India's Balance Sheet 2007

1/. The rupee rose 12.3 percent against the USD during 2007, the most since 1974, closing the year against the dollar at 39.415 at the 5 p.m. close in Mumbai from 44.28 at the end of 2006. The rupee has declined some 0.6 percent since touching 39.185 on Nov. 7, the highest intraday level since Feb. 23, 1998.

2/. Overseas investors had bought $16.9 billion more local stocks than they had sold in the year up to Dec. 27, more than doubling their net purchases in 2006, according to the Securities & Exchange Board of India.

3/. Foreign direct investments this year through August totaled $12.9 billion, compared with $11.1 billion for the whole of last year, according to the latest data from the commerce ministry.

4/. Export growth slowed to an average annual rate of 17 percent in the 10 months up to October, from 21.3 percent a year earlier, according to commerce ministry data.

5/. The Reserve Bank of India bought a record $12.5 billion dollars in October, the 12th straight month of such purchases. The bank's currency purchases from April 1 to October were already up 76 percent (at $47.3 billion) when compared with the entire previous fiscal year, according to the Bank's monthly bulletin published on Dec. 14.


6/. The current-account deficit widened more than expected in the three months through September to $5.5 billion from a revised $5.2 billion in the previous quarter as the trade gap increased because of rising imports, according to data published by the RBI today. The capital-account surplus more than doubled in the quarter to $34.75 billion from the preceding three-month period as capital inflows and overseas borrowing by local companies increased.

7/. Overseas investors bought $2.24 billion of local-currency debt this year, almost tripling their purchases from last year, data provided by the market regulator show.

8/ And last but by no means least, during the nine months between 1 April and the end of December 2007, India’s foreign exchange reserves increased by US$73,54 billion (see chart below). This compares with the average annual increase of US$38 billion over the prior three years. With the current account still in deficit, the increase in reserves is being driven largely by a spike in capital inflows and to a much lesser extent by the conversion of non-dollar reserves into dollars. As can be seen, since mid November the pace has slowed notably due to the widespread perception that the Reserve Bank is determined to try and put a brake on the rise in the rupee. Whether it in fact proves able to do this without producing more inflation is what remains to be seen. I personally doubt it.

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.



Credit crunch, did someone use the expression credit crunch?

Capital Inflows into India and Rupee Appreciation

Well, this is headed I think to become topic of the year again in 2008. Arpitha Bykere has a post up today on RGE Monitor, and I had a piece on Friday up on India Economy Blog.

I think here that perhaps three charts tell it all. First we have the capital inflows themselves:



And then secondly we have the changing relative dollar values of global GDP, which is a topic that takes us straight into the whole debate about "decoupling" and "recoupling". Basically there seem to be two versions of the "decoupling" thesis knocking about. The first of these (which is now very definitely going out of fashion very fast) was based on the idea that the global economy was finally decoupling itself from the US one due to the fact that key global engines among the G7-type economies - and in particular Germany and Japan (and following in both cases lengthy periods of structural reforms) - were finally coming out of a long period of sub-par economic growth and achieving "home grown", domestic-demand-driven, sustainable recoveries in a way which would enable them to take more of the global strain

But there is another sense of "decoupling" (which is the one Claus Vistesen and I prefer to call "recoupling" - although this is not, it should be noted - recoupling in the way in which Nouriel Roubini (for example) uses the expression, which seems to refer to some form of renewed coupling to a US economy which is basically on its way down, not in GDP growth terms - although there may of course be a recession - but in dollar share of world GDP terms) and this is to do with the way in which certain emerging market economies (the EU 10, Ukraine, Russia, China, India, Turkey, Brazil, Argentina, Chile etc) are now accounting for a very substantial proportion of global growth (Claus and I have yet to do the detailed numbers on this, but suffice it to say that India, China and Russia alone will account for over 30 % of the growth in the global economy in 2007). This is a far cry from the central role which the US economy was playing in global growth in the late 1990s. So in this sense something fundamental has changed, and this is what Claus and I are calling "recoupling".

This situation can be observed quite clearly in the two charts which follow, which are based on calculations made from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001 - the weight of the soc called BRIC economies (Brazil, Russia, China and India) has been rising steadily. This is just one example - and a very crude one at that - of why Claus and I consider that demographics is so important, since it is precisely the population volume of the BRIC countries (and the fact that they start their development process from a very low base, ie they were allowed to become very poor comparatively, for whatever reason) that makes this transformation so significant.

Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these economies in recent years and the significantly weaker role of "home grown" US growth. The impact of the collapse of the Tech stocks/internet boom in 2001 is clear enough in the chart, as is the fact that everyone went down at the same time, and this is the old form of "coupling" wherein the US economy due, to its size (and hence specific weight) and "above-par" growth potential played a key role, and, as can be seen, when the US went down, then god save the rest. The present debate is really about what will happen if the rising dollar cost of oil and the ongoing difficulties in the financial sector caused by the sub-prime problem leads the US into recession in 2008. Will everyone else follow this time? In 1999 the US economy represented 30.91% of world GDP, and in 2007 this percentage will be down to 22.4% (on my calculations based on the forceast made by the IMF in October 2007). In 200 the US economy accounted for a staggering 40.71% of global growth, and by 2007 this share is expected to be down to 6.43%. So there are prima-facie reasons for thinking that this time round the impact of any US slowdown will not be as acutely felt in some parts of the globe as was the case in 2000, but which parts of the globe will be more affected and which less so?

So now back to those capital flows. As Arpitha Bykere points out, the rupee rose by around 15.5% against the dollar between Sep 2006 and Oct 2007. The RBI and Indian government have been busying themselves trying to use the various tools they have at their disposal to try to manage the inflows and their potential impact on liquidity and inflation with a variety of forms of FX intervention and sterilization.



Bank reserve requirements have been raised eight times this year, from 5% in December 2006 to 7.5% in October 2007.



The repo rate been raised seven times from 6% in April 2005 to 7.75% in March 2007 while the reverse repo rate has been increased five times from 4.75% in March 2004 to 6% in July 2006.




The increase in reserve requirement acts as a kind of tax on banks (and this makes their work even more difficult for them to increase their deposit base given the pressures for funds which exist in the consumer market and the attractive returns available elsewhere. Further, RBI rules that effectively force them to hold a quarter of their deposits in govt bonds and to purchase the low return sterilization bonds make for added pressures in the conventional banking sector).

India's central bank on December 14 also curbed bank loans to mutual funds by mandating that these loans will be treated as lenders' direct investments in stock and bond markets. The central bank has also accelerated the pace of the sterilization via issuance of market stabilization scheme (MSS) bonds. Using such techniques the RBI has managed to sterilize about 58% of the foreign inflows, according to estmates by Chetan Ayha. The sterilized liquidity (excess liquidity) stock - which includes reverse repo less repo balances, MSS bonds, government balances with the RBI and the increase in the cash reserve ratio - has shot up to US$77 billion as of end-October 2007 from US$19 as of end-October 2006, according to the same estimates.

Banks are currently required to limit investments in capital markets to less than 40 percent of their net worth, while funds may borrow from banks only to meet ``temporary liquidity needs'' and as per the capital market regulator's guidelines.

This move was a response to the discovery by an apparently astonished RBI that the financial records of some banks showed they had extended "large loans to various mutual funds and also issued irrevocable payment commitments to stock exchanges on behalf of mutual funds and foreign institutional investors". Such transactions were found to have been widespread, but were not included by the banks as part of their declaration of capital market investments.

As a result the Securities and Exchange of India has ruled that a mutual fund may borrow only up to 20 percent of its net assets and for periods of not more than six months.Also the RBI has ruled that banks must not give loans or other forms of financial assistance, such as payment guarantees, to foreign institutional investors. Domestic banks have now been given six months to comply with the instructions.

