International | Sep 11 2006
By Chris Shaw
You can count Arjuna Mahendran, Credit Suisse’s head of research for the Asia/Pacific region, as one of the believers in the positive outlook for the Indian economy, but also count him as one of the few to point out there remains a lot of work to be done before it is fair to class the country as the next China.
As Mahendran notes, history shows a developing economy needs to generate strong economic growth consistently for around a decade before it is deserving of the status given to China now and South Korea and Taiwan previously. This suggests India still has a few years to go, meaning there remains the potential for things to go wrong in the meantime.
One possible problem in his view is that India, unlike China, is a democracy and a change in government (the next election is due in 2009) could see changes in policies, so impacting on economic growth. One reason a change remains possible is the Indian government is running a substantial deficit as it is simply not generating as much revenue as it is spending.
At the same time interest rates are moving higher, so increasing the government’s interest bill as it borrows to fund the deficit. While privatisation of assets was previously seen as an option for funding this gap, parts of the ruling coalition are opposed to such an approach. Mahendran points out this gives the government little flexibility for dealing with the funding shortfall, so increasing the potential for an early election if the issue continues.
This becomes a bigger problem when added to the need for infrastructure, as spending large amounts on building sufficient roads and airports and providing the population with water and power requires government funding. Mahendran acknowledges this, but expects an initial focus on the major cities such as Mumbai, Chennai and Delhi will allow enough progress to be made that the benefits will eventually flow through into other parts of the country.
At the same time he suggests the government needs to work towards making the climate more business friendly, as he notes there is far more bureaucracy and red tape in India than in China. This gives the Chinese an advantage especially in the ability to attract overseas investment, a gap he sees as likely to take several years of stable government to address.
While this paints a somewhat gloomy picture, Mahendran remains positive on the Indian economy over the longer-term as he expects these issues will eventually be overcome. Helping in this regard is the fact labour in India remains cheap in global terms, so there will be a continuation of the current trend of global companies moving some of their activities there to take advantage of this situation.
As this happens Mahendran suggests other sectors such as financial services and tourism will benefit, lifting the standard of living for the nation as a whole. At the same time, he points out the country offers emerging market-like growth rates but from a position in the developed world, a solid reason why the nation should continue to attract investment funds that will help with financing the developments necessary to allow India to assume its place beside China as another contributor to global growth.
