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Strategies & Market Trends : India Coffee House -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (6252)	9/2/1999 8:43:00 PM
From: Mohan Marette	Read Replies (1) \| Respond to of 12475

Vasan Sridharan (Senior Economist,StanChart) on Indian Economy. Friday, September 3, 1999 (Courtesy:The Financial Express) Economy to grow at 6.5%, industry will drive growth -------------------------------------------------------------------------------- Vasan Sridharan, senior economist with the Standard Chartered Bank, shares his views on the Indian economic turnaround with Manas Chakravarty and Samuel Bodapaty of The Financial Express. Excerpts. What are your views on the current economic scenario in the country? The Indian economy is in the midst of a cyclical turnaround. Stronger local consumption and investment demand conditions are accelerating industrial output. The performance of the capital goods and durables sectors, in particular, has been impressive. Higher domestic absorption apart, improved global pull factors are also helping power manufacturing growth. Indian exporters are rediscovering their key export markets, especially the dynamic ones of East Asia. In sum, the Indian economy can be expected to expand at 6.5 per cent in FY 99-00, with the growth engine shifting from the agricultural to the industrial sector. Indian corporates will report superior quality of earnings. Views on the changes inthe corporate sector/ superior quality of earnings The downturn in the Indian economy over the past two years has changed the face of the corporate sector. Much like their regional peers, private sector companies in India and, to a limited extent, public sector companies, have rationalised and restructured their business, labour and financial operations. The ensuing productivity gains, at least in part, are a contributory factor, to the substantial fall in inflation in India. Most observers seem to be preoccupied only with the basis effect of inflation. Admittedly a high wholesale price index base in 1998 creates a distorted picture. Yet, moving averages over the past decade to strip off basis effects suggest that inflation has been on a decelerating trend (not deflationary which can be bad as in some other countries). Overall, the potential for productivity linked inflation gains remain enormous in India. What are your views on the Indian rupee (INR) The INR's valuation continues to be asubject of great debate. Several players still assume that the INR needs to depreciate by 7 per cent-8 per cent per annum. But this traditional theory need to be jettisoned in favour of a much lesser depreciation. Establishment of a lower cost structure economy means that India's inflation differential with the rest of the world is narrowing. That at the margin should be positive for the INR as should be the prospects for global US dollar weakness in the next 6-12 months. As it is, based on the 5-currency real effective exchange rate (REER) model monitored by the RBI, the INR is currently 4.5 per cent lower than what it was in FY 93-94. It is no surprise that the RBI last week issued a statement expressing its intention not to route voluminous external payments (oil/official debt servicing related) through the interbank market effectively capping the USD/INR rate for the time being. The overall balance of payments (BoP) position for FY 99-00 is importantly comfortable for the RBI. But doesn't possibilityof higher US interest rates pose risks for India?If the Federal Reserve dramatically raises interest rates to correct `imbalances' in the US economy, it has the potential to affect flows into global emerging markets. History tells us so. In 1994, the doubling of US rates hurt sentiment considerably. But history might not repeat itself as tellingly. The year 1994 was a period characterised by concurrent global growth. There is a difference today. The globe is reviving sharply, but growth still remains uneven, indeed tentative in some parts such as Japan and China relatively. In case this V-shaped global recovery assumes a W-shape, the Fed might not have to raise rates as aggressively. Just about 75 basis points between now and next summer -- a cumulative of 125 bps for the cycle- will suffice. This tightening might not hurt much flow of funds into emerging markets and by extension, India. As it is, macroeconomic fundamentals of emerging markets today are much improved compared to 1994. What impact willthe Chinese devaluation have on India? Offshore non-deliverable forward (NDF) markets appear to be pricing in an aggressive devaluation in Q1-2000. But there is a chance that the markets might be running ahead of themselves. There is no guarantee that a devaluation might be reflationary. The Asian and Latam experiences have shown on the contrary that devaluation could be deflationary. In a way, the `income effects' of a devaluation have towered over its `price effects'. While there remains a need for China to have a more flexible exchange rate system, letting the peg go might not buy growth. Overall, there is reason for Chinese authorities to be cautious. But whenever the peg is adjusted lower, there could certainly be pressure on other currencies, INR included, for competitive reasons. What is the outlook for Indian interest rates? There are two opposing forces at work here. The cyclical turnaround in the Indian economy could pressurise rates upwards. But at the same time, the structuralchanges in the macroeconomic fundamentals (gains on the INR and inflation fronts bear credence) has the potential to keep rates southbound. In the initial stages of a cyclical turnaround, the latter could dominate the former. The central bank can be expected to further ease monetary policy, once the election uncertainties are out of the way. How will elections and politics affect the economy? Stable politics undoubtedly helps. Investors feel reassured. It is likely that this year's elections might produce a majority government. That coupled with the cyclical turnaround will help India embark on further reforms and generate future engines of growth. Infrastructure necessarily needs to be one. Concept of knowledge economy in the Indian context? There is no argument on this count. India needs to rev up public spending in sectors such as education if it wants to catapult the annual per capita income of one billion Indians from their current modest level of $425 in the next 10-15 years.Singapore is a good example of what can be achieved in a limited time span by the technological development of a country's human resources.