West Keeps Indian Economy Afloat in Post Cold War World

India runs massive current account deficits. Its imports far outstrip exports year after year. According to the Reserve Bank (RBI) data, in the April-December 2014 period of last fiscal, India's current account deficit stood at $31.1 billion or 2.3% of GDP.



In spite such large recurring deficits, India has built up over $300 billion in foreign exchange reserves. How does it do it? The simple answer is: Foreign money inflows in the form of debt and investments mainly from the West keep the Indian economy afloat.

Sources of FDI in India Source: Financial Express
These inflows have dramatically increased with western support for India in the post Cold War world. Here's how Indian journalist Pankaj Mishra explains the larger western interest driving this phenomenon:

"Seen through the narrow lens of the West’s security and economic interests, the great internal contradictions and tumult within these two large nation-states (India and Pakistan) disappear. In the Western view, the credit-fueled consumerism among the Indian middle class appears a much bigger phenomenon than the extraordinary Maoist uprising in Central India".  

Here's how the Asian Development Bank (ADB) describes the rising inflows of foreign, mainly western, capital into India:

"Gross capital flows have increased nearly 22 times from $42.7 billion in 1991-92 to over $932.3 billion in 2010-11. As a share of GDP, this amounted to an increase from 15.5% in 1991-92 to 55.2% in 2010-11. Much of the increase in financial integration occurred between 2003-04 and 2007-08. Given the impressive economic performance indicated by close to 9% growth rate, higher domestic interest rates and a strong currency, India's risk perception was quite low during 2003 to 2007. Furthermore, this period was associated with favorable global conditions in the form of ample liquidity and low interest rates in the global markets—the so-called period of Great Moderation."

Many other economies have been growing faster and producing higher investor returns than India. So the returns do not justify the increased capital flows. Such flows are driven much more by the changing geopolitics of South Asia region and the world since the end of the Cold War in early 1990s. Without these inflows, Indian economy would collapse and India would be at IMF's door seeking last resort loans.

Lesson: Geopolitics drive economy. It's the reason for over a trillion dollars of western capital flow into India since the end of the Cold War. It also explains China's massive $46 billion investment commitment in Pakistan agreed during President Xi Jinping's state visit to Islamabad.

Related Links:

Haq's Musings

India's Soaring Twin Deficits

Xi Jinping's Pakistan Visit

How Strategic Are China-Pakistan Ties?

India Pakistan Economic Comparison in 2014

Pakistan's KSE-100 Outperforms India's Sensex

India's IT Exports Highly Exaggerated

Is India Fudging GDP to Show Faster Growth Than China?

Comments

Riaz Haq said…
Sources of FDI in India:


A comparison of the available FDI data to M&A data for India reveals an entirely different picture (figure 2). Countries like the US and the UK together make up 50% of M&A acquisitions into India, and Japan is responsible for another 10%. This triad is effectively responsible for three-fifths of FDI inflows into India (of the M&A variety at least). This provides us a more useful geographic breakdown of who is actually doing the investments in India.
A sectoral analysis of FDI inflows suggests that, on average, between 2000 and 2012, more than 35% of FDI inflows have gone into services, telecom and construction sector, with pharmaceuticals, chemicals and computer sector each receiving about 5% of the country’s total FDI inflows over the corresponding period. However, M&A data at the sectoral level for the same time span suggests telecom and pharmaceuticals (and healthcare) have attracted over one-third of the foreign M&A acquisitions in India. Of late, pharmaceuticals has attracted a greater share of M&As, with the sector taking about 20% of inbound M&A acquisitions between 2010 and 2013 (figure 3).
What does the foregoing discussion imply for policy? Obviously, first and foremost there is a need for better appreciation of the actual sources and destinations of FDI to and from India as well as the sectoral composition of FDI flows. In fact, while not discussed here, as Indian companies invest overseas more aggressively, better quality data on gross inflows and outflows at country and sectoral levels are needed.
Much more attention is also needed with regard to FDI quality at a more disaggregated level (i.e. new FDI versus retained earnings and greenfield versus M&A). While it is important for India to attract FDI, it is pertinent to ask the question whether a policy to attract FDI should be careful in distinguishing between the kind of FDI it wants to attract. All FDI are not the same and are not attracted by the same factors. The prime objective must be to align FDI with national development objectives, consistent with being an open economy.

http://www.financialexpress.com/article/fe-columnist/fdi-inflows-who-is-investing-in-india-and-in-what-sectors/28737/
Riaz Haq said…
MUMBAI—A large pile of debt on the books of India’s big infrastructure companies is complicating Prime Minister Narendra Modi’s plans to boost the country’s economy and improve its woeful roads, electric grids and other public works.

