India "Time of Reckoning" as its Economy "Explodes"

For at least two years in a row, BRIC has, in the words of SGS's Albert Edwards, stood for Bloody Ridiculous Investment Concept, not an acronym for populous emerging markets of Brazil, Russia, India and China as Goldman Sachs' Jim O'Neill saw it ten years ago.

In fact, O'Neill has himself expressed disappointment in India, one of the BRICs, a designation that has boosted foreign investment in India and helped accelerate its economic growth since 2001.

"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 as quoted by Reuters.

Noting India's significant dependence on foreign capital inflows, Jim O'Neill went further and raised a concern about the potential for current account crisis. "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'". "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. Stocks in all four countries have underperformed relative to the broader emerging markets equity index, as well as the markets in the developed nations. Pakistan's KSE-100 has significantly outperformed all BRIC stock markets over the ten years since BRIC was coined.

As India's twin deficits continue to grow and the Indian rupee hits record lows relative to the US dollar, there is pressure on Reserve Bank of India to defend the Indian rupee against currency speculators who may precipitate a financial crisis similar to the Asian crisis of 1997.

In addition to Jim O'Neill, a range of investment bankers are turning bearish on India. UBS sent out an email headlined "India explodes" to its clients. Deutsche Bank published 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.

As explained in a series of earlier posts here on this blog, India has been relying heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its rising current account gap. Those flows are called "hot money" and considered highly unreliable.

Indian policy makers face a significant dilemma. If they do nothing to defend the Indian currency, the downward spiral could make domestic inflation a lot worse than it already is, and spark massive civil unrest. If they intervene in the currency market aggressively by buying up Indian rupee, the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis Goldman Sachs' O'Neill hinted at.

Related Links:

Haq's Musings

India's Twin Deficits

Karachi Tops Mumbai in Stock Performance

India Returning to Hindu Growth Rate

Soft or Hard Landing For Indian Economy?

Karachi Stocks Outperform Mumbai, BRICs


Ishita Sharma said…
Good article.

I liked your site, good information for South Asian investors.
Riaz Haq said…
Here's a Bloomberg report on India exaggerating its exports:

India’s commerce ministry said it overstated merchandise exports by $9 billion in the eight months through November because of “misclassification and errors” in computing overseas sales.

“Notwithstanding the misclassification, there were errors in double counting and all sorts of things which inflated exports by about $9 billion,” Commerce Secretary Rahul Khullar told reporters in New Delhi yesterday. Overseas sales in the April-to-November period now stands at $192.7 billion, Khullar said.

India’s monthly export growth has averaged about 44 percent since April even as Europe’s debt crisis and a faltering U.S. recovery reduced global consumer demand, prompting economists to question the quality of the data. Today’s revision explains “in part the weakening of the rupee,” Asia’s worst-performing currency this year, said Jay Shankar, Mumbai-based economist at Religare Capital Markets Ltd.

“The global economy isn’t doing well, so it was hard to understand how India was posting such fantastic export numbers,” said Biswajit Dhar, director of New Delhi-based Research and Information System for Developing Countries. “There were reasons to believe something was going wrong.”

The rupee weakened 0.6 percent to 52.04 per dollar in Mumbai yesterday, extending its decline this year to 14.1 percent. The BSE India Sensitive Index (SENSEX), which has lost a fifth of its value in 2011, dropped 1.7 percent. The yield on the 8.79 percent bonds due November 2021 rose two basis points, or 0.02 percentage point, to 8.54 percent.
Waning Demand

India’s exports in November were $22.3 billion, Khullar said, without elaborating. Bloomberg calculations based on previously announced data show exports grew 3.7 percent last month from a year earlier, the slowest pace in more than two years.

The South Asian nation’s imports in November were $35.9 billion, he said. Imports in the eight months through November were $309.5 billion, causing a trade deficit of $116.8 billion in the period, Khullar said.

