India Then & Now – October 2009 vs. May 2009

Vikas Bajaj of the New York Times is a smart reporter who covers Indian economy better than most reporters. This week he wrote an article titled India Finds Itself Awash in Foreign Investment.

While reading this article, we remembered that he had written another article in May 2009 titled India, Suddenly Starved for Investment.

The difference in the content & tone of these two articles is the story of the massive creation of credit by the world’s Central Banks, especially the US Fed by its zero interest rate policy. Capital always seeks growth. And growth is today the exclusive preserve of Emerging Markets.

India is a voracious user of capital. China has too much money and India has very little. So India is in a position to use capital efficiently and without creating overcapacity. The lack of overcapacity makes India prone to inflation when growth accelerates beyond a certain level. This is the story painted by Vikas Bajaj this week.

                   (construction site of a commercial complex in Mumbai- NYT)

We include some excerpts from the October 2009 article by Bajaj: 

  • Nearly $7 billion more foreign direct investment flowed into India than left the country in the second quarter, from April through June, nearly twice as much as in the previous six months combined.
  • Including cash invested in the stock and bond markets, India received about $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 percent a year as early as 2010, far sooner than forecasts by the International Monetary Fund and many independent analysts.
  • “Because we are a fairly large attractor of capital, the possibilities of bubbles building up in sectors like real estate are very real,” said Abheek Barua, chief 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.”
  • 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 percent in the five months that ended in August, compared with the same period last year. Builders say sales of affordable apartments — priced from $10,000 to $30,000 — are up, too. Even retailers, who were forced to close hundreds of stores last year after overexpanding, are talking about opening new outlets.
  • “There is a large amount of liquidity in the world,” said A. Murugappan, executive director at Icici Securities. The money is flowing here, because “people see that India and China are the two growth areas.”
  • 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.

If you want to see how bad it was in May 2009, read the Bajaj article India Suddenly Starved for Investment.

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