RBI’s control over monetary policy has evidently been gradually weakening. Initially RBI followed an independent monetary policy of targeting the interest rate while maintaining a competitive exchange rate with partial capital controls. But as the economy has gradually accelerated to around a 9% average over the last three quarters, and as the sub-prime blow out has added to the attraction of strongly growing emerging economies with relatively higher interest rates and the prospect of strong relative currency apprecaiation, the consequent ineviatable arrival of large capital inflows has lead to RBI to acquiesce its ongoing appreciation, and control over the value of the rupee has to some extent been sacrificed in an atempt to keep control over the interest rate. But as the rupee has steadily approached the 40 USD pain threshold level the RBI has shifted its efforts towards control over the capital account, imposing soft controls on inflows and easing outflows. Moreover, the use of interest rate is constrained by concerns about unnecessarily slowing growth in one direction, and accumulating inflationary pressure (including food, manufacturing, asset inflation) in the other.

In theory the RBI could allow exchange rate appreciation to offset the liquidity injection (buying dollars and selling rupees, for example). But a case can well be made that the Indian exchange rate is already somewhat over-valued. The 36-country real effective exchange rate was about 8.5% above the ten-year mean as of September 2007.





More importantly, the 12-month trailing trade deficit has shot up to 6.7% of GDP as of September 2007, resulting in an adverse impact on job creation in the manufacturing sector. Total goods exports growth has decelerated to 4.3% in rupee terms as of September 2007. In our view, small and medium enterprises would have been growing at an even slower rate, as the large companies would have been able to maintain their growth better.

Even if one were to consider the services sector exports, the trailing four-quarter sum of the current account deficit (excluding remittances) is at 4.2% of GDP as of June 2007. The headline current account deficit, however, is at a manageable level of 1%, primarily on account of the rising remittances from non-residents. The four-quarter trailing sum of non-residents’ remittances has shot up to US$30 billion (3.2% of GDP) as of June 2007. For assessing the impact of the exchange rate on the domestic output balance, we believe that we should exclude remittances, which represents transfer of income generated in foreign countries. Having to stand back and watch any further appreciation of the exchange rate will be a testing moment for policy makers considering the potential adverse impact on domestic growth and job creation.

Another important source of capital inflows has been Portfolio Investment which rose from $2.8 b in FY2000 and $12.5 b in FY2005 to $18.5 b Apr-Sep 2007. According to the IMF Foreign Institutional Investment (FII) has risen from $1.8 b in FY2000 to $8.7 b in FY2004 and to $15.5 b during Apr-Sep 2007. Moreover, the number of FIIs registered in India doubled to 1,050 between Mar 2001 and Jun 2007, and there are now around 3,336 FII sub-accounts. FII equity inflows have increased from $9.8 b in 2004, to $11 b in 2005, and now to over $16 b in the year so far of 2007.

India's stock market - buoyed by strong corporate performance and the aforementioned inflows - has risen 43% to date in 2007. According to Citigroup, FIIs holdings in the Bombay Stock Exchange 500 companies rose from 12% in March 2001 to around 22% in June 2007, which is greater than the holdings of domestic mutual funds.

In mid-October, the RBI reacted to some of this by banning foreign investment in the stock market via off-shore derivatives in the form of Participatory Notes (PN). Such derivatives had been habitually used by foreign investors who were not officially registered in India (say hedge funds) to indirectly invest through registered investors. Between Mar 2004-Aug 2007, the number of FIIs/Sub Accounts that issued PNs rose from 14 to 34. The share of PNs in total foreign portfolio flows is believed to have increased from 32% during 2006 to about 55% by Oct 2007, with hedge funds accounting for around 50% of the PNs. It has, however, been suggested that the real motive behind the October RBI measure was not so much to restrict investment as to improve the transparency of capital inflows and that restricting inflows via PNs is likely to have little or no impact on the overall inflows entering India in the medium term.

Hedge and mutual and pension funds activity have all been growing in India. Hedge fund investment in India has risen 400% from $2.8 b in Sep 2005 to $13.97 b as of July 2007 with over 90% of these investments in equities accruing high returns. According to the Financial Times, private equity deals have surged from $3.9 b in 2006 to around $ 5.9 b ytd in 2007.

FDI has also risen significantly from the low level of $3.8b in FY2004 to $16 b in FY2006. In addition, cross border M&A deals increased to 226 deals worth $15.3 b in 2006 from 192 deals worth $9.5 b in 2005. More importantly, investment by non-resident Indians in foreign currency deposits and rupee accounts has risen over the years from $21.7 b in FY2000, $33 b in FY2004 to $41.2 b in FY2006, leading the RBI to cap interest rates on the latter. Moreover, remittances have increased from $12.9 b in FY2000 to $20.5 b in FY 2004 and $27.2 b in FY 2006.

According to the IMF India's external debt rose 22.6% to $155 b in FY 2006 (with the appreciating rupee contributing to 10% of this increase) and now is equivalent to 16.4% of GDP. Around 56% of the increase in external debt was due to ECBs and 16% of the increase was due to NRI deposits. India's Net International Investment Position has improved somewhat in the recent years due to increase in assets (rising outward FDI), even as liabilities have continued to grow. Rising FDI and equity portfolio inflows have helped non-debt creating inflows to rise from 27% in FY2000 to 47% in FY2006, but FDI inflows are only up from 14.7% in FY2000 to 25% in FY2006.

The Rupee, Wheat and Various

India's rupee exchange rate is market-determined, according to the latest statement by Finance Minister Palaniappan Chidambaram. This seems to indicate that he is prepared to accept the idea of relief for those facing problems amid the currency's fluctuations. The rupee itself has weakened 0.5 percent this week to 39.555 against the dollar, reversing slightly three previousweeks of gains, although it has risen almost 12 percent so far this year.

``We don't have a view on the rupee,'' Chidambaram told reporters in Mumbai today. ``It is market-determined. The rupee's appreciation or otherwise gives rise to stress in some sectors. We will address those problems.''

The government, which said capital inflows have caused the rupee to strengthen, wants exporters to be more competitive and productive to cope with the effects of the rising rupee. A higher rupee makes Indian goods more costly overseas and erodes the revenue of the South Asian nation's exporters. The Indian government is considering the refund of some duties as a relief measure for exporters. It has also cut customs duty on some products and has also announced subsidized loans and tax breaks to try to help exporters.

``You must also see the real effective exchange rate,'' Chidambaram said. ``The rupee has risen against a basket of six currencies by about 6 percent.''

India was the world's third-biggest wheat buyer last year, and the government has now indicated that local supplies will determine the extent of imports.

``It's not a factor of prices alone, it's a factor of food security,'' Farm Minister Sharad Pawar said in New Delhi today. ``We won't compromise on food security.''

India, the world's second-biggest wheat user, has imported 1.79 million tons since July, helping support the doubling in prices this year on the Chicago Board of Trade.

The government said Dec. 18 it is confident of meeting an output target of 75.5 million tons as favorable weather spurs planting. Farmers may sow wheat on 27.5 million hectares (68 million acres), compared with an average 26 million hectares, the farm ministry said. A harvest of 75.5 million tons would be the biggest since 2000.

State warehouses held 9 million tons on Nov. 23, enough to meet demand for nine months, Food Corp. of India, the nation's biggest buyer of grains, said last month. Prices have more than doubled in the past year as drought and increased demand eroded global inventories.

Agriculture Minister Sharad Pawar also said that India's sugar industry faces low prices and demand because of ``unprecedented'' output, cutting income for the sugar industry and farmers, To cope with excess supplies, the government will keep 5 million tons of the sweetener in storage, he told the annual meeting of the Indian Sugar Mills Association in New Delhi today. Compensation for farmers is also being worked out, he said.