India will get “close to, but not quite $300 billion in exports” in the year ending March 31, he said.

The South Asian nation’s export growth has vacillated this year, surging 82 percent in July before slowing to an 11 percent gain in October, according to previously reported data by the commerce ministry.

A report by Mumbai-based Kotak Institutional Equities Research in October showed “wide gaps” in engineering export numbers released by the government and data culled from annual reports of the top 500 companies on India’s exchanges for the year ended March 31.

While official announcement showed engineering exports jumped 79 percent to $68 billion in the year through March, data collected by Kotak from company reports indicated only an 11 percent increase to 638 billion rupees ($12.3 billion) during the period, according to the report written by Sanjeev Prasad, Sunita Baldawa and Amit Kumar.
Riaz Haq said…
India rupee has slid 19% against US dollar since March this year, according to the Wall Street Journal:

The Indian rupee partially recovered from a fresh record low against the U.S. dollar Tuesday, aided by a late rebound in local stocks and as the euro pared its losses.

The dollar was at INR53.22 late Tuesday, after touching an intraday high of INR53.515, and compared with INR52.84 late Monday. The greenback's previous record high was INR52.85, on Monday.

The rupee has borne the brunt of global risk aversion emanating from the euro-zone crisis and due to concerns over high domestic inflation, slowing growth and a possible widening of the federal government's budget deficit.

The dollar has gained nearly 19% against the rupee since March, making it Asia's worst-performing currency this year.

The rupee could easily be set to fall to as much as 55 to a dollar by the end of the year, as unhedged local firms rush for cover on their dollar debt, said Ashish Vaidya, head of trading at UBS in India.

Local authorities are making efforts to boost foreign-exchange supplies to help arrest the rupee's slide against the U.S. dollar, the junior minister of finance said. "The finance ministry has been keeping a close watch on the situation," Namo Narain Meena said in the upper house of parliament.

A subcommittee of the Financial Stability and Development Council, headed by Reserve Bank of India Governor Duvvuri Subbarao, is also continuously assessing the matter, he added.

The Bombay Stock Exchange's Sensitive Index rose 0.8% to end at 16,002.51, recovering from its intraday low of 15,771.59.

Meanwhile, Indian government bonds rose on investors' expectation that moderating economic growth will allow the central bank to take a dovish stance and ease policy rates sooner than expected.

The 8.79% 2021 bond ended at INR102.55, up from INR102.26 Monday.

The Reserve Bank of India is likely to pause tightening interest rates at its rate-setting meeting Friday, after 13 increases since March 2010.

"But a fast depreciating rupee may add to some imported inflation as India buys about 80% of its crude oil need," said a senior dealer at a state-run bank.

The market is awaiting November's inflation data, due Wednesday.

According to the median estimate in a Dow Jones Newswires poll of 15 economists, the wholesale price index likely rose 9.04% in November from a year earlier, compared with a 9.73% increase in October.
Riaz Haq said…
The Indian stock market today lost its trillion-dollar status, as a decline in the rupee and share valuations led to its size slipping below this mark to $994.97 billion, according to India's Economic Times:

India had managed to hold onto the select league of the countries with a trillion-dollar stock market by a whisker for past few days, but finally gave in today after the market barometer Sensex fell to a fresh 28-month low and the rupee lost further value against the US dollar.

At the end of today's trade, the total size of the Indian market, measured in terms of cumulative valuation of all listed stocks, stood at Rs 52,60,440.78 crore.

As the rupee ended the day at Rs 52.87 level, the stock market's size in the American currency was USD 994.97 billion -- just a shade below the trillion-dollar mark.

The Indian market had a size of USD 1.0116 trillion (Rs 53,48,352.02 crore) at the end of yesterday's trade.

A total of 13 countries are now estimated to be left in the trillion-dollar stock market club, including the US, the UK, Canada, Brazil, Australia, Hong Kong, South Korea, China, Japan, Spain, Germany, Switzerland and France.

