Tuesday, December 28, 2010

Indian Economy: Hard or Soft Landing in 2011?

Pakistan's economy had a hard landing in 2008. It was triggered by a balance of payments crisis brought about through precipitous decline in foreign capital inflows combined with policy inaction in response to major external shocks in terms of food and fuel prices during political transition. Is the Indian economy similarly vulnerable in 2011? Is it headed for significant slowdown in the next twelve months? And if it is, can the Indian leadership manage a soft landing through major policy actions now?

To answer these questions, let us examine the following facts:

1. India's current account deficit widened sharply to $13.7 billion in the June-quarter, which was around 3.7 per cent of GDP. The deficit was $4.5 billion in the same period year ago.

2. India's FDI has declined by a third from $34.6 billion in 2009 to $23.7 billion in 2010. Its current account deficit is being increasingly funded by short-term capital inflows (FII up 66% from $17.4 billion in 2009 to $29 billion in 2010) rather than more durable foreign direct investment (FDI), posing a risk to external balance and funding of gap, according to a recent warning by Goldman Sachs. "Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward," the Goldman note said.

3. Inflation in India is running at a double digit pace as is credit expansion. India's primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed. Year-over-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11.

4. India's Food and fuel prices are continuing to rise by double digits. The food price index rose more than 12 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.

5. The oil prices are likely to spike as the American and European economies recover in 2011, prompting Indian commerce secretary Rahul Kullar to acknowledge that “I am not sanguine. One blip on crude prices and my import bill suddenly zooms. On pro-rata basis we are looking at $ 120 billion with a caveat that if oil prices go up, it could be $ 130-135 billion”. Crude oil prices are currently running at $ 87-88 per barrel.

While China's situation is better because it enjoys significant current account surpluses and has strong capital flow controls, it is also seeing its economy overheat along with India's economy. Joseph Stiglitz, a Nobel Laureate Columbia University economist, has argued that India is more vulnerable to an asset bubble than China, saying that “strong economies that don’t yet have capital control become the focal point” for the liquidity injected by the US Federal Reserve. Stiglitz thinks that India, more than China or Brazil, should watch out for the tidal wave of money made available from the Fed’s quantitative easing. Mike Shedlock, an American investment advisor, believes that "India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both".

Indian President Pratibha Patil said last week that she is confident the economy will grow at about 9 percent in the current fiscal year ending March 2011 and would be on a sustained growth path of about 9 to 10 percent in FY12, according to Reuters. It is quite surprising that the Indian government continues to talk about increasing levels of economic growth in 2010-2011 and beyond amidst growing inflation and rising imbalances in the Indian economy. What they should be thinking about now is how to manage a soft landing by reducing liquidity and cutting India's twin deficits, rather than stepping on the accelerator and risk a big economic crash with long term negative consequences.

Related Links:

Haq's Musings

China's Trade and Investment in South Asia

India's Twin Deficits

Pakistan's Economy 2008-2010

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports


Anonymous said...

Never mind who has posted the article, the Indian economy IS weakening. I have verified all the facts in this post and they are true.

The current account deficit HAS trebled over the past year, mainly due to our increasing trade imbalances. Having a CAD of more than 3% is an alarming situation. The Indian economy has also liberalized so that we are allowing greater FII inflows.

We need to correct these problems otherwise the next global economic slowdown will have a much greater impact on India than the previous one. Indian manufacturing industry needs to be given a boost and domestic companies need to be given a helping hand in dealing with international competition.

Though the situation is not as alarming as the OP has suggested, yet, what has been pointed out is a major cause for concern has has to be dealt with sooner rather than later.

Riaz Haq said...


From Keral.com:

Nobel Prize winner Joseph Stiglitz commented that India should take appropriate measures to curb the inflow of short term investments in the form of US dollars. This loosely controlled inflow of US dollars into the Indian market is with the purpose of investing and reaping gains inherited from the prospects of developing countries such as India. Stiglitz stated that since most of the investments are short term in nature, they do not in any manner contribute to the rise in employement rates of the country. Also, since they are can be withdrawn on a short notice, he said that possibility of a sudden withdrawal cannot be discredited. Stiglitz went on to remind that the economic crisis of 1990 was mainly brought on by the unexpected withdrawal of investments by short term investors.

India’s Economic Advisory Council, headed by C. Rangarajan has stated that India can withstand an inflow of investments of up to $7000 crores, judging by the current market standards. There is a prominent rise in the inflow of funds and investments from abroad to the Indian share and debenture market. An investment of $7000 crores can work to null the trade deficit in India amounting to around $5000 crore dollars. The remaining money from foreign investments can be set aside as a reserve, he said. The recent unexpected surge in the flow of investments to India can be traced to the financial bail-out package proclaimed by America.

It has to be noted that many countries including China have obstructed excess inflow of investments into their economy stating that this may lead to a tilt in the economic balance in the country. Currently, with China rising to a superpower status, and India on its heels as a close competitor, it is crucial that the Government of India takes some time out to ponder over the words of the great mind that Joseph Stiglitz is.


From Wall Street Journal:

“I do worry about countries like India where they are debating how much intervention in the market they should have,” he said Thursday in Hong Kong. “The free capital can go to fewer and fewer places, and India’s one of those,” he said.

Speaking more generally, he said: “Strong economies that don’t yet have those capital controls become the focal point for all this loose money and they will be the countries under a lot of stress.”

The trouble of course with such “hot money” is that it leaves the country just as quickly as it came in, whipsawing financial markets and destabilizing businesses, as in the Asian financial crisis of the late 1990s.

Mr. Stiglitz was speaking at the Mipim Asia real estate conference.


Anonymous said...

Is the Indian economy similarly vulnerable in 2011?

Nope! Even if policy makers do nothing FX reserves cover ALL FII/FDI and leave $50bn for contingency.

Even if CA defecit hits $150 bn we'll sail through without breaking a sweat i.e relying on FII

Remittances+FDI +$50bn from reserves > 150bn deficit(worst case scenario)

Exports are picking up as is FDI owing to robust 9% growth and I don't see FIIs withdrawing overnight anyway infact RBIs current problem is to repel FII not attract FII given that $3 trillion of liquid cash is floating around trying to invest in emerging markets...

And oil prices are falling thanks to china slowdown and more problems in the eurozone and rapid increase in Iraqi crude output currently exempt from opec..

PAkistan in 2008 was a net DEBTOR and had a tiny FX reserve pile and thus was unable to survive a sudden spike in oil price and deterioration of investment sentiment...

Besides the ruling class of India is a lot lot more financially literate than Pakistan's.

Riaz Haq said...

Anon: "PAkistan in 2008 was a net DEBTOR and had a tiny FX reserve pile and thus was unable to survive a sudden spike in oil price and deterioration of investment sentiment..."

Pakistan had reserves to cover about about 7-8 months of imports, and India has about 12-14 months of imports.

So it is true that India has significantly more cushion now than Pakistan had in 2008.

But confidence is a fragile thing. As soon as the reserves begin to evaportate, so does the investor confidence, causing a rapid deterioration in an economy increasingly depdndent on investment, particulaly the hot money (FII) that leaves on the first signs of trouble.

And as long there is spare capacity in the world, the amount of FDI everywhere will remain limited until demand picks up in US, Europe and elsewhere.

What India must do now is to raise interest rates, slow credit expansion and bring inflation under control to regain fscal and monetary discipline. This will ensure a soft landing in 2011, and avoid a crash.

Anonymous said...

'And as long there is spare capacity in the world, the amount of FDI everywhere will remain limited until demand picks up in US, Europe and elsewhere.'

Only if you really believe in free trade.
For eg:There is massive spare capacity in the auto industry globally BUT all major companies are opening plants in India because we have 100%+ tarrifs against imports.

It is a similar story in many other products as long as consumption in India grows FDI will follow for nothing else but to sell in India.

Pakistan had reserves to cover about about 7-8 months of imports.

Notionally yes but most of the FX was tied to servicing external liabilities.So the net free FX available for cushioning mports was 3-4 months and the oil price rally was the proverbial last straw that broke the camel's back..

India by contrast has enough free FX to cover 12 months of imports...

Also India's investment grade rating enables it to raise funds abroad if it so chooses Japan's central Bank and RBI have a agreement to that effect..

What India must do now is to raise interest rates, slow credit expansion and bring inflation under control to regain fscal and monetary discipline. This will ensure a soft landing in 2011, and avoid a crash.

ABSOLUTELY NOT!! What India should do is to ensure direct credit expansion to infrastructure development.$1 trillion allocated over 5 years is just what it needs because:

1.Glut is capital goods production globally means we get capital goods at firesale prices now and thus build capacity on the cheap.

2.The multiplier effect on the economy is mainfold i.e $1 of cap goods import=$10 in export over a 10 year period using that capital good.

3.We need growth to increase tax revenue to bring down the fiscal defecit.

4.Need to implement reforms on a war footing.History has shown that the Indian state function best under crisis situations be it 1991,1971,etc etc

Riaz Haq said...

Anon: "Also India's investment grade rating enables it to raise funds abroad if it so chooses Japan's central Bank and RBI have a agreement to that effect.."

History tells us that ratings can change very quickly along with confidence...leading to economic crashes.

It takes a lot of effort to maintain confidence in economy, including fiscal and monetary discipline which is slipping in India, along with double-digit and rising inflation and growing twin deficits.

Anonymous said...

Umm...India has more forex reserves than foreign debt.

OTOH, Pakiland's foreign debt is 53 billion $ and it's reserves are 16 billion.

"But confidence is a fragile thing."

confusing your wishful thinking with reality...color me surprised..

that's no less deluded than comparing the KSE(market cap 38 billion $) to the indian stock exchanges(combi ned market cap 3+ trillion $)...which is like comparing a penny stock like Netsol with INFY

Riaz Haq said...

Anon: "OTOH, Pakiland's foreign debt is 53 billion $ and it's reserves are 16 billion"

The size of the foreign debt is not the issue...the issue in India is its mounting current account deficit funded increasing (upto 80% recently) by short-term capital inflows which can dry up quickly as we saw in the 1997 Asian financial crisis.

Hot money is no one's friend. It moves quickly to seek fast and quick returns causing temporay economic bubbles which are prone to bursting

Anonymous said...

In one of the links Riaz provided, this was mentioned:-
"NEW DELHI - India’s November exports increased by 26.8 per cent to $ 18.9 billion year-on-year, prompting government to exude confidence that overall shipments this fiscal may breach the target and touch $ 215 billion.

215 billion!!!
10 yrs ago I remember Pak was about 18 billion and India at 40 billion. We barely moved to 40 billion and India moved to 215.
Of course facts like this do not bother Riaz as much as wishful thinking that Indian economy would crash in 2011 proving that Pakistan is not a failed country.
I admire your priorities.

Zen, Munich said...

@Anon, DC

There is no need to slam Riaz the moment he expresses skepticism of India, whether he has good faith or not.
In Economics, skeptics have been much more accurate than optimists.

The stories I hear from India from direct sources tell how much messed up everything there is - like quadrupling the price of many food items - and this is happening in a trillion dollar economy. I hear stories of people defaulting on their loans because house prices are not appreciating as it has been, students dropping out of engg. colleges in 3rd year because they do not get easy loans anymore etc. That per se is alright - but in India, some of these same people make quite a lot of noise when they get something trivial and that is part of their nature.
Foreign car companies setting up businesses to satisfy domestic demand would itself create lot of employment oppurtunities. Nevertheless I doubt whether this is sustainable in the long run, unless India can export some of these cars as domestic demand will saturate at some point..The fact is that India never expereinced a full blown crisis since 1991. Dotcom bubble affected only IT which at that time employed even tinier part of labour force and Indian banks were in good shape when entering the current crisis. Food price inflation and social unrest are the biggest long term threat to India as I see.

Riaz Haq said...

DC: "India’s November exports increased by 26.8 per cent to $ 18.9 billion year-on-year, prompting government to exude confidence that overall shipments this fiscal may breach the target and touch $ 215 billion."

One month does not make a trend. India' exports have increased, but the imports have increased faster, creatng large trade deficits contributing to widening current account deficits.

And India's current account deficit is being increasingly funded by short-term capital inflows (FII) rather than more durable foreign direct investment (FDI), posing a risk to external balance and funding of gap, according to a recent warning by Goldman Sachs.

"Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward," the Goldman note said.

India's reliance on short term capita flows is raising alarms among the investment community, they see it as a prelude to the kind of crash that occured in Asian economies in 1997.

Riaz Haq said...

Regarding Goldman Sachs' recent warning on India, here's a bit of history:

Goldman Sachs has clearly contributed to the euphoria about India, by projecting that its economy could be 50 times its 2006 size by 2050, which would make it the world's third largest, after China and the United States.

However, Goldman's Jim O'Neill has also said that when he ranked countries by the potential risks to their growth — everything from inflation to corruption — India ranked 97th in the world, behind Brazil and the Philippines.

London-based Maplecroft terror risk index based on 2009 data ranks Iraq first, Afghanistan second, with Pakistan and Somalia third and fourth respectively. They are rated at extreme risk along with Lebanon 5, India 6, Algeria 7, Colombia 8 and Thailand 9, according to Reuters.


Anonymous said...

One month does not make a trend.

Nov exports weren't out of the blue but an accelerating rate strating in sep 2010.

The #1 category is engineering goods up a whopping 50%...

"Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward,"

Riaz please understand what you quote...

80% of capital inflows=FII

BUT Current account deficit is 100%funded by remittances and FDI whith about 5-10 billion to spare.

The 80% capital inflows is what causes the FX reserves to rise...

Riaz Haq said...

Here's a Daily Times report on Gallup survey finding Pakistanis are pessimistic about their nation's economy in 2011:

“This year, the public opinion in Pakistan is not hopeful as only 13 percent think that 2011 will be a year of economic prosperity while 34 percent expect it to be a year of difficulty thus giving a negative score of –21 percent on Net Hope,” said Chairman Gallup Pakistan Dr Ejaz Shafi Gilani.

“The devastation caused by floods during the middle of the year created a mood of economic pessimism among the public, despite the fact that the country fought this calamity with courage and showed extraordinary resilience,” Dr Ejaz added.

As the new century enters its second decade, both economic data and perception data suggest that while wealth is still concentrated in Europe and North America, while there is a shift of power and prosperity from the West of the 20th Century to the East, he added.

He said these findings have been derived from one of the largest global surveys covering 53 countries across all continents including all the G7 countries, the four countries of emerging BRIC (Brazil, Russia, India and China) and another 45 countries from Asia, Africa, Latin America, Australasia and including Pakistan. Together, a sample of over 64,000 scientifically selected men and women were interviewed by leading pollsters associated with Gallup International.

This is the second global survey, which the Group has conducted and released during this month. The key question in the global survey was: “Would you say that 2011 will be a year of Economic Prosperity, Economic Difficulty or remain the same.” At a global level 30 percent of the world expects that 2011 will be the year of prosperity and 28 percent expect it to be the year of economic difficulty, while 42 percent think the economic situation will remain unchanged. The hopefuls outscore the pessimists by 2 percent. That is the net Global Hope Score.

The data shows that global hope is highly concentrated among the rising economic powers, the so-called BRIC. The Hope Score for this Group is 35 percent.

In sharp contrast, the Hope Score for the rich countries of the world, known as the G7 (USA, Canada, Germany, France, UK, Italy, and Japan) is in the negative: -19 percent.

Among them, the Pessimists (36 percent) outscore the Hopefuls (17 percent) by 19 percent points.

Briefing the journalists about the survey here Wednesday, Dr Ejaz Shafi Gilani chairman Gallup Pakistan claimed that comparing the survey data with India, it must be noted that Hope Score are volatile and can make sharp jumps in short years.

“This would be true of the mood in India. In the latest survey popular opinion in India shows a Net Hope of 24 percent.

In previous years, India generally scored lower than Pakistan on such measures. Even now the per capita income in the two countries is not far apart $3260 in India compared with $2710 in Pakistan,” he said adding that our civil society and the government seem to have a tough task ahead of them in 2011. app

Riaz Haq said...