A global glut has slashed refined sugar prices 12 percent in the past year, making the sweetener the worst-performing agricultural commodity over that period. World output may exceed demand by 11.1 million tons this year, led by a record output in India, the International Sugar Organization has said.

``Indian sugar industry is today faced with a situation of very high stocks, low prices of sugar and lack of demand,'' Pawar said. ``Depressed prices of sugar have resulted in accumulation of cane-price arrears'' of 26 billion rupees ($657 million) for farmers in the year that ended on March 31.

To give the sugar industry liquidity, the government plans to ask state-run banks and lenders to give loans against the expected production for the year ending Sept. 30, 2008. The loan will be repayable in four years. The plan will give sugar producers about 38 billion rupees.

India's Wholesale Inflation Slows Again

India's wholesale inflation slowed again in the first week of December as food costs declined, giving the government some room to raise prices of gasoline and diesel for the first time in more than a year. Wholesale prices rose 3.65 percent in the week ended Dec. 8 from a year earlier, slower than last week's rate of 3.75 percent, the Ministry of Commerce and Industry said today in New Delhi.




Inflation has held below the Reserve Bank of India's 5 percent target for five months. Still, price pressures may be reignited as the government may have to increase retail fuel costs if crude oil rises further, according to the central bank.

The relevant ministers are due to meet next week to discuss increasing fuel prices, according to Oil Minister Murli Deora speaking last week. India hasn't increased retail fuel prices so far this year, although global oil rates have risen more than 50 percent. The slowdown in prices will help Prime Minister Manmohan Singh to sustain the fastest pace of economic growth in 60 years and will reassure the central bank that short term prices are not likely to exceed the 5 percent year-end target.

The Reserve Bank is scheduled to meet in the last week of January to review interest rates, and has already raised its benchmark interest rate nine times since October 2004 in its battle to control inflation.

Economic Growth

India has mow been expanding at a rate of aprroximately 9 percent since April 2005, making it the fastest after China among the world's top 15 economies, and the Singh government would like to be able to accelerate growth to a 10 percent pace by 2012.

Indian policy makers succeeded in curbing inflation, which reached a two-year high of 6.69 percent in January, in part by capping the retail prices of gasoline and diesel to protect consumers from the increase in crude prices. The wholesale inflation rate dropped to 2.97 percent in October, the lowest since July 2002.

The Indian government caps gasoline and diesel rates to help keep inflation down and protect the poor, who make up half the country's 1.1 billion people. Gasoline and diesel prices were last changed on Feb. 15, when they were cut for the second time in 2 1/2 months. Cooking gas prices haven't been raised since November 2004 and kerosene since April 2002.

India recently went back to importing wheat (for the second time this year) in order to replenish depleted stockpile, and federal farm secretary P.K. Mishra has warned that India's harvest level may fall unless the main wheat-growing states receive more rainfall. If this happens India may need to import wheat for the third year in succession in 2008.

The Uncomfortable Rise Of The Rupee?

Well I'm afraid I'm not quite done with the Economist on India yet (see this extensive post to read the story so far), since our sterling correspondent, undaunted by the failure of all that vindaloo curry he had been eating to overheat anything more than his own digestive tracts our is now worrying about, guess what, the rise of the rupee.

As he says, in a post whose title I have ironically cited in this one:

The rupee's rise may be less dramatic than that of the Philippine peso, Brazilian real or Turkish lira. But it is uncomfortable nonetheless.

Quite so, just like a strong vindaloo without the obligatory mango lassi as accompaniment it a rising currency produces its own kind of dispeptic discomfort. But hold on a second, mightn't a rising currency in India actually be good news, and in any event inevitable. Nothing it seems is ever good news where India is concerned for our valiant correspondant, and everything needs to be tinged with it's due dose of schadenfreund.

So what then is all the fuss about? Well the rupee certainly is rising. Here is a chart showing how it has risen vis-a-vis the US dollar over the last 2 years.




As the Economist India corresponent points out, India's currency has strengthened by about 15% against the dollar in the last year alone, and by over 10%, on an inflation-adjusted, trade-weighted basis, since August 2006. And why is this. Again our correspondent is pretty much to the point:

This vigour is due to a strong inflow of foreign capital, some of it enticed by India's promise, the rest disillusioned by the rich world's financial troubles. The net inflow amounted to almost $45 billion in the year to March, compared with $23.4 billion a year earlier.

Although I can't for the life of me understand why the latest data he has is from back in March. Can't this guy ever do a professional job? Data up to the start of December is readily available here, and fascinating reading it is, as you can see it in the chart below.



As we can see, while the net inflow of external funds in the year to March - as proxied by the level of foreign exchange reserves held at the Reserve Bank of India -was $45 billion, the net inflow between 31st March 2007 and the start of December has been $74.4 billion, or not that far from double the whole amount that entered in whole fiscal 2007/2008 in just 9 months (and $41 billion of this since 15 August). This is, of course staggering, but unfortunately, it seems, you aren't going to read about just how staggering it is in the pages of the Economist since over there we are still looking at last years data (the last time I cricised them they said I was cross, this time I am angry aren't I, does it show?). As can be seen directly from the chart, the money really started to flow in from mid-September and the very fast rate of inflow continued till mid November.


Now the locus classicus on all this is certainly Morgan Stanley's Chetan Ahya, really it was this post of his which alerted me to the extent and significance of what was happening.

Over the seven weeks ending November 2, 2007, India’s foreign exchange reserves have increased by US$34 billion (annualized inflow of US$250 billion). Indeed, the trailing 12-month sum of FX reserves has increased to US$100 billion. This compares with the average annual increase of US$38 billion over three years prior to these seven weeks. With the current account still in deficit, the increase in reserves is being driven largely by a spike in capital inflows and to a very small extent because of conversion of non-dollar reserves into dollars. During the last seven weeks in which FX reserves have shot up, we believe that capital inflows would have been US$35 billion. Out of this, not more than 10% has been on account of FDI inflows. Non-FDI inflows including portfolio equity and external debt inflows form a major part of these inflows.

While the inflows are pouring in at the annualized run rate of US$250 billion, in our view, currently the country can absorb only about US$40-50 billion of capital inflows annually without causing any concern on attended risks of overheating. The key question policy makers are grappling with is how to manage these large capital inflows. As the strong growth in domestic demand has resulted in overheating of the economy recently, the central bank does not want to leave such large capital inflows fueling the domestic liquidity. Not surprisingly, the central bank has accelerated the pace of the sterilization by way of issuance of market stabilization scheme (MSS) bonds and an increase in the cash reserve ratio (CRR). Over the last 12 months, the RBI has sterilized about 58% of the foreign inflows. The sterilized liquidity (excess liquidity) stock including reverse repo less repo balances, MSS bonds, government balances with the RBI and the increase in the cash reserve ratio has shot up to US$77 billion as of end-October 2007 from US$19 as of end-October 2006.

Now while the issue of whether or not India is overheating raises its head again here, the context is quite different, and it is clear that the Reserve Bank of India is now struggling with the problems that may arise in the wake of such a massive influx, especially if it continues, as it may well do if the problems in the developed economies experience in 2008 turn out to be greater than may appear to be the case at present, and again if not all the emerging economies are as sound as they appear to be. Also, India is hardly to blame for this state of affairs, since the money is leaving one place (the developed economies following the sub-prime bust, rather than intentionally going somewhere. It is just that, amongst all that growing risk you can see out there, India looks to be as good a safe haven as you can find these days.

