India on the Up and Up?

With latest figures showing that the Indian economy grew at an annual rate of 5.7% in the first quarter of 2003, the Economist asks whether India is getting ready to rock'n roll:

because of a confluence of benign trends, economic optimism abounds. India's GDP is expected to grow by at least 6% this year, thanks partly to demand from a more robust global economy, and, more importantly, to the most bountiful monsoon for many years. Almost half of India's GDP still comes from the countryside.

A stockmarket surge has been barely dented by the Supreme Court ruling or even, for more than a few hours, by the deadly terrorist bombings in Mumbai last month. Earlier this month, the index covering the Mumbai exchange touched levels not seen since February 2001, having climbed by more than 50% since April. Profits of companies included in the index were up by an estimated 50% in the second quarter of 2003, compared with the same period in 2002.

True optimists look far beyond the stockmarket. Painful reform and restructuring in the 1990s, they say, is paying off. Shorn of the protections and blandishments of what became known as the 'licence raj', and more open to foreign imports, India is now producing companies that can compete with any in the world. These include not just the well-known successes in information technology and pharmaceuticals, but also businesses in 'old economy' industries: cars and car parts, motor-cycles, cement and steel.

In 2002, a subdued year for the world economy, India's exports grew by 19.2%, a rate beaten only by China, whose currency, Indian exporters point out, is notoriously undervalued, whereas the rupee has, unusually, been appreciating against the dollar. However, India's is still, in global terms, an economy that has a long way to go before it looks very much like a tiger. Last year it accounted for just 0.8% of world exports.

It is true that many Indian firms are exhibiting new signs of self-confidence. Indeed, China itself, long seen by Indian businesses as a threat, is now seen by some as an opportunity. The success there of Indian steelmakers, to take an old economy example, has been such that they have been exceeding the quantitative quota (3% of steel imports) that China imposes on them.

Asked to explain the rosier outlook, manufacturers cite one factor above all: the sharp decline in interest rates - from an annual rate of roughly 12% to half that - in the past five years. Besides beautifying company balance sheets, this is encouraging consumers to borrow, to buy cars, for example, and build houses.
Source: The Economist
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