Here are some recent excerpts and data from Indian media on the subject of India's current account deficit:

From Indiatimes:

"Post the 1991 BoP crisis, policymakers in the country have ensured that the current account deficit does not rise above 2% of GDP, a kind of self-imposed prudential limit. However, the dynamics of current account have changed over the past two years. In 2008-09 , for the first time since the 1991 BoP crisis, India’s current account deficit widened to more than 2% of GDP (2.4%). In the first half of 2008-09 , a large spike in crude oil prices in mid-2008 to $145/bbl pushed oil imports up suddenly. Oil balance (imports less exports) deteriorated to 5.4% of GDP in 2008-09 from 4.3% of GDP in 2007-08"

From Financial Express:

"India needs $40 bn inflows in 2011 to just have a flat market
Samie Modak (of Credit Suisse)"

From Rediff:

"Foreign Direct Investment (FDI) inflows into the country between January-October this year aggregated $17.37 billion, compared to $23.8 billion in the corresponding year-ago period, translating into a 27 per cent decline."

From Indiatimes:

"The latest balance of payments data published by the RBI, however, puts the figure (of NRI remittances) at $55 billion. Remittance flows currently constitute around 4% of India’s GDP. Between 2004-05 and 2008-09 , private transfers on average financed 48% of the merchandise trade deficit. "

Anonymous said...

So much for declining investor sentiment...


Riaz Haq said...

anon: "So much for declining investor sentiment..."

I don't you really appreciate the alarms that the following Mobius statemmnts raise in the minds of people like Nobel Laureate Stiglitz and investment advisor Mike Shedlock who I quoted in my post.

Mark Mobius says:

"The Indian government has been battling high inflation for a while now and Mobius says he expects some government action next year, but does not see any aggressive action being taken."

"The money flow into emerging markets will continue. The total flow of course is increasing with the flood of money hitting all of these markets. As money supply in the US, Europe, Japan, China and in India is going up, there is need for a home for this money and emerging markets are going to get their share."

The first of these statements says that Mobius believes that Indian regulators are and will continue to be behind the curve in reigning in inflation which could spell disaster for the Indian economy.

The second of the above statements should worry you about the potential for the kind of disaster that hot money caused during the 1997 Asian financial crisis.

Business cycles have not been canceled in India and other emerging economies. The Indian economy is just as capable of overheating as developed economies. Hot money can and will spell disaster in the absence of controls on capital flows.

Anonymous said...

The first of these statements says that Mobius believes that Indian regulators are and will continue to be behind the curve in reigning in inflation which could spell disaster for the Indian economy.

Not really it means that the Indian regulators are seasoned experts who like to think things through instead of stupidly slamming the breaks at the first sign of troubl like Bank of Japan did in 1989 effectively causing an economic collapse from which Japan hasn't yet recovered.

The second of the above statements should worry you about the potential for the kind of disaster that hot money caused during the 1997 Asian financial crisis.

Only if the hot money is being used to finance deficits which it is NOT currently and unlikely to in the future in any significant way.

We have banned hedge funds from investing in the Indian market long ago along with short selling and forward trading in a vast number of instruments...

We have enough FX to cover a Complete withdrawl of ALL FII from the market with $80 billion to spare...

None of this was true in ASEAN in 1997..So why should i worry?

We have a superb regulator in RBI which has NEVER failed the trust of the nation completely independant of political pressure...

Infact you should be happy too unlike Pakistan whose economic collapse or success will have zero impact on the World (at least economically).

India's theoretical collapse would send shockwaves around the world given that it is more than twice the size of all ASEAN countries combined and is currently contributing around 15-20% to overall world GDP growth.

To further quantify:

Total market cap KSE= $40 billion(a rounding error in the larger scheme of things)

Total market cap of Indian bourses:$3 trillion + (Bigger than Germany's GDP)

Anonymous said...

Business cycles have not been canceled in India and other emerging economies. The Indian economy is just as capable of overheating as developed economies

Amen!Notice how well RBI handled the soft landing (growth slowing from 9% to 6% in 2008-09.

What makes you doubt their capabilities this time around?

Infact Bank of England sends people to take lessons in management from RBI.

Ironically the british set up RBI in colonial times with rock solid safeguards including an independant cadre and complete independence from political pressure which Indians clung on too while the British greatly weakened the Bank of england by setting up the FSA and clipping its wings...The result is a USD 1 trillion black hole caused due to Thatcher era deregulation...

BoE is using RBI as Exhibit A for its case of abolishing the FSA...

Riaz Haq said...

Anon: "Not really it means that the Indian regulators are seasoned experts who like to think things through instead of stupidly slamming the..."

Are we talking the same RBI that failed in 1966 and 1991 BoP crises?

Anon: "Only if the hot money is being used to finance deficits which it is NOT currently and unlikely to in the future in any significant way."

You are wrong! Read the Goldman report again. I have provided a link to it as published by Economic Times.

Anon: "We have enough FX to cover a Complete withdrawl of ALL FII from the market with $80 billion to spare...None of this was true in ASEAN in 1997..So why should i worry?"

Rating agencies will downgrade India, rupee will collapse, analysts will turn negative, and investors will rush to the exists as soon as there's a significant drop in reserves. That's how crises spiral out of control even in strong economies even in the developed world.

Anonymous said...

'Are we talking the same RBI that failed in 1966 and 1991 BoP crises?'

1991 crisis was a watershed in the Indian economy caused by the collapse of the USSR (our closest ally),high oil prices and a collapse of remittances from the gulf due to gulf war 1.

The RBI handled it brilliantly we were under IMF supervision for less than a year and by 1992 the economy started growing at 6% pa and never looked back...(this corresponds to PAkistan's lost decade btw)

It also negotiated India's entry into the WTO as a founding member(ahead of China) in 1995 on very concessional terms which allowed us to keep our protective tarriff barriers while enabling access to western markets and technology.

Exactly how did the RBI fail??

Anonymous said...

Rating agencies will downgrade India, rupee will collapse, analysts will turn negative, and investors will rush to the exists as soon as there's a significant drop in reserves. That's how crises spiral out of control even in strong economies even in the developed world.

No country with enough FX reserves with its central bank to be a net creditor to the world has EVER had a run on its markets...

Also ratings practically matter if you need to borrow money to balance your budget like say Greece..We don't borrow from abroad we lend abroad...

Riaz Haq said...

Here's the link to the most recent RBI report:


Riaz Haq said...

Anon: "The RBI handled it brilliantly "

You are talking about RBI's response after the 1991 BoP crisis erupted, not RBI's inability to prevent the crisis in the first place.

Riaz Haq said...

Anon: "No country with enough FX reserves with its central bank to be a net creditor to the world has EVER had a run on its markets..."

How much FX is enough? A year's worth of imports? And what happens as rapidly deplete.

But India is not a "net creditor"...India is a debtor nation.

Here's how Economic Times put it recently:

"A country’s current account consists of merchandise trade (exports and imports of goods) and the invisible trade — income and expenditure from export and import of services, profits earned on investments and remittances by workers. A deficit would occur when total imports are greater than exports. A deficit implies that the country is a net debtor to the world. "

Read more about it in the recent RBI report.

Anonymous said...

You are talking about RBI's response after the 1991 BoP crisis erupted, not RBI's inability to prevent the crisis in the first place

Absolutely Riaz so RBI should have:

1.Prevented the collapse of the USSR.

2.Prevented Saddam from invading Kuwait

3.Miracurously lowered international oil prices.

What I am trying to point out is the calibre of talent inside RBI (and the reason I trust its ability to manage the economy)

The 1991 crisis in the background of Kashmir in flames,Rajiv Gandhi assasination and the great USSR no longer there to protect us could have broken the country,caused a lost decade or led to latin america style hyperinflation..

But nothing,,it was all over in 8 months and the economy actually grew in 1991 itself...Hats off to the RBI.

Pakistan can only dream of such macro economic management capability.

Anonymous said...

But India is not a "net creditor"...India is a debtor nation.

A country is a creditor nation when its external assets(FX reserves) are greater than its external liabilities i.e FII+ECBs

This is the case with India.

The economic times journalist got is wrong.

Riaz Haq said...

Anon: "Absolutely Riaz so RBI should have:1.Prevented the collapse of the USSR.2.Prevented Saddam from invading Kuwait 3.Miracurously lowered international oil prices."

It's the regulators' job to anticipate and act to minimize the effects of external and internal shocks.

When inflation is already running in double digits as it is now, the regulators need to turn screws tight to reduce credit expansion, and that's not happening in India. In fact credit is expanding, not shrinking in India.

When oil prices are rising, the regulators need to reduce non-energy related deficit, but that's not hapening either.

When short-term capital inflows are rising and being used to finance deficits, the regulators need to impose controls to prevent havoc that hot money can wreak.

Anonymous said...

'When inflation is already running in double digits as it is now, the regulators need to turn screws tight to reduce credit expansion, and that's not happening in India. In fact credit is expanding, not shrinking in India.'

Depends on what is causing inflation.It it is supply side constraints then yes a rate hike is in order but if it is for certain structural reasons then a policy change is in order.For eg onion prices have crashed after we banned exports and eliminated tarrifs on imports.

'When oil prices are rising, the reguators need to reduce non-energy related deficit, but that's not hapening either.'

Non oil related export growth > import growth since sep'10 AND most of our oil is bought on long term contracts not at international spot prices..we being the world's fourth largest importer and the closest major market to middle eastern oilfields usually buy oil on better terms than other nations and our refineries can process much cheaper heavy venezuelan crude which sells at a steep discount.

When short-term capital inflows are rising and being used to finance deficits, the regulators need to impose controls to prevent havoc that hot money can wreak.

Correct!Which is why:

1.Hedge funds are banned.
2.All FIIs need to register and have to adhere to strict investment guidelines failing which they are liable to be banned.
3.Short selling is banned in a wide array of market instruments.
4.Most Indian FIIs are Pension funds and the like which invest for the long term according to transparent alllocation procedures.
5.ECBs by private corporations need to be approved by RBI on a case to case basis.
6.The above includes types of bonds that can be floated by large corporations on the international bond market

etc etc etc

The above restrictions were put in place well before the financial crisis when deregulation was the prevailing fad..

Anonymous said...


Riaz Haq said...

India's external is rising, according to the Hindu:

NEW DELHI: India's external debt has gone up by 12.8 per cent to $295.8 billion in the first-half of the current financial year (2010-11), mainly due to increase in overseas borrowings by corporates and appreciation of rupee vis-a-vis other major currencies.

The long-term debt rose by 9.5 per cent to $229.8 billion, while the short-term debt increased by 25.8 per cent to $66 billion during April-September 2010.

External debt stood at $262.3 billion at the end of March 2010, and increased by $33.5 billion during the April-September period.

“The increase in external debt at end-September 2010 over end-March 2010 level was mainly on account of higher commercial borrowings and short-term debt,” Finance Ministry said in a statement on Friday. Rupee appreciation led to rise in external debt by $6.3 billion or 18.8 per cent of the total increase.

Among the components of long-term debt, which accounted for nearly 80 per cent of the total debt, the share of commercial borrowings stood at 27.8 per cent. The share of Government debt in total external debt stood at 24.4 per cent or $72.3 billion as against $67.1 billion at the end of March 2010.

The share of U.S. dollar in the external debt portfolio was 53.9 per cent at end-September, while that of NRI deposits 16.9 per cent. Multilateral debt accounted for 15.8 per cent of total debt at the end of September.

The share of U.S. dollar denominated debt was the highest in external debt stock at 53.9 per cent at end-September 2010 followed by rupee (18.8 per cent), the statement added.

Anonymous said...

So? Corporates are borrowing long term to fund expansion at home and abroad,buy tech and companies and move up the value chain.ROCE India Inc>>China Inc so the debt is being serviced from revenue..On the whole debt/revenue of India inc is DECLINING.

What's more most of these loans are raised with high penalty clauses if the lender chooses to call in the loans.

But thanks so much for you concern about the well being of the Indian economy,,,

Anonymous said...

@ Mr. Haq,

Your expert opinion is needed here.

IMF warns about Pakistan's deteriorating economy

Riaz Haq said...

Anon: "Your expert opinion is needed here.IMF warns about Pakistan's deteriorating economy"

This post is about Indian economy, not Pakistan's economy.

But if you really want to know my opinion on Pakistan's economy, here is what I think:

IMF is on Pakistan's case, and I expect some basic reforms to happen there under pressure. There is currently no such pressure on the Indian policy makers to get their act together to address India's rising inflation and growing twin deficits.

Pakistan's conomy is so far down that the only place for it to go is up from here. The first indication of it is the fact that Pakistani stocks outpaced Indian stocks by about 2:1 in 2010.

If you had invested $100 in KSE-100 stocks on Dec. 31, 1999, you'd have over $1000 today, while $100 invested in Mumbai's Sensex stocks would be worth about $400. Investment of $100 in emerging-market stocks in general on Dec. 31, 1999 would get you about $300 today, while $100 invested in the S&P500 would be essentially flat at $100 today.


Riaz Haq said...

India Inflation Threat May Force Subbarao to Add to Rate Rises, IMF Says, acording to Bloomberg News:

India’s central bank may have to keep raising interest rates to combat persistent inflationary pressures, the International Monetary Fund’s mission chief to the country said.

“We see a pretty strong underlying inflationary pressure still in there,” Masahiko Takeda said on a video on the IMF’s website. Monetary policy “has been appropriately tightened,” though “in our view there’s a possibility that further monetary tightening action may be needed to contain the high inflation.”

The Reserve Bank of India said Dec. 30 that threats to growth have “receded” and inflation risks “have come to the fore,” signaling it may tighten monetary policy further after boosting interest rates the most in Asia in 2010. Governor Duvvuri Subbarao, who increased rates six times in 2010, held off on raising borrowing costs in a Dec. 16 policy announcement as a record 1.1 trillion rupees ($24.3 billion) of share sales last year caused a cash squeeze in the banking system.

IMF’s Takeda made the comments after completing an annual review of India’s economy, which was discussed by the IMF board on Dec. 22. In the board’s conclusions released today, the IMF said that the Indian economy is expected to grow 8.75 percent in the fiscal year ending March 31, and 8 percent the following year. The IMF staff report was not published.

The IMF board also said it sees inflation measures between 8.5 percent and 10.5 percent amid “little slack in the economy, the ongoing exit from the policy stimulus introduced during the crisis, and structural factors affecting food prices.”

Less Inflation

India’s benchmark wholesale-price inflation cooled to near a one-year low of 7.48 percent in November. The reading exceeds the Reserve Bank of India’s goal of between 4 percent and 4.5 percent.

The Washington-based IMF also warned that capital inflows may increase more than India’s capacity to absorb them as growth remains “among the fastest” in the world and yields in advanced economies stay low.

“While exchange rate flexibility would remain the first line of defense, reserve accumulation and macroprudential measures could be employed if strong inflows continue,” the institution’s board said in an e-mailed statement.

Risks to growth are mainly linked to global expansion, the IMF said. It said “elevated inflation, fiscal consolidation needs, and buoyant capital inflows” as “near-term challenges” that call for “careful calibration of macroeconomic policies and the diligent pursuit of ongoing reforms.”

Riaz Haq said...

Failed state of Pakistan feeding "Shining India"?

Here's a BBC story on India urging Pakistan to resume onion exports:

India is trying to persuade Pakistan to resume exporting onions overland to curb soaring prices.

The matter has been taken up with the government of Pakistan, External Affairs Minister SM Krishna said.

Pakistan banned overland exports of onions to India on Tuesday with traders saying they feared shortages at home.

Last month, India abolished import taxes on onions after prices nearly tripled in a month.

"We have initiated talks and before not too long, we are hopeful we will find a solution to this, easing pressure within our country for onions," Mr Krishna told a press conference in Delhi.

Pakistan banned exports to India through the land route via the Attari-Wagah border crossing, although the sea route is still open.

Much of the trade, however, is by road and rail which are cheaper and quicker.

India's food inflation has risen for the fifth straight week this week to 18.32% - the highest in more than a year.

The price of onions, a key food staple for Indian families used in almost all dishes, has risen dramatically over the past month.

A kilogram which usually costs 20 rupees went up to 85 rupees ($1.87; £1.20) last month. At present, it is 65 to 70 rupees a kilo.

The rise has been blamed on unusually heavy rains in the bulk-producing western states of Maharashtra and Gujarat and in southern states, as well as on hoarders and speculators.

Discontent over food inflation has been a major headache for the government.

High prices of essential commodities such as onions have previously sparked unrest and helped bring down the national government in 2004.

Anonymous said...

riaz jee:

1.december exports up a whopping 36% this year CAD will be less than 3% of GDP.

2.windfall of 3G licenses and buoyant tax revenues to keep fiscal defecit under check.

Thanks for your concern...

Anonymous said...

riaz very conveniently ignoring oct nov dec export figures??

