'Neill hinted at.

Related Links:

Haq's Musings

India's Twin Deficits

Karachi Tops Mumbai in Stock Performance

India Returning to Hindu Growth Rate

Soft or Hard Landing For Indian Economy?

Karachi Stocks Outperform Mumbai, BRICs

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21 Comments:

Blogger Ishita Sharma said...

Good article.

I liked your site, good information for South Asian investors.

December 11, 2011 at 12:02 PM  
Blogger Riaz Haq said...

Here's a Bloomberg report on shrinking of industrial output in India:

India’s industrial production shrank in October for the first time in more than two years, adding pressure on the central bank to pause this week after a record run of interest-rate increases.

Output at factories, utilities and mines fell 5.1 percent from a year earlier after a revised 2 percent gain in September, the Central Statistical Office said in a statement in New Delhi today. That’s the first decline since 2009 and compares with the median estimate for a 0.7 percent drop in a Bloomberg News survey of 24 economists.

Manufacturing has moderated in nations from China to Brazil as Europe’s debt crisis saps global growth, prompting officials to hold or lower borrowing costs. Prime Minister Manmohan Singh’s efforts to bolster the Indian economy have been hampered by corruption scandals, inflation and the decision last week to stall the easing of investment rules for foreign retailers.

“The only policy authority that we are going to see responding to boost growth will be the central bank,” Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG, said before the report. “Once the RBI is content with inflation and is sufficiently worried about growth, we will see it cut interest rates.”

Prior-Wandesforde expects the Reserve Bank to keep the repurchase rate at 8.5 percent in the Dec. 16 policy meeting.

India’s inflation rate has exceeded 9 percent every month this year as the rupee’s 14 percent slump against the U.S. dollar during the period, Asia’s worst performance, adds to the cost of imported goods. The BSE India Sensitive Index has lost a fifth of its value in 2011.

Slowing Inflation

India’s benchmark wholesale-price inflation probably eased to 9.04 percent in November from 9.73 percent in October, according to the median of 24 estimates in another Bloomberg News survey. That would still be higher than the levels in Brazil, Russia and China, which including India make up the so- called BRIC nations. India’s commerce ministry will unveil the data on Dec. 14.

Consumer prices rose 6.6 percent in Brazil, 6.8 percent in Russia and 4.2 percent in China last month.

Reserve Bank Governor Duvvuri Subbarao has raised the repurchase rate by 375 basis points since the start of 2010. That’s the fastest round of increases since the central bank was established in 1935, Bloomberg data show.

Consumer demand has begun to wane as a result of higher borrowing costs.

The Society of Indian Automobile Manufacturers may cut its annual domestic passenger-car sales target as costlier loans and fuel prices sap demand for Maruti Suzuki India Ltd. and Honda Motor Co. vehicles, Sugato Sen, a senior director for the group, said last week.
------------
Singh, halfway through his second term, is under pressure to revive a legislative agenda derailed by graft allegations in the award of telephone licenses and street protests against inflation. His government faces at least five regional elections next year, including one in Uttar Pradesh, India’s most populous state.

The government on Dec. 7 was forced to suspend a decision to allow overseas retailers including Wal-Mart Stores Inc. to open supermarkets amid protests by the opposition and its allies that forced repeated adjournments of parliament for two weeks.

“This confirms the perception of policy paralysis and that hits investor sentiment which will ultimately hit growth,” said Leif Eskesen, a Singapore-based economist at HSBC Holdings Plc. “It can have implications for medium term growth outlook.”


http://www.businessweek.com/news/2011-12-12/india-factory-output-falls-for-first-time-in-more-than-two-years.html

December 11, 2011 at 10:24 PM  
Blogger Riaz Haq said...

India industrial output falls 5.1%, reports Wall Street Journal:

Industrial output fell 5.1 % from a year earlier in October, after a 1.9% expansion in September, dragged down by a contraction in manufacturing and mining production, government data showed Monday.

The reading widely missed the median estimate in a poll of 15 economists for a contraction of just 0.55%.

Industrial output last fell in June 2009, when it shrank 1.8%.

Government bonds rose following the data amid growing expectations the RBI will hasten a rate cut. The benchmark 7.80% 2021 bond rose to 101.85 rupees from 101.76 rupees before the data and closed at 102.26 rupees.

Economists said a rate cut may come early next year if inflation continues to decline over the next few months.

"While the governor of the RBI continues to stress that he is more concerned about inflation than growth, this is the sort of number that will surely make him sit up and take notice," said Robert Prior-Wandesforde, director of Asian Economics at Credit Suisse.

The RBI, which has raised interest rates 13 times since March 2010, has previously said the likelihood of another increase at its next policy review on Dec. 16 was low.

Despite headline inflation likely remaining elevated at about 9% for November, the sharp contraction in production could prompt some monetary measures at the policy meeting this week, added Citigroup economists Rohini Malkani and Anushka Shah.

Monday's data showed that manufacturing output, which has a 75.5% weighting in the index of industrial production, fell 6% from a year earlier in October, compared with a 2.4% rise the previous month. Mining output shrank 7.2%, after falling 5.6% in September.


http://online.wsj.com/article/SB10001424052970203518404577093490474041970.html#articleTabs%3Darticle

December 12, 2011 at 10:40 AM  
Blogger Riaz Haq said...

Here's a Bloomberg report on India exaggerating its exports:

India’s commerce ministry said it overstated merchandise exports by $9 billion in the eight months through November because of “misclassification and errors” in computing overseas sales.

