Spotting green shoots of recovery seems to have become a global pastime. One of the latest to join the bandwagon is Mastercard Worldwide, with Yuwa Hedrick-Wong, its economic advisor, asserting that India will recover in the second half of the year.
There’s nothing new about that—it’s more or less the consensus. What is interesting, though, are the reasons Hedrick-Wong gives for his optimism.
He says that India has a lower capital intensity of output compared with China, which basically means that India uses capital more efficiently than China. Since Indian businesses “have a relatively lighter touch when it comes to deploying investment capital”, they can operate more effectively when there’s a credit squeeze. Hedrick-Wong believes that this will enable them to move faster when the recovery begins.
Moreover, thanks to the Reserve Bank of India’s conservative policy of raising interest rates during the boom, the cost of capital has been relatively high, which means that the hurdle rate for justifying investments has been higher. India’s real policy rate, for instance, has been higher than China’s throughout the entire period of 2000 to 2008. Hedrick-Wong believes that this has ensured a better quality of investment in India compared to most other countries, including China.
The third reason that goes in favour of India is its competitive advantage as a destination for outsourcing of services. The Mastercard economist pointed out that the global recession has led to tremendous overcapacity in manufacturing. In December 2008, for example, global capacity utilization in automobiles was 73% and in semiconductors it was 62%.
The extent of overcapacity can be also seen from the fall in prices. For instance, the price change in the US toys industry between December 2007 and December 2008 has been –18.2%, while that in the television set manufacturing has been –19.4%.
Hedrick-Wong says that overcapacity is going to get worse this year, because Chinese wages are coming down as exports decline. In short, any country trying to manufacture and export its way out of the downturn will have Chinese prices to contend with.
On the other hand, Hedrick-Wong points out that the cost of services in the US, such as computer consulting services, has gone up by 5.3% between December 2007 and December 2008, healthcare services by 5.4% and management and technical consulting services by 1.7%. He says that the price rise implies severe supply constraints in such services and that’s good news for India’s information technology outsourcing sector, despite all the talk of protectionism. Manufacturing too will become more service-intensive.
This global structural shift, says Hedrick-Wong, will be good for India. The upshot: India could recover faster than many other markets.
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