Indian Economy (GDP) has recorded a growth of 8.9% in Q1 of 2006-07.
Looks like the economy has got very good momentum now. Star performers were trade, hotels, transport and communication sectors.
Current account deficit widened to US$ 6.1 billion. Could this lead to a depreciation of the rupee and thereby lead to spike in inflation and thus interest rates ? Or may be now that oil prices have cooled off substantially the worst maybe behind us and going forward with robust exports and lower oil prices the current account deficit should narrow.
Joined: 05/Aug/2006
Location: India
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Posted: 29/Sep/2006 at 11:25am
The Indian Rupee could display near term strength towards 45.50, but that should be used to sell it as it looks ready to decline towards 47-47.50 over the 6-Months time frame. The Risk to this view is a fall below 45 in the Dollar-Rupee rate.
You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!
NEW DELHI, Nov 28 (Reuters) - India's trade deficit widened to $6.21 billion in October from $5.33 billion in September and $2.93 billion a year earlier as demand for imports in the world's second-fastest-growing major economy outstripped exports.
The government said on Tuesday the trade gap widened to $30.23 billion in the first seven months of the fiscal year that began in April from $25.19 billion in the same period last year.
"We see a current account deficit of 1.8 percent of GDP for the fiscal year 2006/07, which would be higher compared with 1.3 percent in 2005/06," said Rajeev Malik, senior economist at JP Morgan in Singapore.
Bond and currency markets were relatively unchanged after the data, with the yield on the 10-year bond holding around 7.38 percent and the Indian rupee hovering around 44.75 per dollar.
"Oil imports are particularly strong, despite a decline in crude prices. Export performance is disappointing," Malik added.
Exports in October rose 11.3 percent from a year earlier to $9.62 billion, while imports rose an annual 36.8 percent to $15.83 billion, the provisional data showed. Oil imports in October rose 55.5 percent from a year earlier to $5.35 billion.
Exports in the April-October period were $69.52 billion, compared with $56.93 billion in the year-ago period.
The government's full-year export target is $126 billion, a rise of 22.3 percent over the previous year.
Imports in the first seven months of 2006/07 were $99.75 billion, compared with $82.12 billion in the year-ago period, with oil accounting for about one-third of total imports.
You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!
India to Overtake China's Growth, Credit Suisse Says
By Cherian Thomas
Dec. 13 (Bloomberg) -- India will overtake China next year as the world's fastest-growing major economy on rising consumer and government spending, Credit Suisse's chief Asia economist Dong Tao said.
Credit Suisse raised its 2007 growth forecast for India's $775 billion economy, Asia's fourth biggest, to 10 percent from 8.5 percent, Tao said. China's $2.2 trillion economy is expected to grow 9.9 percent next year from 10.4 percent in 2006, he said.
Surpassing China's expansion rate for the first time at least two decades may help lure the overseas investment India needs to replace dilapidated port and roads and create manufacturing jobs. Prime Minister Manmohan Singh needs rapid growth to lift 350 million people out of poverty in the world's second-most populous nation.
``India's growth story will only get stronger,'' said D. H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. ``There is a lot of money available to spend in India.''
India's benchmark stock index, which has risen 38 percent this year, touched a record on Dec. 7 as overseas funds bought a net $8.52 billion of stocks after having invested a record $10.7 billion in 2005.
Per-capita income in India has doubled in the last nine years and the number of households earning an annual income of at least $10,000 is rising more than 20 percent a year, according to McKinsey & Co. Commercial banks' outstanding loans have doubled in the past three years and has risen more than 30 percent since April 1.
Rising Incomes
India had the highest average salary increase in the Asia- pacific region in 2006 gaining 13.8 percent in 2006 compared with 14.1 percent gain in 2005, according to human-resources consulting firm Hewitt Associates Inc. Salaries in India may rise by 12.3 percent to 15 percent in 2007.