“Notwithstanding the misclassification, there were errors in double counting and all sorts of things which inflated exports by about $9 billion,” Commerce Secretary Rahul Khullar told reporters in New Delhi yesterday. Overseas sales in the April-to-November period now stands at $192.7 billion, Khullar said.

India’s monthly export growth has averaged about 44 percent since April even as Europe’s debt crisis and a faltering U.S. recovery reduced global consumer demand, prompting economists to question the quality of the data. Today’s revision explains “in part the weakening of the rupee,” Asia’s worst-performing currency this year, said Jay Shankar, Mumbai-based economist at Religare Capital Markets Ltd.

“The global economy isn’t doing well, so it was hard to understand how India was posting such fantastic export numbers,” said Biswajit Dhar, director of New Delhi-based Research and Information System for Developing Countries. “There were reasons to believe something was going wrong.”

The rupee weakened 0.6 percent to 52.04 per dollar in Mumbai yesterday, extending its decline this year to 14.1 percent. The BSE India Sensitive Index (SENSEX), which has lost a fifth of its value in 2011, dropped 1.7 percent. The yield on the 8.79 percent bonds due November 2021 rose two basis points, or 0.02 percentage point, to 8.54 percent.
Waning Demand

India’s exports in November were $22.3 billion, Khullar said, without elaborating. Bloomberg calculations based on previously announced data show exports grew 3.7 percent last month from a year earlier, the slowest pace in more than two years.

The South Asian nation’s imports in November were $35.9 billion, he said. Imports in the eight months through November were $309.5 billion, causing a trade deficit of $116.8 billion in the period, Khullar said.

India will get “close to, but not quite $300 billion in exports” in the year ending March 31, he said.

The South Asian nation’s export growth has vacillated this year, surging 82 percent in July before slowing to an 11 percent gain in October, according to previously reported data by the commerce ministry.

A report by Mumbai-based Kotak Institutional Equities Research in October showed “wide gaps” in engineering export numbers released by the government and data culled from annual reports of the top 500 companies on India’s exchanges for the year ended March 31.

While official announcement showed engineering exports jumped 79 percent to $68 billion in the year through March, data collected by Kotak from company reports indicated only an 11 percent increase to 638 billion rupees ($12.3 billion) during the period, according to the report written by Sanjeev Prasad, Sunita Baldawa and Amit Kumar.


http://www.bloomberg.com/news/2011-12-09/india-overstated-exports-by-9-billion-this-year-ministry-says.html

December 12, 2011 at 11:17 AM  
Blogger Riaz Haq said...

India rupee has slid 19% against US dollar since March this year, according to the Wall Street Journal:

The Indian rupee partially recovered from a fresh record low against the U.S. dollar Tuesday, aided by a late rebound in local stocks and as the euro pared its losses.

The dollar was at INR53.22 late Tuesday, after touching an intraday high of INR53.515, and compared with INR52.84 late Monday. The greenback's previous record high was INR52.85, on Monday.

The rupee has borne the brunt of global risk aversion emanating from the euro-zone crisis and due to concerns over high domestic inflation, slowing growth and a possible widening of the federal government's budget deficit.

The dollar has gained nearly 19% against the rupee since March, making it Asia's worst-performing currency this year.

The rupee could easily be set to fall to as much as 55 to a dollar by the end of the year, as unhedged local firms rush for cover on their dollar debt, said Ashish Vaidya, head of trading at UBS in India.

Local authorities are making efforts to boost foreign-exchange supplies to help arrest the rupee's slide against the U.S. dollar, the junior minister of finance said. "The finance ministry has been keeping a close watch on the situation," Namo Narain Meena said in the upper house of parliament.

A subcommittee of the Financial Stability and Development Council, headed by Reserve Bank of India Governor Duvvuri Subbarao, is also continuously assessing the matter, he added.

The Bombay Stock Exchange's Sensitive Index rose 0.8% to end at 16,002.51, recovering from its intraday low of 15,771.59.

Meanwhile, Indian government bonds rose on investors' expectation that moderating economic growth will allow the central bank to take a dovish stance and ease policy rates sooner than expected.

The 8.79% 2021 bond ended at INR102.55, up from INR102.26 Monday.

The Reserve Bank of India is likely to pause tightening interest rates at its rate-setting meeting Friday, after 13 increases since March 2010.

"But a fast depreciating rupee may add to some imported inflation as India buys about 80% of its crude oil need," said a senior dealer at a state-run bank.

The market is awaiting November's inflation data, due Wednesday.

According to the median estimate in a Dow Jones Newswires poll of 15 economists, the wholesale price index likely rose 9.04% in November from a year earlier, compared with a 9.73% increase in October.


http://online.wsj.com/article/BT-CO-20111213-705115.html

December 13, 2011 at 9:36 AM  
Blogger Riaz Haq said...

http://www.economist.com/blogs/freeexchange/2011/12/india%E2%80%99s-economy
India’s economy
Slip-sliding away

EXPECTATIONS for India’s economic growth rate have been sliding inexorably. In the early spring there was still heady talk about 9-10% being the new natural rate of expansion, a trajectory which if maintained would make the country an economic superpower in a couple of decades. Now things look very different. The latest GDP growth figure slipped to 6.9% and industrial production numbers just released, on December 12th, showed a decline of 5.1% compared with the previous period, a miserable state of affairs. The slump looks broadly based, from mining to capital goods, and in severity compares with that experienced at the height of the financial crisis, in February 2009, when a drop of 7.2% took place. Bombast is turning to panic.