CAD<3% if oil import basket<$100(Indian oil import basket is typically$15 less than spot prices due to import of cheap venezuelan crude and long term contracts)

Fiscal defecit well under control this and next fiscal due to massive windfall in 3G licenses fees...

oh and India EU FTA likely...

Riaz Haq said...

The BBC is reporting that the Indian Prime Minister Manmohan Singh has held a cabinet meeting to tackle spiralling food prices.

Finance Minister Pranab Mukherjee, Home Minister P Chidambaram and Food and Agriculture Minister Sharad Pawar were among those at the talks in Delhi.

The soaring price of vegetables, milk and other eatables in the past month have taken food inflation to 18.32% - the highest in more than a year.

The agriculture minister has said the crisis is likely to continue for now.

Growing concern over food inflation has caused stocks on Indian markets to fall in value in recent days. The BBC's Sanjoy Majumder in Delhi says investors fear the Central Bank could raise interest rates as a short-term measure.

The price of onions, a staple food used in many dishes, has risen dramatically - even prompting India's government to approach long-time rival Pakistan for help.

A kilogram of onions, which usually costs 20 rupees in India, went up to 85 rupees (£1.20; $1.87) last month. It is now about 60-65 rupees a kilogram.

The government has ordered some state-run stores to sell the vegetable at 35 rupees a kilogram from Tuesday.

The price rise has been blamed on unusually heavy rains in the bulk-producing western states of Maharashtra and Gujarat and in southern states, as well as on hoarders and speculators.

Cooking oil and wheat flour have also become costlier in the last month.

Discontent over food inflation has been a major headache for the government.

High prices of essential commodities such as onions have previously sparked unrest and helped bring down the national government in 2004.

Riaz Haq said...

Pakistan is running double digit inflation, according to Fox News:

ISLAMABAD -(Dow Jones)- Pakistan's inflation rate accelerated marginally in November as food prices soar, hurt by the unprecedented floods, raising the prospects of further monetary tightening by the central bank.

The consumer price index--the main measure of price changes--rose 15.48% in November from a year earlier, said Asif Bajwa, secretary of the Federal Bureau of Statistics, during a news conference. This is quicker than the 15.43% rise in October.

The index was up 14.44% from a year earlier in July-November. Pakistan's fiscal year runs from July through June.

"The reading is slightly lower than our expectations but it could cross 16% in December due to a low base last year," said Khurram Shehzad, analyst at InvestCap Securities.

Shehzad blames the high cost of food articles, driven by a rise in sugar and potato prices, for the uptrend in inflation rate.

The data highlight intensifying price pressures in the economy fueled by a heavy damage to the farm and civil infrastructure due to the floods. Prime Minister Yousuf Raza Gilani warned inflation could soar to 20% as the government struggles to revive the economy from disastrous floods.

Prices of food and beverages rose 20.54% from a year earlier in November, compared with a 20.06% increase in the previous month. They have a 40% weight in the consumer price index.

The government had before the floods forecast economic growth at 4.5% in the current fiscal year. Economists reckon that the government will likely lower the estimate once it has a clear assessment of the extent of damage from the floods.

The State Bank of Pakistan expects economic expansion of 2%-3% in the current fiscal year. At its last monetary policy review on Nov. 29, the central bank lifted the discount rate--its main lending rate--for the third time since July as it sought to tame inflation that it said will accelerate to an average 13.5%-14.5% in the current fiscal year, higher than the previous projection of 9.5%.

Although economic growth is weak, economists say the possibility of more rate hikes cannot be ruled out as inflation continues to spiral.

A large part of the country was submerged by the floods that killed thousands and left millions homeless. The widespread damage has severely crippled the economy that was already suffering due to unceasing violence in the country.

Riaz Haq said...

Here are excerpts from a Wall Street Journal Op Ed by Rupa Subramanya Dehejia on potential for India-Pakitan trade:

How does India fit into this picture? And can two nuclear-armed rivals with a fraught relationship meaningfully engage in trade and commerce with each other?

Trade is one of the engines of growth and development but in the case of Pakistan, this potentially important link with India is virtually missing. At present trade is roughly $2 billion a year.

Pakistan accounts for less than 1% of India’s trade and India less than 5% of Pakistan’s trade. Contrast this to the bilateral trade relationship following independence, when 70% of Pakistan’s trade was with India while more than 60% of India’s exports went to Pakistan.

According to Mohsin Khan of the Peterson Institute, economists estimate a “normal” trading relationship would be five to 10 times larger than the current amount.

There is also an estimated $2 billion to $3 billion a year in trade that takes place unofficially through third countries, especially the United Arab Emirates.

If this could be normalized as bilateral trade, it would occur at a much lower cost and therefore greater economic gain.

I’d argue that we must at least try to improve our economic relationship even if the political relationship is still frosty. The great exemplar here is the European Union, which was built on the premise that binding neighbors together economically was a prerequisite for ensuring peace and prosperity for all. We in India have yet to fully absorb this lesson. A prosperous Pakistan will not only be good for Pakistanis themselves but also good for us in India.

It’s time for the liberal commentators on both sides of the border to stop wringing their hands about the demise of a secular liberal democracy, because Pakistan hasn’t been that for some time, if it ever was.

While the support that the Indian intelligentsia has offered their counterparts in Pakistan following the assassination is heart-warming, it’s not consequential in the big picture. Liberals in Pakistan may fight on but it’s time for us in India to accept that Pakistan is an Islamic state with Islamic values and laws.

The crux here is that trade and commerce know no religious boundaries. We must work towards building a stronger bilateral relationship on that basis.

Anonymous said...

I don't think India should trade much with Pakistan..

We have inherited more of an island nation psyche from the UK.If you think about it all of India's borders are fenced and electrified and 99%+ of trade and movement happens via sea and air..

I don't think that's such a bad thing if Pakistan was a major trade partner accounting for say 15-20% of trade we would be very badly affected economically with Pakistan's current chaos which looks likely to continue for this decade(Lost decade 2.0).

Instead we are for economic purposes an island nation with next to no trade with our incompetent neighbours and good sea links to EU and the english speaking world.We are growing at 9%pa so this current arrangement works!

Riaz Haq said...

Anon: "If you think about it all of India's borders are fenced and electrified and 99%+ of trade and movement happens via sea and air.."

So you are ok with Pakistani decision to cut overland onion exports to India?

Anonymous said...

'So you are ok with Pakistani decision to cut overland onion exports to India?'

Absolutely!Infact that is yet another reminder for why PAkistan can never be trusted as a reliable trade partner.I mean just imagine if it was something critical like oil or gas supplies..we would really be in a soup then wouldn't we ?..

In any case onion prices have crashed a week back so imports are no longer necessary..but thanks again for the reminder of PAkistan's (lack of)bankability..

Much better to keep all trade on the sea and build a super blue water navy to protect it..which we are doing anyway.

Riaz Haq said...

Anon: "Much better to keep all trade on the sea and build a super blue water navy to protect it..which we are doing anyway. "

Your blue water navy is a joke. It couldn't even stop a few terrorists who attacked Mumbai in 2008 by entering via sea route on a dingy.

And adding a piece of old Soviet junk like Adm Gorshkov will ony make your navy more vulnerable!

Riaz Haq said...

Here's a BBC report on Indian govt's plans to curb inflation:

India has announced a slew of measures to curb spiralling food prices.

The prime minister's office said the government would review import and export of essential commodities and sell onions at a restricted price.

Experts, however, say the measures are too little, too late and a repeat of already failed steps.

Meanwhile, government data released on Friday showed that the wholesale price index (WPI) had risen to 8.43% in December - the highest in a year.

This was attributed to the soaring price of vegetables, milk and other staples which took food inflation to 18.32% last month - the highest in more than a year.

Admitting that food prices had risen to "unacceptable" levels, the authorities said it was proving difficult to manage inflation.

The price of onions, a staple food used in many dishes, has risen dramatically - even prompting India's government to approach long-time rival Pakistan for help.

A kilogram of onions, which usually costs 20 rupees in India, went up to 85 rupees (£1.20; $1.87) last month. It is now about 60-65 rupees a kilo after government intervention.

The government said state-run stores would sell the vegetable at 35 rupees a kilo. The expected arrival of 1,000 tonnes of onions from Pakistan soon would also ease the situation, it said.

The price rise has been blamed on unusually heavy rains in the bulk-producing western states of Maharashtra and Gujarat and in southern states, as well as on hoarders and speculators.

The ban on export of onions, pulses, cooking oil and cheaper varieties of rice will continue. State agencies would also retail edible oil and pulses at a reasonable rate, the authorities said.

Economists said the government had shied away from taking bold steps and that the steps would be unlikely to help much.

Discontent over food inflation has been a major headache for the government.

High prices of essential commodities such as onions have previously sparked unrest and helped bring down the national government in 2004.

Riaz Haq said...

In addition to significant foreign institutional investments (FII) in Karachi shares last year, the reports of surging remittances by overseas Pakistanis and the nation's growing exports are the only two other pieces of good news amidst an avalance of bad news on the economic front in Pakistan in 2010.

The State Bank of Pakistan has reported that overseas Pakistanis sent home $5.291 billion during July-Dec, 2010, an increase of $761 million or 17 per cent year over year, according to Pakistan's Dawn newspaper.

Remittances of $863 million were sent by overseas Pakistanis last month, up 23.72 per cent or $165 million compared to December, 2009.

Exports in the July-December 2010 touched almost $11 billion – $1.8 billion, or 20.6per cent, higher than last year’s exports in the corresponding period. Meanwhile, imports stood at $19.2 billion, marking a growth of 19.6 per cent, or $3.2 billion, in the first half, according to the Express Tribune.

Pakistani government has been relying heavily on remittances by overseas Pakistanis to fund the massive trade imbalance, which exceeded $8 billion during the first six months of this fiscal.

The increased remittances and rising exports have helped bring down the nation's current account deficit to $504 million for six months, or 0.6 percent of GDP, about 30% lower than the same period in the previous year.

Foreign direct investment (FDI) declined 15.5 per centin the first six months of the current fiscal year to $828.5 million from $968.9 million in the same period last year, according to the Nation quoting figures from the State Bank of Pakistan.

Riaz Haq said...

Here's a WSJ piece asking "Are India's central bankers hawks, doves, or just chicken?

The Reserve Bank of India's decision to raise interest rates Tuesday surprised no one. Consider the context. The bank has made it clear fighting inflation is its priority and raised its own inflation forecast for the year through March to 7%, from 5.5% earlier. Paving the way for more tightening, the central bank said there is an upward bias to its projection of 8.5% annual economic growth.

But the RBI still chose to raise rates by only a quarter point. This despite the fact that, at 6.5% now, India's key lending rate is still one percentage point below its average level from the last time India was growing so fast.

The size of the increase is in line with what RBI Gov. D. Subbarao has described as "calibrated" tightening that started last March. Even if this made sense then, it no longer does, with India's economy on much more solid ground. That hasn't stopped the RBI from using concern over growth as its excuse for keeping rate increases slow.

Moreover, the moves don't seem to have worked. After slowing for just two months last year, price gains have again picked up pace. As the RBI itself notes, inflation in non-food manufactured products remains above its medium-term trend. A recent rise in global food prices will add to the pressure, given the high sensitivity of consumer prices to food inflation. India's already high consumer-price index will rise 2.1 percentage points if global food prices go up by 30%, Credit Suisse estimates.

The central bank has argued that its role is limited to preventing gains in food and energy prices from affecting prices of other goods. This would make sense if the rise in food prices in India was likely to be a short-term phenomenon that could be resolved with an adequate rainfall, as the RBI hoped it would last year. Even now, the RBI is hoping price gains will slow within the next six months.

But food prices have been rising at a double-digit rate for more than two years, reflecting that this is driven by growing demand, as incomes rise faster than crop yields can be increased or new farm infrastructure built. Growth in demand, a product of India's economic rise, is something the RBI can slow with more-aggressive rate increases.

There was relief in some quarters that Tuesday's increase wasn't bigger. Bonds, in particular, rallied following the news, indicating that traders had been bracing for something more severe. That will surely come to look like a short-sighted reaction, if the central bank finds itself having to raise interest rates higher and faster later to make up for its gradualism now.

Riaz Haq said...

Here's an excerpt from an interesting Indiatimes report about delegates getting tired of the talk of India at Davos 2011:

“Amongst the delegates,” wrote stockbroker Paul Fletcher in a blog from Davos, “there is a feeling that if we hear another session on demographics or China versus India we may protest.”

Such a forthright disregard for the so-called ‘India story’ may understandably offend nationalist sentiments and bring on the ‘west versus rest’ polarization that keeps many public intellectuals in business. But the harsh truth is that India has been sold, resold and re-re-sold in so many samosa and Sula evenings that it has lost novelty. The Davos lot is aware and excited by India’s potential — who wouldn’t be at the thought of a 91 million-strong middle class by 2030?

They are also aware but a little less moved by the realization that calculating opportunity costs aren’t among the inherited attributes of the timeless “ancient civilization, new nation” (India’s self-description in the billboards of Davos).

The irritation at the mismatch between words and deeds has begun to show: the latest report by the Reserve Bank of India shows that foreign direct investment in India declined by 36% between April and September 2010 compared to the same period in 2009. This decline coincides with FDI growth of 17% in non-Arab Asia. Whispers from North Block suggest that thanks to a rampaging minister of environment, the story for the next six months may be equally discouraging.

As talk of a “governance deficit” becomes all-pervasive, ‘India inclusive’ —another promotional line in Davos—is increasingly being seen as the eyewash for ‘India elusive’.

It is not as if those quizzed by the Indian media on the 2G licences and uncompetitive interest rates are unaware of the emerging wrinkles on the face of Bharat Mata. It is an open secret that the mood in Indian business circles is distinctly downbeat. They know that the ‘India story’ is meandering.

Riaz Haq said...

Here's a piece by Prabhu Chawla of the Indian Express on India at Davos 2011:

... the ‘event managers’ of the India show were late by three years as nobody in the famous Alpine ski resort today has the patience to hear the old “India Story” that drew applause till 2008 — to the strains of Bollywood music in Zurich — and the line “India Everywhere.” In retrospect, the Indian extravaganza at Davos seems as pretentious as the throng of Kolkata’s dubious book lovers. By 2009, attendance began falling in India-related events at Davos. In that year not even 20 guests attended an Indian IT czar’s evening session. India in 2011 is a disaster story, with Foreign Direct Investment (FDI) contracting by a stunning 31 per cent in a single year — from $34.6 billion in 2009 to $23.7 billion. On the other hand, FDI to Singapore, a country one-fifth the size of the National Capital Region of Delhi, has grown by 122 per cent in 2010—an astounding $37 billion. What is rising is the flight of Indian-owned capital from India: estimated an astonishing $75 billion in the first decade of the millennium, according to a Columbia University study. Against this backdrop, the question that needs to be asked is: Why must the government spend millions of tax rupees to fly its flag at the Alpine jamboree? What object do the evening parties at Davos serve, attended by the same people who usually meet in Mumbai and Delhi for the same purpose — whining and dining.

When put in the China-context, the India story looks even grimmer. The dragon slalomed past the tiger in Davos 2011. China did not have to announce its presence from a restaurant corner, offering samosas as fondue; its aura was felt everywhere. The China-focused sessions spoke more about what China could do for the world than about itself, or its potential. There was no China hoarding visible anywhere. Their delegates numbered just over 20. But hardly a session went without a Chinese face on the podium, or a deferential mention of the country in the proceedings. It was ironic when Min Zhu, a Chinese special adviser to the IMF, not only stole the show in a discussion on India — addressed among others by Chidambaram and ICICI Bank chief Kochhar — but also advised Indians quite magisterially on how serious they ought to get on the inflation problem.
There were plenty more reasons for India to keep a muted profile at Davos 2011. The country has just clocked a current account deficit of $15.8 billion in July-September 2010 — a bewildering 72 per cent increase on the previous year’s $7.26 billion....

Unknown said...


I wonder you'd actually like to back up the comment about the Indian Navy being a joke.

Because, I'd go so far as to say that its the strongest navy around after the P-5 navies. And by 2015-16, it will rival the British and French navies and have a combined tonnage second only to the USN and PLAN. As a matter of fact, over the last five years the Pakistani Navy has become a peripheral threat to the IN where it once was the primary adversary.

As for the strawman about the terrorists sneaking through, I suggest you read up what coastal policing implies and who's responsibility it is. Do you think the US Navy is 'a joke' because illegal immigrants from El Salvador, Honduras and Cuba still manage to sail to US shores, or that the US Army is a joke because it cannot stop illegal immigrants from Mexico from sneaking through the border, or that the US Air Force is a joke because the 9/11 hijackers succeeded?