The companies that build big projects owe more than 3 trillion rupees ($48 billion), the result of a failed effort by the previous government to get businesses to help improve India’s infrastructure. The total amount of debt for Indian infrastructure companies is at its highest in more than a decade, affecting the overall economy because banks, fearing the loans won't be repaid, are reluctant to lend to other companies.

Debt levels have risen across Asia in the past five years and are now higher than they were before the Asian financial crisis in 1997. The borrowing has taken different forms in different countries. In China, giant state-owned companies borrowed the most, in Thailand and Malaysia, consumers took on debt, while in Japan, the government boosted its world-leading borrowing.

High debt levels could limit India’s ability to help drive global growth at a time when China is slowing and many of the world’s economies are weak. Foreign portfolio investors have poured $42 billion into Indian stocks and bonds over the past year, leaving them vulnerable to cracks in the country’s economy.

In India, overall debt levels are relatively low. But the sector struggling the most with its borrowing is also one that Mr. Modi is counting on to juice the economy and boost the country’s productivity. Instead, the companies are now focused on reducing their debt.

“At this point, we are not able to commit more equity to new projects,” said Ankineedu Maganti, managing director of Soma Enterprise Ltd., a south India-based developer of roads and other infrastructure projects. “We’re still trying to recover from the past.”

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In 2014, bank credit to infrastructure was 14% of overall credit, and now infrastructure companies account for among the biggest portions of the bad and stressed loans on the books of Indian banks.

The bad debt has made banks less willing to lend, weighing on the overall economy, according to a Finance Ministry report in December. “The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets,” the report said. “Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend.”

Banks have been pushing infrastructure companies to sell assets and pay back debt. But India’s insolvency laws make it unattractive for lenders to push companies into liquidation, so the standoff is likely to continue.

http://www.wsj.com/articles/indias-debt-pile-up-complicates-growth-plans-1430758983
Riaz Haq said…
#India Worst performing stock market? This is the end of the Modi bubble for FIIs

Is PM Narendra Modi running out of luck? He had famously boasted being a lucky Prime Minister while seeking votes during the Delhi elections. The context, of course, was international oil prices had less than halved and that seemed to have brought all round uptick in economic sentiment, what with the stock markets soaring to new highs early 2015. Consensus among global FIIs was that they will remain overweight India as compared to other markets like China, Brazil, South Korea, Taiwan and Russia. But everything seems to be reversing over the past month and a half.
Suddenly the FIIs, with a cumulative investment in Indian stocks of about $300 billion at market value, are looking at other emerging stock markets for returns and no longer treat India as the most preferred destination as they did last year, and even the beginning of this year. FII net outflows gave been of the order of Rs 12,500 crore over the past month. The stock market index has seen the biggest correction of 10 percent in a short time. This has caused speculation whether the markets are slipping into a bear phase.

But what is indeed worrisome is India is probably the worst performing stock market among emerging economies this year. This is in sharp contrast to the view taken by the big FIIs that the Modi government reforms could trigger a multi-year bull run in India. Now the same FIIs are shifting the weightage of their global allocation to China where the stock markets have shown 30 percent growth since January. India's Sensex growth remains in negative territory. Even FII inflows, which primarily influence market movement, are flat to negative since January.
Worse, now FIIs also seem to prefer oil exporting markets like Russia and Brazil, both of whom had fallen out of favour after the global oil prices had more than halved, badly affecting their revenues. Now the FIIs believe that oil prices are moderately correcting and returning to oil exporting markets like Russia and Brazil makes sense. This view is buttressed by another major consideration. They feel as the US economy recovers and the prospect of monetary tightening by the Federal Reserve brightens, the dollar would strengthen in the short to medium term.

The Economic Times has just reported a survey of top CEOs and the majority of them suggest that demand is depressed. "The bonhomie and cheer that greeted the arrival of the Modi government is replaced by a sombre mood and a grim acknowledgement of the realities of doing business in India," reports ET, as it captures the sentiment of the CEOs. Little wonder that this is reflecting in the behaviour of the stock market and currency. The largest engineering conglomerate L&T had said some of its plants are lying idle as demand for capital goods is very weak. The Aditya Birla Group had deferred its revenue target of $65 billion by 3 years, to 2018.
These are not good signs for the economy and both the stock market and currency will reflect this in the months ahead.

http://www.firstpost.com/business/worst-performing-stock-market-end-modi-bubble-fiis-2243556.html
Riaz Haq said…
Commodities collapse cuts imports but also hurts #India's exports: Petroleum, gold jewelry, Iron ore, cotton, food http://cnb.cx/1h1hDvs

Slumping global commodity prices are typically seen as a boon for India, a country that relies heavily on oil imports to service its energy needs, but a closer look indicates it's not all good news.

That's because least 35 percent of India's exports come from commodities-linked products including refined petroleum, gold jewelry, gems, iron and steel. While typically lower input costs should burnish profits for these companies, prices of the final goods Indian manufacturers crank out have also slumped.

