Betting on India
Written by Steven Hansen
I have spent the majority of my life outside the USA. My view of the world is very different than most all people both in and outside the USA. One thing I have learned - that the perceptions or conclusions of a non-native writing on a country are almost certainly wrong.
The facts discussed by non-natives will be correct, but when these dots are connected there are important dots not connected. I believe the USA (in fact all countries') intelligence agencies suffer from this defect. Therefore mostly what is concluded about another country is distorted.
Still, I want to write on India which seems to exist to investors as being in the shadows of China. I am talking up India - not talking down China. In fact, I think the pundits have underestimated China in the medium and long terms. Nothing will outperform a command economy even with misdirected spending or large debt - especially one which is well organized and is dedicated to continuous improvement. When you spend a lot of money, you waste a lot of money (no guts, no glory).
Based on GDP tossed around, India is growing more slowly than China but much faster than the USA.
But the equity markets in India (red line in chart below) have outperformed both China and the USA
Here is the link to the above chart which is interactive - and you can play with different timeframes to show the varying improvements.
According to the World Bank, here is the household final consumption expenditure expressed as a percent of GDP, followed by the definition of household final consumption:
1995 to 1999 2010 to 2014 China 35% 34% India 56% 60% USA 68% 68%
Household final consumption expenditure (formerly private consumption) is the market value of all goods and services, including durable products (such as cars, washing machines, and home computers), purchased by households. It excludes purchases of dwellings but includes imputed rent for owner-occupied dwellings. It also includes payments and fees to governments to obtain permits and licenses.
Yes India and China are very different - India's economy is bottoms up domestic consumption based while China has been command driven and an export led one. Consumption drives the Indian economy. GDP figures can be misleading when comparing China and India. As an example, in 2010 GDP growth was 10.3% for China and 8.6% for India. However, the two countries have different processes for calculating GDP. The IMF has attempted to put both countries on an identical standard and they have reported that when India's GDP is calculated by the China formula, the 8.6% goes away and is replaced by 10.4%.
India suffers from a relatively poor infrastructure - especially the ability to move freight. I could list the infrastructure defects but I really see no portion which is up to par with Western standards (although I would give a good try award to India Rail for its ability to move a lot of people in a timely and reliable manner with antiquated equipment). Even the internet sucks (sucks is a technical word meaning "not good"). For the most part, growth is not well thought out or controlled. Population growth (which is too slowly getting under control) is straining the ability of the government to get ahead with infrastructure development.
Yet there are portions of growth (say Gurgaon) which rivals the best growth in the world. India has the capability of very good controlled growth - but the question is what will this road look like and how long will it take. Two major developments have occurred recently that should have a major positive impact to the Indian economy:
- The election of Narendra Modi as Prime Minister in May 2014 has been what many believe a water shed election sweeping in a majority government for the first time since 1984. Narrow cast and religion voting patterns were set aside and the electorate opted to vote for promise of clean and effective governance. Modi is known for achieving results in his past elected positions - but not known as a great master planner.
- The appointment of Indian-American economist Arvind Panagariya to the key post in economic planning for India. Panagariya is a heavyweight on the stage of international economists.
I have asked my friend, businessman and colleague Sanjeev Kulkarni for his views:
Modi administration's performance since May 2014 has been mixed one. Politically reigning in what is called the "Saffron Family" has been tough who have at times worked at odds with Modi administration. Economically the country has stabilized. Inflation is down and India's manufacturing PMI rose to 54.5 in December, 2014, while in the corresponding period a year ago it stood at 50.7, just above the crucial 50 mark which separates growth from contraction. Many in industry blame the super Hawkish Raghuram Rajan for throttling industrial growth. Modi has put together a heavy weight team which believes free market economy tempered by social spending to create inclusive growth for the third of the world's most extremely poor who live in India.
From May 2014 when Modi got elected , the Super Hawk Raghuram Rajan has been running circles round Modi's administration by keeping tight leash on money. Many believe that the Central Bank single handedly has almost frozen industry by crying wolf on inflation, completely ignoring the generally deflationary trend worldwide. In an ironic twist he has been now circled by the heavyweight Pangariya and his crack team who we believe have better handle on what needs to be done for the Indian Economy. Hopefully we should see the Indian Economy being unfrozen.
Here is our crystal ball for what might happen in the next financial year from April 2015 to March 2016?
- Reform in Indian banking sector
- Government will not find larger fiscal deficit to quicken the infrastructure spending
- A Hawkish Central Bank led by Raghuram Rajan will have to "bow" to equally heavy weights led by Panariya who are not hawkish
- Taxation Reforms which will be friendly to both domestic and international business
- Manufacturing sector should get a boost
Downside scenarios are sabotaging Modi's administration good work by The Saffron (Hindu zealots) and the continuous tension on Indo-Pakistan border. We do not make much about the Indo-China rivalry and have on the contrary argued that both will work together.
My view is that both India and China should be good bets for investors - JUST NOT NOW. The dollar strengthening cycle scares the bejeebers out of me for any non-dollar based investment. This current situation of currency wars (where the dollar is rising almost uncontrollably), falling oil prices, and slowing global economies will reap havoc in capex and bonds - and start restraining profits of global business.
Still, at the appropriate time, bet on India. India should weather this current storm as they have a consumption based economy which should benefit from the fall of oil prices. The element to watch is the dollar to rupee exchange rate. If the Indian central bank (RBI) can keep the rupee pretty much in line at current levels with the dollar, India will attract significantly more dollar based investment.
Other Economic News this Week:
The Econintersect Economic Index for January 2015 is showing our index is midrange in a tight growth range for almost a year. Although there are no warning flags in the data which is used to compile our forecast, there also is no signs that the rate of economic growth will improve. Additionally there are no warning signs in other leading indices that the economy is stalling - EXCEPT ECRI's Weekly Leading Index which is slightly below the zero growth line. There have been some soft data point which caused our index to decline this month - but none of them are currently show the 3 month rolling averages declining.
The ECRI WLI growth index value crossed slightly into negative territory which implies the economy will not have grown six months from today.
Current ECRI WLI Growth Index
The market was expecting the weekly initial unemployment claims at 280,000 to 297,000 (consensus 290,000) vs the 294,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 290,750 (reported last week as 290,750) to 290,500. Rolling averages under 300,000 are excellent.
Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)
Bankruptcies this Week: Tengion