But this is not the moment to take all this into those still uncharted waters. If you want to read more on this aspect of things, then I cannot recommend a better source than Claus Vistesen's Compass and Charts Needed. For my part, I think all I want to register here is that something profound and important is taking place, and not simply a tepid repeat of events we have seen all to often in the past. Starting from this recognition, let the debate as to where we go next, and what to do about it, commence!

Trichet On India and Global Financial Architecture

This one here, is a must read.


The Growing Importance of Emerging Economies the Globalised World and its Implications for the International Financial Architecture
Jean-Claude Trichet

Speech by Jean-Claude Trichet, President of the European Central Bank delivered at the Tenth L. K. Jha Memorial Lecture, organised by Reserve Bank of India, Mumbai on November 26, 2007.

The consultations involved both mature and emerging economies, including the euro area, the United States, Japan, China and Saudi Arabia, again illustrating the fact that large current imbalances are no longer an issue for mature economies only, but a truly global issue. We at the ECB welcomed these discussions as a way to foster the implementation of the agreed strategy to address global imbalances. Evidently, these discussions are also of relevance to India. Large current account imbalances worldwide go hand-in-hand with sizeable cross-border capital flows. India has been confronted with challenges posed by strong capital inflows. This is why addressing imbalances is in the interest of the international community as a whole.......



We have learned indeed that the world economy is changing constantly. The emerging economies, which played a relatively modest role in the global economy 20 years ago, occupy a far more important place today, but one which will be dwarfed in importance by their role in the future.

India GDP Components

The following charts either come from (or have been derived from) the document Revised estimates of Annual National Income, 2006-07 and Quarterly Estimates of Gross Domestic Product, 2006-07, published by the Central Statistical Office on 31 May 2007.9,5
12,0



More to Come.

Bank Loans and Mutual Funds

Bloomberg last Friday:

India's central bank today curbed bank loans to mutual funds by mandating that such amounts will be treated as the lenders' direct investments in stock and bond markets.

Banks are required to limit investments in capital markets to less than 40 percent of their net worth. Funds may borrow from banks only to meet ``temporary liquidity needs'' and as per the capital market regulator's guidelines, Mumbai-based Reserve Bank of India said in a notice on its Web site.

An inspection of the financial records of some banks showed they had extended ``large loans to various mutual funds and also issued irrevocable payment commitments to stock exchanges on behalf of mutual funds and foreign institutional investors,'' the central bank said. These transactions weren't included by the banks as part of their capital market investments.

The Securities and Exchange of India has ruled that a mutual fund may borrow only up to 20 percent of its net assets and for periods of not more than six months.

Banks must not give loans or other forms of financial assistance, such as payment guarantees, to foreign institutional investors, the Reserve Bank said.

The monetary authority has allowed domestic banks six months to comply with the instructions.

The Economist on India

Well, I am revving myself up again now to come back at all those people who said that India was overheating when it was growing away at a mere 8%. In fact India grew at an 8.9% year on year rate during the last quarter (and this following 9.1% in the first and 9.3% in the second quarters of 2007), and far from inflation shooting through the roof it is currently not too far from the Reserve Bank of India's 5% target. Perhaps it is towards China that people should be directing their attention, or towards Eastern Europe, or even - god forbid - the eurozone, but India it seems is one country where the "great overheating" argument is steadily running out of steam. Of course one country which everyone will readily admit is not overheating is Japan, but I thinkwe'll leave that topic on one side for today.

Here I just want to repost part of a reply I gave to the Economist when they had the kindness to try to answer some points I had raised about the general quality of their economic coverage, and about what I take to be their obsession with ignoring the demographic component in economic growth. For the Economist, it seems, growth and development is a single issue item, and is all about insitutions, and institutional quality. Which makes it kind of funny that Argentina, which must be among the worst of the emerging economy pack in institutional quality is still powering away, despite more or less openly manipulating the economic data.

Obviously institutions matter, but so does demography. This is not a one horse race, or if you prefer, this particular horse doesn't only run on one leg.

The topic in question here is India's potential growth rate. Recent GDP performance at just under 9% must have been astounding many of India's critics, especially given the way inflation, despite all that growth, has been kept pretty much under control.

Wholesale price inflation has been preforming even better:



So to go to the start of our story, back in September 2006, I post a piece on the India Economy Blog entitled "Uncharted Water" where I argued precisely the following:

What is clear is that the Indian economy is currently gathering steam,
and this at a time when there is a general consensus that the political will for
reform isn’t what it used to be. Strange isn’t it?

My meaning here isn’t that reforms aren’t necessary, but that there are other
factors at work, and in particular demographic ones. The importance of these
demographic factors generally can be seen from the fact that it is now the newly
developing countries (China, India, Brazil, Chile, Thailand, Turkey) who are
pulling the global economy (and in the process pushing up energy and commodity
prices). The developed world - which makes up say 50% of global GDP is growing
much more slowly than the developing world - and some of this for ageing related
demographic reasons. Global GDP is forecast to grow at a 5% annual rate this
year, yet the US is growing at around 3.5%, Japan 2.5% and the eurozone around
2%. So you tell me, who is pulling who here?

And this is why I say we are moving into uncharted territory. Economists
used to have a little model which worked on the assumption of each economy
having a certain growth capacity in any given moment. But could any one tell me,
what *is* the growth capacity of China or India? I certainly have no idea, and I
haven’t seen anyone else make a convincing case on this topic. The magnitude of
the growth we are now seeing in the developing world is beyond all historical
precedent.

Doesn't look to bad at all does it, in the light of what has been happening during the second half of this year. And remember this was written in the Autumn of 2006, not Autumn 2007 when just about everyone and their auntie is saying something like this. Of course this whole debate is ongoing. Nandan Desai had an excellent piece on IEB which put things pretty much in perspective and in October 2006 I had another piece in the IEB, basically in response to the Sizzling India article in the Economist. I said this:

I am even brazen enough to believe that trend growth may well
have moved up beyond 8.5% going forward, and that indeed within 5 years we may
well see India overtaking China in terms of average quarterly growth rates (of
course this may well vary from one quarter to another, a phenomenon known as
volatility, and of course 5 years from now the Chinese economy may not still be
sustaining the very high growth rates we see today).

Again, I am really comfortable standing by this, and even the point about China, since the inflation problem really does seem now to be getting a grip (remember they have had nearly 30 years now of the one child per family policy, and at some point soon their labour market is going to tighten and tighten, for what may well happen next see my recent article on the growing problem we now have in Russia: "Russian Inflation, Too Much Money Chasing Too Few People" (not too much danger of this getting to be a problem in India in the near future, now is there?).

Since this time of course, the whole recoupling/decoupling issue has really taken off as a live debate. My latest thoughts on this can be found here, and Claus Vistesen's post - The Global Economy, Compass and Charts Needed - follows up on and continues the "uncharted waters" theme.

Now for the Economist. What I said in my response to them was as follows:

To The Economist

Well, at the risk of having to assume some kind of modern "j'accuse" mantle (for which of course there are ample precedents in the early origins of your own magazine) I am going to put up yet another comment. Maybe this is because I would like to participate in that "severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress" which your contents page so boldly announces.

Maybe it is also because I want to pin down quite clearly for future reference just what the issues are, and just why it isn't "absurd" to suggest that the Economist currently systematically fails to factor-in the demographic components in economic growth (or the lack of it). Well, saving the best (or should that be the worst) to the last, I would like now to come to the case of your India correspondent. This gentleman (and I sincerely hope that despite his evident predilection for strong Vindaloo curry he is one of these) has been systematically re-adjusting upwards India's potential trend growth rate in recent months. In fact his estimate seems to have shot up from 6.5% in November 2006 to 7% in February 2007, to 8% in June 2007. Now that's an upward adjustment of around 25% in trend growth in roughly 8 months. Quite an achievement, especially since he offers absolutely no explanation whatever for these adjustments, but what he does not fail to tell us - oh, he never lets a moment rest without beating this drum - is that: "India's economy, like Delhi this week (or Vindaloo curry perhaps, EH), remains far too hot."

