Tuesday, November 28, 2006

On the Economist's concerns on India

I've reproduced a comment I made on some concerns that blogger Pramit Singh posted on, after reading this recent Economist article.

(Also, thanks, VD, for your inputs on everything below).

Consumer-price inflation has risen to almost 7% well above Asia's average rate of 2.5%.

What is the composition of CPI ? Besides, ask yourself, has your grocery bill sky-rocketed ? Please remember that Asia’s consumption basket will be different from India and would include electronics whose prices have been declining in India. Look at mobile bills.. they’ve crashed in the last couple of years, or at the bare minimum, you're paying less for talking more. Cars have become cheaper. The only thing that’s become more costly is petrol, which has nothing to do with Indian economics.

In a survey of 600 firms by the National Council of Applied Economics Research … 96% of firms reported that they were operating close to or above their optimal levels of capacity utilisation—the highest number ever recorded

Isn’t that good ? it indicates high capital efficiency. Btw, did you know India has among the highest ROEs in the world ? which means we’re sweating our assets better. Also remember that these capacities were built almost a decade back and if you’ve got India shining then dude, these 10-year old capacities are going to be exhausted and in need for expansion. And also have a look at the booming capital goods sector which amply demonstrates that Indian companies armed with stronger balance sheets are also seeing visible demand growth and are hence reinvesting.

Indian companies are also experiencing a serious shortage of skilled labour

True, but isn’t that good for the educated because their salaries will keep rising much ahead of inflation which you already think is high ? Sure, this also has to do with the Government’s policy on education and they better do something about it.

Wages are rocketing. Companies' total wage costs in the six months to September were 22% higher than a year earlier, compared with an average increase of around 12% in the previous four years

And despite this, companies have been able to grow profits. Also remember wage inflation is not necessarily bad especially in a growing economy, because it increases spending power which uplifts the rest of the economy as well. Just count how much money you spent on your last shopping spree/holiday/visit to PVR

India's current account has shifted to a forecast deficit of 3% of GDP this year from a surplus of 1.5% in 2003—a classic sign of excess demand

And high oil prices is a major contributor to this. Anyways, a growing economy will need more capital expenditure on machinery (as said above), some of which will need to be imported a lot of the time. The way IT revenues are growing, I think this issue will be resolved soon.

Total bank lending has expanded by 30% over the past year, close to the fastest growth on record –

Isn’t that also good ? India is an under-banked economy and there’s a lot of catching up to do with the rest of the world. Besides, how else will Chunnu and Munnu get their Maruti if banks aren’t eager to lend ? And same goes for the farmer who wants to buy a tractor to improve his efficiency

Share prices are almost four times their level in early 2003. India's price/earnings ratio of 20 is well above the average of 14 for all Asian emerging markets –

The other “Asian emerging markets” have sectors like steel, mining, semi-conductor manufacturing as dominant sectors in their indexes. These sectors by definition are highly capital intensive, have low return on capital and hence trade at lower PEs. FYI, Tata Steel in India trades at 6x PE and Hindalco at 10x PE. Perhaps you could invest your money in commodities and lower the PE of your portfolio.

House prices have also gone through the roof: …prices in big cities have more than doubled in the past two years. Housing loans jumped by 54% in the year to June and loans for commercial property were up by 102%

Agree. But the wealth effect that this is creating is spurring consumption. Ask people who own property, if their spending pattern has changed as their property value increased, or at the very bare minimum are they feeling better. In the IT sector, five years into his/her job, an employee can afford a house priced at Rs50lakhs, which was unthinkable 5 years back. Affordability has increased, thanks to wage inflation (referred to above by yourself) and credit growth (ditto).

- India vs. China: In China, Inflation is only 1.4% and it has a widening current-account surplus, which implies excess supply rather than excess demand

I find it strange that the Economist, itself a vocal critic of the lack of transparency in China’s economic data, harps on these numbers. Anyways, China has a current account surplus but screwed efficiencies. Meaning – they just throw (invest) money into capacity creation with no caution to ROEs, etc. Ever wonder why their famous expressways, even in smaller cities, happen to be empty at times ? Does the Economist have any numbers for China’s capacity utilization in any sector ?

Moreover, average house prices have risen by less than 6% in the past 12 months. And share prices have gained only 42% in the past four years. Even the expansion of bank credit has slowed to an annual pace of 15%, not much faster than nominal GDP growth

I didn’t get your argument here. Are you saying that the growth in housing prices/share prices/bank credit should rise further or has started declining ?

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