``The private consumption story in India is growing,'' Credit Suisse's Tao said in a phone interview from Hong Kong today. ``At this moment, India surpassing China as the world's fastest growing major economy is a possibility. India is more resilient toward a global slowdown compared to China.''
The Paris-based Organization for Economic Cooperation and Development said last month growth among its 30 members will cool to 2.5 percent in 2007 from 3.2 percent estimated for this year, the weakest since 2003 and dragged down by a U.S. slowdown. The 2007 forecast was below the 2.9 percent anticipated in May.
Global Trade
China, which accounts for 5 percent of global trade, has become the fourth-largest U.S. export market, from the 15th before it joined the World Trade Organization in 2001. It has run up record trade surpluses with the U.S., including a $202 billion trade gap last year that was the largest imbalance between any two countries in history.
China's economy has grown at an annual 10.1 percent pace on average in the three years ended 2005, prompting the central bank to take steps to prevent the economy from overheating.
The central bank on Dec. 11 sold 120 billion yuan ($15.3 billion) of one-year bills, the biggest sale this year, to drain cash from the banking system and prevent growth in credit and investment from rebounding. The bank has also forced lenders to set aside more money as reserves and raised interest rates.
India's economy, which has expanded at an average 8.2 percent in the past three years, is being driven by local demand as the country's exports make up only a 12th of gross domestic product and 0.8 percent of global trade.
`Policy Risks'
``The issue is not whether India grows faster than China. The issue is whether India's growth is sustainable,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``India has been accelerating and policy risks are greater in India. India is also an opportunity because so much can be done on infrastructure.''
Prime Minister Singh today begins a four-day visit to Japan to sell the India growth story and seek help in funding his government's five-year $320 billion plan to improve the country's roads, ports and other infrastructure.
India now wants to draw investments from Japan and narrow the gap in overseas funding with China, which began unshackling its economy in 1978, 13 years before India. India's northern neighbor got $60 billion of foreign direct investment in 2005 compared with India's $7.5 billion.
General Motors Corp., Royal Dutch Shell Plc. and other companies have invested in about 3,000 new factories and expansion projects worth $21 billion in India since May 2004 to cater to growing demand, according to the finance ministry.
Government Spending
``Capacity additions in the steel, auto, metals and consumer goods sector seem to be gathering pace in response to strong consumer spending and a pick-up in public investment spending in the power, roads and highway sectors,'' Tao said.
Industries such as steel and cement are also benefiting from Prime Minister Singh's decision to increase spending on roads, ports and other infrastructure by a quarter to 992 billion rupees ($22 billion) in the year that started April 1 in a bid to attract overseas manufacturing companies and spur growth to 10 percent over a decade.
``We do anticipate the government's infrastructure spending to go through,'' Tao said.
You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!
Jon Thorn is the managing director of the Hong Kong-based India Capital Fund, a $260 million fund dedicated to Indian equities, as well as the $60 million India Institutional Fund, a segregated account for American endowments. The fund began in 1994 as a small-cap India play seeded by a George Soros fund, but was relaunched in 2001 to include companies of any size.
Why did the Indian stock market do so well in 2006? Because it offered the most accessible earnings growth in the world. Different markets in Asia such as Taiwan look cheaper, but they have problems that you don’t have in India. For an Asia-Pacific portfolio that can allocate across the region, India has to look among the best destinations because its earnings growth is spectacular.
What about on a global basis? Take any major market: America, the United Kingdom, Germany, Brazil, China or Japan, and compare them to India. You’ll find India enjoys terrific domestic demand, with one of the lowest level of exports as a percentage of GDP. It’s not exposed to exogenous shocks. Compare that immunity and robust domestic consumption with any other market. Tell me: where is better? I’m open to suggestions. The more people understand this, the more they will want to have exposure to India. It’s not rocket science.