"India's miners are seeing sharp contraction in their earnings, agriculture commodity producers are seeing their earnings affected due to the weak price of agriculture products, and the gems/jewelry sector is undergoing a major downturn," said Taimur Baig, chief economist at Deutsche Bank.

The export value of refined fuels – which make up nearly one-fifth of total exports - is down 51 percent on-year this fiscal year, for example, amid falling prices and weak demand. Similarly, gold jewelry exports are down 20 percent on year, while iron and steel exports are down 30 percent, according to the bank.

Of India's top five export destinations – the U.S., United Arab Emirates, Hong Kong, China and Saudi Arabia - exports to China have slowed the most, followed by Saudi Arabia.

While India is not nearly as export-oriented economy compared with many of its Asian neighbors, exports account for a sizable portion of its gross domestic product (GDP) - approximately 15 percent.


Thus, "benefits from lower prices and import costs are being offset by weakness in the domestic commodity sector," Baig said.
"It is clear that India's growth recovery is unlikely to be supported by a vigorous rebound in the external sector anytime soon. Therefore, it is evident that domestic demand would have to play a bigger role in supporting India's growth recovery in this cycle, mainly though a meaningful turnaround in capex and investment," he added.

Banking sector risks

Not only is the commodities slowdown weighing on India's exports, which tanked a whopping 20.7 percent on year in August, it also poses a threat to the country's banking sector.

"India's banks have sizable legacy exposure to stressed sectors such as steel, mining, and infrastructure; their recent loan growth has also been largely toward these sectors," said Baig.

"The commodity headwind is pushing up likelihood of further NPLs [non-performing loans], casting a shadow on the banking system," he said.

Read More Why it could get even worse for materials stocks

India's state-owned lenders are already struggling with deteriorating asset equality as a result of the economy's slowdown in recent years and stalling of large infrastructure projects.

Monetary policy challenge

The correction in commodity prices is also overstating disinflation in India, says Baig, posing a challenge for monetary policy.

"Pressure on the RBI [Reserve Bank of India] has risen considerably to ease policy interest rates. Non-commodity prices, however, are hardly in benign territory," Baig said.

"Education costs were up 6 percent on year through August and the same was with clothing. Thus the issue of how much room is available for the central bank to cut rates with a view to its medium term inflation objective of around 4 percent is being complicated by commodity price driven disinflation," he said.

The RBI is due to hold its next policy meeting on September 29, when it is expected to cut interest rates by 25 basis points to a four-year low of 7 percent. It has reduced its key policy rate a total of 75 basis points this year, standing pat at its last policy review in August.
Riaz Haq said…
#India's August exports shrink for ninth straight month, fall 20.7%. #Modi #BJP http://toi.in/SejmIb

NEW DELHI: Contracting for the ninth month in a row, India's exports plunged by 20.66 per cent in August to US $21.26 billion, widening the trade deficit.

READ ALSO: Devaluation of yuan will affect India's textile exports

The significant slump in country's exports is attributed to global slowdown and declining commodity prices worldwide.

In August 2014, the merchandise exports had amounted to US $26.8 billion. The last time exports registered a positive growth was in November 2014, when shipments had expanded at a rate of 7.27 per cent.

Imports too declined by 9.95 per cent to US $33.74 billion in August this year due to high gold imports, leaving the trade deficit at US $12.47 billion, according to the data released by the Commerce Ministry.

However, the trade deficit has narrowed in August as compared with July this year, when the figure stood at US $12.81 billion.

In August last year, the deficit was US $10.66 billion.

Gold imports rose by 140 per cent to US $4.95 billion in the month under review from US $2.06 billion in August last year.

The main exporting sectors which reported decline in exports include petroleum products (fall of 47.88 per cent), engineering (29 per cent), leather and leather goods (12.78 per cent), marine products (20.83 per cent) and carpet (22 per cent).

Exporters expressed concerns over the continuous decline.
Riaz Haq said…
#India’s #trade deficit with #China swells to $51.9 billion in 2015 http://toi.in/3T-HFY via @timesofindia

India's trade deficit with China increased to $51.86 billion in 2015, Parliament was informed on Monday.
"Increasing trade deficit with China can primarily be attributed to the fact that Chinese exports to India rely strongly on manufactured items meeting the demand of fast-expanding sectors like telecom and power while India's exports to China are characterized by primary products, raw material and intermediate products," commerce and industry minister Nirmala Sitharaman said in a written reply to the Lok Sabha.
She said India's trade deficit with China stood at $51.86 billion, with a bilateral trade of $71.22 billion in 2015. During this period, India's exports to China came in at $9.68 billion while imports were $61.54 billion.
Riaz Haq said…
#Credit Rating: #India Doesn't Deserve To Be Equal To #China #China rated close to #US, #India near junk via @forbes

http://www.forbes.com/sites/panosmourdoukoutas/2017/02/05/india-doesnt-deserve-to-be-equal-to-china/#6e2c485d76b8

India doesn’t deserve to be next to China — when it comes to credit rating agencies that is.

