Why India's Economy Isn't as Bad as Headlines Suggest

[Android]

Earlier this week ratings agency Standard & Poor’s said India could be the first BRIC economy to lose its investment grade status, which was followed a day later by data showing factory output had nearly stalled in April.

While India’s recent dismal economic performance has investors looking for exits, several experts tell CNBC things are not as bad as the headlines suggest.

"India has been and will continue to be a very strong nation," Sean Egan, Founding Partner of Michigan, U.S.-based ratings agency Egan-Jones, told CNBC Asia’s “Squawk Box”. "You will find that in 5 years, it has an even more important place in the global market. I think they will do fairly well over time."

Slowing growth, accelerating inflation and rising fiscal and trade deficits along with a pause in economic reforms have pushed India’s currency to record lows and hurt investor sentiment. But some analysts argue that there is a silver lining in the form of India's strong consumer base and a declining debt-to-GDP (gross domestic product) ratio.

“I think most investors look at the hard numbers to see whether there’s a big increase in debt-to-GDP, and I think compared to a lot of other countries, India is probably better off,” Egan said.

India’s debt-to-GDP ratio stood at 74.9 percent in the fiscal year ended March 31, 2012 according to Standard and Poor's and it forecasts that this will fall to 74.7 percent in the current fiscal year. This compares to the 81.5 percent for Germany and 102.9 percent for the U.S., according to the figures from the International Monetary Fund.

The strength of India's consumer base, made up of a 250 million-strong middle class, will also provide support to the country’s economy, say India watchers. The Managing Director of fund management company Bowen Asia, which invests in Indian consumer stocks, says despite “horrendous” macroeconomic numbers recently, domestic consumption is still strong.

“I think the reality on the ground is very different in terms of what you read,” Aadil Ebrahim, said. The 15 large and mid-cap consumer-focused companies that he tracks grew their sales by as much as 28 percent in the March quarter, he told CNBC.

“On the ground, the consumer is doing absolutely fine right now,” Ebrahim said. “You have seen wage growth of 10-12 percent. There is still a lot of under-penetration out there in a lot of core categories, in terms of housing, in terms of consumer goods. So I think we’re overall quite bullish on the micro level but the macro level is keeping investors away.”

India’s economy expanded at 5.3 percent in the first quarter of the year, its slowest pace in nine years. That has increased the call for the government to initiate pro-growth policies to boost investment so that India can return 8 percent plus growth.

“A major constraint that is holding India back is lack of investment and capacity constraints,” said Hans Timmer, Director of the World Bank’s Economic Prospects Group.“If reforms are put in place, India has the potential to grow 8 percent, almost similar to what we have seen in China.”
News Headlines

 

[Jade]

The most important components of growth such as saving rates and investment rates are very healthy. According to the Solow model, this corresponding saving rates and investment rates should have given India a growth rate of 8.75% this year. 6.5% growth rate indicates that our government is a dampener.

 

[Prometheus]

Despite problems, India to grow at 6.9% in 2012-13: World Bank

 

[Impasse]

You know what, I don't give a damn. I could not feel an inch effect on people and their buying patterns. Companies are investing mroe money to advertise their products. My ad agency had 36% increase in revenues in the first quarter which is still on, compared to last year.

 

[Jade]

You know what, I don't give a damn. I could not feel an inch effect on people and their buying patterns. Companies are investing mroe money to advertise their products. My ad agency had 36% increase in revenues in the first quarter which is still on compared to last year.

S&P downgrading will effect FDI inflow.

 

[Impasse]

Though I agree petrol prices have gone up, cars sale have decreased but it is still very high and rising in hatch back and premium segment. Middle class and lower middle class is holding their liquid assets for better times. Lot of customers are avoiding and even canceled pre booking of petrol cars. They are either shifting to diesel cars or waiting.

On street, life is in full throttle. Our govt has failed, now only thing that can destroy our nation is ill will of top decision makers.

It won't continue forever. Now big giants have come out and have raised issues. Reliance yesterday blamed govt for low production and warned that it could further fall.

I have a question to Indians- How badly your life got affected because of this slump?
Be honest since I want to know for my own knowledge too.

For me, petrol is a serious issue, which I plan to tackle by going for a diesel car. Also, I have seen that lot of companies are using this as an excuse to bargain with new employees and making them settle for less salary. I am aware of their P&L account and I don't see any reason for these companies to do this. They have just got a reason to cost cut.

Anyway, lets hear it from others.

S&P downgrading will effect FDI inflow.

Did it effect FDI inflow till now?

 

[Jade]

Did it effect FDI inflow till now?

It will effect FDI as some investors are risk averse, and S&P rating are about the risk.