Riaz Haq said...

Rahul: " I'd go so far as to say that its the strongest navy around after the P-5 navies"

I do not define strength in terms of number of ships and weapons and personeel, but in terms of competence, or rather the lack of it ...the latest example of it being what the BBC describes as "one of the navy's most embarrassing peacetime incidents" when a big Indian navy ship ran aground near Mumbai close to home port.

Rahul: "As for the strawman about the terrorists sneaking through, I suggest you read up what coastal policing implies and who's responsibility it is. Do you think the US Navy is 'a joke' because illegal immigrants from El Salvador, Honduras and Cuba still manage to sail to US shores, or that the US Army is a joke because it cannot stop illegal immigrants from Mexico from sneaking through the border, or that the US Air Force is a joke because the 9/11 hijackers succeeded? "

Don't kid yourself...most of the illegal traffic is out of India, not into India, with over a million Indians escaping hell hole India every year.

The 911 hijackers came to the US legally with visas, they did not take a dingy ride into New York harbor like the Mumbai terrorists just sailed into Mumbai harbor unhinderd.

Riaz Haq said...

India's prime minister has warned that the country's rapid economic growth is under "serious threat" from inflation, according to the BBC:

Manmohan Singh said getting inflation under control was a matter of urgency, raising the prospect of an eighth interest rate rise in under 12 months.

Emerging markets like India, where GDP growth is running at 8.5%, are helping to drive global economic recovery.

But Mr Singh said India's inflation rate of 8.4% - and food price inflation of 17% - was unsustainable.

"Inflation poses a serious threat to the growth momentum. Whatever be the cause, the fact remains that inflation is something which needs to be tackled with great urgency," he said.

Analysts believe that surging food and oil prices mean that India's central bank may have to raise interest rates before its next policy meeting, which is scheduled for 17 March.

India's stock market has fallen this year on fears that high inflation will scare off foreign investors.

Wages in India are also rising as workers demand pay that keeps up with the cost of living.

Riaz Haq said...

There seems to be consensus developing among Pakistani economists that "prompt measures needed to control rising inflation", according to a report in Daily Times:

LAHORE: Pakistan is fast heading towards higher inflation and to overcome this grim scenario; improvement in governance coupled with a drastic cut in expenditure and revenue generation is crucial.

The doom and gloom scenario needs an urgent handling. Good governance, good policies, good institutions, good macroeconomic management are the drivers of economic growth that have gone dormant for quite some time. This was the crux of the speeches delivered at Economic Dialogue 2011 held at Lahore Chamber of Commerce and Industry on Tuesday. Senior economist Dr Akmal Hussain said the country is facing its gravest economic crisis in history after 1971. He said the economy is in deep recession, poverty along with high inflation is a recipe for disaster.

Unfortunately, he added, the government has zero fiscal space. He warned that Pakistan was heading towards higher inflation if immediate improvement in governance is not accompanied with cut in expenditure and substantial increase in revenue.

The former WB Executive Abid Hassan said that the institutional decay has now started taking its toll and the government should take appropriate measures on emergent basis to stop this decay. He said that with every passing day the country is going deeper and deeper into the economic mire. “Today we have reached a situation where even an economic stimulus would not work. The government should concentrate on tax collection and controlling unnecessary expenditures. Unless and until these two measures are not taken, the economy would not be able to be back on rails,” he said. The PIDE Vice Chancellor Dr Rashid Amjad said that the present day doom and gloom scenario could be changed by overcoming the acute energy shortage being witnessed by the country. The issue of circular debt needs to be taken care of by those sitting at the helm of affairs. “PSDP has a multiplier effect on the employment and economy. It should not be cut,” he said.

Former chief Economist Planning Commission Dr Pervaiz Tahir blamed the political chaos for our economic woes and termed the dictatorship democracy cycle as mother of all ills.

Energy sector expert Munawar Baseer, ex Executive committee member Almas Hyder and LCCI President Shahzad Ali Malik while appreciating the input provided by the economists said that most of the issues and challenges faced by the country are more of political. The political leadership while realizing the sensitivity of the situation should come up with a solid solution with close coordination with the chambers. “The policies are being made in isolation without the consultation of real stakeholders and that’s why the economic situation today has become more complex and directionless,” he said. The speakers said that the business community should be involved for the sake of correct decision-making.

They urged the government to evolve a more realistic and pragmatic framework by putting an end to inter-provincial disparity and the disparities within the province. The government should re-do its priority list and concentrate on the few areas that come on the top of that priority list.

It is very unfortunate, the speakers said, that the country has become the most inhospitable for both the local and the foreign investors for security reasons.

“Our inability to reach a consensus on water issue and inability to tap hydrocarbon potential of Balochistan has virtually pushed us to the wall,” they said. staff report

Riaz Haq said...

FII inflows (aka hot money) into Indian stock markets surged 66% from $17.4 billion in 2009 to $29 billlion in 2010, according to The Hindu newspaper:

Mumbai, Dec. 31 Year 2010 saw foreign institutional investors buy Indian stocks for $29 billion net. This is the most that they have pumped into the Indian market in a single year despite the market-indices here being fairly range-bound during this period.

This is also much more than the inflows ($17.6 billion) seen in 2007, when the Sensex was on a gaining streak.

The markets did surge a little in 2009, too, when FIIs were net buyers for a total of $17.45 billion.

Domestic institutions, on the other hand, were net sellers of equities for Rs 19,503 crore in calendar 2010.

FIIs were also net buyers in equities in all months this calendar, except in January and May. August saw the highest net purchases in a single month this year for $13 billion.

On a year-to-date-basis, the Sensex and the Nifty returned 15 per cent and 16 per cent, respectively.

It was this relentless buying from the FIIs that pushed up the Indian markets in 2010.

Though the Sensex did reach an all-time high this year, it was quite range-bound. The benchmark has been trading between 17,000 points and 21,000 points right through 2010.


The buying spree on the part of FIIs slowed down in the last month amidst all the scams and the routine FII year-end exits when they need to pay their investors. Their net purchases during December has so far amounted to $0.3 billion only.

“Part of this pullback is because India is perceived to be overvalued vis-a-vis other emerging markets.

“Indian markets have enjoyed around a 30 per cent premium to the other emerging markets. But what has happened this year is that the scams have made FIIs start to question the rich valuations here,” said Mr Saurabh Mukherjea, Head of Equity at Ambit Capital. He added that the next year might see a moderation in FII inflows into the country.

Domestic institutions were net buyers of equity during December and November after being net sellers for five consecutive weeks. Mr Mukherjea said that insurance companies have been seeing inflows trickling in during December and that the fund houses here are also in “slightly better health”.

Mr K. Ramanathan, Chief Investment Officer at ING Investment Management, said that mutual funds faced a lot of redemptions this year and they did not get much incremental net inflows.

“The changes in the regulatory framework too hurt the mutual fund industry. Distributors find it better to sell insurance products as the brokerage there is better than from distribution of mutual funds,” he added.


Riaz Haq said...

Hot money inflows now account for 58% of India's forex reserves, reports The Financial Express:

The ratio of volatile capital flows—defined to include cumulative portfolio inflows and short-term debt—to the country’s forex reserves increased to 58.1% in March 2010 compared to last year’s 47.9%.

According to the Reserve Bank of India (RBI), the ratio of short-term debt to the foreign exchange reserves declined from 146.5% in March 1991 to 12.5% in March 2005, but increased slightly to 12.9% in 2006.

However, with expansion in the coverage of short-term debt, the ratio increased to 14.8% in March 2008, to 17.2% in March 2009 and 18.8% in March 2010.

The country’s foreign currency assets are invested in multi-currency, multi-asset portfolios as per the existing norms which are similar to the best international practices followed in this regard. At end of March 2010, out of the total foreign currency assets of $ 254.7 billion, $ 132.1 billion was invested in securities, $ 117.5 billion was deposited with other central banks, BIS and the International Monetary Funds (IMF) and $ 5.1 billion was placed with the External Asset Managers (EAMs).

A small portion of the reserves has been assigned to the EAMs with the main objective of gaining access to and deriving benefits from their expertise and market research, said RBI.

The rate of earnings on foreign currency assets and gold, after accounting for depreciation, decreased from 4.82% in July 2007-June 2008 to 4.16% in July 2008-June 2009.

The RBI held 557.75 tonne of gold forming about 6.0%of the total foreign exchange reserves in value terms as at the end of March 2010.

Of these, 265.49 tonne are held abroad (65.49 tonne since 1991 and further 200 tonne since November 2009) in deposits / safe custody with the Bank of England and the Bank for International Settlements.

In November 2009, the RBI concluded the purchase of 200 metric tonne of gold from the IMF, under the IMF’s limited gold sales programme. The purchase was an official sector transaction and was executed over a two week period during October 19-30, 2009 at market-based prices. As a result of this purchase, the RBI’s gold holdings have increased from 357.75 tonne to 557.75 tonne.

Following the commitment made by India as part of the G-20 framework, the RBI has agreed to purchase SDR denominated notes from IMF up to $10 billion. As on March 31, 2010, $317.9 million was invested in notes of the IMF.

International Monetary Fund designated India as a creditor under its Financial Transaction Plan (FTP) in February 2003. During April 2009 to March 2010, SDR 130 million was made available to Romania, SDR 50 million to Sri Lanka and SDR 117.93 million to Belarus.

The total purchase transactions amounted to SDR 1194.16 million as at the end March 2010. India was included in repurchase transactions of the FTP since November 2005. There were no repurchase transactions during the half year ended March 2010.

The traditional trade-based indicator of reserve adequacy- import cover of reserves- which fell to a low of three weeks of imports at end-December 1990 reached a peak of 16.9 months of imports at the end of March 2004. At the end of March 2010, the import cover stands at 11.2 months.

Riaz Haq said...

BBC's Soutik Biswas's comments on Manmohan Singh's press conference on corruption and governance deficit in India:

..So when Prime Minister Manmohan Singh sat down for a rare hour-long press conference in Delhi this morning, he, unsurprisingly, faced a barrage of questions on what his government was planning to do to crack down on corruption in high places. Unfortunately, say analysts, his answers did not reveal a more assertive chief executive who was fully in control of the situation.

For one, say critics, the reticent Mr Singh appeared to be more bothered by how India's image might have been damaged by the media coverage, than by the rising tide of corruption itself. He gave reassurances that the government was "dead serious" in bringing to book "all the wrongdoers regardless of the positions they occupy". When pressed further, he said: "Wrong doers will not escape this time."

But he also worried that in "projecting" (read, the media reporting) these events, "an impression has gone round that we are a scam-driven country". This was, he felt, "weakening the self confidence of the Indian people". He told the journalists: "In reporting the affairs of our nation, you should not focus excessively on negative features."

Many find Mr Singh's plea disingenuous as India remains one of the most corrupt countries in the world, and graft continues to eat away at its vitals. It hurts the poor most, widens inequity, kills initiative and saps energy out of society. For all its foibles, India's noisy and vibrant media has done more than a good job in relentlessly chasing the alleged scandals - from alleged underselling of telecom licences to purchases for last year's Commonwealth Games. India's merchants of feel-good, however, insist that to highlight corruption at the cost of the country's considerable achievements - and there are many - is wrong.

Critics say Mr Singh should not be worrying about the self-confidence of his citizens. The rising self confidence of Indian people, they say, is despite the weak and ineffectual state; and it mostly comes from the opportunities they have been able to mine for themselves in a highly competitive nation.

Indians may be inured to corruption, but the recent spate of allegations has taken their breath away. Many believe that the time has come for an all-out war against corruption, something consecutive governments have been loathe to do. So, few believe the government when it says it is moving to bring back illicit money that Indians have stashed away in foreign banks. People believe there is a silent consensus among political parties to go soft on corruption. Nothing much has changed during Mr Singh's regime, they say, despite his exhortations and promises.

Mr Singh appears to have taken refuge in the uneasy compulsions of coalition politics to try to take the heat off on the corruption charges plaguing his government - after all, a former minister who is being investigated for his alleged involvement in the telecom scandal belongs to a key ally. So he kept insisting that coalition politics had hobbled him....

drsush said...

Dear Riaz,

I am getting a sneaking suspicion that you are obsessed with India! We will manage somehow.. Please dont worry about us.

I am a doctor not an economist, so i will let anonymous answer the economy bits. Unfortunately i specialise in child care and not psychology, so i cant speculate on the source of your India obsession :)

Well.. As Gandhi said to the British, leave India to anarchy if you will! I am not enthused about taking advise from you considering your country's track record.

We trust our government and if they do not keep our trust we can always vote them out.. Thank God we are a democracy!!

p.s - The Economist predicts India's Per capita GDP to increase to 1500 in 2011. (Pak's will stay at 960 by the way).. Please direct your significant intellect where its needed..

Riaz Haq said...

News about 2010-2011 budgets in South Asia:

The BBC is reporting that "the budget deficit has reduced to 5.1% of GDP this fiscal year, down from more than 6%. The plan is to cut this to 4.6% next year".

Pakistan's budget deficit for first six months of 2010-2011 stood at 2.9%, up from 2.7% last year, according to CNBC and Reuters.

KARACHI, Feb 28 (Reuters) - Pakistan's budget deficit for the first six months of the 2010/11 fiscal year (July-June) was 2.9 percent of gross domestic product, the Finance Ministry said on its Web site (www.finance.gov.pk) on Monday. This compared with a deficit of 2.7 percent in the same period last year. In the October-December quarter, the deficit eased to 1.3 percent from 1.6 percent in the preceding quarter. Analysts said the lower second-quarter deficit was largely due to payments by the United States for logistical support provided by Pakistan in the war against Islamist militants. In November 2010, Pakistan agreed with the International Monetary Fund (IMF) that it would keep the country's budget deficit at 4.7 percent for the 2010/11 fiscal year. However, analysts agree Pakistan will likely overshoot this figure. Some forecast the deficit to be around 8 percent, higher than the central bank's prediction of between 6.0 and 6.5 percent, if fiscal reforms are not implemented. The original target of 4 percent was revised following the devastating summer floods, which caused around $10 billion in damages.

Riaz Haq said...

KSE-100 is so far flat this year but BSE is in sharp decline as foreign buyers are fleeing.

Whatever happened to the Indian equity market? asks the BBC:

Back in November, the Sensex squeezed past 21,000 for a day before starting a three month, 16% fall.

In the same time, the world's main indices, the FTSE Dow and Nikkei have all gained up to 7%, two of the remaining BRIC countries have fallen no more than 7%, and Russia's RTS Index has gained 26%.

Unsurprisingly foreign funds have been fleeing Indian equities in the last three months.

India is in a pickle and two reasons spring to mind - the stock market was heavily overvalued and the Central Bank has been raising interest rates.

At the end of the year the price of the average share on the Sensex was 23 times its earning power (ie its p/e ratio was 23 x). The Shanghai Index was 18 x, Brazil's Bovespa 14 x and Russia's just 9 x (the Dow's p/e was 13 x). That kind of valuation may be fine if future growth seems assured, but there are signs it may be falling off.
'Leg down'

GDP in real terms expanded at an annual rate of 8.2% in the last quarter - slowing from the 8.9% rate recorded in April to June. Now, this isn't a serious problem and no one is suggesting that the Indian growth story is in serious trouble, but it may be more than just a blip.

Maya Bhandari, senior economist at Lombard Street Research, says that, on a seasonally adjusted basis, growth was pretty much flat. She adds: "I would expect another leg down in the market in the coming few months."

Food inflation has been entrenched for some time, which means the Reserve Bank started putting up interest rates a year ago and has since hiked them seven times.

"In the last 25 months or so, we have had negative real interest rates and the central bank is going to have its work cut out to bring down inflation. And while it may be raising rates, the bank is holding more auctions and lowering the statutory liquidity levels for banks - all of which has inflationary consequences," says Ms Bhandari.

On top of domestic inflation pressures, the Middle East and North Africa crisis sent oil prices belting up above $100 a barrel, adding to the central bank's imperative to keep the upward pressure on rates.
Rate rises?

India is the world's the fourth largest oil importer and imports over 70% of its oil requirements. Oil prices, which will stay high for as long as the Arab crisis lasts, will damage India's economy more than most of its main rivals. At the moment, most economists are pencilling in another half to one percentage point rise in rates.

