International | May 03 2006
By Chris Shaw (Tokyo)
The Indian stockmarket is enjoying a bull run and the currency is strong as foreign money continues to flow in and the economy continues to grow strongly.
Despite this, all is seemingly not well with the economy as both the current account and fiscal position having moved into deficit, sparking memories of the balance of payments crisis of the early 1990s.
DBS analysts have looked at the issue from both sides, trying to ascertain whether or not investors should be concerned or simply accept this time is different. In terms of the factors justifying some concern, the bank points out a widening in the trade gap is not a positive, particularly when the position is unlikely to reverse in the short-term as the nation has moved from having excess food stocks to becoming an importer of grains.
At the same time, DBS notes much of the increase is in capital goods, which suggests the economy is continuing to expand. The bank also suggests rising property prices are a threat, as any downturn is likely to have a negative wealth impact and so could slow consumption and the economy overall.
There are positives to offset these factors though, DBS noting India has a far higher level of foreign currency reserves now than it had in the early 1990s, leaving the country in a far stronger position to deal with any crisis.
Also supportive are healthier reserve adequacy ratios. In addition, despite the strong economic growth recently DBS notes inflation is not yet a problem. Whether this changes in coming months is uncertain though, as India is an importer of oil to satisfy its energy needs, so ongoing strength in oil prices are likely to put some upward pressure on inflation going forward.
The other factor to consider is the achievement in recent years to improve the external debt position, DBS noting it was down to about 8% of GDP last year compared to more than 20% of GDP in 1991.
In conclusion, DBS suggests the country’s overall position is far healthier than it was the last time there was a twin deficit crisis in 1991. Having said that DBS is quick to add some caution is still required, as while the Indian economy is currently strong conditions could rapidly change and such a turnaround would introduce new pressures.
The last word on India’s outlook is probably best left to ratings agency Standard &Poors, which last month upgraded its outlook on the country to positive from stable, while reinforcing its sovereign BB+/B rating.
The upgrade was in acknowledgement of the improvements achieved through the implementation of various fiscal reforms, the agency noting if consolidation measures where continued it would consider lifting its credit rating further in the future.
