Let the music play
Wednesday, January 2, 2008
The New York or Nasdaq exchanges have been done, now Indian companies are setting their sights on exchanges such as Euronext and those in Dubai and Australia. Businesses are globalising and so are investors and so is access to capital markets
The last five years form the best period in the Indian economic history when the economy has achieved many milestones. Whether it is sustained high economic growth rate, double digit industrial growth, rising saving and investment levels, huge forex inflows, benign inflation, rising exports, record stock market indices or lately even rising employment generation, India is on an upward moving trajectory.
Recently, the emphasis is on making the growth process inclusive. The beginnings of actual ground work in this respect are being seen. This new trend would ensure rising demand, expanding markets and qualitative growth. In other words, the fructification of the empowerment of “Bottom of the Pyramid”.
India is, today, along with China , leading global growth. India is no more a developing country but a transforming economy. And it?s getting better and better. GDP growth in the first half of 2007-08 has been sustained at 9.1% on top of the already high growth base attained during the previous four years.
India?s international profile is strengthening as a result of its galloping GDP growth, rising FDI inflows and exponential growth in the value of India?s overseas acquisitions, which are due to the creative talent and entrepreneurial spirit of the corporate sector. Indian companies today rank in the top 16-17 companies globally in terms of market capitalisation. In pursuit of their global ambitions, they are looking to list their shares on exchanges in new geographies.
The New York or Nasdaq exchanges have been done, now Indian companies are setting their sights on exchanges such as Euronext and those in Dubai and Australia. Businesses are globalising and so are investors and so is access to capital markets.
Little wonder, therefore, that the recently concluded India Economic Summit evoked a tremendous response from the global business community. More than 350 CEO and board-level participants from over 200 overseas companies from 32 countries was a clear reflection of their increasing interest and growing confidence in India as an investment destination.
By 2020, there will be a shortage of 50 million working age people in the developed world, while India would have a surplus of 47 million. This demographic dividend could be tapped to India?s best advantage , provided India makes the right move by empowering its youth with world class skills required by industry, agriculture and services. The challenge would be to build productivity to stay ahead of other competing countries and be involved in a constant process of innovation , skill development and capabilities.
The success, nevertheless, should not lead India to any complacency. There is still a long way to go in the reform process. For India to sustain its manufacturing revival and move up the value chain, it must bring about a sea change in its R&D climate, develop the required infrastructure facilities, carry out labour reforms and taxation reforms , particularly bring in a low goods and services tax regime and make the financial sector truly global at the earliest.
However, some signs of slowdown have been visible in last few months, like the marginal slowing of GDP and industrial growth, fall in credit for commercial activities due to increase in interest rates, rise in inflationary expectations, strong rupee adversely affecting more and more sectors and reduced growth in exports. But in a transforming economy where structural changes are regularly taking place, such a slowdown should not be a matter of great concern.
Besides, the recent monetary policy deliberately signaled interest rates would rise to check over-heating of the economy. The surge in capital inflows has upset the smoothly running applecart of the economy. The Economist recently ranked 15 large emerging economies according to potential economic risk and India ranked at the bottom of that table, emerging as the riskiest of all. The ranking was based on four variables: the size of the current account balances, budget deficits, credit growth and inflation. A country?s overall score was arrived at from the sum of the rankings of each indicator. The Economist admits that it is obviously only a crude gauge, but argues that it reflects the economic factors that have caused trouble in the past. However, the parameters used by the magazine?s risk model though may be relevant but they are not the best, nor the most relevant. The model misses many features and hence the perspective which may show India in a better light.
For example, India?s fiscal deficit has been steadily coming down in recent years. Even state governments, once notorious for profligacy, have demonstrated better fiscal management. The Fiscal Responsibility and Budgetary Management Act has made financial rectitude a statutory requirement. Also, high current account surplus is broadly regarded as indicator of stellar performance and deficit as sign of potential disaster. The argument is that economies with current account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. However, a modest current account deficit may not be such a bad idea for a transition economy.
In fact, a healthy transforming country typically should run a significant current account deficit, financed by capital inflows.
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