Monday, April 20, 2015

Can Indian Economy Survive Without Western Money?

India runs massive current account deficits. Its imports far outstrip exports year after year. According to the Reserve Bank (RBI) data, in the April-December 2014 period of last fiscal, India's current account deficit stood at $31.1 billion or 2.3% of GDP.



In spite such large recurring deficits, India has built up over $300 billion in foreign exchange reserves. How does it do it? The simple answer is: Foreign money inflows in the form of debt and investments mainly from the West keep the Indian economy afloat.

Sources of FDI in India Source: Financial Express
These inflows have dramatically increased with western support for India in the post Cold War world. Here's how Indian journalist Pankaj Mishra explains the larger western interest driving this phenomenon:

"Seen through the narrow lens of the West’s security and economic interests, the great internal contradictions and tumult within these two large nation-states (India and Pakistan) disappear. In the Western view, the credit-fueled consumerism among the Indian middle class appears a much bigger phenomenon than the extraordinary Maoist uprising in Central India".  

Here's how the Asian Development Bank (ADB) describes the rising inflows of foreign, mainly western, capital into India:

"Gross capital flows have increased nearly 22 times from $42.7 billion in 1991-92 to over $932.3 billion in 2010-11. As a share of GDP, this amounted to an increase from 15.5% in 1991-92 to 55.2% in 2010-11. Much of the increase in financial integration occurred between 2003-04 and 2007-08. Given the impressive economic performance indicated by close to 9% growth rate, higher domestic interest rates and a strong currency, India's risk perception was quite low during 2003 to 2007. Furthermore, this period was associated with favorable global conditions in the form of ample liquidity and low interest rates in the global markets—the so-called period of Great Moderation."

Many other economies have been growing faster and producing higher investor returns than India. So the returns do not justify the increased capital flows. Such flows are driven much more by the changing geopolitics of South Asia region and the world since the end of the Cold War in early 1990s. Without these inflows, Indian economy would collapse and India would be at IMF's door seeking last resort loans.

Lesson: Geopolitics drive economy. It's the reason for over a trillion dollars of western capital flow into India since the end of the Cold War. It also explains China's massive $46 billion investment commitment in Pakistan agreed during President Xi Jinping's state visit to Islamabad.

Related Links:

Haq's Musings

India's Soaring Twin Deficits

Xi Jinping's Pakistan Visit

How Strategic Are China-Pakistan Ties?

India Pakistan Economic Comparison in 2014

Pakistan's KSE-100 Outperforms India's Sensex

India's IT Exports Highly Exaggerated

Is India Fudging GDP to Show Faster Growth Than China?

22 comments:

Rajput said...

I beg to differ. One major source of inflows for Indian market is remittances, which amount to $80 billions. That effectively nullifies their trade deficit. Before 1991. India was a closed economy, highly regulated and protective. After 1991, with liberalization policies, India start growing at amazing pace. I dont know, how much this is sustainable in future, but right now, its in their favor. With huge market and man power, near future looks good for India and it depends upon how their leadership meets the challenges.

Riaz Haq said...

Rajput: "I beg to differ. One major source of inflows for Indian market is remittances, which amount to $80 billions. That effectively nullifies their trade deficit"

Current account deficit includes worker remittances.

Riaz Haq said...

RBI report excerpt:

India depends upon capital flows to bridge the CAD. Foreign Direct Inflows (FDI) and portfolio investments constitute a major share of the flows. Debt flows, External Commercial Borrowings, in particular, have gone up substantially but, as a share of total capital flows, debt flows have declined from 80 per cent in 1990-91 to about 30 per cent in 2011-12. Total capital flows reached a peak of US$ 107 billion in 2007-08 but collapsed to about US$ 7.2 billion in 2008-09 indicating volatile nature of such capital flows. In the current fiscal year so far, India has witnessed a net inflow of about US$ 25 billion in the form of FDI and about US$ 36 billion as portfolio flows as against about US$ 21 billion and (-) US$ one billion respectively in the corresponding period of the last year. During 2014-15, capital flows would be more than adequate to finance CAD.

https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=15447

Majumdar said...

Prof sb,

Let me share with you a state secret. A good chunk of what you see as FDI and portfolio investment is nothing but round tripping of "black money" (That is why ModiGee is beating around the bush looking for Swiss bank accounts- the money is lying right here). That explains why the trillion dollar investment apparently
produces no return by way of exports and portfolio returns.

However, I guess I am a small fry compared to your heroes like Jim O'Neill and Lord William Dalrymple, whom you love to quote and you wont believe me.

