In Monday’s newsletter, we had attached a chart showing the performance of the Nifty with respect to other major world indices, which showed that the Nifty has outperformed all other major world markets in the past and is likely to do so in the future. That was the technical view-point of why the FIIs should invest in India.
Today, in this newseletter, we will discuss the fundamental factors of why it should come to India. With the events of the last few months, it has been more than evident that the largest, if not the strongest, economy in the world, i.e. that of the United States is heading towards a recession. But how does one say that? The answer is the GDP (Gross Domestic Product). A GDP, in simple terms, is used to gauge the health of an economy. Let us compare India’s GDP with the other world economies. According to 2007 data, measured at $796.1 billion, India’s economy is the tenth largest economy in the world. United States has the largest economy with a size of $13.22 trillion. The other countries between the US and the India in decreasing order of size are Japan, Germany, China, UK, France, Italy, Canada and Spain. Now let us look at the GDP growth rates. Again, according to 2007 data, India stands at number 17 with a growth rate of 8.5%, China stands at number 9 with a growth of 10.5%. Azerbaijan has shown the maximum growth of 32.5% in 2007 but has a size of only $14.05 billion. Out of the top ten countries by size the third country, after China and India, is Spain showing a growth of only 3.6%. United States stands at number 63 with a growth of only 3.4%.
You may ask – so what? Just because India is now showing 8.5% growth does not mean that it will be the same in the years to come. Well, you may be right. It may fall down. The signals are already there. But to what level and because of what reasons? Lets consider the various components of GDP. In layman’s language, GDP is the sum of the total consumption, investments, government spending and net exports. Let us look at each one of them in detail.
Consumption is the sum of expenditures by households on durable goods, non-durable goods, and services. Investment is the sum of expenditures on capital equipment, inventories, and structures. Government spending is the sum of expenditures by all government bodies on goods, services and infrastructure. And Net export is the difference between total exports and total imports.
Now that we know the components of a GDP, simple logic tells us that the GDP would go down only if either consumer spending, or companies’ investments, or government spending or exports, or all of them, go down or if the imports go up. Now let us look at the demographics of India. According to a survey done recently, about 65% of the population is between the age of 15-64. Another source also says that the working population of India is expected to remain between 60-65% till 2050 as compared to the ageing population of the western world. A higher percentage of working population means increased demands, which means increased production, which means increase in the number of jobs, which means increased salaries, which means increase in disposable income and which means increase in consumer spending. This explains that both the consumer spending and investments are set to increase in the years to come. With increase in salaries and increase in spending, it would mean increase in tax collections which would, in turn, be spent towards developing the country’s infrastructure. And with the Commonwealth Games approaching in 2010, infrastructure is now set to increase at a much faster pace than usual. The only concern is that with recession in the US, will it affect our exports? If the exports do go down, it will have a negative impact on the GDP. But how much would a recession in US affect us? Our main concern right now is that it will affect us because in this world of international trade, we are dependent on the US also for our exports and a recession there could lead them to cut their imports and hence our exports. But how much are we really dependent on them?
For that we have to see the export figures to US. In the year 2006-07, our exports of goods were roughly 14% of our GDP while total exports of goods and services stood at 27% of the GDP. Out of the 14% (of GDP) worth of goods exported by India, 14.9% (of total exports) was exports to US, which, in turn, means that as far as export of goods is concerned, only 2.09% of our GDP is dependent on them. If 27% is total exports out of which 14% is for goods that means 13% of services were exported. Unfortunately, countrywise export data of services is not available but we do know that out of a total export figure of $119 billion, $54.6 billion (45.88%) accounted for export of software and BPO services. Since the major exports of services to US is in the form of software and BPO only, it means that exports of services to US accounts for roughly 6% (45.88% of 13%) of our GDP. So, our total exports to US is only about 8% of our GDP. Now, how does a recession in US affect us? If they are in a recession, will they stop all their imports? Obviously not. They would, at the most, reduce it to save their spendings. To reduce their costs, they may cut down on imports of manufactured goods. Another way of reducing their spendings would be to outsource some of their jobs. Since both China and India specialize in providing skilled labour at cheaper rates than America, and since India is an English speaking country, most of those outsourcing jobs should come to India. So, while the US imports of goods may go down, the import of services may actually increase. Even if they reduce their imports of goods from India by a hefty 25%, it would still affect our GDP by only between 1 and 2%. This means that the growth rate of our GDP would still be much much higher than the top ten countries of the world (except China).
