Where is India headed??

These are interesting times indeed. Europe and US seem to be having problems managing their fiscal situation and persistently high unemployment. Currencies are yo-yoing everyday. People in Middle-East are busy fighting their own masters. But majority people believe, Asia, led by India and China, will come out of the crisis in a relatively better shape.I dont know enough on China, so will not comment.

But is India as well placed as everybody believes it to be?

- India's average GDP growth for the last 10 years is roughly around 7.5-8% p.a.. We would have probably TREBLED Nominal GDP in the same time frame. I find it really amazing that with all this growth our currency "INR" is still where it was 10 years back against the "USD", which itself has been one of the weakest currencies in this time. That does not speak too well of the quality of the growth.

- After all these years, we are still running a huge Current Account Deficit. We require foreign inflows to keep our forex balance sheet from going haywire. Admittedly crude oil prices do not help, but then crude oil subsidies do not help either. Would we have grown this fast had governments not subsidised petroleum products and fertilizers? I seriously doubt it. Now that those subsidies have become huge, it is becoming very difficult to get rid of them. And they leave huge holes in the government's balance sheet and budgets. This is one of the reasons why the rupee is where it is. Had subsidies not been offered, we would have probably grown slower but would have been in a much better situation to handle the crude oil prices. Just imagine, if Rupee had been 40 rather than 48 to the dollar, the equivalent petrol and diesel prices would have been 20% lower. I know its easier said than done, but I am just illustrating here.

- A lot is made out the forex reserves of 300 bn USD. But India's external debt is more than that figure and more than 20% of the debt is short term in nature. Thus we are always susceptible to foreign money flowing out and creating currency headaches for us. Besides we are also dependent on FIIs to keep money coming in. And when in trouble thats the first money to go out. This is the second reason why the rupee is where it is. What happened in 2008 is a very strong reminder of how susceptible we are to capital flows. It required the government to come out with a big fiscal package to keep our growth momentum intact. That itself raises a question on the nature of the Indian Growth. Is it for real or is just one more liquidity driven story?

- Our political and bureaucratic system have proven to be a disaster. Just as an example, we have had record crops for 2-3 years in a row, but still food inflation is in double digits and people starve to death because we cant manage the food rotting inside our godowns. I dont think it can be explained by simply saying that we have infrastructure bottlenecks. Vested interests are to be equally blamed.One of the reason why inflation reaches double digits as soon as we start clocking closer to 8% GDP growth.

We have had "n" number of scams. These scams, besides denting our reputation as a country, have also drained the system.It is estimated the black money outside the country is more than the GDP currently but we dont have enough resources to put up the infrastructure required to sustain growth.

Look at the way public sector enterprises have been handled. BSNL, once the largest telecom operator of the country now struggles to compete in the market and has started to make huge losses, which, of course, will have to be borne by the tax-payer.

Indian Airlines and Air India have now run up a cumulative debt of around 40000 cr. And are incurring losses at the rate of 7000 cr per annum.

The situation in the 7th largest country in the world is such that industrialists are not able to get land for expansions. (They themselves are partly responsible for the problem)

The country with the 4th largest coal reserves in the world cannot produce enough for itself and has to import increasing quantities of coal. It almost gives a feeling as if, another "crude oil" situation is being made out of coal.

The second largest population in the world has labour shortage problems.Labour strikes are becoming more and more common.

All this probably can be added to the reasons for the situation of the INR.

With all this background, it is not surprising that INR has depreciated against USD in the last few weeks at a rattling speed. ( I had expressed my opinions on the same in my previous article. for those interested....http://rmbworld.blogspot.com/2011/01/is-indian-rupee-headed-for-50-to-us.html)

The way stock price reflects the state of affairs within a company, I believe the currency reflects the same for a country.

The way the world is shaping up, it looks headed for a tough year or two, at least. India wont be spared the pain. We will also suffer.The more important question is how do we come out of the crisis, if it comes. We would require some serious action on the part of the government and bureaucracy. Given the precarious situation of the govt, after all the scams, it is very likely that they will do more social welfare schemes than anything else.

This along with the currency scenario, will make it difficult for the RBI to reduce rates, because inflation MAY NOT go down substantially. That will only lead to slower growth. And 2 years down line, general election will be on the horizon.

So unless the government really comes out of their paralysis right away, the constraints today will be present 3 years down the line as well. Growth rates in this time will surely suffer. Stock markets, Job markets and general public, at large, are hoping to see much better.

There are few IFs :

- What if crude oil prices collapse and give us a lot of breathing space. But that would also lead to a lot of strife in the already tense Middle East. So a collapse in crude oil prices may not be orderly.

- Commodity prices also collapse and thus lower inflation in India. that will mostly happen when the growth in developed world really fizzles out. Given that a lot of sectors and companies in India are now globally correlated, I am not sure that is great news for that part of the economy though its definitely better off for the others. And a big slowdown and crash can also lead to foreign money outflow which is where we are really sensitive as a country. We have seen what happened in 2008.

The world is hyper-dynamic and things change reasonably fast nowadays, so difficult to take long term calls.

But as of now, I see the glass half empty.