December 15, 2011 at 4:17 PM  
Blogger Riaz Haq said...

The Indian stock market today lost its trillion-dollar status, as a decline in the rupee and share valuations led to its size slipping below this mark to $994.97 billion, according to India's Economic Times:

India had managed to hold onto the select league of the countries with a trillion-dollar stock market by a whisker for past few days, but finally gave in today after the market barometer Sensex fell to a fresh 28-month low and the rupee lost further value against the US dollar.

At the end of today's trade, the total size of the Indian market, measured in terms of cumulative valuation of all listed stocks, stood at Rs 52,60,440.78 crore.

As the rupee ended the day at Rs 52.87 level, the stock market's size in the American currency was USD 994.97 billion -- just a shade below the trillion-dollar mark.

The Indian market had a size of USD 1.0116 trillion (Rs 53,48,352.02 crore) at the end of yesterday's trade.

A total of 13 countries are now estimated to be left in the trillion-dollar stock market club, including the US, the UK, Canada, Brazil, Australia, Hong Kong, South Korea, China, Japan, Spain, Germany, Switzerland and France.

The Indian market had first achieved a trillion-dollar size about four and half years ago on May 28, 2007, but moved out of this coveted league about a year later on July 1, 2008.

India again joined this elite club of markets with trillion-dollar valuation about a year later on June 3, 2009.

The Indian market was, in fact, seen inching towards the two-trillion dollar mark at least twice in the past -- first in early 2008 and then at the beginning of 2011 with a size as high as USD 1.9 trillion.

A sharp plunge in the market this year has led to the Indian market valuation falling by close to Rs 20 lakh crore (over USD 500 billion), from about Rs 73 lakh crore (USD 1.7 trillion) at the beginning of 2011.

The rupee has been a declining trend for many months now and had hit its record low level below Rs 54-level last week, but the fall was somewhat arrested since then on the back of an intervention by the Reserve Bank.

The market size has been hovering above the trillion- dollar mark for last few days and an eminent miss was averted on Thursday last week, when the RBI managed to reverse the downfall of rupee after a record fall to Rs 54.30 level.

On Friday, the market size stood at Rs 54,11,301 crore or USD 1.026 trillion, based on that day's currency rate of Rs 52.30, as the market tanked sharply. The trillion-dollar tag had been lost that day itself, if the rupee had managed to hold onto its record high levels.

In terms of individual exchanges, the total size of stocks listed on the NSE yesterday itself slipped below trillion-dollar mark to USD 989 billion (Rs 52,30,333 crore).

At the end of today's trade, NSE-listed market valuation stood at Rs 51,42,566 crore (USD 972.68 billion).

However, the market valuation of NSE-listed companies is not considered as the country's stock market size, as not all the companies are listed on this exchange.

Indian stocks are mainly listed on two national bourses, the BSE and the NSE, but the numbers of listed companies on the two stock exchanges differ sharply.

While about 1,600 stocks are actively traded on the NSE, the number is almost double at over 2,900 at the BSE.

Almost all the stocks listed on the NSE are also listed on the BSE and therefore the cumulative valuation of companies listed on the BSE is treated as the total market size.

http://economictimes.indiatimes.com/markets/analysis/india-moves-out-of-trillion-dollar-stock-market-club/articleshow/11181756.cms

December 20, 2011 at 5:05 PM  
Anonymous Mayraj said...

Businessweek report on infrastructure and power deficits hurting India:

Dec. 19 (Bloomberg) -- Truck driver Sujan Singh should be delivering cars to Mumbai from Maruti Suzuki India Ltd.’s plant near New Delhi. Instead, he’s sitting at a roadside cafe by one of India’s busiest highways, waiting for the traffic to ease.

“I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.”

India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months. The bank says supply bottlenecks that push up costs must be tackled.

The country of 1.2 billion people is paying for two decades of neglect. While China 20 years ago went on a multitrillion dollar spending spree for roads, railways, ports and power stations, its South Asian neighbor concentrated on services. Now, as China reins in prices and expands industry inland to restrain wages, India’s near record-low rupee and price gains are damping consumer spending and choking off company earnings.

“India has allowed a large number of cars without creating enough roads; a large number of industries without enough power to run them,” said Sunil Sikka, president of Havells India Ltd., the nation’s second-largest electrical components maker by value. “It’s like trying to wear shoes without socks -- very, very irritating and difficult.”

Cars and Soap

Sikka said Havells has to pay higher packaging costs to protect lamps and switchgears from India’s bumpy roads, where average speeds are 20 kilometers per hour (12 mph). Businesses from Maruti to soap and food maker Hindustan Unilever Ltd. also suffer, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.

“All companies where there is movement of goods and services and distribution are getting hit,” said Thunuguntla. “It adds to their costs and affects productivity.”

http://www.businessweek.com/news/2011-12-20/india-inflation-hurting-as-bad-roads-conspire-with-power-deficit.html

December 20, 2011 at 6:26 PM  
Blogger Riaz Haq said...

In a tough message to India Inc, Prime Minister Manmohan Singh urged industry leaders to stop negative comments, and pitch in to help India grow.

"I must confess that it is a little disappointing to sometimes hear negative comments emanating from our business leadership or be told that government's policies are causing slowdown and pessimism in the industrial sector. Such comments have added to uncertainty and have emboldened those who have no stake in our economic growth.