Regards

Anonymous said...

Indian CAD for FY 15 is about USD 36 billion.
(Net of Merchandise + Services + Remittances).

India's FX reserves are 320 billion USD and rising.

As a rule of thumb CAD < 2% is safe.

FIIs/FDIs/External Commercial borrowings are over and above this.

And no Western private capital doesn't flow for geopolitical reason else China would not be a massive destination for it.
That its interests are at odds with the West has been known since at least the mid 1990s.



Riaz Haq said...

Anon: " And no Western private capital doesn't flow for geopolitical reason else China would not be a massive destination for it.
That its interests are at odds with the West has been known since at least the mid 1990s."


China's rise has been driven by huge export surpluses since mid 1990s, not by FDI inflows.

http://www.tradingeconomics.com/china/balance-of-trade

In most recent news by BBC, China's export surplus hit a new monthly record of $60.6 billion in Feb 2015.

http://www.bbc.com/news/business-31787698

Student said...

India is not even in top 10 countries of FDI. So bit surprising why Professor Sahib decided to pick India.

http://hereisthecity.com/en-gb/2015/04/19/markets-face-new-threat-as-us-federal-reserve-ponders-interest-r/

No mention of India as one of the countries to be screwed if US increases interest rate.

Riaz Haq said...

Excerpt of Washington Post on Chinese President's visit to Pakistan:

It (China-Pak Corridor) is an impressive proposal, on a scale that we've come to now associate with China's overseas footprint — more usually in corners of Africa. According to the BBC, the Chinese state and its banks would lend to Chinese companies to carry out the work, thereby making it a commercial venture with direct impact on China's slackening economy.

The project is also a key cog in China's own grand-historic vision of itself as a global power and the font of new sea and land "Silk Roads." The China-Pakistan Economic Corridor would link up a major land route in Central Asia to what China imagines will be a key maritime hub at Gwadar.

Sure, there remain real reasons to be skeptical. Much of the new construction would be done in the vast, restive Pakistani province of Baluchistan, where the army is still grappling with an entrenched separatist insurgency. Moreover, as Pakistani journalist and columnist Cyril Almeida points out, the proposed Chinese numbers stretch credulity, especially when set against the meager sums currently being invested from the outside into Pakistan's economy. The proof, in this case, will be in the building.

----------
China, Small suggests, "is finally easing into its role as a great power." And, indeed, it's using Pakistan as a corridor.


http://www.washingtonpost.com/blogs/worldviews/wp/2015/04/21/what-china-and-pakistans-special-friendship-means/

Riaz Haq said...

Student: " India is not even in top 10 countries of FDI. So bit surprising why Professor Sahib decided to pick India."

India is not in the top 10 but it's the most dependent on FDI because of its large deficits. And FDI inflows in India have surged by 26% last year in spite of slow growth and uncertainties.


http://unctad.org/en/PublicationsLibrary/webdiaeia2015d1_en.pdf


Although economic growth in developing Asia slowed down, FDI inflows remained resilient.
Preliminary estimates demonstrate that combined inflows to 40 economies in the region grew by an
estimated 15% to a historical level of around US$492 billion in 2014. Among the subregions East Asia, South-East Asia and South Asia experienced rapid increases in inflows, while those to West Asia dropped. Inflows to China amounted to an estimated US$128 billion, rising by about 3% from 2013. This was mainly driven by an increase in FDI in the service sector, while FDI to the manufacturing sector fell, particularly
from Japan, and especially in industries that are sensitive to rising labour costs. By contrast, FDI inflows to India surged, increasing by about 26% to an estimated US$35 billion, despite macroeconomic uncertainties
and financial risks.

Mayraj said...

Also remittances.
https://blog.riamoneytransfer.com/overseas-remittances-helping-drive-indias-economy/
How Overseas Remittances Are Helping to Drive India’s Economy
http://works.bepress.com/ronald_ravinesh_kumar/18/

http://www.financialexpress.com/article/economy/india-tops-in-remittances-receives-us-dollar-70-billion-world-bank/63475/

Riaz Haq said...

Mayraj: "Also remittances"

India has huge current account deficits even after taking worker remittances into account.

Mayraj said...

True. That is why avan thinks India's heading for a debt trap

Riaz Haq said...