What happened last May and June, when the market corrected by 30%? Everything got ahead of itself. And that goes for Russia, Turkey and other emerging markets too. There has been too much liquidity, and people were allocating too much to these markets. Everything hit the floor. But the good stuff, like India and Russia, got up again. The bad stuff like Turkey hasn’t. This reminded people that high-quality assets are lower risk than low-quality assets.
Is India likely to experience another sharp correction? I don’t think so. What you had in May was the world’s central banks, particularly the Bank of Japan, out to shrink liquidity. The result was nastier than people had expected. I suspect the liquidity target won’t be pursued as robustly for a while by central banks. So much of the growth in the world economy should continue in 2007.
In India specifically, there’s a terrific amount of cash that was and still is sitting on the sidelines. So not all the money that can come in has – yet.
What are valuations like in India? We’d say it’s fair value. Indian companies’ balance sheets have the lowest debt-to-equity ratios in the world. So our upside outlook looks even better with just a little bit of leverage. In our view, Indian shares are not expensive.
Why hasn’t that cash been put to work? Fear. Both domestic and foreign fund managers have raised several hundreds of millions of dollars’ worth for India allocations, but it hasn’t been invested because portfolio managers thought there would be another downward leg. They missed their spot. The assumption, the consensus view, was that India’s markets would do nothing in the second and third quarters, and would look attractive in the fourth. Those investors who thought that way have left a lot of money on the table. In my view, however, you should buy something when it looks cheap.
When will this money hit the market? Since November there has been a buying panic. We’ve seen very heavy volumes. A lot of this money is being allocated. Investors who had been waiting for another downturn have capitulated. Hedge funds are getting excited. Mutual fund companies have raised huge amounts for India stories but the money has sat in bank accounts; sooner or later it has to be invested. We’ve been fully invested since July.
Does your earnings outlook include all sectors? It would pertain to most sectors. There are a few that are a little ahead of themselves, like construction, but nothing stands out as way overvalued. We tend to make big allocations to certain sectors. We like banks, for example. They’re cheap. Of course, it may appear this way to me and not to others; it’s a top-down asset allocation call.
How much turnover is in your portfolio? We prefer high concentrations in any sector that we like, and we tend to hold these stocks for three to five years.
Indian management is reputedly very good; what’s your view? The quality varies from world beating to the mentality of robber barons. It’s unusual to find that range within a single country in Asia, outside of Japan. But Indian companies file quarterly statements, unlike in Japan, so it’s much easier to prove which ones are good in India.
Will earnings growth in 2007 match the pace of 2006? I have no idea. But earnings will certainly go up. We assume growth won’t be radically lower than in 2006.
What about beta or index returns? Again, I don’t know. It seems unlikely that they’ll be as good as in 2006 only because 2006 was such a good year. If you asked me purely as a bet, I’d say Indian shares would probably not do as well – but they’ll still be strong performers. It all comes down to earnings growth, which has been solid for the past two years.
What kind of economic growth do you expect? Compared to the rest of the region, I’m not sure; some other places look as though they also have good prospects for growth. In India, we expect a minimum 15% year-on-year earnings growth over the next two years. Over time, that is what the stock market should do, although whether we see that growth in our pocket is another question.
What are the risks to that growth? Absent a concerted attempt at monetary tightening by the world’s central banks, all of these Asian markets can show upside and they should.
Life can only be understood backwards—but it must be lived forwards
Productivity growth will help India sustain over 8% growth until 2020 and become the second largest economy in the world, ahead of the US, by 2050, Goldman Sachs has said, scaling up estimates of the country's prospects in its October 2003 research paper widely known as the BRICs report.
The original report had projected that India's GDP would outstrip Japan's by 2032 and that in 30 years, it would be the world's third largest economy after China and the US. The new report goes one step further by moving India up from No. 3 and No. 2 in the global sweepstakes of tomorrow.
