As the US slowdown appears a prolonged one with leading companies such as GM declaring bankruptcy and unemployment heads to 9% the major aspects that are confronting us are a long term slump on growth in the developed world who still contribute to the major portion of consumption and higher growth in China and India. This trend we believe is a sustainable trend as capital flows to emerging economies will continue in search of growth.
From India’s stand point of view, we think that the recent euphoria of a 75% move over three months is overdone. There are still several issues that confront us such as a large fiscal deficit, lower job creation due to slowdown in exports. While it is true that there has been a high resilience in India’s economy in part due to the high personal consumption expenditure and government expenditure, this is not sustainable as our fiscal deficit is increasing and threatens to choke capital or the private sector.
Elections 2009 was with unexpected results, which led markets to shoot up like a rocket. That over, we have to see in balance as to what needs to be done and whether this government will seize the opportunity ahead of them to make this election outcome a right move for the country. With 263 sets, the UPA can move ahead with greater speed and alacrity should it so desire but question is whether it will.
The good things first: India will continue to depend on foreign capital to build her infrastructure and as this responsibility falls more on the private sector, the greater the need for foreign capital. The credit crisis in 2008 and early 2009 is waning and money flows have started albeit slowly. While leverage to the past levels is not possible for hedge funds and arbitrageurs there is a fair amount of liquidity moving around that can enter India to boost growth.
Further, the credit crisis was accentuated by a loss of confidence among Indian promotes and banks that were disinclined to lend and companies who were disinclined to borrow. This standoff is thawing and as capital infusions seem to be gaining ground, the velocity of money is set to increase. This will restart momentum in India’s infrastructure projects and to some extent create employment and its own virtuous cycle.
The rural prosperity has been underestimated and there has been a shift in wealth from urban India to rural India thanks to record increase in food prices due to global trends an increase in the minimum support prices. The transfer of wealth is not small, and as per our estimates could range between 40-50 billion dollars which is close to 5% of GDP.
While this amount might have been saved in an urban environment this is being spent in the rural environment as they improve their standard of living. This was not earlier realized and hence the resilience in sales of cement, auto and mobile phones surprised the markets. This appears sustainable and with the restarting of infrastructure, there would be remittances of money by workers which will continue to keep the momentum going.
The National Rural Employment Guarantee Scheme appears to have helped the destitute and stopped exploitation to an extent and has created a minimum wage program to benefit people in that end of the spectrum. Going ahead, we expect the government to continue to press ahead with such projects which will improve the living standards for the deprived segments of society.
There will be a clear emphasis on keeping the infrastructure story going, as it has go hand-in-hand to maintain growth. India’s infrastructure program took a back seat due to poor implementation, change in focus to more social programs to win the elections, and coalition partners who derailed the process. We believe that the new government will not risk this delay for another five year term and will emphasis.
This effort will coincide with easier credit availability in the domestic markets and interest from overseas investors. As to how many projects actually successful remains to be seen, as the track record of India’s companies to implement on such a large scale is not yet tested and we would require large doses of foreign expertise in rolling out these projects. Dependence only on domestic sources will derail the build up of India’s projects and we would require both foreign companies and capital to build our infra structuring.
With interest rates softening and credit becoming easier, consumer credit will restart as well helping demand improve for housing and auto which can also help the economy tick? The credit crisis contracted the credit availability in India by close to 25% last year and any reversion to mean will help growth improve.