India may be on the verge of falling into a debt trap, Atradius’s Michael Frigo
Frigo says the biggest with India is that the country has failed to recognize is the massive govt borrowing and consequent debt pile-up

Singapore: The biggest issue that India has failed to recognize is the massive government borrowing and consequent debt pile-up, and the country may be on the verge of falling into an internal debt trap, Michael Frigo, country manager, Singapore, Atradius Credit Insurance NV, said in an interview. The National Democratic Alliance (NDA) government’s upcoming budget must tackle the issue and attempt to drastically reduce subsidies, Frigo said. Edited excerpts:
In your recent report, you’ve said that India’s real economic growth is expected reach 6.5% in 2015. What will drive this growth in the medium term?
Positive business sentiment coupled with increased household demand and manufacturing output will drive growth to 6.5% this fiscal year.
Overall, India is expected to increase growth and to experience lower inflation this year. The country is already experiencing this as demonstrated by its performance in 2014, with the real economic growth reaching 6.0%. In the medium term, India is anticipated to rebound against its economic growth deterrent through its growing middle class, high investment, urbanization and improvement of the business environment and more structural reforms.
The demand for consumer goods and opportunities for domestic and foreign investment brought about by India’s growing middle class population of around 70-100 million makes it a market which international companies cannot afford to ignore. If these international companies will consider setting up shop soon and invest in the Indian market, the move will greatly help achieve the expected real economic growth reach of 6.5% in a shorter period.
The decline of public debt is also notably significant. If it continues its momentum of exponentially declining like what it has already achieved over the past couple of years, it brings down with it its contribution to the central budget deficit which stands at 4.5% of India’s GDP (gross domestic product) last year.
The resumption of stalled infrastructure projects will also help boost India’s growth, especially considering how the industry sector continues to be one of India’s most important sectors—contributing 29% of GDP in 2013.


http://www.livemint.com/Politics/b4icMeBtgen7Lj7RneFzHO/India-may-be-on-the-verge-of-falling-into-a-debt-trap-Atrad.html

Riaz Haq said...

Sources of FDI in India:


A comparison of the available FDI data to M&A data for India reveals an entirely different picture (figure 2). Countries like the US and the UK together make up 50% of M&A acquisitions into India, and Japan is responsible for another 10%. This triad is effectively responsible for three-fifths of FDI inflows into India (of the M&A variety at least). This provides us a more useful geographic breakdown of who is actually doing the investments in India.
A sectoral analysis of FDI inflows suggests that, on average, between 2000 and 2012, more than 35% of FDI inflows have gone into services, telecom and construction sector, with pharmaceuticals, chemicals and computer sector each receiving about 5% of the country’s total FDI inflows over the corresponding period. However, M&A data at the sectoral level for the same time span suggests telecom and pharmaceuticals (and healthcare) have attracted over one-third of the foreign M&A acquisitions in India. Of late, pharmaceuticals has attracted a greater share of M&As, with the sector taking about 20% of inbound M&A acquisitions between 2010 and 2013 (figure 3).
What does the foregoing discussion imply for policy? Obviously, first and foremost there is a need for better appreciation of the actual sources and destinations of FDI to and from India as well as the sectoral composition of FDI flows. In fact, while not discussed here, as Indian companies invest overseas more aggressively, better quality data on gross inflows and outflows at country and sectoral levels are needed.
Much more attention is also needed with regard to FDI quality at a more disaggregated level (i.e. new FDI versus retained earnings and greenfield versus M&A). While it is important for India to attract FDI, it is pertinent to ask the question whether a policy to attract FDI should be careful in distinguishing between the kind of FDI it wants to attract. All FDI are not the same and are not attracted by the same factors. The prime objective must be to align FDI with national development objectives, consistent with being an open economy.

http://www.financialexpress.com/article/fe-columnist/fdi-inflows-who-is-investing-in-india-and-in-what-sectors/28737/

Sally said...

@RIAZ
Such flows are driven much more by the changing geopolitics of South Asia region and the world since the end of the Cold War in early 1990s.

Are you suggesting that the common investor, John Smith of US, is setting money aside in stocks or bonds for retirement driven by "geopolitics of South Asia" and not because of fundamentals?

Riaz Haq said...

Sally: "Are you suggesting that the common investor, John Smith of US, is setting money aside in stocks or bonds for retirement driven by "geopolitics of South Asia" and not because of fundamentals?"

"John Smith of US setting money aside in stocks or bonds for retirement" knows nothing about international investing; his money is invested by professional money managers who are heavily influenced by US policies and advisories on foreign countries. That's probably why professional money mangers underperform broad market indices over 5 to 10 year horizons. In general, the money managers are interested more in the size of their fees than the ROI of their picks.