Oil is also going to hurt government finances. In his March budget, Finance Minister Pranab Mukherjee estimated that the deficit would fall from an estimated 5.1% of GDP in the year ending March 31, to 4.6% next fiscal year.

But if oil prices keep on going up, the government will have to decide whether to keep on paying out fuel subsidies or deregulate diesel prices.

Keeping the deficit under control would suggest the latter.

Five state elections in the next few months would suggest the former.

London-based India investment consultancy director Deepak Lalwani points out that foreign confidence in India has also not been helped by a slew of scandals, the biggest being allegations that the 2008 sale of second-generation, or 2G, cellular licenses resulted in losses of nearly $36bn in potential revenue for the government.

Riaz Haq said...

Here's a Business Recorder report on threats from inflation and capital inflows in Asia:

ISLAMABAD: Inflation has become or continues to be an important risk to macroeconomic and social stability in a number of countries in Asia Pacific, including Vietnam, Sri Lanka, India, Indonesia, Mongolia, Cambodia, Cook Islands, Fiji, Pakistan, and Bangladesh.

This was revealed in a report titled "Asia-Pacific Sovereigns In 2011: Generally Stable Credit Quality; Inflation, Capital Flows Make Policy Environment Tricky.

Issued by the Standard & Poor's Ratings Services, the report said the challenges of strong capital inflows and rising inflationary pressures bring in important credit risks. Domestic politics and increasing geopolitical risks further complicate policy decisions, it said.

The ability of Asia-Pacific governments to navigate external and domestic challenges adroitly while pushing ahead with economic reforms will determine the pace of ascent in their credit ratings.

"In our base-case scenario, strong growth will support credit quality in Asia-Pacific," said Standard & Poor's credit analyst Elena Okorotchenko Asia continues to outperform other regions in terms of growth and sovereign credit trends.

The report said, despite generally stable credit quality, various factors have combined to make the policy environment tricky for sovereigns in the region, said in a report available here Monday.

Economic growth will enable the public sector of high-income economies to reduce fiscal deficits and resume fiscal consolidation and allow emerging market governments to speed up structural reforms.

But the downside risks to this scenario are growing beyond just a slower U.S. economy or the eurozone debt woes.

Food and energy price increases, the familiar bugbears, are providing a strong inflationary impetus across the board, and present low-income sovereigns in particular with difficult political and fiscal choices.

In addition to inflation, a number of sovereigns, such as Indonesia, Thailand, and Korea, could be facing problems with capital flows, either as a result of large inflows/outflows complicating exchange rate management or because of potential policy mistakes in trying to control such flows.

Recent developments in several Middle Eastern countries have raised questions about contagion effects.

Such popular uprisings are highly unpredictable, although the risks appear to be more pronounced where high unemployment among the young, inflation, poverty or wide income gaps are combined with growing political disillusionment in an autocratic and often corrupt regime.

In Asia, there are countries with ongoing political/social tensions and risks independent of recent events in the Middle East: Fiji, Pakistan, Bangladesh, and Thailand.

"We have factored these risks into current ratings on these sovereigns," said Ms. Okorotchenko.

In a number of other countries, the risk of social unrest is present but mitigating factors are currently strong. These are China, Vietnam, Sri Lanka, Malaysia, and Cambodia.

"The risks in these countries are mitigated by some combination of strong growth, low unemployment, and a degree of popular support for the government," she added.

Of the 22 sovereigns that Standard & Poor's rates in the region, 17 have stable outlooks on their ratings. Indonesia and Fiji have a positive outlook, and only three sovereign ratings are on negative outlooks: New Zealand, Vietnam, and the Cook Islands.

Riaz Haq said...

India has reported weaker-than-expected industrial production numbers, dragged down by a slump in capital goods output, according to the BBC:

Factory output in India grew by 3.6% in February compared with the same month a year ago, according to the latest figures.

Analysts had expected industrial production to grow by more than 5%.

The numbers were pulled back by an 18.4% fall in capital goods output during the month.

Manufacturing, which accounts for 80% of overall industrial output, rose by just 3.5% in February, compared with growth of 16.1% a year earlier.

However, analysts say that the numbers are not a cause of worry as of yet.

"The fact that IIP has come in lower-than-expected is not surprising, as the high-base effect is still playing a part, especially in the manufacturing sector," said D K Joshi of CRISIL in Mumbai.

"But this should start changing by the time April, May data are due," he added.

Mr Joshi also said that the weak numbers were unlikely to have any impact on the Reserve Bank of India's monetary policy.

"Monetary policy is likely to remain on tightening mode given the inflation pressure and strong private consumption," he said.

"We may see a 25 basis point hike in May from the central bank," Mr Joshi added.

Riaz Haq said...

Pakistan posts over $700 million current account surplus in forst ten months of fiscal 2010-11, thanks to rising remittances and record exports, according to The Nation:

KARACHI - Pakistan’s current account has recorded a surplus of $784 million in the first ten months of current fiscal year 2010-11 against deficit of $3.456 billion in the same period of last year due to rising remittances from overseas Pakistanis and steady exports, the SBP reported on Tuesday.
The current account deficit lowered to 0.5 per cent of GDP when compared to the growth of 2.4 per cent of GDP during the same period last year.
The reduction in the growth of current account deficit was caused by increase in exports and record inflow of current transfers especially workers’ remittances. The current transfer increased to $12.907 billion in Jul-Apr FY11 from $10.458 billion during the same period of previous fiscal year.
According to balance of payments statistics released by the State Bank of Pakistan yesterday, as on April 30, 2011 current account balance without off transfers amounted to $271 million against $3.866 billion over the equivalent period of FY10.
Trade account, which is the largest component of the current account, declined to $8.285 billion compared to $9.292 billion. Balance of goods and services stood at $9.677 billion during the first ten months of current financial year against $11.229 billion in the past year. Total goods exports rose to $21 billion during Jul-Apr FY11 from $17 billion of the reported period of the previous year while imports also up $29 billion from $26 billion.
From July 01 to April 30, 2011, capital account dropped to $86 million against $154 million while financial account declined to $412 million against $3.533 million due to delay in IMF funding and below than expected financing from the other international financial institutions.

Riaz Haq said...

Here's an excerpt from an Indian analyst Rohit Bangani's comments:

As we know that is India is world 2nd largest populous country with over 1.2 billion people, just behind China. India’s economy is relatively small in terms of U.S. dollar compared to China which is 4 times larger and U.S. which is 10 times larger than India. India’s GDP is around $1.2 trillion which is less than asset under management of big fund like BlackRock having $3.6 trillion under its belt. India is having current account deficit of 3.5% which makes the country more susceptible to volatility in foreign capital flows than its Asian neighbors, as well as in commodity prices, because the country imports much of its raw material requirements.

Riaz Haq said...

Here's a BBC report on lack of enthusiasm of foreign investors in India's energy sector:

The country is hoping for massive investment in the explorations sector to speed up the hunt for sources of oil.

But despite the efforts by the government, investment has slowed in the last couple of years.

Overall foreign direct investment (FDI) flowing into the country dipped sharply by 22%, to $21bn (£13bn) in 2010 from $27bn in 2009.

FDI is crucial to energy-hungry India. It is hoping for at least $40bn investment in the exploration sector to reduce its dependence on foreign oil.
Despite the optimism of industry watchers, the indicators point in the opposite direction.

In March this year under NELP, the government had offered 34 exploration blocks for auction, of which one didn't have any bidders and 14 got just one bid each.

Major explorers, like Exxon Mobil, Chevron, BP and Royal Dutch Shell, avoided the auction.

Analysts say that this is a worrying trend for the development of the sector.

"There is a requirement of expertise, which these international companies can bring with them, and that would make a huge difference in the energy scenario going forward," said Varun Bhutani, of Halliburton Consulting.

However, some analysts see this reluctance on behalf of foreign investors as almost a tribute to the growing confidence and expertise of the Indian companies.

"You have Indian players who can take up the responsibility going forward. So the reliance on foreign players to that extent has come down," said Nabin Ballodia, of KPMG

Riaz Haq said...

Indian economic growth is slowing, according to the BBC:

India has reported weaker-than-expected growth numbers for the first three months of the year.

The country's economy grew by 7.8% in the first quarter compared with the same period last year, the latest government figures showed.

For the financial year to March, the economy grew by 8.5%, lower than the government's forecast of 8.6%.

India is one of the fastest-growing economies in the world, but has been hit hard by rising consumer prices.

Analysts say a surge in prices of essential commodities, coupled with measures to cool the economy, has started to take a toll on growth.

"Raging inflation and a gradual increase in borrowing costs has dampened domestic demand, alongside lacklustre investment sentiment," said Radhika Rao of Forecast Pte.

The central bank has increased interest rates nine times in 15 months.

The last rise on 3 May boosted the benchmark interest rate by 50 basis points to 7.25%.

"We have a situation where inflation is uncomfortably high, so the authorities are tackling it by raising interest rates," said Justin Wood of the Economist Corporate Network.

"Obviously this tightening environment has been slowing things down." he added.
Losing momentum
Continue reading the main story
“Start Quote

It is significant because it is the first quarter of sub-8% growth since the crisis”

End Quote Sonal Verma Nomura

India's economy has posted robust growth since the global financial crisis.

However, the Reserve Bank of India's monetary tightening policies have seen a loss of momentum.

Analysts say that as the central bank continues its fight against rising prices, the pace of growth is likely to be slow for some time.

"I think this loss of growth momentum will continue for industry for a quarter or two because we are not yet done with interest rate hikes," said Shubhada Rao of YES Bank.

However, analysts warned that though a slowdown in growth had been broadly expected, continued loss of momentum would have an adverse effect on the economy.

"It is significant because it is the first quarter of sub-8% growth since the crisis," said Sonal Verma of Nomura.

"The last four quarters we have been growing above 8%, so this is really a slow starting point for the next financial year," she added. .......
China's economy expanded 9.7% in the first three months of this year compared with the same period the year before.

"They would love to emulate China's growth, but we don't think they are there yet," said Mr Wood.

Riaz Haq said...

Here's a recent piece on FDI decline and FII upsurge in India:

In 2010-11, inbound FDI into India fell by as much as 28%, the second consecutive year of decline and the first such large decline since the opening up of the economy in 1991-92. As a result of this decline, the present level of $27 billion of FDI inflows is the lowest in four years.

A large part of the progress made in FDI inflows over the boom years has now been reversed, with flows down by almost 29% from their high in 2007-08. This trend, more than just being odd, is also worrying when seen in the context of the fact that the past four years cover the recessionary period as well.
The decline in FDI in 2009-10 could be explained by the fact that it was a year when recessionary effects were visible in the global economy. All BRIC countries (Brazil, Russia, India and China) saw declines in FDI flows during that year.

According to the United Nations Conference on Trade & Development (Unctad), flows into China fell by over 12% and to Russia and Brazil by as much as 49% and 42% from the previous year.

However, a number of emerging markets have shown substantial recovery in 2010. The RBI pointed to Unctad figures to show that countries like China, Brazil, Mexico and Thailand had in 2010 shown a rebound in FDI of between 6-53 percent. Indonesia apparently showed a three-fold rise from the previous year.

In India itself, FII flows have been on the rise over the past two years on an annual basis, with only 2008-09 being a year of sharp outflows. In fact, the outflow of $15 billion was more than made up by inflows of $29 billion — their highest ever — in 2009-10. This level was largely maintained in 2010-11 as well, with a small increase.

Both these factors go on to show that the decline in FDI into India in 2010-11 is not the result of a weak global situation or investor risk-aversion. The causes really lie elsewhere.
FDI flows showed a dismal performance in almost every month of the previous financial year, with May being the only exception. By the end of the third quarter, it became clear that FDI inflows would be nowhere close to what they were the year before.

The RBI highlighted this in its quarterly ‘Macroeconomic and Monetary Developments (MMD) study released in January 2011 and suggested some reasons for the trend as well.

According to the bank, the “major reason for the decline in inward FDI is reported to have been the environment-sensitive policies pursued, as manifested in the recent episodes in the mining sector, integrated township projects and construction of ports, which appear to have affected the investors’ sentiments.”

The Ministry of Environment had recently questioned the ecological viability of the Korean steel giant, Posco’s proposed plans in Orissa, which could be one of India’s biggest FDIs ever.

The MMD review further goes on to observe that there are other reasons for the decline as well, such as “persistent procedural delays, land acquisition issues and availability of quality infrastructure”.

Indeed, delays in decision-making are visible in sectors like defence and multi-brand retail, discussions on which have been long in the works. The Department of Industrial Policy and Promotion (DIPP) had floated a discussion paper on defence in May 2010 and on multi-brand retail in July 2010.

Feedback on these was received by parties interested in the sector, but a decision on allowing FDI into these sectors is still nowhere in sight.
This is corroborated by the numbers. Both telecom and real estate have seen an above-average decline in FDI flows during the year. While flows into telecom declined by 35% to $1.6 billion, the flows to housing and real estate declined by as much as 60% to $1.1 billion...


Riaz Haq said...

Here's a VOA report on slowing Indian economy in 2011:

After posting strong growth for two consecutive years, India’s economy appears to be slowing, with high inflation and rising interest rates. But even with the slowdown, the economy is still among the world’s fastest growing.

When India’s economy grew by 7.8 percent in the first three months of the year - its slowest pace in 15 months - economists were not surprised.

D.H. Pai Panandiker, who heads the RPG Goenka Foundation in New Delhi says growth was expected to take a hit after nine interest rate hikes in just over a year by the Reserve Bank.

“Interest rate has gone up by nearly three per cent in the last one year, so that is having its toll on everything, on the market, the investment, the durable consumer market and so on,” explained Panandiker.

The higher cost of borrowing money is affecting several sectors of the economy. Car sales have slowed. Industrial production has fallen. Indian stock markets have lagged behind others in Asia.

The interest rate hikes are meant to tackle inflation, which has hovered around 10 percent for almost two years, and is among the highest in emerging economies. But efforts to control rising prices have had little impact so far.

On the other hand, surging international crude oil prices have added to India’s worries and prompted the government to raise gasoline prices by 9 percent two weeks ago. The move could further fuel inflation.

As a result, the recent interest rate hikes are expected to continue - another is expected in mid-June.

Economist Panandiker warns that the government’s estimates of about 8.5 percent growth this year are unlikely to be met.

“Some slowdown is inevitable," noted Panandiker. "This is the price we have to pay for inflation - that is lower growth. In spite of steps taken by the government, the inflation is not coming down. That is the critical part of it.”

But there is a positive prospect for the economy. Meteorologists have forecast that monsoon rains, which are critical for farmers, will be normal. A good monsoon usually helps cool food prices.

And while growth may be slowing, India is still forecast to remain the world’s second fastest growing major economy after China this year.


Riaz Haq said...

Here's an opinion by Taran Marwah of Afund India for July 2011:

All the “reform processes” are on hold in India for the past six months due to scams in various sectors in the Indian economy. Reforms in FDI in Retail, Insurance and Defense etc are in the “cold storage” since January 2011. FDI into India for the period - January to June 2011 is one-ninth than that of China in the same six month period. Plus Indian fiscal deficit is ballooning due to high crude oil prices and Indian Government’s inability to dismantle APM for petroleum products as mentioned above. Such low level of FDI is not a good sign for the Indian Economy. JFI - Indian trade account deficit for last financial year was US $ 105.00 billion. We predict that RBI will further raise interest rates, when its Board meets for monetary policy discussion in the last week of July 2011. We expect a 50 bpts hike in Repo rates by RBI in the last week of July 2011. Analysts feel that the hike will only be to the tune of 25 bpts. Let us wait and see. RBI is willing to sacrifice GDP growth in India at the cost of reining in inflation.

The BSE SENSEX will be bullish if it closes convincingly above 18190. There have been net FII flows into the Indian Equities and Asian Equity Markets in June 2011. If the trend continues in July 2011, then the levels for BSE SENSEX to watch for July 2011 are as follows :
R1 18800 R2 19340 R3 19500
S1 18500 S2 18190 S3 15960 (subject to closing below 18190 for fifteen consecutive days)
We predict that Indian equities will be range bound for the month of July 2011, with a bearish undertone. The levels are as per above figures. But we are bearish for the Indian equity markets for August and September 2011. We will see BSE SENSEX levels lower than 15960 in Q3 2011. By the way Credit Suisse said in its report of June 2011 to its investors that it predicts BSE SENSEX to be around 16000 in Q3 2011 ? We said this or near about (15960) in Q1 2011 ? AOTC – my problem !


Riaz Haq said...