Now just in case what I am suggesting here is questioned I would like to quote chapter and verse, since the issue is an important one.

In November 2006 the Economist's India correspondent estimated capacited growth for India at around 6.5%.

23 November 2006 Too Hot To Handle

INDIA'S curries can be even hotter than the fieriest of Chinese hotpots; likewise the temperature of the two economies. Despite widespread claims that China's economy is overheating, actually India's shows more signs of boiling over.

In the year to the second quarter, India's GDP grew by an impressive 8.9%, while China's more up-to-date figures show even more breathtaking growth of 10.4% in the year to the third quarter. But to judge whether an economy is too hot, one needs to compare this expansion in actual demand with potential supply, ie, the sustainable rate of growth. Despite India's growth spurt in recent years, its sustainable pace is still much lower than China's, which puts its economy more at risk of overheating and rising inflation.

India's trend growth rate has almost certainly increased but it is still
nowhere near as high as China's. Mr Prior-Wandesforde estimates that it is now
around 6.5%, up from 5% in the late 1980s. But India's recent acceleration
largely reflects a cyclical boom, thanks to loose monetary and fiscal policy.
The Reserve Bank of India has raised one of its key interest rates by one and a
half percentage points to 6% over the past two years, but inflation has risen by
more, so real interest rates have fallen and are historically low. This makes
the economy more vulnerable to a hard landing.

By February 2007 the estimate had risen to "not much above" 7%.

1st February 2007 India overheats

"But the problem is that this new speed limit is almost certainly lower than the government's one. Historic data would suggest a figure not much above 7% - well below China's 9-10%......If something is not done, then a hard landing will
become inevitable."

and by June 2007 it had been revised up nearer to 8%.

June 7th 2007 Waiting For The Monsoon

"This is not to deny that India's economic speed limit has increased, to perhaps 7-8%, thanks to stronger investment and economic reforms. But growth has
exceeded that limit. The economy still shows alarming symptoms of overheating"

And depispite all this, we are now in December 2007, the Indian economy has been growing at around 9% for the last three quarters, and inflation has been kept remarkably under control.

So actually what we are all really waiting for here is not the arrival of the monsoon, but some explanation from the Economist's India correspondent about how he is calibrating all these estimates. There is nothing particularly to be embarassed about in getting this one wrong, since it is pretty difficult to put a number on where Indian growth is going, but it does seem hard to maintain the credibility of your calls if you conveniently keep ignoring what you were saying only yesterday, and more importantly fail to diagnose exactly why it is that India has been able to grow so much faster than you expected. And of course one day India may overheat, and stopped clocks do give the right time twice a day, but this doesn't make them especially useful measuring instruments.

Back in the autumn of 2006, on the India Economy Blog, I argued that we were now entering "uncharted waters" and that no-one really had any accurate idea of what India's true mid-term trend growth rate actually was. I also asserted that it was in all probability way above the more conservative and conventional estimates. I was guessing really, but behind my guesswork was a long hard look at India's underlying demography, and it is just this kind of approach that your India correspondent discounts. Again, chapter and verse:

1st February 2007 India On Fire

Many Indian economic commentators say that further structural reforms, though desirable, are not essential to keep the economy growing at 8% or more because
of the "demographic dividend". A fast-growing working population and a falling
dependency rate (thanks to a lower birth rate) will ensure more workers, more
saving and hence more investment." "India's demographic structure is indeed
starting to look more like that in East Asia when its growth took off. But this
mechanistic view of growth assumes that demography is destiny and that economic
policies do not matter. In fact, open markets, education and investment,
especially in infrastructure, were the three chief ingredients of East Asia's
success. Population growth by itself does not add to prosperity, unless young
people are educated and new jobs are created. India needs to reform its absurdly
restrictive labour laws which hold back the expansion of manufacturing
particularly."

Basically I find myself in agreement with the Indian economists he doesn't like. It isn't that these reforms aren't desireable, as he admits, we all agree on this. But the point is, even ex-reforms (and of course there have been reforms and global opening) demographic momentum would indicate that substantial growth is now going to occur. How substantial? Hard to say, but I think it is quite probable that 5 years from now India will be growing faster than China, and may even peak out at the highest annual growth rates yet seen for a significant economy over the 5 to 10 year window. I can justify why I think this with some sort of coherent argument if anyone wants. I think the big danger for the sort of view you are advancing here at the Economist is that you imagine virtually nothing is possible with institutional reform, and this is just as big a mistake as saying demography is everything. You need to systematically take the two components into account. If you don't do this you risk getting into the ridiculous position the World Bank found itself in this week, when countries like Argentina and Thailand complained that since their countries were registered as going backwards on the global governance index, while both countries were growing quite nicely, then logically the methodology used to construct the index must be wrong. IMHO the World Bank has been totally mechanistic about institutions and thoroughly deserves all the problems it creates for itself on this count. OK, so that's it. I finally rest my case. The dialogue will continue.

And it is, undaunted by the failure of all that vindaloo curry to overheat more than his own digestive tracts our dear correspondent is now worrying about, guess what, the rise of the rupee. Continued in this post here.

India GDP Q3 2007

I think it is important here to note right at the outset that what the Indian Central Statistical Office calls Q2 is in fact what everyone else knows as Q3 (ie July to September). Apart from that everything is more or less in order, so.... according to the CSO:

ESTIMATES OF GDP BY ECONOMIC ACTIVITY

(a) At constant (1999-2000) prices

2. Quarterly GDP at factor cost at constant (1999-2000) prices for Q2 of 2007-08 is estimated at Rs. 7,10,578 crore, as against Rs. 6,52,450 crore in Q2 of 2006-07, showing a growth rate of 8.9 per cent over the corresponding quarter of previous year.

3. The economic activities which registered significant growth in Q2 of 2007-08 over Q2 of 2006-07 are, ‘mining & quarrying’ at 7.7 per cent, ‘manufacturing’ at 8.6 per cent, ‘electricity, gas & water supply’ at 7.3 per cent, ‘construction’ at 11.1 percent, ‘trade, hotels, transport and communication’ at 11.4 per cent, ‘financing, insurance, real estate and business services’ at 10.6 per cent, and ‘community, social and personal services’ at 7.8 per cent. The growth rate in ‘agriculture, forestry & fishing’ is estimated at 3.6 per cent in this period.



4. According to the information furnished by the Department of Agriculture and Cooperation (DAC), which has been used in compiling the estimate of GDP from agriculture in Q2 of 2007-08, the crops rice, coarse cereals and pulses during the Kharif season of 2007-08 recorded growth rates of zero per cent, 3.5 per cent, and 16.2 per cent, respectively over the corresponding season in the previous agriculture year. Among the commercial crops, the production of oilseeds increased by 15.7 per cent during the Kharif season of 2007-08, while the production of cotton and sugarcane is estimated to grow at 1.1 per cent and 0.1 per cent, respectively during the agriculture year 2007-08.



5. According to the latest estimates available on the Index of Industrial Production (IIP), the index of mining, manufacturing and electricity, registered growth rates of 8.1 per cent, 8.3 per cent and 7.1 per cent, respectively in Q2 of 2007-08, as compared to the growth rates of 2.6 per cent, 13.0 per cent and 8.0 per cent in these sectors in Q2 of 2006-07. The key indicators of construction sector, namely, cement and finished steel registered growth rates of 9.9 per cent and 9.6 per cent, respectively in Q2 of 2007-08, as against the growth rates of 11.1 per cent and 11.2 per cent, respectively in Q2 of 2006-07.



