How true is the proverbial saying-"Every Cloud has its silver lining." And so it came true for India in the second quarter of 2009.The New York Times has this to report today. I have paraphrased certain sections to make it more concise.
"MUMBAI, Oct 14 — Six months ago, it looked as if India was in for a bumpy recession. Factories were laying off workers and construction sites were grinding to a halt as foreign investment slowed to a trickle.
But in the last few months India has hit a gusher, as investors around the world have turned away from the dollar, the global refuge during the crisis, and rediscovered their optimism in the world economy and India’s place in it.
There is palpable optimism here. Major stock indexes have roughly doubled from their March lows. Companies are advertising initial public offerings on television. And articles about bonuses and corporate expansion plans have started replacing news about layoffs and deferred projects on the front pages of newspapers.Walla!
Nearly US$7 billion (RM23.7 billion) more foreign direct investment flowed into India's economic arteries than left the country in the second quarter, from April through June. This is nearly twice as much as in the previous six months combined.
Including cash invested in the stock and bond markets, India received about US$15 billion in foreign investment, the most it has received in any quarter except the last three months of 2007, according to Macquarie Securities.
If the current surge continues — and skeptics doubt that it can — the Indian economy could start growing at 8 to 9 per cent a year as early as 2010, far sooner than forecasts by the International Monetary Fund (IMF) and many independent analysts.
“Clearly after the big shock of last year, things are back on track,” said a spokesman of Oxus Research and Investments, based in New Delhi. “People are seeing the recovery to be lot more robust than what many of the naysayers are saying.”
While many say the good times are here to stay, some analysts worry that the renewed ebullience will be fleeting if global financial markets take another turn down.
Confidence in India’s potential could also falter if the government does not address some long-standing problems, namely, improved infrastructure, investment in education and economic reforms, as it has promised to do so, to lift hundreds of millions out of poverty.
Another big concern is that the foreign money might re-inflate bubbles in stock and real estate markets.
Indian stocks are less than 20 per cent shy of their 2008 peak, even though corporate profits and the economy as a whole are growing more slowly now.
“Because we are a fairly large attractor of capital, the possibilities of bubbles building up in sectors like real estate are very real,” said an economist at HDFC Bank, who is nonetheless upbeat about the economy.
“It has clearly happened in China and there is some of that sort of problem here, as well.”
For a country that quarantined its economy from the rest of the world for much of the last 60 years, India has increasingly relied on foreign investment in recent years.
It has helped bridge the gap between domestic savings and the growing capital needs of the private sector and the government, which is borrowing money to pay for welfare programs and subsidies.
In the India’s fiscal year, which ended in March, growth slowed to 6.7 per cent, from 9 per cent a year earlier, in part because of lower foreign cash flows.
Most analysts estimate the economy will grow more than 6 per cent this year, but some optimists say growth will be as high as 8 per cent.
Rising foreign investment should help offset some of the economic impact of erratic monsoon rains. The agricultural sector makes up about 17 per cent of India’s economy but sustains more than half its population.
India’s economy lacks some of the handicaps present in other countries.
For instance, domestic demand never collapsed to the extent it did in the United States, and yet consumer spending is picking up now. Car sales were up 13 per cent in the five months that ended in August, compared with the same period last year.
Builders say sales of affordable apartments — priced from US$10,000 to US$30,000 — are up, too.
Even retailers, who were forced to close hundreds of stores last year after over-expanding, are talking about opening new outlets.
Some Western companies are eager to get a piece of this market. Last month, Ford Motor said it would build and sell a new hatchback here.
McDonald’s announced that it would open 120 more restaurants. And Baltimore-based T. Rowe Price, according to local news reports, is in talks to buy a stake in an Indian mutual fund firm.
At the same time, thanks to strong overseas demand for Indian stocks and bonds, companies here are raising billions of dollars. In a recent initial public offering for Oil India, a government-owned company, demand outstripped available shares by 31 times.
“There is a large amount of liquidity in the world,” said an executive director at Icici Securities. The money is flowing here, because “people see that India and China are the two growth areas.”
Still, the rising flow of foreign funds poses challenges.
India’s currency has appreciated 11 per cent since early March, to 46.13 rupees (RM3.37) to the dollar, because of rising demand for rupees and the broad decline in the dollar. That will make Indian garment and jewelry exports less competitive on the world market at a time when those industries are still recovering.
“That is a cause of worry,” said the Chairman of India’s Gem and Jewelry Export Promotion Council, about the appreciating rupee.
“Profit margins are being squeezed, and in such a period we cannot expect to raise prices.”
The governor of the Reserve Bank of India recently said that to control inflation, his central bank might have to raise interest rates before developed countries , where rates are at historic lows. But he said that doing so could encourage overseas investors to move even more money into India, driving the rupee even higher.
And that could be too much of a good thing."
Neighbouring China had used the market policy of interest rate quite efficiently to deflate the enthusiasm for stocks and properties.
But will India upped its interest rate,if they have to control bubbles?
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