Here's a BBC report of how inflation is hurting Indians and Pakistanis:

Inflation is the price that ordinary Asians are paying for high growth rates.

For the less well-off, who spend their money on food and fuel, the story is even worse. The rise in their household expenses at the moment is usually higher than headline inflation rates.

According to the International Monetary Fund, last year consumer prices rose 13.2% in India, 11.7% in Pakistan and 9.2% in Vietnam. Other Asian nations coped better but the average for developing Asia was 6% - compared to a 1.6% average rise in prices in advanced economies.

The speed at which prices are shooting up means that unless people find ways to save and invest effectively, they in fact get much poorer - even if Asia is getting richer.
The world is jealous of Asia's sky-high growth rates, but for ordinary people the price of success is corrosive inflation which could eat away their savings.

"From outside it looks good," says Manasi Pawar. "We're staying in a big house, paying so much in rent and our kids are going to great schools."

Manasi, a qualified software worker in hi-tech Hyderabad in India, recently became a full-time mother. Her husband also works in the IT industry.

The couple epitomise the emergence of a well-to-do middle class in Asian countries - except there's one significant snag.

"We were actually losing money," says Manasi.

The couple recently woke up to the fact that inflation rates of nearly 9% meant that their savings were actually disappearing in front of their eyes.

"We were sitting on a bunch of cash but we didn't know where to put it, and it's important that we don't let it lie there in the bank - because a bank doesn't give an interest rate that even matches the inflation rate," she says.
The poorest people in society, who spend disproportionately more on food, are hit most savagely of all.

But there is a way to fight back against inflation: to save, and to put some of that money in a part of the economy that rises along with inflation.

For most people, that means investing in shares or equities. "The only way you can make money long-term is through an equity linked product," says Ms Halan.

Money in the bank in India may only earn 3% or 4% - which in fact means you are losing money. But equity linked funds in this exploding economy have risen much faster, sometimes as high as 25%.


Riaz Haq said...

Shares in Infosys have fallen 6% after it said new client numbers hit a four-year low in the most recent quarter, and it had been hit by higher costs, according to the BBC:

The latest quarterly profits from India's second-largest computer outsourcing company also narrowly missed market targets.

Infosys made a net profit of $384m (£243m) in the three months to 30 June, up 18% from a year earlier.

Its revenues for the quarter increased by 23% to $1.7bn.

Infosys said it added just 26 new clients during the three months and that it was having to pay higher wages to attract staff in India's competitive computer industry sector.

The company said it was being affected by global economic uncertainty.

"This is an environment where we need to be cautious. You can look at all the things which are happening," said Infosys chief operating officer SD Shibulal.

"There is still economic instability... there is the European crisis still unfolding. There is always talk about the government spending coming to an end."


Riaz Haq said...

India depends heavily on foreign inflows to survive, given its huge and perennial trade, budget and current account deficits.

India is the biggest borrower from multi-lateral lending institutions.

According to the statistics of World Bank, India has become the largest borrower from the International Development Association (IDA), a component of World Bank Group which helps the poorest countries of the world.

Among the bank’s FY10 Top Ten IDA borrowing countries, India tops the table with $ 2,578 million, followed by Vietnam ($ 1,429 million), Tanzania ($ 943 million), Ethiopia and Nigeria with $ 890 million each, Bangladesh ($ 828 million), Kenya ($ 614 million), Uganda ($ 480 million), Democratic Republic of Congo ($ 460 million) and Ghana (433 million).

IDA, termed as ‘Soft Loan Window’ of the World Bank, was established in 1960 with the aim to reduce poverty by lending money (known as credits) on concessional terms. IDA credits have no interest charge and the repayment period ranges between 35 to 40 years. IDA is the largest sources of assistance for the world’s 79 poorest countries, 39 of which come from Africa. Not only with IDA, India is also the third largest borrower of the International Bank for Reconstruction and Development (IBRD), a part of World Bank group with a total loan of $ 21.9 billion which have financed 77 projects in the country.

Among various states in India, Tamil Nadu hold the maximum assistance of $ 2.1 billion from the World Bank to support its six on-going projects.


Riaz Haq said...

Here are some excerpts from an Indian Financial Express story headlined "More FII money to Pak than to India":

Mumbai: Whether Dalal Street likes it or not, India is now the worst-performing market in the world as dark clouds have started cluttering the economic, investment and political horizons. Worried foreign institutional investors (FIIs), who came to India in droves last year, have been pulling out funds with such alacrity this year that even a much smaller — and significantly more volatile and unstable — market like Pakistan has got more foreign inflows in the last six months.
As per figures of the Securities and Exchange Board of India, FIIs have already pulled out $497 million (including GDRs, primary market, stock markets etc) from India from January to June 22 this year. This has come as a big blow to the market which witnessed an inflow of $29.36 billion in the whole of calendar 2010. FIIs took out Rs 14,387 crore (around $3.2 billion) from the secondary market in 2011, bringing the Sensex down from 21,108 on November 5, 2010 to 17,727.49 on June 23, 2011.

Across the border, Pakistan received a portfolio investment of around $230 million in the last six months. That, too, when the Karachi Stock Exchange, its largest, has a market cap of only $35 billion whereas the Bombay Stock Exchange has a market cap of $1,500 billion.
The latest worry of FIIs is the possibility of tightening in rules governing the tax treaty with Mauritius. If both the governments tighten the regulations governing the treaty, the fund flow through this route will come down drastically. “Funds using this route will go elsewhere. India has got minuscule funds FIIs this year,” said a fund manager with a foreign investment firm.

A large chunk of FII investment in the stock market comes through Mauritius as companies registered there are exempted from tax in India under the treaty. The government had recently indicated about reviewing this tax treaty to tighten registration norms and making the fund flows more transparent.


Riaz Haq said...

The Indian economy is in trouble, says Ramtanu Maitra:

Although the economy continues to show high GDP growth, there is a growing disparity between India's sea of poor people and the few at the top of the heap. Out-of-control inflation, caused by the inflow of billions of dollars in hot money, combined with poor productivity due to weak physical infrastructure has resulted in corruption of unimaginable proportions, which has eaten away the gains made earlier. Prime Minister Manmohan Singh, who heads a group of disparate political parties under the banner of the United Progressive Alliance, is busy keeping the coalition government in power by doing little to prevent further deterioration of the nation's economy.
On June 16, the Reserve Bank of India (RBI) raised its benchmark lending rates for the tenth time in 18 months, as a monetary measure to slow down the rampaging inflation monster, which has already greatly hurt the poor, and is now beginning to hit the middle class, which had benefitted in recent years from the GDP growth and wage rise. The earlier nine such monetary measures within the past 18-month period did not slow down inflation. It is inevitable that the high interest rates will attract more short-term hot money into the country, spurring a faster rate of inflation in the coming days.
India has earned the distinction of incurring the highest inflation of major emerging markets. On June 14, the Singh government said inflation had increased 9.1% in May, compared with a year earlier, a rate higher than expected. High inflation was first observed two years ago in the rise of food prices that affected India's poor the most. But since India's hundreds of millions of poor have little voice in directing New Delhi's economic policies, for the greater part of the last two years such inflation was pooh-poohed by Indian economists, accusing the growing army of the middle class of "over-consumption of food." Now, inflation has shown up everywhere, once again, proving the shortsightedness of those economists.
What this picture, which I elaborate below, underscores, is the inescapable truth that if a fundamental shift away from the monetarist system is not initiated in the United States, and soon, we are looking at the literal devastation of the largest population centers in the world, such as India and China. This is, in fact, the concern of all humanity - and must be stopped.
The Growing Anti-Poor Bias Unwilling to change course, and stubbornly defending the failed economic policy, New Delhi is still harping on India's high GDP growth rate. The New York Times reported on June 15, that Kaushik Basu, the government's chief economic advisor, said, in an interview on June 13, that inflation was a problem that all developing countries were facing. "If you look at emerging economies around the world," Basu said, "India's performance looks pretty run of the mill."
But, neither Basu nor others in the Singh government are interested in taking a good look at the damage done by their strictly money-obsessed policies. "The last two years have been a lost opportunity" for India's governing United Progressive Alliance party, Citigroup said this month in a research report.
This monetarist obsession has given rise to full blown inflation across the spectrum. The unprecedented price rise in basic food items is severely impacting hundreds of millions of Indians. Despite the shouting by the globalizers, investment bankers, and their followers within India, millions of Indian families live on a daily diet which consists of cereal - rice, or wheat flour, or both - some vegetables, including onion, and a variety of lentil, or other similar items. Lentils provide the only significant source of protein they have access to, since they cannot afford to buy other high-protein foods, and this includes a large number of people who are non-vegetarians.. .....

Riaz Haq said...

India's factory output grew at a weaker-than-expected rate in May as manufacturing activity slowed, according to the BBC:

Industrial output grew by 5.6% in May compared with the same month last year, latest government data showed.

Manufacturing, which accounts for 80% of overall industrial output, also rose by 5.6% in May, compared with growth of 8.9% a year earlier.

The figures come at a time when India has been tightening its monetary policy in an attempt to rein in growth.

"Overall, the data provides further affirmation of the moderating growth trends," said Radhika Rao of Forecast Pte.
Inflation vs growth

India's economy has witnessed robust growth in the past couple of years.

However, the success has come at a price. Consumer prices in the country have surged, affecting the cost of living and becoming a hot political issue.

As a result the government and the Reserve Bank of India (RBI) have intervened to ensure that prices remain in check

The central bank has raised interest rates in the country 10 times since March 2010

Analysts said that with the government focusing on controlling prices, other sectors are likely to suffer.

"We are seeing definite signs of slowdown in interest-rate sensitive sectors," said Rupa Rege Nitsure of Bank of Baroda.
Further tightening?

However, despite the slowdown, analysts said that it was unlikely that the government would change its focus.

They said that given the robust expansion that India's economy has seen in recent times, the current figures are not likely to have a big impact.

"A period of subdued growth should not be a major concern for the authorities," said George Worthington of IFR Markets.

"This data is unlikely to prevent the RBI from further modest tightening in the second half," he added.

Mr Worthington added that manufacturing activity was likely to improve in the coming times "as new investments come on stream, allowing a faster rate of growth without adding to inflationary pressures".


Riaz Haq said...

As of July 14, 2011, Karachi stocks are up 2% and Indian stocks are down 9.2% for 2011, according to The Economist market review.


Riaz Haq said...

Here's a Washington Post story on slowdown in India:

....In developments that parallel events in the other Asian powerhouse, neighboring China, rising prices have forced the government to steadily tighten monetary policy. Interest rates rose for the 10th time in 16 months last week.

But business leaders are unhappy. They say the medicine could be making the economic situation worse.

Much of the inflation in India is a function of higher oil and food prices, factors that respond poorly, if at all, to higher interest rates. Instead of depending on the central bank, the government needs to push through the kind of agricultural reforms and investment it has been talking about for years, analysts say.

“Government policy should be focused on improving agricultural productivity, but because that isn’t happening, the burden is falling more and more on monetary policy,” said Sanjay Mathur, Royal Bank of Scotland’s Asia emerging markets economist in Singapore. “Consequently, a number of sectors that shouldn’t be getting hurt are getting hurt.”

That means growth could fall back toward 7 percent, some economists warn, still faster than that of any major economy except China but below what India could achieve — and needs, if it is to pull hundreds of millions of people out of poverty.

“There is no point substituting one bad policy with another bad policy,” said Surjit Bhalla, chairman of Oxus Investments. “When the patient is down, don’t give him another kick in the pants.”

In the early 1990s, India’s government pushed through a series of economic reforms that unshackled the private sector and laid the foundation for two decades of strong growth. With that growth has come rising incomes, an expanding middle class and changing eating patterns. No longer dependent solely on rice, lentils and grains, Indians are demanding more vegetables, fruit, eggs, meat and fish.

Local agriculture has not kept pace. Farmers grow the wrong mix of crops, and about 40 percent of production is wasted before it reaches market because of inadequate distribution, warehousing and cold-storage systems.

Add to the mix a rural employment scheme that has boosted the incomes and appetites of India’s poorest, and a demographic bulge in hungry 15- to 24-year-olds, and it is little surprise that food prices are rising steadily year by year.

That in turn has pushed up wages, while production of raw materials such as coal, ores and cotton is also struggling to keep up with rising demand. Inflation hit 9.1 percent in May, and the central bank says it is expected to remain high through at least September.

To get food prices down, the government needs to promote horticulture and revolutionalize agricultural marketing and distribution, economists say. Allowing foreign companies such as Wal-Mart to set up supermarkets in India and invest in cold-storage facilities, a long-promised but still undelivered policy goal, would also help, they say.
The Organization for Economic Cooperation and Development last week underlined the need for a new set of reforms in India to bolster growth, and no one in the finance or planning ministries seemed to disagree. The problem is getting it done.
Higher interest rates are choking much-needed investment, which was almost flat in the first quarter of this year and grew just 4.1 percent year over year, as overall economic growth slipped to 7.8 percent.

The stock market is sliding — shares are down more than 14 percent this year, making India the worst-performing market in Asia. That in turn makes it more difficult for companies to raise the capital they need to invest.

Riaz Haq said...

"The Next Crisis Will Arise in the BRIC Countries" says Ignacio de la Torre, director of finance programs at IE Business School, in a recent Forbes magazine article:

A steep rise in credit; rapid increases in house prices to levels way beyond available income; use of overvalued property as further collateral to demand additional funding from the banking system, resulting in even higher levels of debt; an increase in the amount of credit needed for the marginal growth of gross domestic product; a constrained installed capacity that yields to inflationary tensions; a labor force with double digit wage rises; limitless liquidity flowing into sectors with low productivity, such as real estate; a relaxation of the rules for granting loans; a rapid increase in corporate debt as a consequence of accelerated investment, mergers, and acquisitions, all fanned by the intoxicating feeling that demand will just keep going up; a central bank incapable of containing such a self-complacent liquidity binge, with interest rates far below those recommended by the Taylor rule; a political class living off an apparent bonanza, refusing to carry out the reforms needed to avoid disaster when the cycle eventually changes, ignoring calls for serious cutbacks in spending, or rises in taxes that could counteract the exuberance.

Spain in 2006? The U.S.? Britain? Iceland, Greece, Ireland? No. I am talking about emerging countries, in particular Brazil, Russia, India and China, the four known collectively as the BRICs. In my opinion, the BRICs are repeating many of the same errors committed by Europeans and North Americans in the lead-up to 2007, namely the following:

A housing bubble. Lax monetary policy has allowed unsubstantiated rises in the price of housing vs. available income, fuelled by bank loans....

Inflation. Savage increases in circulating capital, to keep pace with the speed of price rises, have made inflationary tensions inevitable. ....

Over-reliance on the financial sector. This results from failing to curb increasing credit penetration as a percentage of GDP, dodgy criteria for awarding loans, dubious value of collateral assets, and, in China, the increasing influence of a “shadow banking” sector.

Unprecedented widening of the inequality gap. ....

Too much investment with uncertain returns. ...

Dependence on cheap money: “The dollar is our currency, but your problem” John Connally, the U.S. treasury secretary, said to his French counterpart in 1971, just before the Bretton Woods monetary system blew up. The same is true today, The U.S. Federal Reserve’s zero rates of interest are aimed at resuscitating the American economy, but they have brought about a wave of liquidity that looks to emerging economies for profit, worsening an already delicate situation....

Riaz Haq said...

India's GDP likely to hit $2 trillion this year, reports Rediff:

India is poised to join the coveted club of economies whose national income, or gross domestic product, exceeds $2 trillion.

According to recently released data, India's nominal GDP is expected to grow at 14 per cent in 2011-12, to reach Rs 90 lakh crore (Rs 90 trillion). At a dollar exchange rate of Rs 45, this works out to $2 trillion.

However, if inflation is assumed to be 7 per cent and the real growth rate is 9 per cent as projected, the growth rate of 14 per cent may actually understate nominal growth rate by 2 percentage points, which means India's nominal GDP in dollar terms will actually exceed $2 trillion this fiscal!

India's nominal GDP crossed the $1-trillion mark in 2007-08, which implies GDP has doubled in four years.

First, the magic number of $2 trillion is based on an exchange rate of $45 to the dollar. If the rupee were to depreciate, India's nominal GDP would be lower for the same level of output.

Second, in celebrating the nominal as opposed to the real GDP, we may be losing sight of the contribution of inflation.