That’s according to all major credit agencies, which give China a near perfect score — close to the US — and India a near junk score. Fitch, for instance, gives China A+, and India BBB- (see table).

China’s and India’s Credit Rating

India’s credit rating lag behind China is also reflected in credit markets, where the Indian government has to pay almost twice as much as China to borrow money for ten years—see table.

That’s certainly upsetting to India’s government officials, who blame credit agencies for favoring China over India. Specifically, they are critical of the agencies for failing to lift India’s credit rating despite its improving economic fundamentals, like robust economic growth rates and fiscal discipline.


At the same time, they point to the fact that the agencies have failed to lower China’s rating in spite of deteriorating fundamentals like – the slowing down of the economy and soaring debt to GDP ratio.


------

China has a recent history of current account surpluses and enormous foreign currency reserves, while India has a recent history of current account deficits and moderate foreign currency reserves. This means that China lives below its means, while India lives beyond its means.

That’s a situation that may become worse with Narendra Modi’s free cash for everyone, which is expected to turn India into next the Brazil.

Persistent current account deficits make India more vulnerable than China to the next global crisis – one that, should it occur, will shift the tides of foreign capital flows from emerging countries back to developed countries—a big concern for the credit rating agencies and foreign investors that rely on them.

The bottom line: To move next to China in the credit rate scale, India must learn to live within its own means.
Riaz Haq said…
How #China beats #India hollow in trade and dominates #Indian homes, #markets #economy #trade http://economictimes.indiatimes.com/news/economy/foreign-trade/china-dominates-indian-homes-markets-and-economy-as-trade-deficit-widens/articleshow/59611452.cms via @economictimes

China seems to be grabbing most of it (solar panels). “The US and Europe are taking measures to protect themselves against Chinese dumping. We (Indians) have instead offered them a direct train to the Indian market. The government must ring fence Indian firms to allow them to grow,” says Chaudhary.

Miles away in Delhi, Rakesh Kumar Yadav shows you another Chinese-flavoured world. He is the president of the Federation of Sadar Bazar Traders Association. The umbrella platform for The umbrella platform for 83 other associations with 35,000 wholesale traders does business worth over Rs 3,000 crore annually and employs at least 100,000 people directly and indirectly.

About a decade back, the traders often used to source products — toys, plastic buckets, idols of Indian gods, among others — from domestic manufacturers. In toys alone, Yadav knows many Indian manufacturers who employed 500-plus people and were their suppliers. “They have all shut down and now import from China. Cheaper and better Chinese imports have wiped out the domestic industry,” says Yadav.

On the border, India is trying to ward off Chinese aggression. In the cold Himalayan plateau, temperatures have shot up as an old political rivalry heats up. India and China are sparring over the Doklam tri-boundary area (the third country being Bhutan), near Chicken’s Neck which connects India’s north-eastern states to the rest of the country. Shrill calls for a boycott of Chinese goods are getting louder, with the Rashtriya Swayamsevak Sangh (RSS) and its affiliate, the Swadeshi Jagran Manch, ..

Read more at:
http://economictimes.indiatimes.com/articleshow/59611452.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Riaz Haq said…
#IMF says #India vulnerable for depending on foreign money to finance public #debt, #trade #deficit http://ecoti.in/w-xtyZ @economictimes

India needs to remain vigilant as greater reliance on debt financing and portfolio inflows could create significant external financing vulnerabilities, a recent IMF report has said.

The The International Monetary Fund (IMF) in its report titled 'The 2017 External Sector Report' further said other risks to the Indian economy stem from global financial volatility and 'longer-than-expected cash normalization' following the currency exchange initiative.

"Like other EMs, too too great a reliance on debt financing and portfolio inflows would create significant external financing vulnerabilities. Therefore, there is need to remain vigilant to safeguard the Indian economy.

"...India's economic risks stem from intensified global financial volatility including from a faster-than-anticipated normalization of monetary policy in key advanced economies, longer-than-expected cash normalization following the currency exchange initiative, as well as slower global global growth," the report noted.

India's Monetary policy framework has been strengthened, the report said, adding, "but further supply-side reforms and continued fiscal consolidation are key requirements to achieve a low and stable rate of inflation in the medium-term as well as to keep gold imports contained."

Emphasising that continued fiscal consolidation is needed, which includes implementation of the goods and services tax and further subsidy reforms, the report s ..

Read more at:
http://economictimes.indiatimes.com/articleshow/59848585.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst


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