The Indian market had first achieved a trillion-dollar size about four and half years ago on May 28, 2007, but moved out of this coveted league about a year later on July 1, 2008.

India again joined this elite club of markets with trillion-dollar valuation about a year later on June 3, 2009.

The Indian market was, in fact, seen inching towards the two-trillion dollar mark at least twice in the past -- first in early 2008 and then at the beginning of 2011 with a size as high as USD 1.9 trillion.

A sharp plunge in the market this year has led to the Indian market valuation falling by close to Rs 20 lakh crore (over USD 500 billion), from about Rs 73 lakh crore (USD 1.7 trillion) at the beginning of 2011.

The rupee has been a declining trend for many months now and had hit its record low level below Rs 54-level last week, but the fall was somewhat arrested since then on the back of an intervention by the Reserve Bank.

The market size has been hovering above the trillion- dollar mark for last few days and an eminent miss was averted on Thursday last week, when the RBI managed to reverse the downfall of rupee after a record fall to Rs 54.30 level.

On Friday, the market size stood at Rs 54,11,301 crore or USD 1.026 trillion, based on that day's currency rate of Rs 52.30, as the market tanked sharply. The trillion-dollar tag had been lost that day itself, if the rupee had managed to hold onto its record high levels.

In terms of individual exchanges, the total size of stocks listed on the NSE yesterday itself slipped below trillion-dollar mark to USD 989 billion (Rs 52,30,333 crore).

At the end of today's trade, NSE-listed market valuation stood at Rs 51,42,566 crore (USD 972.68 billion).

However, the market valuation of NSE-listed companies is not considered as the country's stock market size, as not all the companies are listed on this exchange.

Indian stocks are mainly listed on two national bourses, the BSE and the NSE, but the numbers of listed companies on the two stock exchanges differ sharply.

While about 1,600 stocks are actively traded on the NSE, the number is almost double at over 2,900 at the BSE.

Almost all the stocks listed on the NSE are also listed on the BSE and therefore the cumulative valuation of companies listed on the BSE is treated as the total market size.
Mayraj said…
Businessweek report on infrastructure and power deficits hurting India:

Dec. 19 (Bloomberg) -- Truck driver Sujan Singh should be delivering cars to Mumbai from Maruti Suzuki India Ltd.’s plant near New Delhi. Instead, he’s sitting at a roadside cafe by one of India’s busiest highways, waiting for the traffic to ease.

“I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.”

India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months. The bank says supply bottlenecks that push up costs must be tackled.

The country of 1.2 billion people is paying for two decades of neglect. While China 20 years ago went on a multitrillion dollar spending spree for roads, railways, ports and power stations, its South Asian neighbor concentrated on services. Now, as China reins in prices and expands industry inland to restrain wages, India’s near record-low rupee and price gains are damping consumer spending and choking off company earnings.

“India has allowed a large number of cars without creating enough roads; a large number of industries without enough power to run them,” said Sunil Sikka, president of Havells India Ltd., the nation’s second-largest electrical components maker by value. “It’s like trying to wear shoes without socks -- very, very irritating and difficult.”

Cars and Soap

Sikka said Havells has to pay higher packaging costs to protect lamps and switchgears from India’s bumpy roads, where average speeds are 20 kilometers per hour (12 mph). Businesses from Maruti to soap and food maker Hindustan Unilever Ltd. also suffer, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.

