India makes its global presence
felt By Walter T Molano
Although China dominates the business
headlines, India is becoming a contender in the
global marketplace. Initially focused on services,
Indian manufacturers are joining the battle.
Chinese manufacturing exports are six times as
large as their Indian counterparts. However,
India's manufacturing output is increasing at an
annual pace of 7%.
The auto-parts sector
is where Indian manufacturers are having the most
impact, entering the space vacated by US producers
when
oil prices rose. As a result of the new
opportunities, capital inflows are rising. In
addition to foreign direct investment (FDI),
portfolio investment is pouring in. At the end of
May, the capitalization of the Indian stock
exchange breached the US$1 trillion mark, putting
it in the major leagues.
The massive
investment flows are creating some complications.
The acquisition of imported equipment and
machinery needed to modernize the country's
capital stock is fueling a current-account
deficit. Moreover, the capital inflows are putting
upward pressure on the rupee, appreciating 9%
year-to-date against the US dollar. However, the
heavy pace of investment is propelling the Indian
economy. The country's gross domestic product
(GDP) grew 9.2% year on year during the first
quarter of the 2007, making India an important
player in the global marketplace.
The
rapid pace of GDP growth is creating inflationary
pressures. India's inflation rate could finish the
year above 6%, even though the official target is
4-4.5%. As a result, the Reserve Bank of India
began tightening monetary policy. The move had a
noticeable impact on lending rates, pushing
mortgage rates to 12% from a low of 7.5%.
Nevertheless, bankers reported no major reduction
in mortgage applications.
The impact was
more noticeable in the sales of automobiles and
durable goods, which increased year on year only
2.9% and 1.6%, respectively, in March. The
insensitivity of the mortgage market to changes in
interest rates reflects the country's tremendous
housing deficit. Government officials hope that
tighter monetary policy will dampen the annual GDP
growth rate to a more sustainable 8%.
The
heady pace of economic growth is straining the
India's infrastructure. Power blackouts are
becoming a way of life in large cities such as
Mumbai. Engineers estimate that the country will
need to double its electricity infrastructure
every five years for the next 20 years as it
approaches consumption levels of more developed
countries. India's per capita electricity
consumption is one-third of China's and a twelfth
of the United States'.
The ravenous hunger
for energy is also making India a major competitor
for oil and gas. Self-sufficient only a decade
ago, it is now an importer of energy. Indian
energy demand is growing at double-digit rates,
forcing its oil companies to search abroad for
additional resources. Oil and Natural Gas Corp
(ONGC) is actively scouring the world for new
fields and exploration rights.
The
aggregation of the Indian juggernaut to the global
economy will increase the overall demand for
natural resources. Many people consider the
commodity boom to be entering a mature stage.
However, nothing could be further from the truth.
The reincorporation of China and India into the
global economic community after a hiatus of more
than half a century is going to push commodity
prices higher for the foreseeable future.
(Copyright 2007 Walter T Molano, The
Emerging Market Adviser.)
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