India is on a good wicket, never mind the Fitch bitch

India bashers should look more closely at the country’s current state of affairs before writing it off. It is true that inflation, fiscal deficit, current account deficit, corruption and politics are above the danger mark, but it is also true that the country is relatively better off in terms of general prosperity than many other nations in today’s economic environment.

However, the country has to work to stay in its relatively better off position, and hopefully the rating downgrades, the currency weakness (rupee down over 20 percent against the US dollar year on year) and investor apathy will force policymakers to adopt good economic practices going forward.

The average Indian saver has not lost money as most of his savings are either in physical assets or gold and property or in financial assets such as bank deposits and government-run savings schemes. Household savings in financial assets as a percentage of GDP is around 11.8 percent (RBI annual report) while savings in physical assets is around 11.7 percent of GDP.

Savings is equities as a percentage of total financial savings is less than 5 percent. India’s benchmark equity index, the Sensex, has fallen by 20 percent from highs seen in 2007-08, while gold and property prices have doubled in the last four years. Savings in bank deposits and government-run savings schemes have lost money in real terms with inflation of over 9 percent rates trending higher than savings rates of 8-8.5 percent but capital value has been preserved. Hence the average Indian saver has actually seen his or her wealth going up due to the rise in prices of physical assets.

India has not seen a sharp rise in unemployment rate (around 10 percent) as seen by countries such as US (unemployment rate up by 3 percent over the last six years) and eurozone (running at all time highs of over 10 percent). The knowledge sector has been a strong employer with the industry absorbing around 250,000 employees over the last four years and this job creation has helped create additional jobs in metros.

The Indian government employee has been the beneficiary of the sixth pay commission report implementation with pay hikes of over 21 percent since 2006 and has received arrears in the 2008-10 period that cost the government over Rs 29,000 crore. The government employee is sure of his or her job and is drawing higher pay, leading to him or her becoming a resilient consumer.

The working class Indian is more or less sure of retaining employment (leave aside bloated sectors such as financial services) and has not lost money due to the downtrend in the economy. This is not the same with other countries including China. China has seen its benchmark equity index the Shanghai Composite Index come off by 50 percent over the last five years while its property market has seen prices coming off for nine straight months after the government pricked a property bubble.

The Reserve Bank is one of the few central banks in the world that has maneuverability on interest rates. The repo rate is at 8 percent levels while rates of US, UK and ECB are at 0.5-1 percent levels. The RBI is, however, fighting an economy that has been through high inflation and a government that is still not committed to fiscal reforms and is not likely to cut rates to extremes to improve growth. However, there is comfort that there is room for rates to be cut, leading to positive expectations down the line.

In the current world economic context it would be fair to suggest that an average working class Indian is much more confident than his counterparts in many parts of the world. The images of riots in Greece, job lines in Spain, property sale notices in US, and ghost towns in China contrast with the bustle and chaos of India’s cities and towns.

Policymakers should use the better condition of the Indian working class as leverage to stronger economic policies. The data is there in front of the government with inflation for May at 7.75 percent, fiscal deficit at 5.9 percent of GDP and current account deficit at 3.6 percent of GDP (fiscal and current account deficit numbers for 2011-12). The government should strive to bring down these numbers structurally and at the same time improve its governance.

Needless to say, the rating agency downgrades (S&P and Fitch have downgraded the country’s rating from stable to negative) are not warranted given India’s position relative to other sovereign nations, but if it can help spur the government into action then so be it.

(curtsey : first post)

Rupesh Yatesh Dalal
Head Research Department


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