“All companies where there is movement of goods and services and distribution are getting hit,” said Thunuguntla. “It adds to their costs and affects productivity.”
Riaz Haq said…
Results of PISA international test released by OECD in Dec, 2011, show that Indian students came in at the bottom of the list along with students from Kyrgyzstan:

Students in Tamil Nadu-India attained an average score on the PISA reading literacy scale that is significantly higher than those for Himachal Pradesh-India and Kyrgyzstan, but lower than all other participants in PISA 2009 and PISA 2009+.
In Tamil Nadu-India, 17% of students are estimated to have a proficiency in reading literacy that is at or above the baseline needed to participate effectively and productively in life. This means that 83% of students in Tamil Nadu-India are estimated to be below this baseline level. This compares to 81% of student performing at or above the baseline level in reading in the OECD countries, on average.
Students in the Tamil Nadu-India attained a mean score on the PISA mathematical literacy scale as the same observed in Himachal Pradesh-India, Panama and Peru. This was significantly higher than the mean observed in Kyrgyzstan but lower than those of other participants in PISA 2009 and PISA 2009+.
In Tamil Nadu-India, 15% of students are proficient in mathematics at least to the baseline level at which they begin to demonstrate the kind of skills that enable them to use mathematics in ways that are considered fundamental for their future development. This compares to 75% in the OECD countries, on average. In Tamil Nadu-India, there was no statistically significant difference in the performance of boys and girls in mathematical literacy.
Students in Tamil Nadu-India were estimated to have a mean score on the scientific literacy scale, which is below the means of all OECD countries, but significantly above the mean observed in the other Indian state, Himachal Pradesh. In Tamil Nadu-India, 16% of students are proficient in science at least to the baseline level at which they begin to demonstrate the science competencies that will enable them to participate actively in life situations related to science and technology. This compares to 82% in the OECD countries, on average. In Tamil Nadu-India, there was a statistically significant gender difference in scientific literacy, favouring girls.
Riaz Haq said…
India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion, according to a report in the Indian Express:

...The composition of capital inflows shifted in favour of debt, with a rise in the proportion of short-term flows. If the pace of FDI inflows does not pick up once again and FII equity inflows revert to the decelerating trend, CAD may have to be largely financed through debt creating flows in the coming quarters. Recent pick up in FII flows has been mainly on account of investment in debt instruments.
On the capital account, recent policy measures have stimulated debt capital flows in the form of investments by FIIs in debt instruments and NRI deposits. Going forward, however, it would be necessary to reduce dependence on debt inflows and accelerate the reform process in order to ensure revival of equity flows as investors look for strong growth opportunities in an otherwise gloomy global environment, the RBI says.

Widening current account deficit (CAD), diminishing capital flows and moderately deteriorating vulnerability indicators, notwithstanding improved net international investment position, warrant acceleration of the domestic reform process. The RBI feels this will encourage renewed equity flows.

Subbarao made it clear that close monitoring of the short-term external debt will be required in 2012-13. Given that both global and domestic scenario remains bleak, investors would generally tend to prefer shorter-dated government securities.

Capital flows

* In 2011, out of $8.65 billion foreign debt inflows, as much as $4.18 billion came in December while there was an outflow of $357 million from equity

* India’s total external debt has risen to $326 billion while forex reserves have dipped to $293 billion

* If the pace of FDI inflows does not pick up and FII equity inflows decelerate, CAD may have to be largely financed through debt creating flows in the coming quarters.
Riaz Haq said…
Here are "Ten Things for India to Achieve its 2050 Potential", brought out by Jim O'Neill, Head Global Research at Goldman Sachs, and Tushar Poddar, V-P Research, Asia Economic Research Team at Goldman Sachs India, as reported by India's Economic Times:

1. Improve governance

2. Raise educational achievement

3. Increase quality & quantity of universities

4. Control inflation

5. Introduce credible fiscal policy

6. Liberalize financial markets

7. Increase trade with neighbors

8. Increase agricultural productivity

9. Improve infrastructure

10. Improve environmental quality
Riaz Haq said…
Criminals flourish in Indian Elections, reports Washington Post:

DIBAI, India — In India’s democracy, crime really can pay.

In the past month, voters in the northern state of Uttar Pradesh, home to 200 million people, have been lining up in huge numbers to cast votes in state elections.

