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Four popular myths regarding India

BY  Saurabh Mukherjea & Ritika Mankar Mukherjee
The key challenge facing India today (in line with other EMs) is a ‘cyclical’ economic downturn after a long period of above-trend growth.

The sellside typically presents India either as a land of unlimited investment opportunities or as a country in the grip of a downward spiral. Against the backdrop of the latter line of thought being the zeitgeist, we attack four popular myths regarding India: (1) India is in the midst of a ‘structural’ slowdown, (2) India’s macroeconomic woes emanate from inadequate savings, (3) Wage growth across the country has slowed drastically, and (4) India’s GDP growth is the primary driver of equity returns.

Myth #1: India is in the midst of a ‘structural’ slowdown

The key challenge facing India today (in line with other EMs) is a ‘cyclical’ economic downturn after a long period of above-trend growth. An objective analysis by the IMF of India’s positioning on structural economic parameters suggests that India has broadly maintained its positioning over the last six years (Source: the World Bank’s Country Policy & Institutional Assessment - see Exhibit A). The key variable that has changed vs the pre-CY07 era is that the global business cycle has turned downwards, thereby affecting a host of Indian macro variables even though the structural features of the Indian economy, for better and for worse, remain intact.

Myth #2: India’s macro woes emanate from inadequate savings 

India’s per capita income (PCI) was at US$1,491 in CY12 and gross national savings ratio was at 30%. History suggests that an average EM’s savings ratio is typically only 22% at PCI levels similar to India. This statistic in turn points to the significantly higher propensity of Indians to save than other EM peers. 

More than inadequate savings, India’s core problem is that nearly 64% of India’s savings are in the form of physical assets (i.e. gold and real estate). 

India’s disproportionately high demand for gold is a structural problem, but the problem has not become worse in recent years, as is evident from the fact that the average gold imports to current account deficit ratio in India was at 61% in FY13 vs 229% recorded over FY05-07. 

Myth #3: Wage growth across the Indian labour market has crashed

The white-collar labour market in India is clearly plagued by low wage inflation and deficient labour demand, but the blue-collar labour market has in fact experienced record levels of wage growth over the past few years (see Exhibit B) due to: (a) a strong wave of reverse migration; and (b) rising demand for education in the lowest income deciles of the labour market.

Myth #4: India’s GDP growth is the primary driver of equity returns

Our Strategist, Gaurav Mehta, highlights that cross-country evidence lends no support to the proposition that GDP growth and equity returns are positively related (see Exhibit C). Theoretically, there ought to be no correlation between the two variables simply because the microeconomic analogue of GDP is sales and not corporate profits.

(Saurabh Mukherjea is the head of Equities and Ritika Mankar Mukherjee is analyst at Ambit capital.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.

Comments

Sumit
You are really not talking about inflation, impact of oil purchases, your analysis is based on historical trends which can not give future picture. e.g. in earlier times, cities were very close and therefore average travel per person 10-15 years ago was 5 times lesser than today. This has increased demand for fuel (oil our the biggest import) and demand is just going to go up... Article is very good but one sided only.
Varadha
Don't agree with your analysis at all. What ought to be looked at is not "softer factors" like "fiscal policy rating" but determinant of supply side variables like "capital formation", "capacity utilization", "incremental capital/labour productivity", " growth in bank credit for capital formation" etc. India, is analogous to a Toyota Corolla that has already run a 100,000 kms - great car, great quality but badly in need of a massive overhaul and no one is saying that the car has "poor quality" but what got you to the first 100,000 kms does not have legs to run the rest of the distance. What would be interesting is to know how much of this capital formation has come from the Government sector and how much from the private sector and their respective outputs. Gut says that a lot it would be a misplaced capital allocation - much of the money sucked out by the Government for little or negligible long term capital formation. Therein lies India's problem. It's like a conglomerate that perpetually sucks out cash from the productive child to feed the perpetually cash needing child. And actual GDP growth never had a correlation to stock market growth. It was also expected GDP growth that drives returns. so, the result does not come as a surprise.

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