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.