But of the 2,000 candidates from the main parties contesting here, more than a third are facing criminal charges, including murder, rape, kidnapping and extortion, according to figures compiled by the advocacy group Association for Democratic Reforms.

And many of them will win.

“They are popular with voters,” lamented Chief Election Commissioner S.Y. Quraishi. “I call it the Robin Hood syndrome. They take care to use their corrupt money, money that they get through illegal means, to give to the poor.”

Despite a nationwide campaign against corruption last year, the percentage of candidates facing criminal charges has risen from 28 percent to 35 percent since state elections were last held in 2007. At least 30 candidates are incarcerated.

It is a similar picture nationally: 162 of the 545 members of India’s lower house of Parliament are facing criminal charges, compared with 128 in the previous Parliament.
Criminals and wealthy politicians regularly dole out cash in return for votes. Quraishi said his agents seized more than $12 million in cash during elections last year in the southern state of Tamil Nadu, including one haul of $1 million in cash hidden in sacks on the roof of a bus....
Riaz Haq said…
Jim O’Neill, ex Goldman Sachs investment banker who coined "BRICs", praises #China government’s #coronavirus response: ‘Thank God this didn’t start in somewhere like India’. His comments anger #Indian officials. #India #Modi #BJP #CowUrine #COVIDー19|twitter&par=sharebar

Jim O’Neill, the chair of U.K. think tank Chatham House, on Wednesday commended the “fast, aggressive” Chinese response to the coronavirus outbreak, suggesting western countries should follow suit.

“Thank God this didn’t start in somewhere like India, because there’s absolutely no way that the quality of Indian governance could move to react in the way that the Chinese have done,” O’Neill, the former Goldman Sachs chief economist, told CNBC’s “Squawk Box Europe” on Wednesday.

“That’s the good side of the Chinese model, and I think you could probably say the same about Brazil too,” he added.


On one hand, O’Neill acknowledged that the dominance of President Xi Jinping and the diminished responsibility of officials in Wuhan, where the virus originated, may have enabled COVID-19 to initially spread quicker.

“That said — and it’s often like a lot of other things when China got hit with a crisis over the last 30 years — once they realized the scale of it, the system seems to be capable of dealing with it pretty quickly, relative to other places, and pretty decisively,” O’Neill contended.

Chinese authorities suppressed early warnings from doctors and citizens in Wuhan and forced them to apologize for spreading “lies” and in turn failed to contain the outbreak in its infancy. The government has been widely criticized for its delayed response at the outset, with Raymond James analysts likening the situation to the Soviet Union’s handling of the Chernobyl nuclear disaster.

Ophthalmologist Li Wenliang sounded the alarm in December when he told a group of doctors on Chinese social media about seven cases he saw. He and seven other whistleblowers were reprimanded by the Wuhan police in January for spreading “illegal and false” information.

Chinese authorities shut down vast swathes of the country’s travel infrastructure and industrial production last month, causing a profound short-term shock to the Chinese and global economy. However, new cases of the virus in greater China have now slowed to a trickle, while Italy deals with a rapid escalation in new infections and a spiking death toll.

Negi highlighted that the Indian government supplied 15 tons of medical assistance comprising masks, gloves and other emergency medical equipment to China on 26 February 2020.

The outbreak is now a global pandemic while new cases in China have begun to slow, and Beijing is now attempting to cast doubt over whether the virus actually originated in China at all.

A ‘globalized people’
O’Neill, the former commercial secretary to the U.K. Treasury suggested that western governments dealing with outbreaks of their own, such as Italy and the U.K., should look to emulate China, South Korea and Singapore in the swift deployment of aggressive containment measures.

He also argued that finance and economic policymakers must begin treating health policy more seriously and think of it in the same way as other investment spending, and criticized the protectionist agenda of the U.S. and other nations on international trade.

“Unless we get rid of all forms of communication, we are globalized people and we need to think and learn from each other about the right solutions at any moment in time for all of us,” O’Neill concluded.

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