The above facts coupled with the interest rate differential between India and the US leave no choice with the FIIs than to invest in India.
Today, in this newseletter, we will discuss the fundamental factors of why it should come to India. With the events of the last few months, it has been more than evident that the largest, if not the strongest, economy in the world, i.e. that of the United States is heading towards a recession. But how does one say that? The answer is the GDP (Gross Domestic Product). A GDP, in simple terms, is used to gauge the health of an economy. Let us compare India’s GDP with the other world economies. According to 2007 data, measured at $796.1 billion, India’s economy is the tenth largest economy in the world. United States has the largest economy with a size of $13.22 trillion. The other countries between the US and the India in decreasing order of size are Japan, Germany, China, UK, France, Italy, Canada and Spain. Now let us look at the GDP growth rates. Again, according to 2007 data, India stands at number 17 with a growth rate of 8.5%, China stands at number 9 with a growth of 10.5%. Azerbaijan has shown the maximum growth of 32.5% in 2007 but has a size of only $14.05 billion. Out of the top ten countries by size the third country, after China and India, is Spain showing a growth of only 3.6%. United States stands at number 63 with a growth of only 3.4%.
You may ask – so what? Just because India is now showing 8.5% growth does not mean that it will be the same in the years to come. Well, you may be right. It may fall down. The signals are already there. But to what level and because of what reasons? Lets consider the various components of GDP. In layman’s language, GDP is the sum of the total consumption, investments, government spending and net exports. Let us look at each one of them in detail.
Consumption is the sum of expenditures by households on durable goods, non-durable goods, and services. Investment is the sum of expenditures on capital equipment, inventories, and structures. Government spending is the sum of expenditures by all government bodies on goods, services and infrastructure. And Net export is the difference between total exports and total imports.
Now that we know the components of a GDP, simple logic tells us that the GDP would go down only if either consumer spending, or companies’ investments, or government spending or exports, or all of them, go down or if the imports go up. Now let us look at the demographics of India. According to a survey done recently, about 65% of the population is between the age of 15-64. Another source also says that the working population of India is expected to remain between 60-65% till 2050 as compared to the ageing population of the western world. A higher percentage of working population means increased demands, which means increased production, which means increase in the number of jobs, which means increased salaries, which means increase in disposable income and which means increase in consumer spending. This explains that both the consumer spending and investments are set to increase in the years to come. With increase in salaries and increase in spending, it would mean increase in tax collections which would, in turn, be spent towards developing the country’s infrastructure. And with the Commonwealth Games approaching in 2010, infrastructure is now set to increase at a much faster pace than usual. The only concern is that with recession in the US, will it affect our exports? If the exports do go down, it will have a negative impact on the GDP. But how much would a recession in US affect us? Our main concern right now is that it will affect us because in this world of international trade, we are dependent on the US also for our exports and a recession there could lead them to cut their imports and hence our exports. But how much are we really dependent on them?
For that we have to see the export figures to US. In the year 2006-07, our exports of goods were roughly 14% of our GDP while total exports of goods and services stood at 27% of the GDP. Out of the 14% (of GDP) worth of goods exported by India, 14.9% (of total exports) was exports to US, which, in turn, means that as far as export of goods is concerned, only 2.09% of our GDP is dependent on them. If 27% is total exports out of which 14% is for goods that means 13% of services were exported. Unfortunately, countrywise export data of services is not available but we do know that out of a total export figure of $119 billion, $54.6 billion (45.88%) accounted for export of software and BPO services. Since the major exports of services to US is in the form of software and BPO only, it means that exports of services to US accounts for roughly 6% (45.88% of 13%) of our GDP. So, our total exports to US is only about 8% of our GDP. Now, how does a recession in US affect us? If they are in a recession, will they stop all their imports? Obviously not. They would, at the most, reduce it to save their spendings. To reduce their costs, they may cut down on imports of manufactured goods. Another way of reducing their spendings would be to outsource some of their jobs. Since both China and India specialize in providing skilled labour at cheaper rates than America, and since India is an English speaking country, most of those outsourcing jobs should come to India. So, while the US imports of goods may go down, the import of services may actually increase. Even if they reduce their imports of goods from India by a hefty 25%, it would still affect our GDP by only between 1 and 2%. This means that the growth rate of our GDP would still be much much higher than the top ten countries of the world (except China).
The above facts coupled with the interest rate differential between India and the US leave no choice with the FIIs than to invest in India.