 

[OrionHunter]

Says Hans Timmer, Director of the World Bank’s Economic Prospects Group,“If reforms are put in place, India has the potential to grow 8 percent, almost similar to what we have seen in China.”

Source: http://www.defence.pk/forums/world-...isnt-bad-headlines-suggest.html#ixzz1xgJ7nZnR

Oh yeah! IF only aunty had balls!

 

[Impasse]

It will effect FDI as some investors are risk averse, and S&P rating are about the risk.

Ya ok. true.

 

[Boson]

We need to get the govt out of business faster .. atleast one thing we already have in place, which we didn't have earlier in 1991. That the Rupee floats freely.

Hence, if anyone withdraws dollars now, he pays dearly for it. Anyone who sticks to using imported products, pays dearly for it.

Anyone who exports, gets rewarded. Anyone who remits, gets rewarded.

Market reacts quickly: doesn't need political decision to reset a "pegged" rate of currency. Imagine, if we had a rupee pegged at the level of 45 to the USD, the effect would have been a sudden decline in foreign exchange reserves (because 45 could have been defended only by spending a lot of dollars from reserves).

Now, RBI has a choice: It can intervene if it wants. RBI has a stated mandate to reduce the volatility in the rupee rate; but doesn't take a view at the level.

Market supply and demand ensures that if some rich people only want imported luxury cars, they are willing to pay at the rate of 55; not at 45. Hard working NRIs get paid their due. Encourages people to earn dollars outside.

FDI has a price advantage at this point of time.. local prices re-adjust to the new currency rate overtime. So, NRIs are making a killing buying property in India.

-----

What are we still missing?

Do to Diesel, what we did to USDINR .... no point subsidizing luxury cars running on diesel. But before that we need to introduce US style competition to the oil markets.

Reliance is biggie and can beat the $hit out of public sector oil companies, but it's the only one (Essar is a much smaller player and cannot compete nationally).

In fact, it is entirely possible that the competitive price of diesel is only marginally higher than the current "subsidized" price ... once competition squeezed inefficiencices out of IOC, HPCL and BPCL.

Next we need to hit the irrationality in the fertilizer markets ... subsidies must go directly to the farmer, not to middlemen.

Even the wheat and rice subsidies should go directly to those who need it. Rice sells are Rupees 2 per kg !!! and Wheat at Rs 4 per kg !!!

It's better to pay the poor people at Rs 10 per kilo for every kg of rice they are entitled to .... and free markets should sell rice at Rs. 12 per kg.

In fact, stress forces action .. even Narasimha Rao govt was a minority govt... and no could have imagined the reforms it did, while maintaining a minority govt... supported by who else.. the LEFT parties.

We should just keep our heads down and keep working .... India is one-fifth the mankind.

The fate of mankind is drastically linked to that of India. Externalities can jump up and down, blow hot and cold .... but everyone one knows... the weight India carries in terms how the world evolves in the coming years.

That is why.. India does well or bad.. it is news.

 

[junk]

ALLLLLLL IJ WELLLL in the Land of The Greatest Super Hyper Power of the World, All ijjj Welll......

 

[shuttler]

The most important components of growth such as saving rates and investment rates are very healthy. According to the Solow model, this corresponding saving rates and investment rates should have given India a growth rate of 8.75% this year. 6.5% growth rate indicates that our government is a dampener.

how healthy are these rates in india? particular the later?

 

[Adnan Faruqi]

Because India's 75% economy is dependent of internal consumption. And still we are 2nd fastest growing big economy.

The day manmohan singh is gone as PM India's economy will zoom as a cryogenic rocket

 

[Chinese-Dragon]

It's OK, the Indian Government has officially rejected the warning from S&P that they will soon downgrade India to junk status.

BBC News - India rejects Standard & Poor's downgrade warning

India has dismissed a warning from rating agency Standard & Poor's that it could be the first Bric nation to lose its investment grade status.

In a report - Will India Be The First Bric Fallen Angel? - released on Monday, S&P said a division of roles between the "powerful" Congress party president Sonia Gandhi and an "unelected" Prime Minister Manmohan Singh was the main reason behind the poor state of the economy.

"The paramount political power rests with Sonia Gandhi, who holds no cabinet position, while the government is led by an unelected prime minister, who lacks a political base of his own," it said.

All is well.

 

[IndoCarib]

What Happens if India Is Downgraded to ‘Junk’?

Since Standard & Poor’s warned Monday that India could be the first among the BRIC nations to lose its investment grade rating, politicians in India have moved quickly to discount the report.

Finance Minister Pranab Mukherjee “rejects” the report, the ministry said in a statement, which added that there are “several positives” for the Indian economy in the future. Rajkumar Dhoot, a member of Parliament and head of an industry trade group, referred to the report as “drawing room talk,” while Veerappa Moily, the minister of corporate affairs, said “S&P can not speak like this,” the Press Trust of India reported.

