Hindustan Times
India: Decoupling Emerging Economy?
Emerging economies are all fretting. All that money being printed by the US Fed and its ilk is pouring into their economies, causing speculation, inflation and financial indigestion. They are being forced to buy up the foreign exchange to stop their currencies from appreciating, their reserves are growing and their domestic money supply is getting out of hand. Largely true, but not in the case of India.
A recent UBS Investment Research comment, “India Does Whatever It Likes,” makes the point that India is among the emerging economies where this pattern does not fit. Yes, there is a lot of financial institutional investment (FII) flowing in. But the rupee is appreciating very gradually and reserves are at a standstill.
The Reserve Bank of India is, if anything, injecting money into the system because of a purely domestic phenomenon: the growth rate of Indians putting money into their savings accounts is less than the growth rate of Indians borrowing money from their banks. Forget the FII flows. They don’t matter. India has problems, but they aren’t one of them. As the UBS report notes, “India is one of the very few countries in the emerging market universe that has the luxury of setting monetary policy as if the rest of the world didn’t exist.”
On this front, at least, India is an emerging economy that has decoupled from the rest.
The problem at home is acute. As of early December, year on year, deposit growth rose 15% but bank loans grew 23%. This has liquidity problem written all over it. Which is why the RBI has been easing statutory liquidity levels on banks. It has also been raising deposit interest rates gently to incentivise Indians to save more.
But inflation is the key problem. Indians won’t save more if prices rise as rapidly as they are doing today. Its officials continue to express concern about inflation. Which is why commercial interest rates are floating upwards. “Tightening by stealth,” is how Chetan Arya of Morgan Stanley called it.
There is plenty of debate as to what is causing the inflation. Its sources seem to be hydra-headed. Supply and demand for certain foodstuffs is clearly part of the problem. Massively increased borrowing to pay for the various welfare schemes of the United Progressive Alliance is another. But less than one would think, CARE rating agency economist Madan Sabnavis argues. Sabnavis notes that despite rising red ink, the government’s sovereign yields have actually fallen.
So the Indian paradigm will be higher interest rates to improve savings and thus overall liquidity. The higher interest rates will also help keep inflation down, a perennial problem as India’s growing economy struggles with the bottlenecks in supply, infrastructure, etc, that bedevil its system. The comparative story with other emerging economies couldn’t be more different, though China is taking a similar path.
This does raise a question as to where all these FII billions flowing into India are going? Presumably some of this is going to pay off the government’s fiscal deficit via the indirect method of FIIs buying up divested shares in state- owned enterprises like Coal India and Power Grid Corporation. But a lot seems to be flow back and forth between FIIs as they buy and sell Indian shares to each other.
My general impression is that Indian investors are slowly pulling out of the stockmarkets here, wary of the levels the share markets have reached. Business Line’s Research Bureau seems to bare this out. They have calculated that Indian institutions pulled out Rs 210 billion from the stock market by December this year even as FIIs put in Rs 610 billion. This would explain why, as the UBS note comments, “for India there has been no net foreign contribution to base money growth at all over the past year.” But it does lead to a concern about a bubble. In which case, India may not be as decoupled from global quantitative easing as it would like.
(7 votes, average: 3 out of 5)
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Morgan Harry Reply:
January 4th, 2011 at 11:24 am
Your analysis is very simple minded. By just reducing or totally eliminating the stashing away of gold India could bring the value of 1 Re to 1 USD is a very simple minded expectation.
India has very serious problems of infrastructure, quality education, population explosion, corruption at the retail and whole sale level and the attendant inefficiency of ALL operations at ALL levels.
Only about top 5% of the graduates can perform adequately in the jobs after minimal training, and the rest are not employable. The education is largely dismal. The so-called IT/BPO which brings “foreign jobs” from US and Europe has hardly about 2 million total workers in a total labor force of about 500 millions.
At an official rate, the GDP per capita of India is just about $1000 per year. This means about $3 per day per person. Even this increases at a rate of 8% a year, it would take several decades to reach $130 per day person (of developed economies like US), by the time developed countries would have grown much much higher!
People stash away gold because they do not believe in their future. They are afraid that inflation will be so bad that only hard assets like gold will sustain value. Where is the problem?
A few urban elites in India euphorically believe that India is going to join the developed countries soon… they will be disappointed. They must eradicate corruption among voters, politicians, ministers, judges, police, CBI, CAG etc… and they must upgrade their education and infrastructure large scale.
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Kumar Reply:
January 6th, 2011 at 4:39 pm
Very True….we have so much corruption in all level no one can even think about what going to happen in future … and now atleast make some changes we shold educate the young people about the bad effect of corruption having all over India as it is hopeless situation for the seniors/ politicians / bureaucrat…..
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