It is true that our country faces a large number of issues which need urgent resolution. The energy sector, the port sector, the transport sector, the supply of gas and coal, all need greater attention. Corruption and better governance also require firm handling. I wish to assure you that our Government is serious about tackling these issues. We are also committed to ensuring the predictability and transparency of our policy and regulatory environment," the Prime Minister said.

These comments were a part of PM's remarks at a meeting of the Council on Trade and Industry held yesterday evening. India Inc met the PM to discuss concerns over economic slowdown, high interest rates and lack of reforms.

We had a very good interaction with the PM. He listened to all the different challenges faced by the Industry. The PM is very determined to get back on the growth path, Swati Piramal, Member of the PM Council on Trade told NDTV Profit.[RELATED-STORIES]

Those present at the meeting included Tata Sons Chairman Ratan Tata, Bajaj Auto Chairman Rahul Bajaj, Reliance Industries’ Mukesh Ambani, former Chairman of Infosys NR Narayana Murthy, Bharti Airtel's Sunil Mittal and ICICI Bank's Chanda Kochhar. Commerce and Industry Minister Anand Sharma and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia also attended the meeting.


Read more at: http://www.ndtv.com/article/profit/pm-to-india-inc-negative-comments-disappointing-294636&cp

December 22, 2011 at 10:34 PM  
Blogger Riaz Haq said...

Here's investment strategist Stephen Roach (Morgan Stanley) on why India is riskier than China:

India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.

But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion.

While China is in better shape than India, neither economy is likely to implode on its own. It would take another shock to trigger a hard landing in Asia.

One obvious possibility today would be a disruptive breakup of the European Monetary Union. In that case, both China and India, like most of the world’s economies, could find themselves in serious difficulty – with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.

While I remain a euro-skeptic, I believe that the political will to advance European integration will prevail. Consequently, I attach a low probability to the currency union’s disintegration. Barring such a worst-case outcome for Europe, the odds of a hard landing in either India or China should remain low.

Seduced by the political economy of false prosperity, the West has squandered its might. Driven by strategy and stability, Asia has built on its newfound strength. But now it must reinvent itself. Japanese-like stagnation in the developed world is challenging externally dependent Asia to shift its focus to internal demand. Downside pressures currently squeezing China and India underscore that challenge. Asia’s defining moment could be hand.


http://www.project-syndicate.org/commentary/roach12/English

December 27, 2011 at 9:50 AM  
Blogger Riaz Haq said...

Results of PISA international test released by OECD in Dec, 2011, show that Indian students came in at the bottom of the list along with students from Kyrgyzstan:

Students in Tamil Nadu-India attained an average score on the PISA reading literacy scale that is significantly higher than those for Himachal Pradesh-India and Kyrgyzstan, but lower than all other participants in PISA 2009 and PISA 2009+.
In Tamil Nadu-India, 17% of students are estimated to have a proficiency in reading literacy that is at or above the baseline needed to participate effectively and productively in life. This means that 83% of students in Tamil Nadu-India are estimated to be below this baseline level. This compares to 81% of student performing at or above the baseline level in reading in the OECD countries, on average.
Students in the Tamil Nadu-India attained a mean score on the PISA mathematical literacy scale as the same observed in Himachal Pradesh-India, Panama and Peru. This was significantly higher than the mean observed in Kyrgyzstan but lower than those of other participants in PISA 2009 and PISA 2009+.
In Tamil Nadu-India, 15% of students are proficient in mathematics at least to the baseline level at which they begin to demonstrate the kind of skills that enable them to use mathematics in ways that are considered fundamental for their future development. This compares to 75% in the OECD countries, on average. In Tamil Nadu-India, there was no statistically significant difference in the performance of boys and girls in mathematical literacy.
Students in Tamil Nadu-India were estimated to have a mean score on the scientific literacy scale, which is below the means of all OECD countries, but significantly above the mean observed in the other Indian state, Himachal Pradesh. In Tamil Nadu-India, 16% of students are proficient in science at least to the baseline level at which they begin to demonstrate the science competencies that will enable them to participate actively in life situations related to science and technology. This compares to 82% in the OECD countries, on average. In Tamil Nadu-India, there was a statistically significant gender difference in scientific literacy, favouring girls.


http://www.acer.edu.au/media/acer-releases-results-of-pisa-2009-participant-economies/

December 29, 2011 at 8:58 AM  
Blogger Riaz Haq said...

Here's an Indian media assessment of economy in 2011:

A weak economy exposed to an extended euro zone crisis, growing strain on the government coalition, and looming state elections that mean progress on tough reforms are unlikely.

Here are some of the risks to watch in 2012 in the world's largest democracy.

RATINGS (Unchanged since December unless stated):

S&P: BBB-

MOODY'S: Baa3

FITCH: BBB-

The cost of insuring against default on 5-year sovereign debt, in common with debt markets elsewhere in the world see-sawed violently in the second half of 2011, closing the year at 108.5 basis points, up 41.5 since January.

Following is a summary of key political risks in India:

Economic malaise

With a 25% drop in 2011, the Sensex stock market was the world's worst performing among major economies. The rupee was the year's worst performer in Asia with a 16% fall, and all eyes are on the current account deficit as funds flow the wrong way and the oil import bill rises.

Growth in the second quarter of the 2012 fiscal year fell to 6.9%, the lowest rate for more than two years, while industrial output retreated in October for the first time since 2009.

