Goldman Sachs Economists have cautioned The World against investing in India in The Short-Term. With high Inflation and Record current account Deficit, has Indian Economy Deteriorated so much?
After raising the repo and reverse repo rates by 25 basis points (bps) for 6 times in 2010, in its first policy meeting for this year, the apex bank has splendiferously again added another 25 bps to the existing rates. However, so far, these measures have delivered negligible results demanding stricter action. Although from outside the country, RBI’s moves seem right (George Worthington, Chief Economist-Asia-Pacific, Thomson Reuters, tells B&E, “Given these structural factors, the RBI will need to bump rates up considerably, or institute other curbs on liquidity, to rein in inflation this year.”), in reality, even school level economists within the country would be able to tell that the RBI has gotten it horribly wrong – the basic inflation increase is more because of supply side constraints rather than because of excess demand; even the visiting World Bank chief Robert Zoellick was quite taken aback at RBI’s monetary policy and refusal to address the supply side issues. In other words, the RBI should have actually decreased corporate loan rates (and kept retail loan rates unchanged).
But on the other hand, the government looks more focused on maintaining a high GDP growth rate. For that matter, in Q3 itself, our GDP grew at 8.9% y-o-y, the fastest for the country since the second half of 2007. As a result, while IMF now expects India to end up achieving 8.75% GDP growth in 2010-11, Moody’s Analytics has given a growth forecast of 8.5% to 9.5% over the next few years. But at what cost? The government’s die-hard attempts to keep its GDP growth afloat have now started taking its toll on the country’s current account. From 1.5% of GDP in Q1 FY2010, India’s current account deficit (CAD) climbed up to 4.1% of the GDP at the end of Q2 FY2011. Historically, India’s CAD has been financed by capital inflows, FDI and FII, with the former being the stable source of the two. But the clear and present danger for India at present is that while deficit is inching towards a record high, 95% of the same is financed by short-term portfolio inflows (which can reverse anytime if investor sentiment goes negative; and Goldman has already beaten the dead horse into life) in the second quarter. In a precursor, FDI inflow dropped a shocking 36% to $12.6 billion in H2 of the current fiscal as compared to H1 FY2010. In fact, India only received $2.5 billion as FDI in the second quarter. And this is at a time when the government is targeting to attract $100 billion as FDI by 2017.
While the CAD is deteriorating in an imbalanced and distressed manner, rising global fuel prices and higher imports by India to support rising demand (to cover up domestic supplyside failures) has started accumulating in the form of India’s external debt stock, which jumped around 12.5% in the first half of this fiscal to $295.8 billion as on September 30, 2010 (whereas the country’s total forex reserves stood at only $294.2 billion on the same date). Moreover, as the deficit rises, a sudden rise or fall in capital flow (which keeps happening on a regular basis depending on the market conditions) will tend to have a magnified impact on Indian economy making the situation unexpectedly bad.
With the Union Budget round the corner, this is certainly the time when Finance Minister Pranab Mukherjee needs to resort to some tough calls to administer the situation (read our ‘alternative budget’ in the next issue for details). With the US struggling with weak labour and housing markets, with fiscal deficit projected at 10.75% in 2011 (more than double that in the euro area), and gross government debt projected to exceed 110% of GDP in 2016 is taking a breather, this should have been the best chance for BRIC economies to corner all global investment. But strangely, and suddenly, comes the anti-BRIC Goldman advice right out of the blue... Now who was telling us the other day that Goldman does everything these days according to how the US government demands?
But on the other hand, the government looks more focused on maintaining a high GDP growth rate. For that matter, in Q3 itself, our GDP grew at 8.9% y-o-y, the fastest for the country since the second half of 2007. As a result, while IMF now expects India to end up achieving 8.75% GDP growth in 2010-11, Moody’s Analytics has given a growth forecast of 8.5% to 9.5% over the next few years. But at what cost? The government’s die-hard attempts to keep its GDP growth afloat have now started taking its toll on the country’s current account. From 1.5% of GDP in Q1 FY2010, India’s current account deficit (CAD) climbed up to 4.1% of the GDP at the end of Q2 FY2011. Historically, India’s CAD has been financed by capital inflows, FDI and FII, with the former being the stable source of the two. But the clear and present danger for India at present is that while deficit is inching towards a record high, 95% of the same is financed by short-term portfolio inflows (which can reverse anytime if investor sentiment goes negative; and Goldman has already beaten the dead horse into life) in the second quarter. In a precursor, FDI inflow dropped a shocking 36% to $12.6 billion in H2 of the current fiscal as compared to H1 FY2010. In fact, India only received $2.5 billion as FDI in the second quarter. And this is at a time when the government is targeting to attract $100 billion as FDI by 2017.
While the CAD is deteriorating in an imbalanced and distressed manner, rising global fuel prices and higher imports by India to support rising demand (to cover up domestic supplyside failures) has started accumulating in the form of India’s external debt stock, which jumped around 12.5% in the first half of this fiscal to $295.8 billion as on September 30, 2010 (whereas the country’s total forex reserves stood at only $294.2 billion on the same date). Moreover, as the deficit rises, a sudden rise or fall in capital flow (which keeps happening on a regular basis depending on the market conditions) will tend to have a magnified impact on Indian economy making the situation unexpectedly bad.
With the Union Budget round the corner, this is certainly the time when Finance Minister Pranab Mukherjee needs to resort to some tough calls to administer the situation (read our ‘alternative budget’ in the next issue for details). With the US struggling with weak labour and housing markets, with fiscal deficit projected at 10.75% in 2011 (more than double that in the euro area), and gross government debt projected to exceed 110% of GDP in 2016 is taking a breather, this should have been the best chance for BRIC economies to corner all global investment. But strangely, and suddenly, comes the anti-BRIC Goldman advice right out of the blue... Now who was telling us the other day that Goldman does everything these days according to how the US government demands?
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
