More on Infrastructure in India...

Next decade will be of infra: Nath
Union Road Transport & Highways Minister Kamal Nath has kick-started his campaign in Singapore to woo foreign players to invest in the road sector in India.

Addressing the investors at ‘Building India: India Infrastructure Summit’ today, Nath said India’s next decade would be of infrastructure. He said infrastructure would be the defining sector for India in the coming decade as was information technology in the 1990s and the present decade.
Source: Business Standard
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Exactly what should be happening. Glad to see the commitment of the govt towards encouraging PPP in Infrasture. This is going to be the most important phase which will decide the course of the economy in the next couple of decades.

IIP still not going the right way

Story in Business Standard-
Chief Economic Adviser Arvind Virmani today said India's growth projections by international financial institutions are too low and asserted that industrial growth of 2.7 per cent in May is in line with the estimate of seven per cent this fiscal.
Industrial growth figure of 2.7 per cent in May is in line with seven per cent growth (plus-minus 0.75 per cent) for the current fiscal, projected by the Economic Survey with some riders, Virmani, the principal author of the pre-Budget document, said.
"Overall IIP growth is very much consistent and supportive of our projections...international financial institutions like World Bank and IMF are still way too low," Virmani said.
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Here is the picture of growth rate of IIP in the last 6 months-







Source: Indicus Analytics

Thanks to indicus for collecting all the data.

Clearly, the consumer demand has been driving the growth. The 2.7% growth in May is better than 1.4% in April.
But the real question is whether this is good enough.
I don't think so. An annual average of 7% might sound fine in this econopmic environment. But I don't think that we will be able to reach a two digit growth even in a boom period. This is a concern. The primary reason behind this gap is that India does not have the right infrastructure for efficient manufacturing. This is a fact that everyone realises.

The boost will come only when the govt creates the right infrastructure. Hence, I feel the massive spending that the govt has announced in the budget is a step in the right direction. These are policies aimed at achieving long term objectives. Thumbs
up to the UPA

Debt crisis in USA

Yes, there is talk about how the large debt is having an impact on policymaking in America.The U.S. debt currently stands at US$ 11.5 trillion. No joke

Why is this bad?
1. Future spending programs would be curtailed-The U.S. govt will be very handicapped in passing future spending programs through the senate. The amount of spending (over US$1 trillion) announced in the last 10 months or so have not showed results (mainly because very small percentage of it has been actually been spent till now). Obviously, it takes time for money to enter the system through this channel. However, the impatience of people could mean more pressure on govt to spend. But, the problem will be to convince the senators to support more packages. Several of them are already crying foul.

2. No more bail-outs- If the economy dips again, the govt may not be in a position to bail out anyone. This is good for free market economists but not necessarily for the politicians.

3. Credit rating of USA will become low
4. The pressure on interest rates will not ease quickly

Add to that the fear of a falling U.S. dollar. Everyone is aware of the potential of China and Japan to trigger about a dollar crisis by mass selling of treasury bonds.

This is a real crisis. Govt needs to do much more to tackle it. However, I still support most of the spending programs that had been initiated to tackle the on-going crisis.

The mystery behind the high savings rate

Here is an interesting article on New York times on high savings rate in China.
Why Do Chinese Save? Boys Want to Marry
The high Chinese savings rate has been one of the wonders of the world. The household savings rate, as a proportion of disposable income, is 30 percent, and has been rising rapidly in recent years. That figure is twice as high as the highest rate ever recorded in the United States....
Source: The New York Times

The article writes about a working paper written by two economists-Shang-Jin Wei of Columbia University and Xiaobo Zhang of the International Food Policy Research Institute. This working paper concludes that the primary reason for the high savings rate is the gender imbalance, where families of males save more parents want their sons to marry, and they figure that girls are more likely to want to marry rich boys.
India too has a savings rate of 28%. I don't see the evidence of above in India.
I understand cultural differences do explain differences in behaviour of individuals to an extent. However, I don't think we can term cultural differences as the primary driver for such an economic behaviour.

Savings rate, according to me, can be primarily explained by the following:
1. Uncertainty-
Income (through a job or through unemployment benefits)
Inflation

2. Less support from government-
No social cover
Health insurance
Pensions

Given that China and India are expected to grow at 8-11% in the next few years, it will be interesting to see whether the savings rate remains that high. I expect it to lower to around 20-25%.

FDI inflow in India

India receives US$ 2.34 billion FDI in April 2009
The foreign direct investment (FDI) inflows in April 2009 stood at US$ 2.34 billion, compared with US$ 1.96 billion in March 2009, registering a growth of 19.3 per cent. This signals confidence in India’s economy by foreign investors amid the global financial crisis.
In the last fiscal, India attracted a total of US$ 27.30 billion FDI—due to robust trends in the first six months of 2008-09—as against US$ 24.5 billion in 2007-08. Further, cumulative FDI from April 2000 to March 2009 stands close to about US$ 90 billion.
Experts believe that the foreign investment inflow is expected to improve further with the revival of the domestic stock markets.

Source:IBEF

This is great news. Not many people are taking not of this progress. This robust inflow of FDI is reflective of the confidence that foreigners have in India

8% growth rate for India in 2010- WB

The World Bank has projected an 8% growth for India in 2010, which will make it the fastest-growing economy for the first time,overtaking China’s expected 7.7% growth.
The multilateral lender has revised upwards the growth rate for the Indian economy this year to 5.1% from an earlier projection of 4%, according to its Global Development Finance Report released on Monday. India has consistently outperformed growth forecasts by the World Bank in the past.
Source: Economic Times

Couple of interesting points-
1. Clearly, predictions of WB are really off. I had in my earlierpost mentioned how it was being pessimistic in its prediction
2. WB has revised its prediction from 4% to 5.1% in just a couple of months. Now the questions is that what has changed in the last couple of months for India?
FDI has been flowing in regularly. However, I am still not sure how/why have they changed the prediction in a couple of months
3. The prediction looks very pessimistic for 2009 and overly optimistic for 2010

50th Post!!!