Asia's No. 3 economy is sitting on a comfortable cushion of USD 300 billion foreign reserves and a confidence building USD 15 billion currency swap line with Japan was unveiled in December, so quick comparisons with India's 1991 payments crisis are premature.

But the avalanche of gloomy economic news has hit investor confidence and the political situation is not helping matters, with rifts in the government coalition making it hard to pass legislation to increase foreign investment in the economy.

A reversal late in the year on a flagship reform to allow foreign supermarkets to operate in India was a huge blow for the government of Prime Minister Manmohan Singh.

Like peers Brazil and China, the room for government-led stimulus is limited. In December, Goldman Sachs' Jim O'Neill called India the most disappointing of the BRICS countries, and warned of a risk of a balance of payments crisis if policymakers were not careful.

As ever, India's dependence on imported, then subsidised energy is a weakness, with high prices adding to pressure both on the current account and fiscal deficit. A drawn out crisis in Europe could exacerbate the capital outflows and further moderate exports.

December brought some much-needed relief in the form of a sharp fall in food price inflation. That raises expectations of monetary loosening soon to help stoke flagging growth but structural factors are likely to keep prices rising at a fast pace in the medium term.

With hopes dashed for benefits from global supermarket supply chain expertise, India will have to find new ways to reduce food wastage and increase productivity...


http://www.moneycontrol.com/news/market-edge/key-political-risks-to-watchindia_645540.html

January 5, 2012 at 10:43 PM  
Blogger Riaz Haq said...

Here's a FirstPost story on India at Davos WEF 2012:

Barely a few years ago, India was the flavour of the season at the World Economic Forum talk-fest in the Swiss Alpine resort of Davos as international moneybags and businesses, looking for the Next Big Thing after China, latched onto the India Story.

They came by the India Adda pavilion, chomped on curry offerings, got a earful of Bollywood beats – and pronounced that India was Everywhere.

This year, after a bruising 12 months of economic mismanagement that saw inflation soar and growth slow down and a whole lot of other things go wrong, the moneybags’ starry-eyed vision of India has faded. India is Nowhere at this year’s Davos gabfest. Indian TV personalities who have made Davos something of an annual pitstop say that the mood among the Indian contingent this year is downbeat, “almost depressed.”

NDTV’s Vikram Chandra reports that a top industrialist told him: “We are back to being on the sidelines, back to watching others take the limelight. Back to the bad old days. It’s feeling as if the India story is over.”

The unnamed Indian industrialist may not be ready to acknowledge it, but the fact that Davos has gone cold on India is perhaps a good thing, given its horrendous record at predicting the future and reading economic ups and downs.

As Clyde Prestowitz, president of the Economic Strategic Institute, notes, Davos has become the platform for an intellectual form of name-dropping and a chance for the select few to gloat that they have been invited to the meeting.

“It’s a combination of competitive vanity and convenience that makes it all work. Glitteratus A begs for an invitation because he/she can’t stand the thought of not being there if Glitteratus B is there. The fact that many are there then makes it easy to do in a few days a lot of business with each other that without the meeting would take weeks or months. So, for organizing a nice party for them, the glitterati each pay… anywhere from $50,000 to several hundred thousand dollars.”

But far from being a forum that sets the economic and business agenda for the world, Davos has been horribly – and embarrassingly – behind the curve in seeing the future. Prestowitz points out that the Davos meeting in 2008, for instance, foresaw none of the cataclysm in the financial markets and the collapse of real estate markets that would define much of that year and the succeeding years.

Just as glaringly, in 1997, these Masters of the Universe labelled Southeast Asia as the world’s most dynamic region, only to see the whole house of cards collapse barely three months later.

The Davos man, writes Prestowitz, “has consistently proven clueless and unable to set an agenda with regard to the global developments on which he is supposed to be the expert.” This is largely because Davos represents the “global establishment”, which by its very nature cannot see anything that doesn’t fit into its orthodox framework, and has a dogmatic faith in the enriching power of unfettered globalisation.…


http://www.firstpost.com/world/india-nowhere-at-davos-thank-god-for-that-195985.html

January 27, 2012 at 9:21 AM  
Blogger Riaz Haq said...

India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion, according to a report in the Indian Express:

...The composition of capital inflows shifted in favour of debt, with a rise in the proportion of short-term flows. If the pace of FDI inflows does not pick up once again and FII equity inflows revert to the decelerating trend, CAD may have to be largely financed through debt creating flows in the coming quarters. Recent pick up in FII flows has been mainly on account of investment in debt instruments.
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On the capital account, recent policy measures have stimulated debt capital flows in the form of investments by FIIs in debt instruments and NRI deposits. Going forward, however, it would be necessary to reduce dependence on debt inflows and accelerate the reform process in order to ensure revival of equity flows as investors look for strong growth opportunities in an otherwise gloomy global environment, the RBI says.

Widening current account deficit (CAD), diminishing capital flows and moderately deteriorating vulnerability indicators, notwithstanding improved net international investment position, warrant acceleration of the domestic reform process. The RBI feels this will encourage renewed equity flows.

Subbarao made it clear that close monitoring of the short-term external debt will be required in 2012-13. Given that both global and domestic scenario remains bleak, investors would generally tend to prefer shorter-dated government securities.

Capital flows

* In 2011, out of $8.65 billion foreign debt inflows, as much as $4.18 billion came in December while there was an outflow of $357 million from equity

* India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion

* If the pace of FDI inflows does not pick up and FII equity inflows decelerate, CAD may have to be largely financed through debt creating flows in the coming quarters.


http://www.indianexpress.com/news/rbi-not-comfortable-with-rise-in-debt-inflows/905389/2

January 30, 2012 at 6:29 PM  
Blogger Riaz Haq said...