US corporations are also strongly influenced by US government policies and advisories for international investment destinations.

Majumdar said...

Prof sb,

India may be on the verge of falling into a debt trap

You have been saying that since 2007 when we first crossed swords on chowk.com. Having said that, just because it hasnt happened in the past doesnt mean it wont happen in the future.

Regards

Riaz Haq said...

#India Farmer’s suicide at #AAP rall in #Delhi close to #Loksabha #Modi #BJP l https://shar.es/1p2nXl via @sharethis

A farmer on Wednesday committed suicide by hanging himself from a tree in Chief Minister Arvind Kejriwal's presence at the Aam Aadmi Party's rally against the land bill.

The man, identified as Gajendra Singh, climbed the tree as top AAP leaders were present at the Jantar Mantar, a stone's throw from Parliament, and hanged himself with a 'gamcha' (towel). As some people climbed up to save him, the branch gave away and he fell.

He was rushed to nearby RML hospital in a police jee ..

Read more at:
http://economictimes.indiatimes.com/articleshow/47012614.cms

Riaz Haq said...

MUMBAI—A large pile of debt on the books of India’s big infrastructure companies is complicating Prime Minister Narendra Modi’s plans to boost the country’s economy and improve its woeful roads, electric grids and other public works.

The companies that build big projects owe more than 3 trillion rupees ($48 billion), the result of a failed effort by the previous government to get businesses to help improve India’s infrastructure. The total amount of debt for Indian infrastructure companies is at its highest in more than a decade, affecting the overall economy because banks, fearing the loans won't be repaid, are reluctant to lend to other companies.

Debt levels have risen across Asia in the past five years and are now higher than they were before the Asian financial crisis in 1997. The borrowing has taken different forms in different countries. In China, giant state-owned companies borrowed the most, in Thailand and Malaysia, consumers took on debt, while in Japan, the government boosted its world-leading borrowing.

High debt levels could limit India’s ability to help drive global growth at a time when China is slowing and many of the world’s economies are weak. Foreign portfolio investors have poured $42 billion into Indian stocks and bonds over the past year, leaving them vulnerable to cracks in the country’s economy.

In India, overall debt levels are relatively low. But the sector struggling the most with its borrowing is also one that Mr. Modi is counting on to juice the economy and boost the country’s productivity. Instead, the companies are now focused on reducing their debt.

“At this point, we are not able to commit more equity to new projects,” said Ankineedu Maganti, managing director of Soma Enterprise Ltd., a south India-based developer of roads and other infrastructure projects. “We’re still trying to recover from the past.”

--------------

In 2014, bank credit to infrastructure was 14% of overall credit, and now infrastructure companies account for among the biggest portions of the bad and stressed loans on the books of Indian banks.

The bad debt has made banks less willing to lend, weighing on the overall economy, according to a Finance Ministry report in December. “The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets,” the report said. “Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend.”

Banks have been pushing infrastructure companies to sell assets and pay back debt. But India’s insolvency laws make it unattractive for lenders to push companies into liquidation, so the standoff is likely to continue.

http://www.wsj.com/articles/indias-debt-pile-up-complicates-growth-plans-1430758983

Riaz Haq said...

#India Worst performing stock market? This is the end of the Modi bubble for FIIs

Is PM Narendra Modi running out of luck? He had famously boasted being a lucky Prime Minister while seeking votes during the Delhi elections. The context, of course, was international oil prices had less than halved and that seemed to have brought all round uptick in economic sentiment, what with the stock markets soaring to new highs early 2015. Consensus among global FIIs was that they will remain overweight India as compared to other markets like China, Brazil, South Korea, Taiwan and Russia. But everything seems to be reversing over the past month and a half.
Suddenly the FIIs, with a cumulative investment in Indian stocks of about $300 billion at market value, are looking at other emerging stock markets for returns and no longer treat India as the most preferred destination as they did last year, and even the beginning of this year. FII net outflows gave been of the order of Rs 12,500 crore over the past month. The stock market index has seen the biggest correction of 10 percent in a short time. This has caused speculation whether the markets are slipping into a bear phase.