6. Among the services sectors, the key indicators of railways, namely, the net tonne kilometers and passenger kilometers have shown growth rates of 7.4 per cent and 6.9 per cent, respectively in Q2 of 2007-08. In the transport and communication sectors, the production of commercial vehicles, cargo handled at major ports, cargo handled by the civil aviation, passengers handled by the civil aviation and the total stock of telephone connections (including WLL and cellular) registered growth rates of (-) 0.2 per cent, 13.2 per cent, 22.1 per cent, 14.7 per cent and 46.3 per cent, respectively in Q2 of 2007-08 over Q2 of 2006-07. The other key indicators, namely, aggregate bank deposits, and bank credits have shown growth rates of 23.9 per cent, and 21.9 per cent, respectively in Q2 of 2007-08 over Q2 of 2006-07.

Rupee on the rise

India's rupee headed its third weekly gain in a row this week on speculation declining interest rates in the U.S. will prompt global funds to boost holdings of high-yielding emerging-market assets. The rupee gained after the Federal Reserve cut its key interest rate this week to the lowest in almost two years. Funds based abroad have bought a record amount in Indian debt this year, more than doubling holdings as the nation's economic growth accelerated to the fastest rate since 1989.



The rupee rose to 39.35 per dollar as of 11:05 a.m. Friday in Mumbai, up from 39.3975on Thursday. Its 12.4 percent gain this year is the second-best performance by an Asian currency after the Philippine peso.

The Federal Reserve cut its benchmark rate on Dec. 11 to 4.25 percent, the lowest since January 2006, from 4.5 percent to prevent a housing slump from slowing growth in the world's biggest economy. The Reserve Bank of India's benchmark rate is 7.75 percent, the highest in five years.

Overseas funds bought $2.05 billion more Indian debt than they sold this year, compared with $881.3 million for the whole of 2006, data released by the Securities and Exchange Board of India showed. Their Indian debt holdings are currently $3.37 billion, compared with $1.33 billion at the end of 2006.

India December 2007 Price Inflation

India's wholesale price inflation accelerated to a three-month high this week as the prices of fruits, vegetables and oil products increased, the government said. Still, the general position across 2007 is not that bad.

Wholesale prices rose 3.75 percent in the week ended Dec. 1 from a year earlier, faster than the previous week's 3.01 percent gain, the Ministry of Commerce and Industry said today in New Delhi. That was the highest since 3.94 percent in the week ended Aug. 25. Analysts had forecast inflation at 3.49 percent.



India today revised the inflation rate for the week ended Oct. 6 to 3.22 percent from 3.07 percent. The government revises the figure after a delay of two months on additional price data.

In October, the consumer price index for industrial workers (CPI IW) rose at a monthly rate of 0.75% after having remained unchanged month-on-month in September, and having risen 0.76% in August. As a result, annual headline inflation has dropped steadily from 7.3% in August to 6.4% September and to 5.5% in October.




Despite the benign inflationary environment of the past months, in line with market expectations, the Reserve Bank of India decided to maintain the interest rate unchanged at 7.75% on its 30 October policy meeting. However, the Bank unexpectedly raised the cash reserve ratio (CRR) for the fourth time this year by 50 basis points, from 7.0% to 7.5%, in order to prevent what monetary authorities consider “unacceptably high” inflows of foreign capitals from fuelling price pressures.



The Bank’s governor, Yaga Venugopal Reddy recently described the current inflation rate as “suppressed”, since it does not reflect the record oil prices, as the government has restrained from raising fuel prices so far this year. The Central Bank aims at keeping inflation close to 5.0% this fiscal year ending March 2008, and to lower it to a range of 4.0% to 4.5% over the medium term.

India Risk Elements

According to a recent assessment by the Economist Intelligence Unit the risk situation in India looks like this:

Banking sector risk

Stable: Bank credit is rising as a percentage of GDP. An increase in household
defaults remains possible, especially given the central bank!s maintenance of
current interest rates.

Political risk

Because both the government and its leftist supporters have compromised"at
least in the short term"on some of the issues that divide them, the prospect of
an early general election has, for the time being, receded.

Economic structure risk

Although wholesale price inflation, targeted by the central bank, continues to
decline, rising oil prices are likely to increase pressure on both producer and
consumer prices.

India Industrial Output October 2007

India's industrial production grew more than analysts predicted in October as the onset of the festival season and rising incomes seem to have spurred consumer spending. Production at factories, utilities and mines increased 11.8 percent from a year ago, up from September's revised 6.8 percent rise, the statistics office said in New Delhi today.



Consumer spending got a boost in October as India's 830 million Hindus prepared to celebrate the Deepawali festival of lights and the nation's 140 million Muslims observed Id-Ul-Fitr, which marks the end of the fasting month of Ramadam. Demand for cars, mobile phones and other manufactured products rose as companies offered bonuses before the festivities.

Company sales in India get a fillip in the festive months of October and November as people consider it an auspicious time to make purchases. Deepawali, the most important festival on the Hindu calendar, fell on Nov. 9 this year and Dusshera was on Oct. 21. Muslims celebrated Id-Ul-Fitr on Oct. 14.



Manufacturing, which accounts for 80 percent of industrial output, gained 13.3 percent in October from a year earlier, according to today's statement. That was the quickest pace since March. Consumer-goods production jumped 12.5 percent, the most in six months.

Also Indians received the second-highest salary increase in the Asia- Pacific region this year, helped by the unprecedented economic growth. Wages rose an average 14.8 percent in 2007 from 14.4 percent last year, according to human-resources consulting firm Hewitt Associates Inc.

Accelerating industrial growth, which makes up a quarter of the $906 billion economy, has helped the benchmark Sensitive Index to soar 47 percent this year.

Local sales of passenger cars in October rose 14.6 percent from a year earlier to 105,878 units, the New Delhi-based Society of Indian Automobile Manufacturers have said. S

Honda Motor Co., Volkswagen AG and half a dozen other companies plan to spend at least $6.6 billion in India on new factories to cash in on rising auto demand. GM is spending more than $300 million to build a second car factory in India.




The Reserve Bank of India has lifted its benchmark interest rate nine times since October 2004 in an attempt to fight inflation, making commercial bank loans more expensive.



Sustaining high industrial production growth will require the creation of supportive infrastructure, Finance Minister Palaniappan Chidambaram said in a mid-year review of the economy last week. The government estimates India will need $500 billion worth of investments in the next five years to build and upgrade its roads, ports, airports and utilities if it wants to accelerate growth to a 10 percent pace by 2012.

India's gross domestic product has expanded at an average annual pace of more than 9 percent since April 2005, making it the world's second-fastest growing major economy after China. India's economic growth, currently the world's fastest after China, is constrained by the lack of skilled manpower and inadequate infrastructure, Prime Minister Manmohan Singh said in New Delhi earlier today.

India Industrial Output

India Current Account

India Population

India Annual Inflation

India Annual GDP Growth

India's Dollar GDP

Basically there seem to be two versions of the "decoupling" thesis knocking about. The first of these (which is now very definitely going out of fashion very fast) was based on the idea that the global economy was finally decoupling itself from the US one due to the fact that key global engines among the G7-type economies - and in particular Germany and Japan (and following in both cases lengthy periods of structural reforms) - were finally coming out of a long period of sub-par economic growth and achieving "home grown", domestic-demand-driven, sustainable recoveries in a way which would enable them to take more of the global strain during what was perceived as being a period of inevitable US "correction".

Claus Vistesen and I never actually bought this story, in particular we didn't buy it since we never thought that domestic demand would recover in countries like Germany, Japan and Italy in the way in which many were expecting, essentially for age-related demographic reasons. I think history has, more or less, borne us out on that one.