Here are "Ten Things for India to Achieve its 2050 Potential", brought out by Jim O'Neill, Head Global Research at Goldman Sachs, and Tushar Poddar, V-P Research, Asia Economic Research Team at Goldman Sachs India, as reported by India's Economic Times:

1. Improve governance

2. Raise educational achievement

3. Increase quality & quantity of universities

4. Control inflation

5. Introduce credible fiscal policy

6. Liberalize financial markets

7. Increase trade with neighbors

8. Increase agricultural productivity

9. Improve infrastructure

10. Improve environmental quality

http://economictimes.indiatimes.com/quickiearticleshow/3137357.cms

March 3, 2012 at 9:38 AM  
Blogger Riaz Haq said...

Criminals flourish in Indian Elections, reports Washington Post:

DIBAI, India — In India’s democracy, crime really can pay.

In the past month, voters in the northern state of Uttar Pradesh, home to 200 million people, have been lining up in huge numbers to cast votes in state elections.

But of the 2,000 candidates from the main parties contesting here, more than a third are facing criminal charges, including murder, rape, kidnapping and extortion, according to figures compiled by the advocacy group Association for Democratic Reforms.

And many of them will win.

“They are popular with voters,” lamented Chief Election Commissioner S.Y. Quraishi. “I call it the Robin Hood syndrome. They take care to use their corrupt money, money that they get through illegal means, to give to the poor.”

Despite a nationwide campaign against corruption last year, the percentage of candidates facing criminal charges has risen from 28 percent to 35 percent since state elections were last held in 2007. At least 30 candidates are incarcerated.

It is a similar picture nationally: 162 of the 545 members of India’s lower house of Parliament are facing criminal charges, compared with 128 in the previous Parliament.
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Criminals and wealthy politicians regularly dole out cash in return for votes. Quraishi said his agents seized more than $12 million in cash during elections last year in the southern state of Tamil Nadu, including one haul of $1 million in cash hidden in sacks on the roof of a bus....


http://www.washingtonpost.com/world/criminals-flourish-in-indian-elections/2012/03/03/gIQA1E1JsR_story.html

March 5, 2012 at 9:23 PM  
Blogger Riaz Haq said...

Here's Business Standard story of India's unraveling economy:

"Dear God," wrote economist Rajeev Malik as he called on the Almighty to help a "rudderless" government in a biting critique that underscored a growing frustration at home and abroad with the stewardship of Asia's third-largest economy.

Writing in the Business Standard newspaper, the well-respected Malik echoed the exasperation of Indian and foreign business groups pressing for the government to swiftly implement major economic reforms and formulate a coherent strategy to deal with its mounting problems.

Another newspaper said India could be heading to a Greek-style crisis.
Prime Minister Manmohan Singh's Congress Party blames unreliable allies in his coalition government for blocking major reforms aimed at opening up the economy to much-needed foreign investment and tackling obstacles in the way of growth, from creaking infrastructure to endemic corruption.

"Policy paralysis" has become the favoured shorthand of politicians, journalists and other India watchers.

But events since the announcement of the 2012-13 budget in March suggest a deeper dysfunction: a leadership vacuum that has led to empty promises and muddled policy decisions, most notably on tax reform.

They also raise questions about the most important economic relationship in government -- the one between Singh, who engineered the opening up of India's economy in 1991, and his former boss, Finance Minister Pranab Mukherjee.

Foreign companies looking for action are frustrated by the government's determinedly rosy view of the future that appears to ignore a recent raft of negative economic data.

The finance ministry pitched for a credit rating upgrade in a meeting with Fitch Ratings on Thursday even though Standard & Poor's Ratings Services cut the country's credit outlook just last month.

Self-awareness could avert a "macro-economic train wreck," wrote Ron Somers, president of the US-India Business Council.

India's economic growth has slumped to a near three-year low and its current account deficit is the highest since 1980, a gap that is difficult to control when the rupee is at a record low.

The government has projected a budget deficit of 5.9% of GDP, which Moody's Investor Service says is credit negative. Inflation is the highest among the so-called BRICS group of major developing countries, and industrial production contracted unexpectedly in March.

"We have a full-blown crisis on our hands," said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry.

"The Indian growth story is intact," Mukherjee insisted in a speech to parliament this week as Singh sat impassively at his side in the upper house of parliament.

WHO IS IN CONTROL?

The Hindustan Times warned on Friday of a Greek-style debt crisis unless the government took firm action to rein in its fiscal and current account deficits.

"But increasingly the sense is that the government simply lacks the political capacity to make tough decisions," it said.

The government was forced late last year to backtrack on plans to open up the $450 billion supermarket sector to foreign firms such as Wal-Mart Stores after a political backlash, including from within the coalition.

Just this month, it delayed plans to tax foreign investors after an exodus of funds, partly driven by concerns the tax could be applied retroactively, battered the rupee.

"It is not an exaggeration to state that the magnitude of the economic damage and mismanagement by the Congress party under Dr Singh's watch will be embarrassing for even a student of introductory economics," Malik wrote....


http://business-standard.com/india/news/in-india-muddled-leadership-leaves-economy-adrift/165432/on

May 19, 2012 at 9:47 AM  
Blogger Riaz Haq said...