But what is indeed worrisome is India is probably the worst performing stock market among emerging economies this year. This is in sharp contrast to the view taken by the big FIIs that the Modi government reforms could trigger a multi-year bull run in India. Now the same FIIs are shifting the weightage of their global allocation to China where the stock markets have shown 30 percent growth since January. India's Sensex growth remains in negative territory. Even FII inflows, which primarily influence market movement, are flat to negative since January.
Worse, now FIIs also seem to prefer oil exporting markets like Russia and Brazil, both of whom had fallen out of favour after the global oil prices had more than halved, badly affecting their revenues. Now the FIIs believe that oil prices are moderately correcting and returning to oil exporting markets like Russia and Brazil makes sense. This view is buttressed by another major consideration. They feel as the US economy recovers and the prospect of monetary tightening by the Federal Reserve brightens, the dollar would strengthen in the short to medium term.

The Economic Times has just reported a survey of top CEOs and the majority of them suggest that demand is depressed. "The bonhomie and cheer that greeted the arrival of the Modi government is replaced by a sombre mood and a grim acknowledgement of the realities of doing business in India," reports ET, as it captures the sentiment of the CEOs. Little wonder that this is reflecting in the behaviour of the stock market and currency. The largest engineering conglomerate L&T had said some of its plants are lying idle as demand for capital goods is very weak. The Aditya Birla Group had deferred its revenue target of $65 billion by 3 years, to 2018.
These are not good signs for the economy and both the stock market and currency will reflect this in the months ahead.

http://www.firstpost.com/business/worst-performing-stock-market-end-modi-bubble-fiis-2243556.html

Riaz Haq said...

Commodities collapse cuts imports but also hurts #India's exports: Petroleum, gold jewelry, Iron ore, cotton, food http://cnb.cx/1h1hDvs

Slumping global commodity prices are typically seen as a boon for India, a country that relies heavily on oil imports to service its energy needs, but a closer look indicates it's not all good news.

That's because least 35 percent of India's exports come from commodities-linked products including refined petroleum, gold jewelry, gems, iron and steel. While typically lower input costs should burnish profits for these companies, prices of the final goods Indian manufacturers crank out have also slumped.

"India's miners are seeing sharp contraction in their earnings, agriculture commodity producers are seeing their earnings affected due to the weak price of agriculture products, and the gems/jewelry sector is undergoing a major downturn," said Taimur Baig, chief economist at Deutsche Bank.

The export value of refined fuels – which make up nearly one-fifth of total exports - is down 51 percent on-year this fiscal year, for example, amid falling prices and weak demand. Similarly, gold jewelry exports are down 20 percent on year, while iron and steel exports are down 30 percent, according to the bank.

Of India's top five export destinations – the U.S., United Arab Emirates, Hong Kong, China and Saudi Arabia - exports to China have slowed the most, followed by Saudi Arabia.

While India is not nearly as export-oriented economy compared with many of its Asian neighbors, exports account for a sizable portion of its gross domestic product (GDP) - approximately 15 percent.


Thus, "benefits from lower prices and import costs are being offset by weakness in the domestic commodity sector," Baig said.
"It is clear that India's growth recovery is unlikely to be supported by a vigorous rebound in the external sector anytime soon. Therefore, it is evident that domestic demand would have to play a bigger role in supporting India's growth recovery in this cycle, mainly though a meaningful turnaround in capex and investment," he added.

Banking sector risks

Not only is the commodities slowdown weighing on India's exports, which tanked a whopping 20.7 percent on year in August, it also poses a threat to the country's banking sector.

"India's banks have sizable legacy exposure to stressed sectors such as steel, mining, and infrastructure; their recent loan growth has also been largely toward these sectors," said Baig.

"The commodity headwind is pushing up likelihood of further NPLs [non-performing loans], casting a shadow on the banking system," he said.

Read More Why it could get even worse for materials stocks

India's state-owned lenders are already struggling with deteriorating asset equality as a result of the economy's slowdown in recent years and stalling of large infrastructure projects.

Monetary policy challenge

The correction in commodity prices is also overstating disinflation in India, says Baig, posing a challenge for monetary policy.

"Pressure on the RBI [Reserve Bank of India] has risen considerably to ease policy interest rates. Non-commodity prices, however, are hardly in benign territory," Baig said.

"Education costs were up 6 percent on year through August and the same was with clothing. Thus the issue of how much room is available for the central bank to cut rates with a view to its medium term inflation objective of around 4 percent is being complicated by commodity price driven disinflation," he said.

The RBI is due to hold its next policy meeting on September 29, when it is expected to cut interest rates by 25 basis points to a four-year low of 7 percent. It has reduced its key policy rate a total of 75 basis points this year, standing pat at its last policy review in August.

Anonymous said...

Stupid question! Can China survive without exports? NO! If west goes bust right now, say goodbye to chinese economic boom too and so to CPEC.