The difference between real and nominal GDP is inflation, and so for a given level of real GDP, the higher the inflation the more rapidly would nominal GDP increase. This is clearly an undesirable outcome for everybody.
Statistical convolutions aside, the health of the Indian economy needs a candid review, particularly in light of potential downsides that could derail the genuine progress the Indian economy has made over the past two decades.

The slowdown in virtually all sectors of the economy, barring a few select industries like 'transport, logistics and communication', which has been growing annually at 25 per cent, is indeed worrisome.

Growth in the agriculture sector continues to be dampened by under-investment, despite some increase during the past five years. This has resulted in the sector being caught in a classic low productivity trap.

Manufacturing too is spinning on its wheels, with annual growth rates stubbornly in the single digits. This reflects deeply embedded structural problems, which have been discussed in this space.

India's economic growth continues to rely on the service sector growing at or around 10 per cent annually, which renders it vulnerable to global shocks.

The situation on the supply side also leaves a lot to be desired. This particularly applies to the tardy progress in the development of infrastructure and investment in human development, which is already holding India back.


Riaz Haq said...

Here's a Times of India story about the impact of corruption on "Brand India":

BANGALORE: Anna Hazare's anti-graft campaign has pushed corruption to the fore again. Corporate honchos say businessmen overseas have been vexed with corruption here for a long time, and this movement addresses their worry too.

Kris Gopalakrishnan, executive co-chairman, Infosys Technologies, said Brand India is affected because of the perception that we can't solve the problem of corruption.

Kiran Mazumdar Shaw, CMD, Biocon, said India has an outstanding business reputation. But people outside feel the cost of doing business in the country comes at a price that may require underhand dealings to get things done. "This perception needs to change," she said.

Krishnakumar Natarajan, CEO, MindTree, echoed that feeling: "Outsiders feel the government is not transparent and India is not an easy place to do business. There is discomfort, especially on issues related to infrastructure," he said.
* Anti-corruption watchdog Transparency International placed India at 87 among 178 countries in the 2010 corruption index. India scored 3.3 on a scale of 10

* Janaagraha initiative ipaidabribe.com shows Bangalore at the top with maximum number of bribes paid. Earlier this week, the site showed 3,641 instances of bribe that amounted to Rs 10 crore. Police, followed by the registration department and municipal services, sought the maximum number of bribes. The site depends on people logging in their bribe-paying details, and therefore is limited to that extent.


Riaz Haq said...

The BBC reports that inflation hit a high of 9.78% in India:

Inflation in India rose to 9.78% in August, its highest level in a year, officials say.

The increase was mainly due to the rising cost of food, fuel and manufactured goods across the country.

Inflation is a major headache for the Indian government and the central bank has raised interest rates 11 times in 18 months to try to keep a lid on it.

Despite this, a senior government adviser has said he thinks inflation will stay between 9-10% this year.

There are fears that that the Reserve Bank of India will continue to raise rates as inflation has remained high.

Correspondents say that the bank is now in the awkward position of fighting high prices amid mounting worries about the health of the global economy.

The government is projecting growth of 8.5% for the fiscal year that ends next March.

But the growth rate is threatened by the rising prices - which limit domestic consumers' spending power.

A further curb could come from lower export demand as developed countries struggle with low or no economic growth.


Riaz Haq said...

Brazil, India current account deficits leads to ‘inevitable’ crisis warns a Chinese economist:

Li Daokui told a forum that emerging economies such as Brazil and India face fiscal and current account deficits and a crisis was “inevitable,” Caijing Magazine reported on its website www.caijing.com.cn. “China will play a very important role during the financial consolidation”.

But there will be no such crisis in China because it is quite different from most other developing and developed countries,” he said. In February, the Indian government raised “serious concern” about a trade deficit that could more than double to 278.5 billion USD in three years and may cause an unquestionable current account deficit.

Brazil's current account deficit ballooned to a record for the month of March as foreign companies in Brazil sent more profits home and Brazilians spent more on travel and goods overseas. In January, the International Monetary Fund warned fiscal balances in Brazil, China and India were weaker than it had earlier projected.

Li Daokui also expects the US dollar, Euro and Yen to face downward pressure over the medium and long term.

The IMF had projected Brazil's debt-to-GDP ratio at 66.8% and India's at 71.8% while for China it had projected a debt-to-GDP ratio of 19.1%, warning of deterioration in the fiscal accounts of India and Brazil.

The Brazilian government had since announced budget cuts, but the country still need to do more to earn an upgrade on its sovereign debt rating, according to analysts.
For India, however, it could easily bridge the deficit if its government manages to bring at least part of the black money stashed away by Indian citizens in overseas tax havens.


Riaz Haq said...

Here are some excerpts from an opinion piece about India's talk of setting up a sovereign wealth fund (SWF):

Unlike China and other East Asian countries, which have established such funds on sustained current account surpluses, India has been running persistent current account deficits. Its current account deficit touched $ 29.8 billion in fiscal 2009 as against $ 15.7 billion in fiscal 2007. Unlike West Asia, India does not have any dominant exportable commodity (such as oil or gas) so as to generate significant surpluses. It continues to be a huge net importer of oil and gas. The country’s current account deficit is widening despite steady growth in software services exports and a rise in workers’ remittances from overseas Indians.

Its persistent current account deficits have been financed by large capital inflows in the form of portfolio investments and other volatile capital flows that are subject to capital flight. Given the overriding presence of volatile capital flows in India’s forex reserves, coupled with vulnerability to external shocks, it would be erroneous to consider its foreign exchange reserves ($ 280 billion) as a position of strength.

India’s external debt has been rising steadily for the past few years on account of higher borrowings by the Indian companies and short-term credit. Besides, India also runs a perennial fiscal deficit which means that raising substantial money for sovereign fund from budgetary allocation would be extremely difficult.

Santiago Principles

AS far as the proposed fund’s objectives to invest directly in strategic cross-border assets are concerned, the Indian policy-makers need to recognise that the overwhelming majority of sovereign funds are passive investors. In the rare cases where SWFs have made direct investments, they have not sought controlling interests or active roles in the management of invested companies, as private investors do. Even the large-scale direct investments made by SWFs in US and European banks during 2007-08 were minor in terms of bank ownership and did not come with any special rights or board representation.

Any direct investment in strategic assets by a sovereign fund will invite severe criticism for its alleged political and non-commercial objectives. Not long ago, the Western world had characterised SWFs as "villains" and introduced new policy measures, popularly known as the Santiago Principles, to regulate the investments of SWFs globally. Thus, acquisition of strategic cross-border assets (including natural resources) will not be a cakewalk. Also $ 10 billion is not enough to acquire strategic assets abroad-unless they become very cheap.

Furthermore, there is no guarantee that investments made by the Indian fund will be profitable. As witnessed during the global financial crisis, SWFs from West Asia, China, Singapore and Norway suffered huge losses for their investments in Western banks and private equity funds.

Paradoxical as it may sound, extreme poverty and hunger still pervades India. For New Delhi, the first priority should be to free the nation from hunger, malnutrition and illiteracy rather than financing the acquisition of strategic assets or rivals abroad.

In this regard, a portion of the country’s forex reserves could be prudently used in the improvement of physical infrastructure, education, health and financial services, particularly in rural India.


Riaz Haq said...

Here's an excerpt from a NY Times story on India's slowing economy:

Most countries would be thrilled to have a growth rate of more than 7 percent, but for India, which strode at a 9 percent pace before the financial crisis of 2008 and hit 8.5 percent last year, it would be a significant letdown. Slower growth would mean fewer Indians climbing out of poverty and could help spur greater social unrest.

And it would pose yet another challenge to the global economy, which is increasingly depending on emerging markets like India and China to make up for stagnation in the West.

The Indian slowdown was in the making long before most analysts were concerned about a double-dip recession in industrialized nations. Private investment has been sliding since late last year and once-robust car sales have decreased in recent months. Indian stocks began falling in November and are now down more than 24 percent from their high. Moreover, inflation has been hovering at nearly 10 percent even after the Reserve Bank of India raised interest rates 11 times in less than two years.

“Today, the economy is running on the engine speed achieved some time ago,” said R. Gopalakrishnan, an executive director at the Tata Group, India’s largest business conglomerate. Stressing that he was speaking for himself and not his company, he added, “It’s not sputtering to an end, but it’s slowing down.”

The new economic worries are occurring while the Indian government has been preoccupied with the biggest protests the country has seen in nearly two decades.
Now, analysts said, the government is unlikely to act on the land and retail measures for several months, if not longer. Even as markets elsewhere were relatively stable, India’s benchmark Nifty stock index fell 1.9 percent on Friday, to its lowest level in 14 months.

Furthermore, many analysts say the government is unlikely to push big reforms next year because India’s largest and one of its poorest states, Uttar Pradesh, will go to the polls in 2012. Federal elections are due in 2014.

Still, some business leaders say the corruption movement has demonstrated that the government, which is run by a coalition led by the Congress Party, may no longer be able to postpone difficult policy decisions. Many of the most vocal protesters at Mr. Hazare’s rallies have been people 25 or younger — a group that makes up about half India’s population.

“The middle class has been created; it wasn’t there 30 years ago,” said Mr. Gopalakrishnan, the Tata executive. “And their aspirations have been created. There is an energy there that has come out of human passion. Being standstill and letting this putter out is not an option.”


Riaz Haq said...

India’s manufacturing grew in September at the slowest pace in 2 1/2 years after the central bank’s record interest-rate increases, according to a Bloomberg report:

The Purchasing Managers’ Index was at 50.4 from 52.6 in August, HSBC Holdings Plc and Markit Economics said in an e- mailed statement today. That’s the weakest reading since March 2009. A number above 50 indicates expansion.

The Reserve Bank of India last week signaled it may maintain its tight monetary policy after Governor Duvvuri Subbarao said inflation remains above the acceptable level. In China, a manufacturing index advanced for a second month, suggesting the world’s second-largest economy is weathering Premier Wen Jiabao’s steps to check price gains.

“Inflation control would continue to be the dominant theme and goal in India,” Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore, said before the report. “The sheer size of the rupee’s move makes imports costly and adds to price pressure.”
The International Monetary Fund last month cut its forecast for India’s economic growth. The South Asian economy will expand 7.8 percent in 2011, the Washington-based lender said, slower than the 8.2 percent projected in June. For 2012, it lowered its estimate to 7.5 percent from 7.8 percent.

Merchandise exports growth slowed in August, gaining 44.3 percent to $24.3 billion from a year earlier, according to an e- mailed statement from the commerce ministry today. Exports jumped 81.8 percent in July, the biggest increase since at least April 1995, Bloomberg data show.


Riaz Haq said...

SIAM, India's auto-industry lobby, forecasts sales growth will slow to 2% to 4% for the year ending April, about one-tenth of what it was last year, according a report in the Wall Street Journal.

Rising prices are usually something auto makers welcome. Not in India.

As recently as April, some Indian auto makers were struggling to produce enough cars to meet demand as sales hit successive monthly highs.

But thanks to rising interest rates, buyers are hitting the brakes.

Across the industry, sales fell 16% in July compared with last year and 10% in August. September's decline was a relatively mild 1.4%, the Society of Indian Automobile Manufacturers reported Monday, though sales figures in the three ...


Here's more from Reuters:

NEW DELHI, Oct 10 (Reuters) - Car sales in India are expected to rise just 2 to 4 percent this fiscal year, an industry body said, cutting its forecast for the second time this year, as high interest rates and rising costs continue to hit demand in Asia's third-largest economy.

The growth forecast is down from the earlier estimate of 10 to 12 percent by the Society of Indian Automobile Manufacturers (SIAM), and 16 to 18 percent before that. Car sales had jumped 30 percent in the fiscal year 2010/11 that ended March.

"If the government continues to raise fuel prices and interest rates continue to go up the demand for cars will remain subdued," S Sandilya, President, SIAM and Chairman, Eicher Motors , told reporters.

Indian car sales last grew in single digits in 2008/09, at 1.39 percent.

Demand for cars in the world's second-fastest growing auto market after China has also been dented in recent months by rising vehicle costs, with many first-time buyers plumbing for motorcycles or scooters.

Car sales fell 1.8 percent in September to 165,925 cars, data released by SIAM showed on Monday. Demand for cars shrunk in July for the first time in nearly three years.

However, sales of commercial vehicles, a key pointer to the country's economic activity, rose 18.05 percent to 70,634, while motorcycle sales rose 19.93 percent to 933,465 vehicles.

India's central bank has raised interest rates 12 times since March last year in an effort to battle stubbornly high inflation, a move that has hurt credit-based purchases and slowed economic growth.

The Indian car market, which saw a 10 percent decline in August, is driven by a burgeoning and aspirational middle class that mostly relies on bank loans for purchases.

Maruti Suzuki , India's largest car maker, and 54.2 percent owned by Japan's Suzuki Motor Corp , posted a 21 percent drop in September sales, but rival Tata Motors , which makes both commercial vehicles and cars, reported a 22 percent increase for the month.

"The way things have been going in the last few months, this is a realistic number. While there is some uptick in festive demand, it's nowhere close to what it was in the last two years," said Vineet Hetamasaria, auto analyst at Mumbai's PINC Research.

SIAM raised its growth forecast for commercial vehicles to 13 to 15 percent, from the earlier forecast of 12 to 14 percent.

"Demand for movement of goods still remains, because the economy is still growing at 7 to 8 percent," SIAM's Sandilya said.


Riaz Haq said...

Here's a Dawn report on Pakistan auto sales July-Sept 2011:

KARACHI: While sale of cars, two and three wheelers and light commercial vehicles remained brisk from July-September 2011, production by a leading tractor assembler remained suspended between second week of July 2011 and September 2011.
Buying spree was witnessed for locally assembled cars thanks to huge arrival of home remittances, surging farm income, slight increase in car sales through bank financing, etc.

Even rising prices of locally produced cars and high cost of fuel (petroleum products and CNG) did not make any adverse impact on vehicle sales.

Pak-Suzuki Motor Company Limited (PSMCL) raised the prices by Rs14,000-30,000 followed by two to four per cent by Indus Motor Company (IMC).

Honda City also became costlier by Rs25,000 while Civic price was raised by Rs38,000.

Pakistan Automotive Manufacturers Association (PAMA) claimed rise in overall car sales to 38,065 units in July-September 2011 as compared to 30,030 units in the same month of last year.

Overall sale of costly cars (1,300cc and above) rose to 16,936 units as compared to 14,949 units.

Sale of Honda Civic, Honda City and Toyota Corolla stood higher at 1,710, 2,562 and 10,682 units as compared to 1,558, 2,274 and 10,371 units respectively. Suzuki Swift sales also surged to 1,826 units from 673 units.

In 1,000cc segment, overall car sales jumped to 7,343 in July-September 2011 from 5,679 units in the same period of last year in which sales of Suzuki Cultus and Suzuki Alto swelled to 3,710 and 3,633 units from 2,860 and 2,819 units respectively.

Increase in Suzuki Mehran sales to 8,415 units from 5,356 units made a positive impact on overall sales of 800cc and below 1,000cc cars which rose to 13,786 units from 9,402 units.

Sale of Daihatsu Cuore and Suzuki Mehran went up to 1,282 and 4,089 units as compared to 1,136 and 2,910 units.

A leading car assembler said he checked with many banks who intend to cut interest rates from Nov 1 after Central Bank`s decision to lower interest rates.

He said car financing by banks now enjoys 20 per cent share in overall car sales and this share may go up slightly after cut in interest rates.

From July onwards, the buyers especially on cash basis had resumed purchases and it was evident from sales trend in the first quarter of the current fiscal year.

Rising farm income also encouraged farmers and growers to purchase more new bikes, thus pushing up Honda bikes sales to 152,605 units in July-September 2011 from 126,701 units in the corresponding period of 2010.

Sale of Suzuki bikes also increased to 5,506 from 4,588 units while sale of Ravi and Habib bikes (Chinese two-wheelers) improved to 6,680 and 7,707 units from 5,971 and 4,053 units.

Qingqi and Sazgar three-wheeler sales reached 5,193 and 3,901 units from 2,787 and 2,976 units.

In pick-ups, a total of 4,586 units of Suzuki Ravi and 856 units of Toyota Hilux were sold in July-September 2011 as compared to 3,129 of Ravi and 285 units of Hilux in the same months during 2010.

In heavy vehicles, sales of only Master trucks rose to 110 units from 82 units while sales of Hino, Nissan and Isuzu trucks plunged to 231, 33 and 36 units from 422, 102 and 119 units.