13 comments:
It was nice reading this piece on effect of US recession. Can you clarify this doubt: If US goes into recession, then countries like Germany, UK, Japan and others which trade heavily with the US will have severe impact. As a result if all of them try to save by reducing imports, then the effect on Indian economy will be greater. Is this right?
Interesting question, Ramnath. Yes, indeed, the impact on the Indian economy will then be greater. But, how much and to what extent seems like a bit difficult to put in figures. I hope there may be somebody reading this post who may be able to answer this question better.
But all in all, it will be an indirect relationship. Because US is going into a recession, it will try to reduce imports but by how much? 10-20%? And then the countries with which they are trading will be hit and in turn they reduce their imports? How much? 5-10%? Which effectively means about 2% (10% of 20%). And of that 2% what is the percentage of trade with India? Even if it is 10% (which is quite a lot) it effectively means a hit of only 0.2%. Will that matter too much to the Indian economy, considering the demographics and the speed with which it is growing?
Looking at the way the markets have plummeted, it appears an old adage rings true: "When the US sneezes, the rest of the world gets a cold."Panic spread across the Frankfurt trading floor on Monday, Jan. 21, when the country's DAX index experienced its biggest plunge since the Sept. 11, 2001 terrorist attacks in the United States.
---------
micheel
buzz maaketting
Thank you for the detailed explaination of the recession and its impact on global economy. I belong to the IT industry, looking at the state of various companies and laying off I feel the impact is very bad. Usually the recession lasts for 6 - 2 years right? How long will this recession last? Have you made any analysis?
Are we missing out on number of jobs in india dependent on US economy directly & indirectly (there is a huge economy IT/ES & BPOs build around them), and if US goes in recession these people would cut their spending, or even their jobs might be gone -> lesser consumer spending + credit defaults (in case of job losses) -> lesser demand -> lesser prduction -> decreased investments in anticipation of lesser demand -> lesser tax collection & infrastructure growth .... ->further less GDP & job creation
Yes, Madhuri, recession usually lasts between 6 months to 2 and a half years. We have already seen fairly bad last 10 months. The situation now is so bad that one feels it can't get any worse. But believe me, it can. But soon (maybe 6 months, maybe 1 year) it will come to a point where it couldn't get any worse. That will be a beginning.
Harsh, you are right, this post was written in mid February 2008. The BPO situation couldn't have been forecast at that time. The situation has become slightly worse now, yet there will not be too large an impact on we Indians, as you envisage.
When the clouds cover the sun there is always a silver lining of hope and hope is the only asset to face anything in life. I like reading your article. It motivated me and encouraged me to face the day to day life in a new way. Thanks buddy and keep it up.
Yeah I agree with ammar...not only u gave the hope but also for the technical analyis which you have presented. I think u hav gone to the depth of the subject bfore presenting it.
Harsh: I would like to add one more thing that only BPO and software industry which is dependent on US,alone cannot bring so much difference to our economic recession.
I hope Vikas can throw more light upon this with some statistics on IT industry and effect on it.
It's one of the best article I have read on the recession front, congrats and keep posting. Do you have a home for you so that we can look at more posts of yours?
Guys! This recession would take time to heal and since IT and other export/import sectors are affected it would take atleast 5 or 6 years to heal.
IT sector was saturated much before the recession. And for the next 3 yrs eng graduates will be passing out nevertheless.... (tough time for them - they had already made the choice) This would lead to a shocking scenario if you think!
Vikas I am trying to see the effectiveness of cost cutting measures taken by IT companies speciafically during recession 2008-2009 ,seeing global cut off ..are these measures really fruitful especially laying off employess where a company has invested right from recruitment to training ..?
Shweta, you must be one of those HR guys. Hardly anybody would have the insight to see that companies do invest in recruitment and training. Well, yes, it doesn't make sense. But when companies are short of money, they wouldn't mind re-spending on recruitment and training if it saves them money now.
Let's take a very basic example. Suppose you want a dress for yourself and you go to the market, invest your time, money and energy to find the right dress but want to take the advice of your friend also before buying it. Next day you take your friend too and she too liked it and you decide to buy it. Next day you go back to the shopkeeper and give him Rs.500/- advance so that somebody else doesn't buy it. And then suddenly an urgent expenditure comes and you are unable to buy that Rs.5000/- dress. Wouldn't you be willing to forego your and your friend's time, money and effort and your advance rather than to borrow Rs.5000/- from somebody? Wouldn't you be willing to reinvest your time and effort again when you have the money? Same goes with companies. It's a very basic example but you can see the similarity.
Post a Comment