But there is another sense of "decoupling" (which is the one Claus and I prefer to call "recoupling", although this is not recoupling in the way in which Nouriel Roubini uses the expression, which seems to refer to a renewed coupling to a US economy which is on its way down) and this is to do with the way in which certain emerging market economies (the EU 10, Ukraine, Russia, China, India, Turkey, Brazil, Argentina, Chile etc) are now accounting for a very substantial proportion of global growth (Claus and I have yet to do the detailed numbers on this, but suffice it to say that India, China and Russia alone will account for over 30 % of the growth in the global economy in 2007). This is a far cry from the central role which the US economy was playing in global growth in the late 1990s. So in this sense something fundamental has changed, and this is what Claus and I are calling "recoupling".

This situation can be observed quite clearly in the two charts which follow, which are based on calculations made from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001 - the weight of the soc called BRIC economies (Brazil, Russia, China and India) has been rising steadily. This is just one example - and a very crude one at that - of why Claus and I consider that demographics is so important, since it is precisely the population volume of the BRIC countries (and the fact that they start their development process from a very low base, ie they were allowed to become very poor comparatively, for whatever reason) that makes this transformation so significant.

Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these economies in recent years and the significantly weaker role of "home grown" US growth. The impact of the collapse of the Tech stocks/internet boom in 2001 is clear enough in the chart, as is the fact that everyone went down at the same time, and this is the old form of "coupling" wherein the US economy due, to its size (and hence specific weight) and "above-par" growth potential played a key role, and, as can be seen, when the US went down, then god save the rest. The present debate is really about what will happen if the rising dollar cost of oil and the ongoing difficulties in the financial sector caused by the sub-prime problem leads the US into recession in 2008. Will everyone else follow this time? In 1999 the US economy represented 30.91% of world GDP, and in 2007 this percentage will be down to 22.4% (on my calculations based on the forceast made by the IMF in October 2007). In 200 the US economy accounted for a staggering 40.71% of global growth, and by 2007 this share is expected to be down to 6.43%. So there are prima-facie reasons for thinking that this time round the impact of any US slowdown will not be as acutely felt in some parts of the globe as was the case in 2000, but which parts of the globe will be more affected and which less so?

Fitch and Bad Loan Problems in India

From Bloomberg this morning:

Indian banks may see bad loans swell as interest-rate increases this year failed to deter consumers from borrowing more, Fitch Ratings said in a report today.

Bad loans from defaults on home mortgages could rise if interest rate increases this year are followed by a decline in property prices, the credit assessor said. About half of loans to individuals are to buy homes, the prices for which have doubled over the past two years in south Mumbai, according to Cushman & Wakefield.

``Consumer loans typically carry higher risk and delinquencies would depend on underwriting standards of individual banks,'' said Vishal Goyal, an analyst with Edelweiss Capital Ltd. ``It is not a concern at this point in time because banks are anyway charging higher risk spreads on such loans.''

India's bank lending rates rose this year after the central bank raised the cost of borrowing to contain inflation fueled by real estate purchases that were funded with loans. ICICI Bank Ltd., the nation's second biggest, and HDFC Bank Ltd. gave 33 percent more loans in the three months to Sept. 30, while loans by State Bank of India, the biggest, grew 26 percent compared with a year earlier.

``The need to access capital may come into sharper focus if the credit cycle deteriorates,'' Fitch said.

Indian banks may find it more expensive to raise capital overseas, with rising rates prompting some to delay borrowings, Fitch said in the report. The need to raise capital ``could well provide an impetus for consolidation'' among banks, it said.

Higher Credit Demand

Still, banks would continue to benefit from rising credit demand as companies invest further to gain from a growing economy, Fitch said. India's $906 billion economy will probably post its third year of at least 9 percent growth in the year to March 31.

Housing Development Finance Corp., which is 12.6 percent owned by Citigroup Inc., posted a decline in bad debt and expects to meet its annual loan target of 25 percent, Chairman Deepak Parekh said yesterday in New Delhi.

The strengthening of the rupee against the dollar could hurt smaller textile exporters, Fitch said. The local currency is headed for the biggest annual gain since 1974, increasing more than 12 percent this year against the dollar, data compiled by Bloomberg showed.

India Private Equity Deals May Grow 40% in 2008

From Bloomberg this morning:

Carlyle Group, the world's second- biggest buyout firm, said India's private equity market may expand as much as 40 percent next year, even as increased competition for stakes drives down returns.

``The private equity market in India will continue to do well even as returns could come down in percentage terms,'' Shankar Narayanan, managing director at Carlyle India Advisors Pvt., said in Mumbai today. The total value of buyout agreements could reach $18 billion next year, he said.

Private equity companies invested more than $4.2 billion in India this year, taking the total value of such funds committed to the nation to $12.9 billion, according to the Asian Venture Capital Journal. India was the Asia-Pacific region's second- largest private equity market in the first half, after Australia, as the value of deals jumped 55 percent.

Executives from Sequoia Capital, 3i Group Plc, Actis Capital LLP and other buyout firms are in Mumbai for a two-day gathering to discuss how to make more profits in India as investments have become more expensive.

Buyout funds have bought Indian listed and unlisted companies on expectation of higher returns as the government forecasts expansion of about 9 percent for the year, maintaining the South Asian nation's position as the fastest-growing major economy after China.

Infrastructure Push

India is building power plants, transmission lines and substations as part of a $500 billion infrastructure plan to spur economic growth.

``I would stay invested in sectors like airports and power over the next three years,'' Anil Ahuja, managing director and co-head, Asia 3i India Pvt., said in Mumbai yesterday.

Buyout companies could invest more than that amount in India next year, amid soaring valuations, raising their bets on the world's second-most populous nation, said Sumir Chadha of Sequoia Capital, the venture firm that made billions of dollars backing Google Inc.

``Most deals are getting done at very high valuations,'' Chadha said. ``There is just so much money chasing deals now.''

A five-year stock rally has made it difficult for private equity firms to realize higher profits in India.

New York-based Warburg Pincus LLC earned about six and a half times its original investment when it sold shares in Bharti Airtel Ltd., India's biggest mobile-phone company, in 2005.

``Returns that we saw in 2003-2004 will be very difficult to replicate next year,'' said Darius Pandole, partner at New Silk Route Advisors Pvt., which raised a $1.3 billion fund to invest in Asia this year. ``The market is hot and investors want to deploy money now.''

India's Economy Expands 8.9%, Slowest Pace This Year

From Bloomberg today:

India's economy grew at the slowest pace since the final quarter of 2006, signaling the central bank may soon end three years of interest-rate increases.

Asia's third-largest economy expanded 8.9 percent in the three months to Sept. 30 from a year earlier, after a 9.3 percent increase in the previous quarter, the statistics office said today in New Delhi. Analysts expected an 8.7 percent gain.

Manufacturing growth was the weakest in seven quarters as higher borrowing costs curbed demand for cars and motorcycles, prompting Tata Motors Ltd. and Hero Honda Motors Ltd. to reduce output. A planned relaxation of foreign-investment rules may attract companies such as Frankfurt airport owner Fraport AG, helping improve India's congested air terminals and shoddy roads.

``Removing bottlenecks is central for India's growth to continue,'' said Maya Bhandari, an economist at Lombard Street Research Ltd. in London. ``India is growing at its potential, its macro fundamentals are solid and you have a situation where companies will put more money there.''

India's benchmark share index gained 1.9 percent to 19363.19 on the Bombay Stock Exchange. The yield on the key 10- year government bond fell 1 basis point to 7.91 percent.

