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Numbers Don’t Lie: India Beats US for Growth

Wednesday, 31 Aug 2011 07:52 AM

By Ashish Advani

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As I have been saying for quite a while now, more quantitative easing (QE3) will happen and it will come around by October.

We received proof that the case is being built up for that. The minutes of the last Federal Reserve meeting were released Tuesday. And we heard about the serious discussion held by the FOMC about QE3. While we had three dissenters to this, the markets were relieved to hear that Fed is already discussing this.

And that was enough to turn a flat to negative market to a rally mode. And the U.S. dollar started tanking as if QE3 was already announced. So far, so good in predicting the Fed’s next move.

Here is a simple pop quiz for you: Let’s assume that you had surplus cash and were looking to invest it. And you were given two choices: One was the ability to invest it in a country that had grown a cumulative of 7.75 percent over the past two quarters, and the other was a country that had grown by an average of 1.2 percent per quarter for the past two quarters. Which one would you invest in?

We are talking about the GDP growth in India vs. the GDP growth in the United States. India announced its recent quarter growth was 7.7 percent.

This follows the United States announcing its last quarter growth was a whopping 1 percent. Last quarter, India grew at 7.8 percent while the United States grew at 0.4 percent.

You decide which country deserves your investment dollars?

While the headline growth number in India was 7.5 percent, we have to note some important details.

Investment growth posted an uptrend to 9.6 percent year over year from 2.2 percent in the previous quarter. The service sector was up 10 percent, driven by trade, hotels and communication; financing/insurance at 9.1 percent, Agriculture growth remained strong, up 3.9 percent due to higher production of rice, wheat, pulses and oilseeds.

Indian Reserve Bank has raised rates 11 times since the 2009 global collapse. And this has led to moderation of growth. Effects on inflation due to the raising of rates are also beginning to show. While inflation is still uncomfortable, it is getting lower.

Another important factor which will lead to significant upside in the next couple of quarters is the fact that the monsoon season is expected to end at normal levels in the next couple of weeks. And this will lead to a large surplus in the agri businesses. This will turbo-charge growth with an ambitious target of ending the year closer to 8 percent growth than away from it.

While I was in India, I observed a new trend emerge which will lead to healthy consumption, even in the case of tight monetary policy of the Reserve Bank of India. While the rates of interest for borrowing remain high, causing slowdowns, one asset that most Indians own is sitting idle.

Most Indians own gold and this asset was unused in the past. Now due to the high prices of gold, micro financing has taken an innovative turn with gold financing available to the common man. This will continue to provide liquidity when traditional borrowing channels remain constricted. This will continue to grease spending in India. And that will fan the hot economy with liquidity and ensure continuing growth.

The key question now is will Reserve Bank of India raise rates again on Sept. 16. Opinion is divided on both sides of the decision. I personally believe given the growth, which is strong and yet moderated along with signs of slowing inflation, RBI will decide to halt and watch the market data before any further steps. And if this happens, you will see Dalal Street soar at least 1,000 points, if not more.

Back home, we are struggling with natural disasters and man-made disasters (Congress in Washington, D.C.). The challenge is job growth and no one has a clue of how to get this back on track yet. And as long as we struggle to create jobs, nothing much will improve. We will see stagnation of growth with the GDP hovering between minus 2 percent to plus-2 percent rates.

Given this outlook, where do you plan to invest? I know where I will be investing.

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