Source: The Economist

Five years (2003-08) of near-9% growth suddenly seems a distant memory. The CSO estimated GDP growth in October-December 2008 at just 5.3%.

Indeed, the IMF estimates that India will average just 5.1% growth in the calendar year 2009. There is much gloom and doom in the stock market, which has now fallen below its October-November lows. The government claims bravely that its stimulus packages are finally having an impact, but this is not reflected in the mood of corporates or households.

Maybe growth in 2009 will be 6%, a tad higher than the IMF estimate. But it may not get much faster till the world economy recovers, and that may not happen till 2010 or even 2011. If so, India will grow at just 6% annually for the next two years.

Some experts ask, what’s wrong with 6% growth? Why are we whining and groaning? After all, 6% growth will represent the fastest growth rate in the world after China’s. If India can grow at 6% when the US has just plunged downward by 6%, why not enjoy the spectacle? One consulting firm says that it scents trouble in only one of six verticals of its business. Why then is so much gloom and doom?

I personally believe that gloom is fully justified in the short run, but not a sense of doom. When a country moves up from 4% growth to 6%, this generates optimism and excited enthusiasm. But if growth falls from 9% to 6%, that is terribly painful. What matters is not just the rate of growth but its direction too.

The mood of corporates, governments and households depends a lot on expectations. Keynes emphasised the critical role played by the animal spirits of entrepreneurs, who take risks, innovate and so accelerate growth. When the economy swings up, animal spirits bubble fiercely. But in a downswing, animal spirits droop. Risk taking is replaced by risk aversion, adventure by caution, and innovation by safety-first tactics.

During the upswing of 2003-08, entrepreneurs were able to raise ever larger sums of equity at ever higher prices. They were also able to get ever larger loans at diminishing rates of interest, especially foreign currency loans. This explosive growth of cheap financing drove India’s 9% boom.

Some economists argue that India’s own savings rate has shot up to 37%, and this is the main driver of growth. Not so. The sudden rise in India’s savings rate is cyclical in substantial measure, and will now swing down as corporate and government savings collapse. The earlier cyclical upswing was itself predicated on corporate access to cheap, plentiful capital.

Today that access has become difficult and expensive. Leveraged takeovers, Tata Steel’s purchase of Corus, Tata Motors’ acquisition of Jaguar Land Rover, Hindalco’s purchase of Novellis, were once hailed as immense national triumphs. Today they look over-leveraged and overpriced disasters. Corporates with dollar loans now have to mark these to market, suffering huge losses.

The plight of small and medium enterprises is grim. They face huge delays in payments from customers, while their own credit lines have closed. Even if GDP grows by 6%, industry may grow at less than 3% per year. So, 6% growth should legitimately translate into corporate and investor gloom.

Central and state governments are equally hit by the decline in growth. Revenue from corporate and income tax has been growing at a breakneck annual rate of 30-40% for some years, financing a spending spree. This high spending pattern has now been buttressed by additional spending and tax cuts in three stimulus packages. Consequently, the government’s fiscal position, which had been improving dramatically in the era of 9% growth, is now in a shambles.

The earlier revenue boom facilitated enormous increases in outlays on Bharat Nirman, Sarva Shiskha Abhiyan, and the National Rural Employment Guarantee Scheme. But now that GDP growth has suddenly slowed to 5-6%, the government finds its coffers emptying fast, and so its borrowing requirement has tripled over budget estimates to Rs 330,000 crore.

This threatens to soak up all bank funds, curbing corporate access to badly-needed capital and thus worsening the slump. So, the second-highest growth rate in the world, 6%, is consistent with huge fiscal strain and the crowding out of corporate borrowing. Good grounds for gloom, surely. It could be worse, of course, ask Pakistan, but it is bad enough.

Finally, consider the plight of households. They have been hit terribly by a negative wealth effect. When the economy was booming, owners of shares and real estate found their assets doubling and quadrupling, and happily spent part of this wealth increase on booming consumption. But now asset values have crashed, leaving consumers feeling suddenly impoverished. The associated pain is crimping spending.

In rural India, households are still doing well, thanks to good harvests and high minimum support prices, expanded employment guarantee programmes, and rising minimum wages in many states. This is the one silver lining in the economy. Yet credit to households has undoubtedly been squeezed hard.

