India is no different from the rest of the globe when it comes to the economy. One should not buy India because of its population or consumption story. One should buy India because it’s a democracy and has the ability to put things right. The country is showing that it can put things right by punishing the corrupt, righting the wrongs of monetary and fiscal loosening and trying to gain political consensus on subsidies. The latter is a long hard grind but it’s worth it.
US stuttering, Eurozone in shambles, Japan in doldrums and China facing hard landing. India with its projected headline GDP growth of 7% plus, relatively protected bond markets (debt is internalized) and highly regulated banking system (30% of deposits goes into statutory reserves) seems to stand out amidst the global turmoil. Media is quoting politicians, economists, market men and bureaucrats of the safe haven status of India.
India does not stand out in the global turmoil and is definitely not a safe haven country. In fact, India stood out in the credit crisis of 2008 with its financial system being insulated from the global carnage by sound counter cyclical central bank policies. The RBI under the governorship of Dr. Y.V.Reddy resisted all businessmen and politician attempts to loosen regulations to let a flood of foreign money come into the country. The result of RBI’s policies at that time is there for everyone to see.
Post 2008 crisis, India went down the path of global governments and central banks in pump priming the economy. The government borrowed and spent taking up fiscal deficit by almost 300bps while the RBI cut rates by 400bps to all time lows. The result, an economy recovery built on steroids, which proved unsustainable. GDP growth went up by over 1.5% while inflation went up by 6%. That is the reason India is following the trend of global markets with the Sensex falling in tandem with global equity indices in the current market sell off. The Sensex has lost 7% since the beginning of August post the US debt debacle.
India has a long way to go to become a safe haven. India runs a fiscal deficit and has been running a fiscal deficit over the last twenty years. India’s central government debt (internal liabilities) to GDP at around 50% is better than many countries including the US (projected at 74% of GDP for 2011). The fact that India’s debt is lower than other countries does not make it superior to them. India’s outstanding debt has doubled over the last six years, even as the country experience GDP growth of over 8.5% on an average in the same period. India also runs large subsidies, which has remained sticky at around 1.5% of GDP over the years, except for the pump priming period between 2008-2010 where subsidy bill went up to close to 2.5% of GDP.
India runs a current account deficit, which is projected, at around 2.5% of GDP. The country imports 75% of its oil requirements and given that fuel is subsidized, rising oil price does not diminish consumption. Oil imports constitute 25% of total imports. The current account gap is funded by capital flows. The country has portfolio flows of USD 28 billion in 2010-11 while fiscal 2011-12 year to date portfolio flows have been just slightly positive. The dependence on volatile capital flows to pay from subsidized consumption makes the country vulnerable to global shocks.
Buy India, but wait for the returns.