The India Story : Where is the economy heading ?

So where exactly is India heading? Our GDP is at an all-time low reaching a growth rate of just 6.2% in this fiscal year down from the golden days of over 9% growth just a year back, the political system is facing lots of hard times due to the rise in regional times and our fascination with Gold imports and energy needs continue to affect our current account deficits. Experts and pundits are questioning the viability of the India story, but is there really an alternative?

India, today is the world’s second most populous state next only to China and given the high growth rate it will soon overtake China. It is more significant to note that the total middle income population is higher than that of the total population of United States – the world’s biggest market! So we are essentially looking at market for the future – can we ignore it?

While analysing India, it inevitably brings in comparison with China especially after Jim O Neil coined BRIC, clubbing India with China. There can be nothing further from reality though. India and China follow two distinctly different growth models, and such comparisons defy conventional wisdom. While sustainability of China’s economic model has been the question, in case of India the question is whether the growth engine has reached a halt.

A major reason though for the lack of faith in India’s story is our current account deficit, largely due to imports of Gold and Energy. India imported about 38 billion USD of Gold in the current fiscal year till December as compared with 56 billion USD in the fiscal year 2011-12. In order to curb the import, the imposition of a tax of 6% per 10 grams of Gold also does not seem to yield much result in curbing demand while increasing illegal import of Gold in the country. However, if we look at quality of Gold as an asset, it reigns supreme over many alternate asset classes and has the prospect of one day being used as an asset for external borrowings by the state. At the same point of time, India can become self -sufficient in energy resources if it starts exploiting its energy reserves. The natural gas reserves (RIL might be reducing output to revise contract prices) in KG Basin, the Shale gas reserves in Arunachal (by conservative estimates it is sufficient to meet the country’s energy needs for about 50 years) and the Thorium reserves in Kerala all stand testimony to the fact.

While much headway has been made with respect to manufacturing in the country, social initiatives like NREGA will ensure that wage rates will be above a certain level, thus ensuring that India will not be able to compete with low cost manufacturing in countries like Bangladesh and China in the long run. Hence, the focus therefore should be to move up the value chain and look at high end exports in manufacturing and service sector. The continuous weakening of the Indian rupee should help in exports while also attracting foreign investment in the financial markets – close to 4 billion USD has been invested in Indian equity market by foreign investors in January this year.

The decision of the central government to allow FDI in retail indicates that there is an increasing willingness to get the Indian growth engine back on the track. The recent decision to deregulate diesel prices further points that India is well on its way to adopting market economics in the long run as also the elections in crucial states like Gujarat and Bihar being contested on issue of development and not caste-based politics show the growing change in mind-set of the voters.

Whether S&P downgrades India or not, can you find another better place to invest in given financial situation in the world? There are no signs of recession ending either in US or EU, with Britain planning a referendum in 2015 to decide whether to quit EU. Deutsche Bank CEO Mr. Anshu Jain recently commented that he would rather prefer India’s problems than those of EU. Perhaps, there is still hope. The bigger question is: Can we put our money on the Indian tortoise to win the race? Maybe, yes.