Until Raghuram Rajan took charge of the RBI on September 4, it had become hard to open a newspaper without running into trenchant criticism of the Indian economy. Some of the criticism is valid (for example, it can't really be questioned that what Jairam Ramesh did at the Environment Ministry has stymied the rollout of power and infra projects) but much of the criticism is little more than random economic commentary from self-interested parties.
In particular, I disagree not so much with India's economic predicament but with the portrayal of a cyclical downturn as a structural crisis. To my mind, this is one of the three myths regarding India that are being perpetuated at present.
Myth 1: India is in the midst of a 'structural' slowdown
The key challenge facing India today (in-line with other Emerging Markets) is a 'cyclical' economic downturn after a long period of above-trend growth. Whilst India's GDP growth rate has clearly decelerated from the peak in CY07, the other BRIC economies also have suffered a similar fate (China for example has slowed by 6.4 per cent points from its peak growth in CY07 versus India's 6.1 per cent point slowdown). Moreover, in the last global growth upswing spanning CY01 to CY07, the pick-up in GDP growth was the strongest in India compared to the other BRIC economies (6.2 per cent versus 5.9 per cent for China).
In fact, an objective analysis by the World Bank of India's positioning on structural economic parameters suggests that India has broadly maintained its positioning over the last six years (Source: the World Bank's Country Policy and Institutional Assessment of India). The key variable that has changed versus the pre-CY07 era is that the global business cycle has turned downwards, thereby affecting a host of Indian macro variables even though the structural features of the Indian economy, for better and for worse, remain intact.
Myth 2: India's macro woes emanate from inadequate savings
India's per capita income (PCI) was at $1,491 in CY12 and gross national savings ratio was at 30 per cent. History suggests that an average emerging market's savings ratio is typically only 22 per cent at PCI levels similar to India. This statistic in turn points to the significantly higher propensity of Indians to save compared to other emerging market peers.
More than inadequate savings, India's core problem is that nearly 64 per cent of India's savings are in the form of physical assets (i.e., gold and real estate). India's disproportionately high demand for gold is a structural problem, but the problem has not become worse in recent years, as is evident from the fact that the average gold imports to current account deficit ratio in India was at 61 per cent in FY13 versus 229 per cent recorded over FY05-07.
Furthermore, when India's current account deficit (CAD) expanded to an all-time high in FY13, India's gold imports in fact contracted in absolute terms from $56 billion in FY12 to $54 billion in FY13. In FY14, India's gold imports have actually shriveled dramatically in response to the measures introduced by the government over the past three months.
The core dynamic which was responsible for India's CAD to expand to record levels in FY13 to $88 billion (4.8 per cent of GDP) was the fact that India's exports growth collapsed. Merchandise exports growth fell to -1 per cent y-o-y in FY13 as global growth rates sagged. When compared to the 24 per cent y-o-y growth recorded in exports over FY04-07, the impact of the global economic downturn on India's CAD becomes evident.
Myth 3: India's GDP growth is the primary driver of equity returns
Cross-country evidence lends no support to the proposition that the GDP growth and equity returns are positively related either in India or elsewhere. Theoretically, there ought to be no correlation between the two variables simply because the microeconomic analogue of GDP is sales and not corporate profits. However, that does not stop doom mongers from pointing to India's economic downturn and highlighting that as a potential catalyst for foreign investor outflows. It might have escaped this constituency's notice that although China has comfortably outgrown India over the past 20 years, the Indian stock market has outperformed its Chinese counterpart over these 20 years (and that too in dollar adjusted terms).
There is merit and profit in not being a merchant of fear during these difficult times for the Indian economy. Instead, it makes more sense to focus on buying high-quality Indian companies across the market-cap spectrum in the late stages of this cyclical downturn.
After all, given that classic contrarian indicator, The Economist cover story, has already underscored bearish sentiment in relation to India, the risk-reward tradeoff is in favour of those who buy in India today.
Saurabh Mukherjea is CEO, Institutional Equities, at Ambit Capital. The views expressed here are his own and not Ambit Capital's.
This column first appeared in October 2013 issue of Wealth Insight.