Goldman Sachs' research arm said in a global research paper released on Monday that India's growth acceleration since 2003 represented a structural increase rather than simply a cyclical upturn. It said productivity growth drove nearly half of overall growth and expected it to continue for some years.
"We project India's potential or sustainable growth rate at about 8% until 2020. The implication is that India's contribution to world growth will be even greater (and faster) than implied in our previous BRICs research," Goldman Sachs Global Research said.
The vote of increased confidence from the world's largest investment bank, whose previous chairman Henry Paulson is now treasury secretary in the Bush administration, comes when India is easing into its new seat in the global political arena as a nuclear power and consolidating its economic might as the world's services backbone.
The paper said a turnaround in manufacturing productivity was central to the ratcheting up of productivity growth. The private sector was the principal driver of this turnaround, as it improved efficiency in the face of increased competition due to the cumulative effects of a decade of reforms.
"The underlying reasons are: increased openness to trade, investment in information and communication technology, and greater financial deepening. These factors still have some distance to run," it said.
Life can only be understood backwards—but it must be lived forwards
I can make a whole lot more money skillfully managing intangible assets than managing tangible assets —Warren Buffet, CEO Berkshire Hathaway.
It’s a wonder that Warren Buffet isn’t managing India Inc. A recent global survey from Brand Finance, which specialises in brand valuation and intangible asset valuation, reveals that India notches the second highest proportion of intangible value. This partly reflects the dominance of the software sector in the Indian stock market. Switzerland leads the pack in the ‘Global Intangible Tracker 2006’ study which covers 5000-plus companies quoted in 25 countries over five years. The headliner: David Haigh, chief executive of Brand Finance says we could easily overtake the leader country over a ten-year period.
Intangibles are not seen and hence often not appreciated. The surveyed companies had a total Enterprise Value of $36.2 trillion end-2005. But know this, 62% of the value of the world’s quoted companies is now intangible. Advertising is the most intangible sector globally, with all of its value being intangible, and sectors with very high proportions of intangible asset value aremedia (91% intangible value), pharmaceuticals (89%), reveals the study.
Our drivers of intangible power:
It’s not Scotch mist or airy fairy. A panoply of categories and brands is firing India’s intangible-value growth. Says Unni Krishnan, managing director, Brand Finance India: Whilst diversified Indian umbrella brands like Tata, Godrej and Reliance make significant contributions, the rise of sectoral specialists cannot be overlooked. From ICICI in banking and financial services toJet Airways in airlines, Wipro in IT Services and L&T in construction and engineering, Indian brands are poised to make their mark on the global stage. Even smaller companies like a Ritu Kumar in fashion or PNC in Bollywood are making rapid strides in building brand and IP value.
Haigh lists the main intangible asset categories for India as marketing, artistic, technological, customer and contractual. `` All these areas have powered India to its high position. However in absolute terms, areas like IT/ Telecoms/ Software; Service/ Outsourcing; Film/ Media and Medical/ Pharmaceutical are likely to create the biggest gains over the next 10 years.’’
His explanation on each:
Marketing: Companies like Reliance, Hutch, Bharti, Tata and Godrej have strong Indian brands which have generated significant brand value in the Indian market. Most are not well known outside India but this will change organically as Indian companies continue to expand abroad.
The larger, more sophisticated Indian companies are buying brands and marketing intangibles as well as creating home-grown ones. For example, Tata bought Typhoo tea in the UK and Godrej bought Erasmic bodycare products and others. The main difference this will have is that accounting standards require that acquired intangibles are capitalised in balance sheets, so the number and value of disclosed intangible assets will increase.
Artistic: Companies in the film and recorded rights industry create this type of intangible asset. The accounting standard-setters had Hollywood in mind when thinking of this because Disney and other major Hollywood studies generate huge intangible values from their film and artistic rights. There are also huge merchandising rights associated with them. The same value creation opportunity is clearly attached to Bollywood.