Here's an Economist story "A Bric hits the wall":

INDIA’S economy has had some bad economic ideas inflicted on it over the past century, from imperial neglect to the cult of the village and big-ticket socialism. Maybe the concept of BRICs—a handful of emerging economies including India that were destined for fast growth—should be added to the list. It led to a bubble of complacency that is now being popped rather brutally. Growth in India was 5.3% in the three months to March—worse than the 6% expected, below the prior quarter and way below the close-to-double digit rates that were meant to be preordained and propel India to economic super-power status.

Other BRICs have slowed too, including China and Brazil. But India's GDP figures, the worst for at least nine years, will have a deep impact on the sub-continent. The country was meant to grow in its sleep—regardless of what happens in the rest of the world. A quick bounce back looks unlikely. The central bank has cut interest rates a little this year, but will struggle to loosen policy further given high inflation. The ruling coalition keeps on promising a bout of reforms to boost confidence, but it is so divided, its behaviour so erratic and its record of delivery so poor that few believe this will actually happen. Expectations for growth over the next couple of years will probably slip further, to 6%.

A 6%-growth-India raises three issues. For one, the old orthodoxy was that after liberalisation India had been on an accelerating path, driven by demographics and its high rate of savings and investment. A rival view is now likely to take hold. It notes that India has grown pretty consistently at 6% since the mid 1980s, with the exception of a faster period in 2004-2007. What looked like a step up in trajectory now looks like a one-off blip driven by a global boom, an uncharacteristic bout of tight fiscal policy and an unsustainable burst of corporate optimism. Political history may have to be rewritten too. The reformers of 1991, who include the present prime minister, have turned out to be not visionaries, but pragmatists without a deep commitment to liberalisation who have been unable to build a lasting consensus among voters and the political class in favour or reform.

Second, financial stability will become trickier. Nominal GDP growth (including inflation) has slipped to the low teens. This is still above the rate of interest India's government pays on its debt and thus in theory enough to avoid a debt spiral—despite high fiscal deficits running at almost a tenth of GDP. Government bond yields are artificially depressed because banks are forced to buy government paper and because the central bank has been buying bonds actively in the last six months. Although this can go on for a while, the stress is showing up in two different areas. One is the banking system where gross bad debts plus "restructured" loans have risen to over 8% of the total—a figure high even by western banks' standards. Bankers and the central bank argue that "restructured" loans are unlikely to result in large losses. But with lower growth more corporate borrowers will come under strain, as will the credibility of those reassurances.
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Perhaps growth will bounce back. And if it doesn't, perhaps public frustration will be expressed at the ballot box, creating a new, less complacent political climate. The view that India's democracy is a self correcting mechanism that steers the country back onto the right course when things go wrong, was an integral part of the bulls' view of India. Hopefully it is one idea from the boom that proves to be correct.


http://www.economist.com/blogs/newsbook/2012/05/indias-economy

June 2, 2012 at 9:25 AM  
Blogger Riaz Haq said...

Here are a few excerpts from Wall Street Journal story titled "India Fades":

India's growth prospects have been fading for some time. Multinationals are walking away from the country, withdrawing some $10.7 billion worth of investments in 2011 alone, according to Nomura. Manufacturing contracted by 0.3% for the year that ended March 31. Agriculture and services faltered as well.
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Delhi managed to keep the party going after the 2008 financial crisis with more government spending and easier credit. But that only postponed the reckoning—while sending the inflation rate north of 8% for the better part of the last two years.

After growth dipped below 7% late last year, Prime Minister Manmohan Singh turned to gimmicks, like having state-owned Coal India boost coal supply to power producers in a one-off manner or proposing to set up special manufacturing zones where factories would get tax breaks. But businesses want less red tape permanently, especially when it comes to energy investments, as well as labor reform to make hiring and firing easier. On both fronts, the Prime Minister has done nothing.

Then there was his one serious attempt at reform. In late November he announced plans to allow foreign investment in big-box retail stores. The reform would have been a boon for consumers, and would have helped import some crucial supply-chain know how. But the reform met the usual combination of populist and special-interest resistance, and the government folded in 10 short days.

Indians are increasingly disenchanted with Congress's failure to push for pro-market reforms, and have voted accordingly in recent state elections. That's the good news. There's been a lot of talk about India's emergence as a new economic superpower. An India with the ambition to rise in the world will not treat a high-growth economy as a national birthright.


http://online.wsj.com/article/SB10001424052702303640104577440103460087194.html

June 5, 2012 at 8:09 AM  
Blogger Riaz Haq said...

Here's The Economist on India's reckoning:

.... They were there to launch an official economic history of 1981-97, a period which included the balance-of-payments crisis of 1991. The mood was tense. India, said Manmohan Singh, the prime minister, faced “very difficult circumstances”. “Does history repeat itself?” asked Duvvuri Subbarao, the outgoing head of the Reserve Bank of India (RBI). “As if we learn nothing from one crisis to another?”

The day before Indian financial markets had had their rockiest session for many years. The rupee sank and stockmarkets tumbled. Money-market rates rose. The shares of banks thought to be either full of bad debts or short of deposit funding fell sharply. The sell-off had been made worse by new capital controls introduced on August 14th in response to incipient signs of capital flight. They reduce the amount Indian residents and firms can take out of the country. Foreign investors took fright, fearful that India might freeze their funds too, much as Malaysia did during its crisis in 1998.

India’s authorities have since ruled that out. But markets keep sliding. On August 20th the RBI said it would intervene to try to calm bond yields. The rupee has dropped to over 64 to the dollar, an all-time low and 13% below its level three months ago. It is widely agreed the country is in its worst economic bind since 1991.

