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posted on 30 November 2018

A Growing Global Threat: India

by Elliott Morss, Morss Global Finance


One might think that India, with a projected real GDP growth rate of 7.4%, would justify a careful look by investors. After all, China’s growth rate is projected at only 6.6%. In what follows, India is examined and the findings are worrisome.


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The Economy

Table 1 provides some indication of how India compares with China. The first notable difference is public debt. India’s is much higher than China. Inflation in India and its bond rate are double those in China. For some reason, India’s stock market was buoyant in 2017. India ran a trade deficit against China’s large trade balance. And again not surprisingly, India’s currency lost twice as much as China’s against the US dollar.

Table 1. Economic Indicators

Source: FocusEconomics

But beyond the issues highlighted in Table 1, India’s financial system is facing similar problems to what happened to the US in 2008. As was the case in the US, India’s government is pushing banks to lend to the rural poor, to infrastructure projects, and to buy government bonds. And then you have the so-called “shadow" banks who want to find ways to use bank deposits to make high risk investments. These are not heavily regulated. They are usually prohibited from taking deposits so fund themselves with debt.

I quote from “Schumpeter" writing in an article in The Economist:

Accidents keep happening. In February PNB, the second-biggest state lender, disclosed a $2 billion fraud involving diamond merchants.

This happened after the government took the amazing step of demonetization of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series. This led to a rush by currency holders to put their currency into bank deposits.

I quote again from Schumpeter:

Flush with cash, and with rates low, they [the banks] looked for ways to lend the money out again and part of the answer was to fund the shadow banks, which went on a binge - the top 50 have doubled their debts and assets in the past five years. Perhaps as much as $50 billion-$100 billion of their debts comes due within 12 months.

A sell-off in global markets could easily trigger a new wave of panic. In September IL&FS, a financial firm that owns and finances roads and power plants, defaulted on some of its $13bn of debt. The contagion has struck India’s shadow banks, which rely on $250-300 billion of borrowing to fund themselves. Their market value has collapsed by a median of 40% this year.

This matter has not been resolved.


India is heavily dependent of coal for energy. 47% of its energy production comes from coal. India is also heavily dependent on coal imports. 40% of its coal consumption comes from imports. And while coal consumption is declining globally, it continues to grow in India. While coal consumption fell in China by 3% in the 2014-17 period, it grew by 20% in India over the same period.

India is the second largest coal user in the world. And the International Energy Agency estimates that global coal demand will grow 177 million ton oil equivalents (MTOE) between 2016 and 2022. It estimates further that 135 MTOE of that growth, or 74%, will come from India. In light of this, it is not surprising that there is considerable pollution in China.


Fine particulate matter (PM2.5) is a globally recognized air pollution measure of tiny particles in the air. As Table 2 indicates, nine of the ten leading most heavily polluted cities are in India. And with coal consumption growing, the pollution is likely to get worse before it gets better.

Table 2. - Most Heavily Polluted Cities in the World

Source: WHO


In many ways, India is a resource-poor country. This includes water and has lead to a serious dispute between India and Pakistan, both nuclear weapon holders. The ongoing issue involves India’s plans to construct dams on rivers flowing from India through Pakistan. Pakistan worries these dams will affect the flow into Pakistan. Treaties allow allows dams for power generation until they don’t affect the flow. This matter is only part of the tensions that have existed between the two countries for many years.

Religious/Cultural Clashes

About 80% of India’s population practices Hinduism and with 14% being Islam, with Christianity, Sikhism, Buddhism, Jainism also practiced. Problems frequently erupt and Prime Minister Modi, a Hindu, has done little to maintain the peace. A Hindu mob tore down a centuries-old mosque in the northern Indian town of Ayodhya 26 years ago. Now leaders of Modi’s Hindu nationalist Bharatiya Janata Party (BJP) and its affiliates are stepping up efforts to build a massive Hindu temple where the mosque once stood, and Ahmad and many of the other 5,000 Muslims still living in the town say they once again feel under siege.

Corruption and Governance

Other countries manage ethnic differences well. Singapore comes to mind. But India has a Democratic form of government and does not. And this goes for corruption is well. There is plenty of corruption in both India and China. Transparency International rates countries on corruption. Scores run from 90 for Denmark and New Zealand to 10 for Somalia. India has a 40 score and China a 41 score, about the same. But there is a difference on how corruption plays out. In China, the Party first decides what it is going to do. The corruption takes place after the Party has made a decision on new projects. So there have been many new projects in China:

  • Excellent infrastructure;
  • More than 40 high speed train systems in place and
  • Major investments being made to reduce fossil fuel reliance.

In India, none of this. In India, the bribes go out before and decisions are made. The result is usually stasis: those that benefit from the stasis quo outbid others and nothing gets done.


For the record, Table 3 provides data on US exchange traded and mutual funds. It is notable that in the last year, they have all fallen dramatically for reasons discussed above. A possible bounce up? Don’t hold your breath. Investing in India is only for madmen.

Table 3. - Indian ETFs and Mutual Funds

Sources: Yahoo Finance, Investopedia


India is a very dangerous place and there is little reason to believe things will get better in the foreseeable future. It would not be of great global concern but for the fact that it is so large. Right now, China has more people than India. But the United Nations predicts India will become the largest country in the world by 2030 with 1.5 billion people.

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