Indian economy is very similar to the US and Euro zone in the sense that it is about 60% consumer driven as opposed to commodity export boom and/or government spending driven as is the case with the rest of the BRICS. The demographics are the most favorable among any nation in the 21st century. Lower Oil import cost should provide a huge boost to the supply side and help the balance of payments deficit in terms of USD thus providing a floor to INR. Cost of capital is higher though. Firms that raised USD denominated debt due to lower cost of capital have to be cognizant of the currency risk since a depreciation in the INR can cause the debt covenants of the balance sheet ratios to be breached.
Lastly, there is the lack of proper infrastructure. Albeit, the right moves are being made in the regard. For example, from what I hear, $100 Billion Amravati project to build a new state capital for Andhra Pradesh. 21st Century will belong to India. It is hers for the taking
Make in-india- why the 21st century belongs to india-
Make-in-India: Why the 21st
Century belongs to India?
It is the Consumer!
GDP: Gross Domestic Product
GDP = C + G + I + Nx
C = Consumer Spending
G = Government Spending
I = Investments. Foreign Direct Investments, Private Capital (PE, Venture, Corp.)
Nx = Net of Exports (Exports - Imports).
So what is the ideal mix?
Let us take a look at the United States first since there is well published data, is
the largest economy accounts for approximately 20% of world GDP and most
importantly, it’s currency, the USD, is the measuring stick and reserve currency!
C = 70%
G = 20%
I = 12 to 13%
Nx = -2 to -3%
The key is the Consumer!
Now let us take a look at the GDP components of India:
● RBI Data: http://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!2
● Pie Charts: http://mecometer.com/infographic/india/gdp-composition-breakdown/
It looks remarkably similar to to the US! Infact, it is even better. Why?
The G component is only 12%. Capital (ie Investments) is 30%! Consumer is about 60% and growing!!
Net of Exports is -3.4%
Eurozone most likely has a similar component to it, however, the consumer is shrinking in that zone.
Rest of the BRICs are either commodities driven or are dependent on investments/government.
Demographics are the most favorable...
50% of the population is under 25! That is 550 Million people under 25!!
Yet to form households, consume and grow. The world has never seen anything
like this folks!! This is massive. US Baby boomer boom pales in comparison.
Doesn’t China have more people? Yes, but they are older and the one child policy
has now created a massive drag on the consumer growth potential.
Also, the Chinese economy today is not mostly depended on consumer spending.
It is driven by Government and FDI which is shrinking...
So what do we have in store for India...
● Demographic dividends
○ Elaborated in Imagining India, the book by Mr. Nandan Nilekani, founder of Infosys
● Consumer growth is insatiable. Animal spirits like never seen before
● Energy costs are going down helping with the balance of payments deficit in
USD. Mainly due to lower Oil import expense
● Investing in renewable energy and Nuclear under PM Modi initiatives
● Starting to target growth in the manufacturing base.
○ Make-in-India initiative
● Moving up the value chain in information technology and services
○ Snapdeal, Flipkart, Paytm, etc
What are the watchouts?
● Cost of Capital is very high
○ Forces Indian multinational to raise USD denominated debt in International Markets
○ Exposing them to massive currency risk. Here is why:
○ Depreciation in the Indian Rupee causes the value of the USD denominated in INR to go up
○ Balance Sheet debt ratios in INR become unfavourable
○ Could trigger debt covenants leading to equity sale, even hostile takeovers or liquidations
● Lack of proper Infrastructure is a huge drag on the economy
○ Unlike China, India did not invest in its infrastructure on a massive scale
○ This may be a blessing in disguise since this limited the government spending and let the
consumer growth drive the economy
○ It is time now to invest in infrastructure.
○ Projects like Amravati, the new capital city for Andhra Pradesh
○ $100 Billion possibly on this one project I hear!!
At the end of the day, it is all about execution.
Democracy has forced more of an organic growth in India as opposed to top down
command and control investment driven growth in China.
Moving forward, this is likely to be a huge asset as evident from the slowdown in
China where the investment spigots have been turned off.
How long could one nation continue to be the buyer of 80% commodity demand?
21st Century belongs to India. It is hers for the taking…
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