India is not being singled out. Since May, when the Federal Reserve first said it might slow the pace of its asset purchases, investors have begun adjusting to a world without ultra-cheap money. There has been a great withdrawal of funds from emerging markets, where most currencies have fallen by 5-15% against the dollar in the past three months. Bond yields have risen from Brazil to Thailand. Some governments have intervened. On July 11th Indonesia raised its benchmark interest rate to bolster its currency. On August 21st its president said he would soon announce further measures to ensure stability.

India, Asia’s third-biggest economy, is more vulnerable than most, however. Economic news has disappointed for two years, with growth falling to 4-5%, half the rate seen during the 2003-08 boom. It may fall further. Consumer-price inflation remains stubborn at 10%. A drive by Palaniappan Chidambaram, the finance minister, to push through a package of reforms and free big industrial projects from red tape has not worked. An election is due by May 2014, adding to uncertainty.

India’s dependence on foreign capital is also high and has risen sharply. The current-account deficit soared to almost 7% of GDP at the end of 2012, although it is expected to be 4-5% this year. External borrowing has not risen by much relative to GDP—the ratio stands at 21% today—but debt has become more short-term, and therefore riskier. Total financing needs (defined as the current-account deficit plus debt that needs rolling over) are $250 billion over the next year. India’s reserves are $279 billion, giving a coverage ratio of 1.1 times. That has fallen sharply from over three times in 2007-08 (see chart 1) and leaves India looking weaker than many of its peers (see chart 2)...
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India’s position could still get worse. But assuming things stabilise, when the official histories come to be written about 2013, what might they say? Most likely that the rupee’s slump caused a severe shock to the economy that made a recovery in growth rates even harder. But perhaps, also, that it prompted a more serious debate about the policies that India needs to become less vulnerable to the whims of an unforgiving world.


http://www.economist.com/news/finance-and-economics/21584010-why-india-particularly-vulnerable-turbulence-rattling-emerging

August 22, 2013 at 11:13 PM  
Blogger Riaz Haq said...

Here's Wall Street Journal quoting BRIC coiner Jim O'Neill as saying “If I were to change it, I would just leave the ‘C’:


SAO PAULO–Former Goldman Sachs Asset Management Chairman Jim O’Neill, who coined the BRIC acronym describing four burgeoning emerging market countries, stands by the term he invented more than a decade ago, but admits that three of the countries have disappointed him in recent years.

The acronym created in 2001 groups Brazil, Russia, India and China, and has become a reference for a perceived shift in economic power toward developing economies.

“If I were to change it, I would just leave the ‘C,’” Mr. O’Neill said in an interview. “But then, I don’t think it would be much of an acronym.”

Economic growth in other BRIC countries has been disappointing, and the economic outlook for developing economies in general has changed in the last few years amid the end of a commodities boom and a slowdown in Chinese growth–which nevertheless remains high compared with that of its counterparts.

Meanwhile, signs of a recovery in the U.S and expectations the Federal Reserve will soon reduce its bond-buying program have helped strengthen the U.S. dollar, sucking money out of emerging markets and putting even more pressure on their less developed economies.

It has become “fashionable” to say the developed world is recovering while emerging markets are all slowing down, Mr. O’Neill said. “But what people don’t understand is the size of China,” he added.

The economist said that if China’s economy grows 7.5% this year, as he expects, that would create an additional $1 trillion in wealth, in U.S. dollar terms. “For the U.S. to contribute at the same level, it would have to grow around 3.75%,” Mr. O’Neill said.

Economists currently expect the U.S. economy to expand 1.5% in 2013, down from 2% projected in May, according to a recent survey by the Federal Reserve Bank of Philadelphia.

From 2011 to 2020, Mr. O’Neill said he has assumed average growth for the BRIC countries of 6.6% a year, less than the 8.5% average in the previous decade. Most of it up to now has come from China.

India has been the biggest disappointment among the BRIC countries, while Brazil has been the most volatile in terms of investor perceptions, the economist said.

“Between 2001 and 2004, many people told me I should never have included Brazil. Then, from 2008 to 2010, people told me I was a genius for including Brazil and now, again, people say Brazil doesn’t deserve to be there,” he said.

Brazil’s economic growth, which reached 7.5% in 2010, has been weak since then in spite of multiple government stimulus measures. The country seems doomed to growth of 2% or so in both 2013 and 2014, according to economists’ forecasts.

Brazil’s rapid growth in 2010 raised expectations, but many people forgot that the country is vulnerable to big moves in commodities prices, Mr. O’Neill said.

Another problem, he said, is that private investment remains a small share of the country’s gross domestic product. Brazil’s investment rate has been stuck at around 18% of GDP, the lowest level of any BRIC country, for a decade.

---

“They should only worry if there’s a pickup in inflation expectations; otherwise, they should relax,” he said, before the central bank late Thursday unveiled a massive intervention program to provide relief for the currency.

Brazilian inflation is currently 6.15%, close to the 6.5% ceiling of the central bank’s target range for 2013.

Even in the face of weak growth, Mr. O’Neill says he doesn’t plan to add or subtract letters from his famous acronym.

“If, by the end of 2015, there is persistent weak growth in Brazil, India or Russia, then I might,” he said, noting, however, that he expects Brazil to surprise positively in 2015, possibly even in 2014.


http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/

August 23, 2013 at 10:28 PM  

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