This week I am in India. I am visiting Chennai and Mumbai on this trip and bring you the view of the business world here from the ground level.
It is fascinating and disappointing at the same time as I visit India. And I am left with mixed emotions as I explore the business community and opportunities. I am excited because what the world knows about the 8 percent to 9 percent GDP growth in India is very true and palpable.
And I find it very reassuring.
I say all of this in light of the growing cacophony of stories that are making the rounds about the hard landing that is about to hit China.
For all of the readers who have missed these stories, let’s review. China has an almost fabled story of success and seems to be able to succeed at whatever it sets out to do. It grows at amazing rates, control spending when required as well as manage expansions and contractions of money supply precisely. And the world is suspicious of such perfection.
So there are growing reports about how the growth in China is a false pretense. Vast numbers of cities are being created that are almost empty. Thousands of high tower buildings are being built with no residents. Some reports even insinuate that half-completed buildings are being torn down to start again. And this is the growth we are seeing in China. Therefore, this artificial growth has to end with a sudden and abrupt stop, i.e. a hard landing.
While I can argue that point to some extent, today we are talking about India.
India’s growth is real and spread out rather evenly. I have meet with multiple local and global bankers who have a macro view on the overall Indian economy. And the consistent message is that India is booming.
Yes, there are phases of slower growth than some quarters, but the underlying story is intact. With monsoon season about half over (remember India’s overall growth is quite heavily dependent on agriculture) we seem to have an average monsoon season. And if we can sustain that to the end of the season (early September), we can almost be assured of an 8 percent GDP growth rate again. Obviously, the caveat is that there is no catastrophic global meltdown again.
The current account deficit in India has nose-dived down and this has helped the rupee appreciate. All those who bought rupees based on my past notes would be enjoying good returns already. The current account deficit reduction has been due to lower trade deficit -- good news on both deficit fronts. I wish the United States could learn from India, but I would digress if I discussed that.
There are some signs of worries as my trip unfolds here. Capital inflows are declining, which shows up very clearly in lower stock-market valuations. There is also a slowdown in capital goods investments. In my mind, capital goods investment is a long-term advance indicator of robust growth in the future. So this slowdown is a bit worrying. However, I will watch to see if this trend reverses or intensifies as reports are released in the next few months.
The other worry that has swarmed back in my mind, which is a deeper-rooted problem, is the management style of the Indian companies.
While India has really entered the 21st century and is rapidly becoming a global player, the management styles in some of the companies is still old school and deeply hierarchical. There is a strange sense of entitlement within the corporate structures which is based on seniority rather than talent. I am familiar with this style of management, but my visit has brought back the stark reality that despite the rapid growth and astounding successes, this style of management still prevails.
Take the example of one of India’ shining stars – Infosys. In a recent management change which was transitioned and orchestrated well, the preference was given to tenure rather than talent. And this disappoints me to a certain extent.
The take-away from this is to closely watch each company in India before undertaking any investments. All that shines isn’t gold. And thus investing in India-based ETFs can be fraught with risks. It is best to navigate the murky waters of India investing with a good guide at hand.
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