the australian newspaper article 19 aug 08

http://www.theaustralian.news.com.au/story/0,25197,24202505-20142,00.html

Growth hiccup could pause India's stellar run

Michael Sainsbury | August 19, 2008


WHILE all eyes on Asia have naturally pulled focus on China and the Beijing Olympics, all is not exactly well with Asia's other rising giant, India.

Inflation in the world's second most populous nation is running at 12.44 per cent. Already at 13-year highs, it is tipped to climb higher.

Adding to the pain, the country's growth, which has been charging along at 8 per cent or more for the past three years, is slowing.

Last week India's Prime Minister's Economic Advisory Council (PMEAC) said inflation may touch 13 per cent, while the GDP growth rate is expected to fall to 7.7 per cent from the 9 per cent recorded last year.

Some analysts believe that India's growth will slump even further to just 7 per cent or less.

It will end a stellar run that has seen GDP growth above 9 per cent for three years running; it has not fallen below 7.5 per cent since 2003-2004 (India uses a March 31 year end).

Soaring interest rates are helping to dampen growth, having been raised 13 times in the past 12 months as the central bank struggles to contain inflation.

In late July, the Reserve Bank of India added 50 basis points to official rates, sending them to 9 per cent and raising the reserve requirements ratio on banks by 25 basis points, also to 9 per cent.

"The interest rate hikes are a necessary part of maintaining currency stability," UBS economist Philip Wyatt said.

But he added that rates were probably very close to top of the cycle.

So far it's been an increasingly tough year for India, where the booming stock market, as in China, has seen its value sliced in half in only nine months.

Of course it's all relative.

Riding along in China's wake, India has been one of the global success stories of the past half decade.

Per capita gross domestic product has risen from $473 in 2001-2002 to $1019 in 2008, while exports have surged from $43billion in 2001-2002 to $125.5 billion in 2006-2007.

UBS has forecast that Indian exports will continue to rise, reaching $250 billion by 2009-2010.

This has boosted the country's foreign exchange reserves from about $300 billion today to a forecast $410 billion by 2009-2010. But unlike China, where the central command-and-control Government has invested in an impressive and stupendous program of building roads, power stations and other programs over the past two decades, India's own infrastructure falls woefully short and is risking the country's boom.

This is plainly obvious to any visitor to the country's main financial centre, Mumbai.

The 40km trip from the airport can take about 90 minutes or even up to an hour longer, much of it along narrow, potholed roads crammed with traffic.

"Industry has grown almost despite the Government," Citi's head of investment banking,

Nalin Nayyar, told The Australian.

He said that the lack of infrastructure was holding back India's economy and increasing the price of food and other inputs.

The Indian Government has scoped a $US500 billion ($574 billion) national infrastructure program over the next five to seven years.

"They realise the urgency of doing it quickly," Mr Nayyar said.

New Delhi is targeting the public-private partnership model as it ramps up plans to modernise India.

"There is a lot of private money waiting to be put to work," he said.

This investment will come both from India's own rich conglomerates and offshore money, with most major private equity groups now active in the market.

The Indian growth story began with economic reforms in 1991 under then finance minister Manmohan Singh, who is now the country's Prime Minister.

But it was not until 2004 that the country really started to take off, with a spurt of merger and acquisition activity.

Unlike China's manufacturing-based revolution, India skipped that step and instead saw growth from the information technology services boom.

The Indian market is highly leveraged to world energy, and commodity prices and growth in listed construction stocks has also slowed.

Financials make up 19 per cent of the market, with the next biggest sector, IT services, one where Indian companies such as Infosys, Satyam, Tata Consulting Services and Wipro are quickly eating into the market share of traditional US-based giants IBM, EDS, Accenture and CSC.

Petrochemicals and oil and gas together account for 19 per cent of the market and metals 10 per cent.

There is structural strife, too, on India's stock markets.

The older Bombay Stock Exchange is continuing to lose market share to its newer rival the National Stock Exchange, which was founded in the mid-1990s.

The BSE, which recently de-mutualised but has yet to list, now only accounts for 30 per cent of volumes across the market, and there are concerns its position may weaken further, cruelling competition.

Despite this, analysts still believe there is value to be found in the share market.

After a 35 per cent correction since early January, the Indian market is now trading at 13.3 times a one-year-forward looking price-to-earnings value, according to UBS.

The banking group has picked conglomerate Reliance Industries, telecoms group Idea and consumer goods joint venture Hindustan Unilever as stocks it rates as "high conviction".

There is increased interest from offshore money, with India's British-based legal system seen as safer than the uncertain centrally controlled environment in China.

Private equity groups were stepping up the minority stakes they were prepared to take from a regular 5 to 10 per cent to larger stakes of up to 30 per cent, Mr Nayyar said.

Australia's Macquarie Group, too, is rapidly building up its presence in the country, making a raft of senior appointments last week in preparation for the infrastructure boom.

Another wrinkle in the grand plan to make India's success better emulate China's is a general election, due in about May next year.

The ruling Congress Party was recently forced to change its coalition partners and will now face off against the more populist Hindu-based party, BJP.

There are three major and long-overdue reforms in banking, insurance and pensions that financial markets are hoping will be pushed through before then.

The insurance sector is still in its infancy and the Government wants to help its development by increasing the limit of foreign ownership from 24 per cent to 49 per cent.

There are a range of reforms in the banking sector and a push for competition in the pensions sector, where at present there is asingle Government-run provident fund which is mainly invested in bonds and restricted from entering the equities market.

Still, the slowdown of India and China clearly has implications for Australia. In the past year there has been a flurry of interest in Australian mining companies by groups from both nations: China's main target is iron ore, whereas India's steel moguls want our coking coal.

On the back of softening commodities prices in recent weeks there were signs this week of weakening in the resources sector, which has so far bucked the general slowdown on the Australian stock market.

The bottom line is that if the resources super-cycle has not peaked, it is certainly into a correction that may turn out to be longer than expected.

A quick bounce back of the Indian economy can only help.