There have been many steps taken to stimulate demand in India and China. IMF projects that India and China will have to bear the brunt of Global growth in the coming years but I am not sure it will happen. here is why…
You don´t build a consumer society overnight. India is building a foundation for a consumer society, consider for example the per capita income in India has risen by over 50% since 2000-01 this is a good sign as income rises, disposable income rises and being humans we spend the excess. Where the spending is allocated is important in the overall scheme of things, Indians typically are conservative, however the Indian household has never been taught the power of investing or compounding so I believe 2/3rd of the households will squander the excess income and not create capital for investment. The remaining 1/3rd might know about investing and compounding but 50% of that might get burned in the stock market. I believe the best way for the excess to be spent would be to allocated the capital based on the demographic… if the head of the household is less than 40, I would allocated 50% of it towards buying a house if you don´t own a house already, 50% towards investments in good quality companies that pay divident. I think the context of India needs to be factored in while investing in India, India is lacking in power, infrastructure, healthcare, education and housing. I would try to see the trend on each of these sectors and if I cannot will allocate funds in equal proporation to good quality companies that pay divident in these sectors.
I have to admit that there are a lot of investment advice being dished by the banks in India but they are very convoluted and does not get into the psyche of the common middle class family. I think there needs to a conserted effort at the grass root level to stimulate investment and demand in India.
I am not an expert in China but I can extrapolate the scene is very similar to India but I think Chinese save more given the beating the stock market there has taken… and the rise in per capita income in China has been higher so there is more capital to be deployed. I think the only problem in China is the lack of property rights so people cannot invest in real estate and buy their home or land or a farm… I might be wrong but that is my perception.
Well, I love the power of being able to dump my thoughts through the blog. I need no permission, I don´t care if anyone reads it or for that matter knows that I write a blog… rant and digression aside let me get on with the topic that I wanted to write about:
Global Economy – where in the world are we heading…
I think everyone agrees that the entire globe is going into a recessionary phase, but the trillion dollar question is when are we going to be able to get out of this mess. The answer like most economist would say it depends… it depends where in the world you are and where you sit in the socio-economic pyramid.
Lets take the example of India, the elite the ones sitting on top of the pyramid namely the politicians, bollywood stars, uber industrialist, gundas, bullies etc don´t really care as they have been investing and squeezing every last penny from the rest of the folks that their investments in building things for the past 3 decades or more and there is enough local demand for things that they have build that they will survive the downturn. Lets go all the way to be bottom the guy who is surviving on Rs.100 (approximately $2) per day does not care either as his lively hood has not improved will not improve and will continue to strive to make that Rs. 100 and get on with life. So that basically leaves the middle class the aspiring lot who borrowed money to invest in the stock market or buy their dream house, a car, Plasma TV, fancy mobile phone etc etc are basically in a pickle. They will have to stick to their jobs to make sure they can maintain the cash flow to pay for their borrowed wealth and given the slow down that is happening in the rest of the world, 1/3 rd of them will be affected and will loose all personal equity. The lucky ones will have a rich dad or father-in-law or someone in the family to bail them out.
Why is this analysis important? well, recession is a self fulfilling prophecy every talks the market down and hold on to everything they have that they make the situation worse than it was. The unlucky lot will owe banks in India and they will have provisions to write it off but not all of it so they will start to lend less to reduce “risk” of default and the spiral continues.
Everyone has been touting that India will not be affected there is some truth to it but mostly exaggerated. I believe India and China will bear the brunt of the problems later on say around 2010 or 2011 because for India and China to keep churning things and services there needs to be a buyer. The boom in India is because of Foreign Investors who came into India after Fitch, Moody´s and S&P; made India a Investment grade country in January 2007. Maybe the insightful ones started coming into India say a year or two before that… so this slapstick about local demand is actually suedo demand driven by foreign capital. There is hardly any local capital maybe it will get better if India and Non-Resident Indians keep sending their savings back to India. But this takes time and there is no short cut to build a sustainable society.