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The Boom From The Bottom

 

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India avoided a U.S.-style housing bust and is better positioned to pump money into the cash-starved financial system today because its much-maligned central bank was never wooed by the allure of easy money—no matter how loudly industry clamored for faster growth. When the central banks of other countries were essentially offering free money, India's realized that, as a democracy of mostly poor voters, it couldn't afford to grow at 10 percent a year if that meant skyrocketing prices for essential commodities like rice and flour. For that reason, the central bank constricted the money inflating the real-estate bubble (and prices for everything else) by raising interest rates to a peak of 12.5 percent last summer, which earned it criticism for being out of step with more aggressively growth-oriented central banks. Because of this, India has ample ground clearance to lower rates and reduce reserve requirements for banks to spur growth and avert deflation.

The private sector is in pretty solid financial shape, too. The central bank kept a close eye on both state-owned and private banks, preventing them from leveraging to perilous heights by keeping the cash reserve ratio high, limiting the use of securitizations and derivatives and essentially barring the off-balance sheet vehicles that U.S. banks used, disastrously, to hide their debt. As a result, India's banks aren't sitting on a mountain of bad loans, which makes them freer to lend to companies in need. Indian companies, cognizant of the cash crunch that burned them in the late 1990s, didn't overextend this time, either. "[One] great source of strength is India's corporate sector, who have much stronger balance sheets [than in the past]," says Chaudhuri.

One sign of that is companies that are putting their wealth to work. In December, India's Wipro Technologies purchased Citigroup's captive IT services firm Citi Technology Services for $127 million in cash, and in October, Tata Consultancy Services was able to buy Citi's business process outsourcing business, Citigroup Global Services, paying $505 million. Both moves suggest that reports of the IT sector's demise in India are greatly exaggerated.

The biggest risk to India in 2009 at this point may not be the global economy but domestic politics. Prime Minister Manmohan Singh's United Progressive Alliance will see its term expire in May, and India's election rules mean that he can no longer enact any significant policies—a measure adopted to prevent incumbents from stacking the deck with populist sops. That means as much as five months of paralysis, precisely when speedy, creative action is the order of the day. Moreover, though the nemesis of Singh's Congress party—the Bharatiya Janata Party—mostly favors similar policies, a change in government would likely result in some further slowing of infrastructure projects that are already running behind schedule. And elections in India can be tricky. In the last one, the BJP-led National Democratic Alliance lost despite racing economic growth, because poor voters rejected the BJP's campaign claims of an "India Shining."

With the light bulb flickering, Singh's Congress may face an even bigger challenge winning them over. The poor don't care how much faster than other nations India is growing, only whether their lives are better than they were five years ago.

© 2009

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Member Comments

  • Posted By: MichaelX @ 11/17/2009 10:55:28 AM

    "Oh, I am very happy to be giving you tech support. Pllease give me your information so I can send you to someone who will ask it again" . I immedeately hang up the monent I hear an eastern voice. It's good they are coming out of the dark ages, but to what end? To become another china? To eschew the western idealism by emulating it? Your religeous beliefs doom you.

  • Posted By: audiq7 @ 11/16/2009 10:57:07 AM

    I must add that India's success is contingent upon eliminating Islamist/communist terror and rejection of caste/religious/regional disparities by it's people. Barbaric/primitive men like andy21 will keep showing up in a thoroughly 'modern' avatar (to hide their inferiority complex) and think they can fool the world. Much better human beings are my uneducated servants in India who just want their daughter to get a good education/job so she can make her life any way she sees fit.

    The truth is that while the modern cities and market places in most towns are free from casteist transactions , marriages and family related plans do revolve around people of similar locations and tastes.Casteism is every where in this world but in India it is not so bad or violent, considering that reforms were initiated by visionaries from the high castes"

    What are these full of crap sentences? He thinks he sounds very sophisticated. "Casteist transactions" is a new word as I have not heard of it anywhere. He will also not care to explain what he means by "similar tastes". Lifestyle itself of all Hindus is the same, be it clothing, food, practice of religion. But of course there are some primitive, narrow-minded people like yourself, who like to 'project superiority' of their last name or particular community and so obviously marry within a small structure. They have little self-esteem, intellect or goodness inherent so there is no way for them to understand that marriage within caste provides no guarantee of "similar taste". It does not guarantee that this person of my caste will be sincere towards me, or take care of me happily if God forbid I become physically handicapped. My definition of "similar taste" is two people developing emotionally/spiritually together, having the ability to bring out the best in the other person. This is not a standard definition of "similar taste" for most people who do not look beyond immediate instant gratification and that usually means material benefits. These same people are more likely to visit brothels, have secret extra-marital affairs once bored with their spouses. Here I am referring to both eastern/western cultures as I believe human beings have similar mentality, and research has also proven this to be true.

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  • Posted By: audiq7 @ 11/16/2009 10:55:35 AM

    Real estate market in India is not some bubble that will burst, it is fuelled by an ever expanding manufacturing and industrial sector and improvement in infrastructure by the Government of India. Also our organized /unorganized retail market is projected to grow 20% annually. The Indian economy was growing at 8.75% from 2004, till the worldwide meltdown happened in 2008, bringing down the sensex. It will return to 10% growth rate in about 2-3 yrs because Indian savings rate is 35% of the GDP. The stock market has risen by over 50% this year, and demand for domestic consumer goods has picked up again. India is not a "export powerhouse" like China as yet because we don't provide artificial concessions to exporters that are unsustainable in the long term. India was one of the first countries to pass the economic stimulus package, which we are now replacing with another set of economic reforms (possibly labour too) this December. The range of products from automobiles to sophisticated electronic gadgets and household items is INCOMPARABLE to the STAGNANT markets of USA and Europe where creativity means creating demand/markets for over-priced goods/services. USA's only advantage is that it's a new country cut off from the world, with a favorable people to land ratio.

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