In buses, Hino bus sales dropped to 56 units from 110 units and Isuzu bus sales also came down to 12 units from 23 units........


Riaz Haq said...

Here's a BBC report on IMF's downbeat forecast of Asian growth:

The International Monetary Fund (IMF) has cut its growth forecasts for Asia over worries about eurozone debt and new fears for the US economy.

The IMF said risks for Asia were "decidedly tilted to the downside" because of these concerns over its two major export zones.

It said gross domestic product (GDP) growth across Asia would average 6.3% in 2011, and 6.7% in 2012.

In April, it had predicted close to 7% growth in both years.

The body warned about a risk of capital outflows from the region, and the possibility that oversees investors may reverse the large positions they have built in Asian markets since 2009.

In addition, inflation is still high in a number of Asian countries, the IMF said.

But it believes consumer prices could ease after peaking this year, as food and energy prices "gradually moderate".

The IMF also said that Asian policymakers were faced with "a delicate balancing act".

"They need to guard against risks to growth but also limit the adverse impact of prolonged easy financial conditions on inflation," it noted.


Riaz Haq said...

Here's an except from Tehelka.com on slowing Indian economy:

It finally took a foreign journalist to burst their bubble. James Lamont of the Financial Times reported that several economists had begun to voice fears that India could return to a ‘Hindu’ rate of growth. “Far from being in a pole position among emerging markets,” he wrote, “India trails in terms of attracting foreign capital and beating inflation. Senior executives complain bitterly about Delhi’s painfully slow or inconsistent decision-making. Many local companies are focussing their investments on Africa or Latin America.” Similarly, a senior executive of a Singaporebased investment company expressed his shock at finding that when he asked senior executives of Indian firms where his company could invest in India, they sought his advice instead on where they could invest in east Asia. The official growth figures were misleading, and the real rate of growth, in their opinion, was not more than 5 percent.

The hard data support this conclusion. According to the latest estimates, industrial growth has fallen from 9.7 percent in April-July 2010 to 5.8 percent this year. The decline in manufacturing has been even more steep, from 10.5 to 6 percent.

Sectoral growth rates are even more revealing. Growth in the capital goods sector fell from 23.1 percent in April-July 2010 to 7.6 percent this year. Growth in the production of intermediate goods, which is considered the most reliable indicator of future production, fell from 10.1 percent to 0.8 percent. If one looks closely at the data, one sees a pattern of recession spreading from the most interest rate sensitive industries outwards to the less sensitive ones. The real estate sector went into an absolute decline in the last quarter of 2010-11. Car sales have also slumped.

Surveys of industry’s future intentions are uniformly pessimistic. The purchase managers’ index has fallen continuously for five months and is close to 50 percent, which indicates zero growth. A massive postponement of investment is taking place: the latest survey of investment intentions by the Centre for Monitoring Indian Economy shows that these have declined by 55 percent over what they were a year ago.


Riaz Haq said...

Indian auto sales continue to drop by double digits, according to India Today:

October's festive cheer failed to revive car sales during the month as higher interest rates and rising fuel prices kept potential buyers away.

Leading car maker Maruti Suzuki India Ltd (MSIL), reeling under the workers strike, was the hardest hit with sales falling to less than half of last year's level for the month.

The firm's domestic sales dipped by 52.16 per cent at 51,458 units in October 2011, from 107,555 units sold in October, 2010.

MSIL's small car sales (M800, A-Star, Alto and WagonR) fell by 54.86 per cent to 25,009 units against 55,404 units in October, 2010. The compact segment (Estilo, Swift and Ritz), posted a 56.09 per cent dip in sales to 10,859 units.

Sales of DZiRE decreased by 48.14 per cent to 5,001 units and SX4 fell by 83.81 per cent to just 320 units. MSIL sold only three units of its luxury sedan Kizashi.

India's number two car maker Hyundai Motor India Ltd (HMIL) reported a 4.95 per cent drop in sales to 33,001 units from 34,720 units in October last year.

"We have seen that sales get a boost in the festival season, but this year, sentiment has been tepid. We don't expect a major upswing in the near future, the challenging economic environment is affecting industry," Arvind saxena, director (marketing and sales), HMIL, said.

In the A2 segment (Eon, Santro, i10 and i20), the company sold 41,204 units, while in the A3 segment (Accent and Verna), sales stood at 6,929 units. While the new Santa Fe SUV attracted 190 buyers its small car Eon has received more than 9,000 bookings till date.

Tata Motors saw a marginal 2.64 per cent increase in its passenger vehicles sales in the domestic market at 25,124 units in October, from 24,478 units sold in October 2010. While the Indica family sales stood at 10,812 units, up 11 per cent, the Indigo family recorded drop in sales by 24 per cent at 6,268 units. Sales of Sumo, Safari and Aria grew by 23 per cent to 4,176 units and Nano sales recorded 26 per cent increase at 3,868 units....

Read more at: http://indiatoday.intoday.in/story/october-car-sales-dip-costly-fuel-higher-interest-rates/1/158264.html

Riaz Haq said...

Moody's downgrades India's banks, according to WSJ:

MUMBAI -- Global ratings firm Moody's Investors Service Wednesday changed its outlook for India's banking system to negative from stable, flagging concerns of a possible rise in bad loans, capitalization constraints and pressure on profitability in a tough environment.

The action, however, is in contrast with the stable outlook assigned to the financial strength rating of 14 out of the 15 banks rated by Moody's.

"India's economic momentum is slowing because of high inflation, monetary tightening and rapidly rising interest rates," said Vineet ...


Riaz Haq said...

Here's a Bloomberg report on Indian equities' performance:

Nov. 29 (Bloomberg) -- India’s benchmark stock index, the third-worst performer in Asia this year, may be hurt the most among emerging-markets equities from global risk aversion because of a slowing economy and a weak rupee, according to Tata Asset Management Ltd.

“India’s in a difficult spot,” Venugopal Manghat, the Mumbai-based co-head of equities at the money manager, said in an interview yesterday. “Our macros are probably the worst or are worsening at a more worrying pace than any other economy in the emerging-markets space.” His Tata Balanced Fund has beaten 91 percent of its peers in the past three years, data compiled by Bloomberg show.
In India, overseas investors pulled out $842 million from equities last week, the biggest weekly outflow in six months, data from the regulator show. That sent the rupee to a record low of 52.73 on Nov. 22. The currency gained 0.6 percent to 51.965 yesterday, paring this year’s drop to 14 percent, the worst performance among Asian currencies.

“We could have further pressure from the global end, which means risk aversion could go up and currencies could depreciate further,” Manghat, 40, said.

The Reserve Bank of India, which has lifted interest rates 13 times since March 2010 to curb inflation that has exceeded 9 percent since December, last month cut its growth forecast to 7.6 percent from 8 percent. Morgan Stanley reduced its growth estimate for India to 7 percent for the year ending March 31 from 7.2 percent, according to an e-mailed report yesterday.\---------------
Shares of Indian consumer-goods producers, automakers and private lenders may fare better than the overall market in the next six months, said Manghat. The Tata Balanced Fund had 13.2 percent of its assets in consumer non-durable companies, 10.6 percent in banks and 6.8 percent in automakers at the end of October, the fund’s fact sheet shows.

“Consumption is a secular story and will be a big driver for the Indian economy,” he said. “India is significantly under-banked, significantly low in terms of penetration and private banks are more nimble, faster at decision-making, and are better structured to make good use of this opportunity.”

The fund has returned 26 percent annually for the past three years, data compiled by Bloomberg show.


Riaz Haq said...

Goldman Sachs' Jim O'Neill, who coined BRIC, says India's performance most disappointing, according to Economic Times:

LONDON: Growth in all four BRIC economies has surpassed expectations in the decade since the term came into existence but India's record on productivity, FDI and reform has been the most disappointing, the chairman of Goldman Sachs Asset Management Jim O'Neill said on Tuesday.

O'Neill, who coined the term, BRIC, in December 2001 to jointly describe the four biggest developing economies, Brazil, Russia, India and China, was speaking at the London leg of the Reuters 2012 Investment Outlook Summit.

"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 who oversees almost a trillion dollars in assets at Goldman.

Just this week, India's government caved in to opposition pressure and put on hold a landmark reform of the retail sector that was seen opening the doors to billions of dollars in foreign direct investment in the supermarket sector.

The long-awaited measure, passed earlier this month, had been hailed as ending the government's economic reform paralysis that is widely seen as the root cause of high inflation, shrinking capital inflows and a wider current account deficit.

"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'," O'Neill said. "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.

The glacial reform pace has hit India's hopes for double-digit economic growth, O'Neill said, adding: "India is as bad as Russia is on governance and corruption and, in terms of use of technology, Russia is in fact much higher than India."

On the other BRICs, O'Neill said Brazil's main problem was an overvalued currency which puts the country in danger of "Dutch disease" - a term first used to describe how North Sea oil discoveries in the 1960s triggered a surge in Dutch energy exports but also in the Dutch currency, pummelling much of the country's manufacturing. China's challenge was to effectively manage a transition to a higher-consumption economy with slower growth, he said.

O'Neill remains positive on Russia but said much depends on what Prime Minister Vladimir Putin can deliver in terms of reform following an election at the weekend that left his ruling party with a much reduced parliamentary majority.


Riaz Haq said...

Here's Hindustan Times on Mukherjee's anxiety over Indian economy:

"The economy is in a difficult situation but that does not mean that we
shall have to start eating lizards,” Mukherjee said in the Lok Sabha, the lower house of Parliament.

India's economic growth slumped to 6.9% in the July-September quarter against the budgetary target of 9% growth for 2011-12. During the first half of the fiscal, the economy grew by 7.3%.

Mukherjee said the projection of 9% growth during the budget was not a pipe dream, but the unexpected high prices of oil and other commodities coupled with a slowdown in global economies, notably in Europe and the US, had hit the Indian economy hard.

"The hard fact is there are certain situation on which you do not have a control but you have to face the consequences,” he said.

The finance minister said because of the high oil and other commodities prices in the international market, expenditure on oil, fertiliser and food subsidies has increased exponentially, widening the fiscal deficit. He said fertiliser subsidies were likely to increase to Rs 90,000 crore against the budgetary target of Rs 40,000 crore.

"During the budget in February, average oil price of Indian basket I assumed $90 per barrel. However, oil price has been consistently at around $110 per barrel,” he said.

However, Mukherjee emphasised that the basic fundamentals of the Indian economy were strong. “Basic fundamentals of the Indian economy are still strong. Rate of savings is high. Yes, it is not as high as 35-36% but it is around 33-33.5%. Rate of Investment is around 34-35% despite depression.”

He said the proposed reforms could help improve the situation.

“I do believe that things can improve if the institutions strengthened, if Parliament functions, if this house debates, discusses and decides for which it is meant, you will see the atmosphere will change,” he said.

Mukherjee said the slowdown in growth was a cause of anxiety.

“From 2004-05 to 2007-08, we grew at 9%. Therefore we placed our standards high and from there we have come down. That's why it is my anxiety,” he said.

Indian economy grew 8.5% in 2010-11. In the union budget, Mukherjee said growth target was 9%, plus minus 0.25% for 2011-12. However, the growth declined to 7.7% in first quarter and it slumped further to 6.9% in the second.

"There was a time when these%age could have been an object of celebration when we place it in perspective on the economic development and growth of this country. From 1951 to 1979 we grew at a rate of 3.5%, whole of 1980s we grew at 5%, whole of 1990s we grew at 5.6%, even in the first half of the last decade we grew at around 6%,” he said.


Riaz Haq said...

India faces serious financial crisis, reports Economic Times:

Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

This is a perennial problem for India. The current situation is so worrisome because India is grappling with big internal and external economic threats simultaneously. Growth is slowing. Inflation remains high. Political paralysis has stymied domestic reforms.

The RBI, the last line of defence against a currency meltdown, has cautiously begun to support the rupee, but its firepower may be more limited than its $300 billion in reserves would suggest.

Beyond India's borders, Europe is the biggest worry. As its banks deleverage, investment money has flooded out of India's markets. If Europe's debt troubles deteriorate, India could be hit with a balance of payments crisis as severe as the one that forced a sharp devaluation in 1991.

The rupee, which has dropped 16 percent in the past four months, got a reprieve last week after the world's big six central banks banded together to try to ease dollar funding strains, helping it to snap a four-week losing trend.

But analysts widely expect the rupee, trading on Monday at 51.26 per dollar, to resume its slide.

"The Indian currency will be the first casualty of a deterioration in the euro zone crisis," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

If Europe's crisis deepens, India's trade deficit would widen even more rapidly, and it would have even more trouble attracting foreign capital.

"Risk appetite will obviously collapse and gradually the currency crisis is likely to take the shape of a balance of payments crisis," Nitsure said.

Worries about India have spiked in tandem with concern over Europe. UBS hosted a client conference call about India on November 29, which it announced with an email headlined "India explodes." Deutsche Bank sent out 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.

India relies heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its current account gap. Those flows are fickle.

Foreign portfolio investors have sold a net $50 million worth of equities so far in 2011 , in sharp contrast to the $29 billion they invested in 2010, data from the Securities and Exchange Board of India's website showed. In November alone, foreign funds pulled $661 million out of Indian stocks.

"The Indian economy is one of the most vulnerable to liquidity shocks in the region, not helped the least by deficits in its key balances," said Radhika Rao, an economist with Forecast PTE in Singapore.--------..

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.


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):




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...


Hopewins said...

RH: "But India is not a "net creditor"...India is a debtor nation.

Here's how Economic Times put it recently:

"A country’s current account consists of merchandise trade (exports and imports of goods) and the invisible trade — income and expenditure from export and import of services, profits earned on investments and remittances by workers. A deficit would occur when total imports are greater than exports. A deficit implies that the country is a net debtor to the world. "

This is not correct.

A current account deficit (CAD) does not AUTOMATICALLY "imply that the country is a net debtor to the world".

It depends on how the CAD is financed. If it is financed by DEBT, then yes, the country is a net debtor. But if it is financed by EQUITY, then the country may not be a net debtor.

So how can we tell how a country is financing its CAD?

The easiest way to tell for most developing countries (non hard-currency states) is to compare their Foreign Exchange Reserves (FXR) of currency, sovereign debt and gold to their Total External Commercial Debt (TECD).

(A) If the FXR> TECD, then the country is a NET CREDITOR
(B) If the FXR= TECD, then the country is neither a creditor nor a debtor.
(C) If the FXR<TECD, then the country is a NET DEBTOR.


(A) Thailand- FXR is 200 Bln$, TECD is 100 Bln$, therefore Thailand is clearly a NET CREDITOR.
(B) India- FXR is 295 Bln$, TECD is 290 Bln$, therefore India is neither a creditor nor a debtor in any significant way.
(C) Pakistan- FXR is 14 Bln$, TECD is 50 Bln$, therefore Pakistan clearly is a NET DEBTOR.


Riaz Haq said...

India on verge of financial crisis, says The Guardian:

The Reserve Bank of India (RBI) in Mumbai. The country is facing its own financial crisis. Photograph: Vivek Prakash/REUTERS
India's financial woes are rapidly approaching the critical stage. The rupee has depreciated by 44% in the past two years and hit a record low against the US dollar on Monday. The stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country.

In a sense, this is a classic case of deja vu, a revisiting of the Asian crisis of 1997-98 that acted as an unheeded warning sign of what was in store for the global economy a decade later. An emerging economy exhibiting strong growth attracts the attention of foreign investors. Inward investment comes in together with hot money flows that circumvent capital controls. Capital inflows push up the exchange rate, making imports cheaper and exports dearer. The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves.

The trigger for the run on the rupee has been the news from Washington that the Federal Reserve is considering scaling back - "tapering" - its bond-buying stimulus programme from next month. This has consequences for all emerging market economies: firstly, there is the fear that a reduced stimulus will mean weaker growth in the US, with a knock-on impact on exports from the developing world. Secondly, high-yielding currencies such as the rupee have benefited from a search for yield on the part of global investors. If policy is going to be tightened in the US, then the dollar becomes more attractive and the rupee less so.

But while the Indonesian rupee and the South African rand are also feeling the heat, it is India – with its large trade and budget deficits – that looks like the accident most likely to happen. On past form, emerging market crises go through three stages: in stage one, policymakers do nothing in the hope that the problem goes away. In stage two, they cobble together some panic measures, normally involving half-baked capital controls and selling of dollars in an attempt to underpin their currencies. In stage three, they either come up with a workable plan themselves or call in the IMF. India is on the cusp of stage three.