Technological: Companies like Ranbaxy have already created huge value in the area of patents and know-how. It is already the largest supplier of prescription drugs in the US market as measured by volume. But volume lags value because most of its products are off-patent generics or contract-manufactured. Ranbaxy has a strategy of creating original pharmaceutical molecules and has thousands of trained pharmacists, engineers and technical people in India to achieve this.
Customer: Companies like WIPRO in the outsourcing business with customers in the developed world have created huge customer relationships which are intangible assets. These will create a long stream of revenue into the future as they are based on intelligent, low-cost, English-speaking service which India is ideally equipped to provide.
Contractual: Companies like Mittal Steel have massive contracts for raw materials and supply of finished steel. These often have huge embedded value. One other intangible asset in this area is ‘assembled workforce’. In the case of India the quality of assembled workforce is one of the most powerful assets for the future. At a national level this is perhaps the most important intangible asset as many of the others come from this source.
Life can only be understood backwards—but it must be lived forwards
A year ago, the nervous observer of the Indian corporate scene might have been forgiven for suspecting that the (then) three-year-old boom could be petering out. Although the results of some 3,000 listed companies were still pretty handsome, it was clear that margins were beginning to get squeezed. Today, the happy truth is that such nervousness can be put aside. Corporate results show that firms have continued to power ahead, and that demand remains buoyant in most markets. The only worry is that inflation has continued to ratchet up to a level where the word ‘over-heating’ suggests itself.
Enter the governor of the Reserve Bank of India.
If Dr Reddy were to study the corporate scene from a medium-term perspective, India’s listed companies have grown their top lines by an annual average of about 18 per cent over the last four years, while profits have surged annually by 27 per cent. Net profit margins are now running at a handsome 10 per cent of turnover. Quite simply, there has been no previous period like this one. And he should not be the one to spoil the party.
From a short-term perspective, the trick that Dr Reddy has to perform (during his quarterly monetary review) next week is to let the system continue to barrel along, while addressing the inflation problem. There is no getting away from the fact that his assumptions for the year have gone badly wrong: not only is inflation ruling above his preferred band of 5-5.5 per cent, but money supply has grown much faster than he had expected, and so has bank credit. Those numbers tell us that the governor has to act, and the obvious measure would be to raise interest rates by at least 25 basis points, perhaps more. May be other steps need to be taken too. The government has tried to do its bit by addressing supply side issues, but the baton is really in the governor’s hand.
But before he makes his move, the question that he should answer is whether the numbers have gone wrong because growth has been under-estimated. In other words, is the economy growing even faster than the official numbers tell us? Everyone who knows how the GDP numbers are put together knows also that there are huge question marks over the reliability of those numbers; accurate data simply do not exist. So if one were to look for pointers in the areas where the numbers are in fact reliable, the GDP figures come across as being under-estimates. It is hard to understand, for instance, how truck sales could be growing at 30 per cent (on top of previous good years) if the non-services sector—industry and agriculture—is growing only 6 per cent. And remember that the speed of truck movement has increased because of the better roads; if anything, this efficiency gain should mean that we need fewer trucks. Exports have grown at more than 20 per cent for several years running, including this year—despite the rising rupee. And the corporate numbers do not suggest over-all growth of just 15 per cent (9 per cent plus 6 per cent inflation).
What if we were to assume for the moment that the GDP is in fact growing faster than the official numbers tell us? That would explain why the RBI governor got his maths badly wrong—the system would therefore require more money supply and more credit than he had bargained for. If on top of that the finance ministry is right in arguing that the causes of inflation this year have little to do with money supply, then the governor’s task becomes more complicated. On balance, a hike in interest rates is inescapable, and banks are doing it anyway because that is the only way in which they can get more deposits to use for feeding the demand for credit. But it would be a pity if we read the macro-economic picture wrong and ended up with more draconian measures, for that might squeeze growth when there is no need to do so.
Life can only be understood backwards—but it must be lived forwards
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