Manufacturing gained 8.6 percent last quarter from a year earlier, easing from a previous increase of 11.9 percent, according to today's report. Electricity output slowed to 7.3 percent from 8.3 percent, while farming rose 3.6 percent after a 3.8 percent gain in the quarter ended June 30.

`Gentle Slowdown'

``The Indian economy is softening but not dramatically so,'' said Robert Prior-Wandesforde, senior economist at HSBC Holdings Plc in Singapore. ``A gentle slowdown is probably exactly what the Reserve Bank of India would like to see.''

The central bank expects growth in the year to March to ease to 8.5 percent after it raised interest rates nine times since 2004. The reverse repurchase rate is now at a five-year high of 6 percent. Inflation was 3.21 percent in the week ending Nov. 17, down from 6.7 percent at the start of 2007.

Higher interest rates have curbed demand for autos and motorcycles, prompting Tata Motors and Hero Honda Motors to delay opening new factories and cut output.

Still, economic expansion in this financial year almost matches the average 8.6 percent growth from 2003, the quickest pace in the nation's history since independence in 1947. That's boosting profits for companies doing business in India.

Coal, Cement

South Africa's Richards Bay Coal Terminal, the world's biggest coal-export facility, expects a 30-fold surge in sales to India this year. Fraport said this month it is aiming to boost activities in ``booming markets'' such as China and India.

With exports accounting for only 23 percent of India's $906 billion economy, Lehman Brothers Inc. expects the South Asian nation to be immune to a deceleration in world growth sparked by mortgage defaults in the U.S.

The International Monetary Fund last month cut its projection for global growth next year to 4.8 percent from an estimate of 5.2 percent in July.

India's pace of growth is almost three times the economic expansion in the U.S. and countries that share the euro, and falls only behind China's 11.5 percent gain last quarter among the world's top 15 economies.

Global producers of cement, steel, copper and other products are benefiting from a five-year $500 billion plan by India's government to modernize and expand roads, ports and other infrastructure.

Foreign Investment

``Despite a slowdown in manufacturing, the sustained rate of investment gives me the confidence that the year will end pretty close to 9 percent growth,'' Indian Finance Minister Palaniappan Chidambaram told reporters in New Delhi. ``With luck, it could even be on the right side of 9 percent.''

The government will next week consider easing foreign investment rules in aircraft maintenance companies, petroleum marketing firms and commodity exchanges, the Economic Times reported. Since assuming office in May 2004, the government has relaxed foreign investments in telecommunications and single- brand retail outlets.

``India is very committed to reforms,'' said Stephen Roach, chairman of Morgan Stanley Asia Ltd. ``I like what I see in India. The Indian economy is really performing very impressively right now.''

Demand in India is also being bolstered by new jobs created by companies such as Cisco Systems and Mahindra & Mahindra Ltd., which are expanding to benefit from local consumer spending.

More Jobs

Cisco Systems Inc., the world's largest maker of computer- networking equipment, plans to triple its workforce in India to 10,000 people by 2010, Chief Executive Officer John Chambers said last month.

Mahindra, India's biggest sport-utility vehicle maker, plans to spend about $1 billion in the next four years to double automobile production.

State Bank of India, the nation's biggest lender, today won government approval for a $4.2 billion share sale, its first in a decade, amid higher demand for mortgage, car and other loans.

The Indian economy has quadrupled in size since 1991, when the Oxford-educated Singh as the finance minister, introduced free-market measures that cut red tape and allowed foreign companies to set up operations locally. That's helped double per capita income in the last eight years.

India May Sustain 9% GDP Growth for a Record 3rd Year

From Bloomberg today:

India's 9 percent economic growth may be sustained for a record third year on prospects of bumper crops and a retreat in crude oil prices, Finance Minister Palaniappan Chidambaram said.

``If harvests are good, we are able to enjoy a bit of luck with crude oil, and we are able to moderate capital flows, which are putting pressure on inflation, we should have 9 percent'' in the fiscal year ending March 31, the Harvard-educated minister said in an interview yesterday in New Delhi.

Chidambaram's prediction came after figures showed the pace of growth slowed in Asia's third-largest economy last quarter amid decade-high borrowing costs. Morgan Stanley's Asia chairman Stephen Roach said the slowdown was temporary, with 9 percent growth in India being ``eminently achievable.''

``I am very optimistic about India over the next three to five years,'' Roach said in an interview in New Delhi. ``The combination of monetary tightening and a higher value of the rupee in the foreign-exchange market can put the brakes on the economy in the near term.''

India's $906 billion economy grew 8.9 percent in the three months to Sept. 30 from a year earlier, after gaining 9.3 percent in the previous quarter, the government reported last week. China's $2.6 trillion economy expanded 11.5 percent in the third quarter.

Foreign Investment

Industry Minister Kamal Nath last month said almost all of India's economy is now open to overseas investment since Prime Minister Manmohan Singh, as the finance minister in 1991 started to dismantle India's Soviet-style controls on industry. Only some defense-related areas and retail remain closed, Nath said.

Since assuming office in May 2004, Singh's government has relaxed foreign investments in telecommunications and single- brand retail outlets. The government will this week consider easing foreign investment rules in aircraft maintenance companies, petroleum-marketing firms and commodity exchanges, the Economic Times reported.

To attract more funds from abroad, India last year enacted a law to enable construction of special economic zones, enclaves modeled on China's Shenzhen. The government also has a five-year plan to attract investments of $500 billion in roads, ports and other infrastructure.

Chidambaram said that while investment will continue to drive India's economic growth, ``there are some risks, such as crude oil prices, over which we have no control.''

Fuel Subsidies

India is Asia's third-biggest oil consumer and imports almost three-quarters of its needs. It hasn't raised fuel prices this year, when oil surged to a record, to protect consumers in a country where more than half the 1.1 billion population live on less than $2 a day. That's adding to an annual $25 billion subsidy bill which could have been spent instead on health, education and other infrastructure.

Crude oil for January delivery fell 9.7 percent to $88.71 a barrel last week on the New York Mercantile Exchange, the biggest weekly decline in two and a half years.

India's agriculture, which makes up a fifth of the economy, depends on the vagaries of the June-September monsoon rains to irrigate crops across the world's seventh-largest land mass.

There were more rains than forecast this season, according to the state-owned weather bureau, improving prospects for a record output of crops from rice to cotton and soybean.

Interest Rates

JPMorgan Chase & Co. and HSBC Group Plc expect more than three years of interest-rate increases by the central bank will also moderate India's expansion. The economy grew 9.4 percent in the year ending March 2007 after gaining 9 percent in the previous 12 months.

``Ex-agricultural growth will continue to trend lower over the next 18 months because of the lagged effects of the tightening of policy conditions, both in the form of a stronger exchange rate and higher interest rates,'' said Robert Prior- Wandesforde, senior economist at HSBC in Singapore.

India's central bank, which has raised its benchmark interest rate nine times since October 2004, on Oct. 30 ordered lenders to set aside more reserves for a fourth time this year to prevent inflows of foreign cash from reigniting inflation and pushing up the rupee, already at a nine-year high.

Global investors, encouraged by India's unprecedented economic growth, have bought $17.3 billion of stocks and bonds so far this year, higher than the previous record of $9.46 billion in 2005.

To check the flood of capital, the Securities and Exchange Board of India, the stock market regulator, on Oct. 25 barred issuance of offshore instruments tied to derivatives. The rupee has gained 11.7 percent against the dollar this year.

``The Indian rupee will retain a strengthening bias over the medium-term owing to robust capital inflows,'' said Siddharth Mathur, an analyst at JPMorgan Chase in Singapore. JP Morgan expects India's economy to grow 8.6 percent in the year to March 31, and 7.5 percent in the following 12-month period.