Sunday, February 11, 2007

India Shines...Or really So - Part 1

These days newspapers are filled with articles of how India is now an emerging giant and would soon overtake China. How everyting is rosy and oh yes the same cliche just improve upon the infrastructure and both physical and social and then you would see how we can achieve achieve double digit growth rate. Though I have my issues with the growth in China but we take it some other day today let's concetrate on India.

Let's put things into perspective it's not just the Indian economy but the world economy that is booming and this includes the Latin American countries like Argentina who are still in fiscal mess, many laggard countries of Africa and why go very far even our dear neighbour Pakistan is doing great. Yes clocking a GDP growth of more than 9% for a 700 billion dollar economy does make an impact globally.

The growth that has happened during these few years is mainly due to the booming asset prices and the boom in the commodity markets. In India the growth has really been demand driven and this kind of growth is always shortlived. Soon the prices start soaring, the interest rates start rising and we see the growth rate coming down. The strucutre of the Indian economy still remains the same and with this structure to achieve a sustained double digit growth rate we require a savings rate of around 40%, yes we can get around this figure but that requires the so called 'Structural Change' which we haven't seen.

However to make matters worse what we are seeing today is that the interest rates are not going up as they should have been. RBI has increased the repo rate but left the reverse repo unchanged, that would have sucked liquidity from the market and what's more we hear that our dear FM making plea to banks not to hike housing loan rates. All this has meant that today with inflation at a 2 year high the real interest rates have actually fallen!!! creating conditions for what I call the 'Inflation Arbitrage' (more on it later). So it's not all that rosy here. Next we further discuss this topic and later dwell down to various sectors.

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