Indian economy slowing

Readers may recall how I have been bearish on India—same with China for different reasons—for a while now. One of the big reasons I turned bearish on India was because it was running a current account deficit while it was booming. Nothing wrong with that but in India's case, it was questionable (especially given how their government is generally corrupt, inefficient, and runs high deficits.) Well, it looks like we are starting to see the bust that comes from running a current account deficit to finance your growth.

India’s phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39 percent of the country’s gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years.

In a recent report, the International Monetary Fund said Indian companies were among the world’s most vulnerable, after American firms*, because they borrowed aggressively during the boom...

The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing, infrastructure and even art, which was bolstered by demand from globalization’s nouveau riche here and abroad.

The above quote from The New York Times updates us on the current state of affairs. It describes how growth has sharply deteriorated now that foreign capital flows have slowed. You likely won't see the slowdown in the numbers because the government seems to be expanding its fiscal spending. But unlike other countries like Brazil or China, the government likely can't sustain its spending unless it wants its soverign rating downgraded again (it's one notch above junk from what I recall.)

Another potential looming problem in India is a real estate bust. It's not clear to me how bad the situation is but I suspect there is a potential for downside surprises. I remember reading articles a few years ago stating how some metropolitan real estate prices were totally out of reach of most (and some of the highest in the world if you account for income levels and cost of living in that region.) Having said that, I could be wrong with my bearish view of real estate. Recall how I have been bearish on Chinese real estate and nothing has happened over there. It's really hard to call real estate in emerging markets because it's hard to tell if prices are rising due to speculation (mostly via debt as usual) or due to sustainable urbanization. Many developing countries have seen huge swaths of the population move from rural areas to cities and this urbanization trend will (legitimately) push up prices.

Having said all that, one should always keep in mind that India is in its early stages of development. If present day China is like USA in the early 1900's, India is like USA in the 1800's. For example, the Indian economy, similiar to USA in the 1800's, is driven by agriculture. Although information technology, pharmaceuticals, and manufacturing is popular with investors, the economy is still driven by the largely rural farmers. The crop harvests have a huge impact on the economy (the same can be said, to a minor degree, of China.) Agricultural voters also largely control government and this is one reasons India is not very capitalist and inefficient. Free trade in agriculture, although good for the country in the long run, will put hundreads of millions out of work since they are inefficient and can't compete with foreign farmers and agribusiness companies.

(* That IMF report seems questionable if it says that American firms are the most vulnerable to a credit bust. I haven't looked at the report but if it is talking about financial firms, that's quite true. But if it is talking about non-financial firms or firms in general, American firms are far better off than most other firms. Except for those over-leveraged private-equity buyouts in the last decade—there are only a few of these—most public American companies have strong balance sheets. This is especially true of the megacaps.)


2 Response to Indian economy slowing

May 5, 2009 at 9:50 PM

Regarding China, have you seen this:
I think this is a good coherent case of a China bubble in making.
Btw, I posted a comment on your Shilling post yesterday but it disappeared. What's happened?

May 6, 2009 at 12:03 PM

grr... I hope this message system didn't lose your post :(  I didn't delete it... Sorry that you lost that message... hopefully it won't happen again...
Yep... China does look to be skating on thin ice. My concern is not so much economic but political. I'm not sure if the political system can handle any economic shocks. That is really the big risk no one talks about...

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