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How bad is the Indian economy?
Many indications appear to suggest that things have gone horribly wrong for India. But according to CMIE, one of the leading information service providers in the country, things may be not as bad as they seem.
True, prima facie, there is cause for alarm. Falling growth in output and rising inflation may suggest that the economy is headed towards stagflation. But presenting other data to an audience in New Delhi last month, Mahesh Vyas, managing director, CMIE, painted a scenario that suggests that there is a great deal of steam still left in the Indian economy. CMIE believes that the drop in the Index of Industrial Production (IIP) is on account using a computation which has not captured the intrinsic strengths of the Indian corporate sector.
Four key indicators—two on the manufacturing sector and, two on the entire economy—paint a much rosier picture.
Also Read R.N. Bhaskar’s earlier columns
Also See In The Pipeline, Inherently Strong, Packing a Punch (Graphic)
First, there has been continued growth in the fixed asset formation of Indian manufacturing companies. By eliminating non-manufacturing companies, the data leaves out firms in businesses such as real estate and financial and other services whose asset values may be inflated. Obviously, these fixed assets would be available for enhancing production in the coming months and years.
The health of the Indian manufacturing companies is further buttressed by the fact that they have begun to enjoy healthier debt-equity ratios than ever before. This means that they now enjoy better borrowing capabilities and have the ability to weather the coming financial storm.
Evidently, this has been possible because of the continued boom in the capital markets over the past few years, which allowed these companies to build up their premium reserves, and then use them for financing the growth in assets without taking on debt. Relatively sober capital market conditions in the near future will ensure that fancy projects aimed merely at tapping easy money will stay away from the investing public, giving good manufacturing companies that much more of credibility and the ability to grow more healthily.
The good news is not just confined to the Indian manufacturing sector. CMIE, which monitors all investment outlays in the country, has data to show that fresh investments have continued their upward trend.
All these investments have the potential for creating additional goods and services both for consumption within India and for markets overseas. What is even more interesting is that the pipeline of new projects remains amazingly strong. Announcements of new investments continued in July (Rs2.18 trillion) and August (Rs1.32 trillion) this year. This is also borne out by statements of K.V. Kamath, chairman, ICICI Bank, affirming that the pipeline of funding commitments remains extremely strong for the next two years at least, though there has been a slowdown in the offtake of funds during the last two months.
Some of these new investments are in areas related to refineries, metals, cement, automobiles and power. The commissioning of new gas fields will reduce the country’s import bill, and the setting up of fresh power generation capacities will further trigger another cycle of growth in the economy.
Undoubtedly, all these figures relate to the period before September. Much of the chaos in the global economy has been witnessed only from September, threatening to shake the very foundations of the entire world’s financial edifice. It has frightened investments away and even consumers.
The US and many countries in the EU are officially in recession—defined as negative growth for two consecutive quarters. Even the International Monetary Fund has gone on record stating that there will be little growth or even negative growth in most developed countries.
Could this contamination hurt India? To some extent yes, say economists. But the strategy for India would be to ensure two things: One that purchasing power with most Indians should not be allowed to decline. Second, that the rupee should be allowed to become stronger.
The first will ensure offtake of goods and services in a country which is not overly dependent on exports but has grown primarily on account of domestic consumption. This will require the government to keep the country’s financial taps open for financing more cost-effective roads, railway lines and other infrastructure so that employment generation does not stagnate, and the costs of doing business actually decline.
A strong rupee, on the other hand, will allow imports to remain cheap, thus reducing the cost of importing oil and fertilizers, India’s biggest import bills. A strong rupee will also be deflationary because lower prices of imported goods and services will keep a cap on domestic prices from going out of control. Lastly, a strong currency will encourage foreign funds to come in because of the double benefits from a strengthening local currency and picking up stocks at rock bottom prices.
Clearly, deft financial and political management will be in great demand. Is that expecting too much?
Lemon or melon?
Last month, NYSE Euronext managed to acquire a 25% stake in Qatar’s Doha Securities Market (DSM) for $250 million. This put DSM’s value at$1 billion (Rs4,930 crore today). It was a race between London Stock Exchange (LSE) and NYSE Euronext, and most observers believed that the latter would lose out. The reason? Qatar Investment Authority owns 15% of LSE and it was widely believed that this would allow the Qatar-LSE relationship to get strengthened.
But the deal is interesting for yet another reason.
But DSM’s number pales into insignificance when stacked against the 7,792 companies listed on Bombay Stock Exchange (BSE) as in April. Moreover, BSE accounted for a market capitalization of Rs46,64,674.08 crore in April—around $971 billion at current exchange rates. Even if one takes into account the erosion in values of 50% of this value, even then BSE’s market capitalization would be at least $485 billion, significantly higher than DSM’s $130 billion. The only place where DSM scores over BSE is in turnover figures—DSM’s $ 29.9 billion is a bit ahead of BSE’s 25.65 billion in 2007.
So why then was BSE valued at just around $1 billion (actually, just around $0.78 billion at current exchange rates), when it gave away 5% of its equity to Deutsche Borse in February last year? It may be recalled that the 5% equity stake of BSE was sold for Rs189 crore. Is BSE worth no more than DSM? So did someone undersell BSE?
Did Qatar sell a lemon, or did Deutsche Borse win a melon?
More bad news
How bad can the current financial meltdown get?
According to the figures released by the Bank of International Settlements:
# The total value of all outstanding over-the-counter derivative global contracts at the end of 2007 reached a whopping $596 trillion, some 11 times the world’s output. A decade ago it was $ 75 trillion, or 2.5 times global GDP.
# Of this, (the by-now infamous) credit-default swaps accounted for $57.9 trillion by end 2007. It may be recalled that just last week this column had mentioned that they reached a peak of $62 trillion before coming down to $54.6 trillion by end June 2008.
# The amounts outstanding in respect of single-rate OTC (over the counter) derivatives stood at (an additional) $393 trillion at the end of December 2007.
If that wasn’t enough, here’s what the International Monetary Fund (IMF) had to say:
# American and European banks will shed some $10 trillion of assets (this “base case" estimate of the IMF is equivalent to 14.5% of their stock of bank credit in 2009).
# Credit will shrink by 7.3% in the US, 6.3% in the UK and 4.5% in the rest of Europe.
Things could get a lot more volatile than many believe.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com.
Graphics by Paras Jain / Mint
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