The criticism of Standard & Poor’s is overlooking an important point, analysts say. Whether politicians and industry leaders agree with the rating agency or not, a downgrade to so-called ‘junk’ status, could have very serious, very negative connotations.

“We shouldn’t ignore foreign rating agencies, either right or wrong,” said Vikram Limaye, deputy managing director at the Infrastructure Development Finance Company. “We should take their concerns into account. It is incumbent upon us to explain why their fears are misplaced or exaggerated in a reasonable way. Dismissal will not get us anywhere.”

A rating downgrade to junk status would mean that there would be in increase in the overseas borrowing costs for Indian companies and the country’s ability to attract foreign investment would be considerably diminished.

“This could have a major impact on overall fund flows, which rely heavily on international ratings,” said Dipen Shah, who leads fundamental research at Kotak Securities. “While the overall international debt is not so alarming as a proportion of the G.D.P., India needs a lot of capital flows to cover up its balance of payment deficit.”

While the cost of borrowing will increase, India’s borrowing capability will also be materially reduced, as certain investors who only invest in investment-grade paper will shun India.

“There are certain pools of capital focused only on investment-grade paper, which will then not be available for India-related paper,” said Mr. Limaye. “The other challenge is that after these rating agencies’ downgrade, the upgrade, while it is not an impossibility, always takes a much longer time to come. The country will have to be able to show an improvement in the overall outlook: the current account deficit, macro economic situation, decision-making and level of uncertainty. “

Though the impact of a rating downgrade will be contained to a certain degree because of India’s limited exposure to external debt, the lack of foreign capital and external funding will hinder growth, Mr. Limaye said. “As a country, we are dependent on capital flows,” he said. “If you have to think about the planning commission’s estimate that over the next five years there is need for an investment in infrastructure of a trillion dollars, there will certainly be a requirement of international capital both in the form of debt and equity.”

Many analysts said the rating agency’s report was prompted by the lack of government action following the revision in the rating outlook in April, when S.& P. scaled down its outlook for India to “negative” from “stable.”

“The report is not an outlook or rating downgrade, but a warning,” said Mr. Shah. “It is a kind of wake-up call they wanted to give the Indian government. In my opinion, this has been brought on by the lack of change in the country’s fiscal policies over the last two months after their downgrade in April. While they perhaps expected further action from the government, there has been relative inaction.”

India’s BBB- long-term sovereign credit rating is currently one degree better than junk status. The report cited slowing gross domestic product growth, political roadblocks to economic policy making and growing deficits as some of the factors that would cause India lose its investment-grade rating.

“In our view, setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, thus, its credit quality,” said Joydeep Mukherji and Takahira Ogawa, the S.& P. credit analysts who wrote the research report. “How India’s government reacts to potentially slower growth and greater vulnerability to economic shocks may determine, in large part, whether the country can maintain its investment-grade rating, or become the first ‘fallen angel’ among the BRIC nations,” which also include Brazil, Russia and China.

The report examines the recent forecasts for economic growth, stating that India’s G.D.P. growth has fallen to an annual rate of 5.3 percent in the first three months of 2012 from 6.1 percent in the previous quarter. The report also takes into account the 20 percent decline of the Indian rupee against the dollar over the past year.

However, the report states that further fiscal reform and an improvement in the country’s investment climate could cause a return to recent high growth rates.

Despite the recent negative economic signals, the Indian economy is much better prepared to face the current global uncertainty than it was in the 1990s, when the country suffered a balance of payments crisis, Mr. Limaye said.

“While we are running large current account deficits, I don’t think we are at the point where people need to be alarmist about the overall macroeconomic situation,” said Mr. Limaye. “We don’t have the kind of short-term debt that we had in 1991, where our foreign currency reserves were not sufficient to cover our obligations.”

He contended that the country has brought its current woes upon itself. “The macro fiscal situation in India has deteriorated over the last couple of years, and people feel that there hasn’t been enough conviction or definitive action on the part of the government,” said Mr. Limaye. “In some ways we are to blame for where we are and what people are saying about India. The growth in India could be much higher because there is the potential for a large domestic growth story independent of the global situation.”

The chairman of the bank HDFC, Deepak Parekh, echoed this sentiment on Monday, saying in a letter to shareholders that “as a result of the self-inflicted traumas that India has brought upon itself, some companies are caught in the dilemma of giving up the ‘billion opportunity.’ ”

What Happens if India Is Downgraded to 'Junk'? - NYTimes.com

The Sonia Manmohan disconnect is costing us dearly.