Housing and auto loans have fallen off sharply, and all the RBI’s attempts to lower consumer lending rates have had very limited impact so far. Consumer defaults (in personal loans, credit card debt, auto and housing loans) are galloping upwards. And the farm loan waiver may well induce galloping default in new farm loans too. So, despite the silver lining of rural consumption, this lights up only the fringes of a dark cloud.

Let’s return to the question posed in the title of this article: what’s wrong with 6% growth? The answer is that a veritable cavalcade of things is wrong with it. Even if it is the second highest rate in the world, adjusting downward from 9% to 6% is hugely painful.

In the longer run, an economy that keeps growing at 6% in the trough of a business cycle will look very strong. So there is no cause for a sense of doom, the long run looks bright. But there is every reason for 6% growth to cause gloom in 2009.

Source: The Economist

India’s cities need at least 25m more homes, according to report from McKinsey, a consultancy, and the Federation of Indian Chambers of Commerce. In Mumbai, the commercial capital, more than 8m people now live in shantytowns, often paying substantial rent for the privilege. But buying a home of their own is way out of reach for most of them: a 70-square-metre flat in the centre of the city costs $500,000 or so.

Matheran Realty is one of several firms that think they have a solution: ultra-low-cost housing. In Karjat, 90km east of Mumbai, Matheran Realty is in the process of building 15,000 flats with prices starting at just 210,000 rupees ($4,500) for 19-square-metre units. Tata, the firm that makes the $2,500 “Nano” car, is building 1,300 basic units at Boisar, about 100km north of the city, and may add more. Priced at 390,000-670,000 rupees each, they are already oversubscribed. Other firms are planning similar developments elsewhere in India.

The cost is being kept low chiefly because the flats are being built outside big cities, where land is much cheaper. Owners are expected to commute. The units are also very small and spartan. The simplest consist of a single room with a sink in the corner and a toilet behind a partition. They are in buildings of no more than three storeys, so there is no need for expensive structural works. Instead of bricks, lightweight moulded concrete blocks are used for the walls. The concrete is often made with foam, fly-ash or other waste materials to make it lighter as well as cheaper. There are no lifts and just one staircase per block. All this means that the homes can be built very quickly and with unskilled labour.

The developers say the potential for very cheap housing in India is huge. Many of those living in slums today are employed as drivers, factory workers or tailors, with incomes of around 90,000 rupees a year—easily enough to afford a flat which costs 200,000-400,000 rupees. According to Ashish Karamchandani of Monitor Group, another consulting firm, India has 23m urban families with incomes of 60,000-130,000 rupees a year. Including rural areas, Tata Housing sees an even larger market of 180m households earning between 90,000 and 200,000 rupees.

Until very recently one of the biggest hurdles was finance. Banks were unwilling to lend money to people without credit histories or proof of permanent residence. But two government-owned banks—the National Housing Bank and the National Bank for Agriculture and Rural Development—have agreed to provide funds to finance companies so that they can offer mortgages to such buyers. To reduce risk, buyers must put down at least a quarter of the purchase price and employers must confirm their income. Borrowers are then charged little more interest than those with an established credit history.

Lenders and developers are convinced that they have struck gold. Who would have guessed that the combination of subprime loans and a building boom would have become attractive again so soon?

India:

India’s diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India’s output with less than one third of its labor force. Slightly more than half of the work force is in agriculture, leading the United Progressive Alliance (UPA) government to articulate a rural economic development program that includes creating basic infrastructure to improve the lives of the rural poor and boost economic performance. The government has reduced controls on foreign trade and investment. Higher limits on foreign direct investment were permitted in a few key sectors, such as telecommunications. However, tariff spikes in sensitive categories, including agriculture, and incremental progress on economic reforms still hinder foreign access to India’s vast and growing market.

Privatization of government-owned industries remains stalled and continues to generate political debate; populist pressure from within the UPA government had restrained needed initiatives. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India achieved 8.5% GDP growth in 2006, 9.0% in 2007, and 7.3% in 2008, significantly expanding manufactures through late 2008. India also is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Strong growth combined with easy consumer credit, a real estate boom, and fast-rising commodity prices fueled inflation concerns from mid-2006 to August 2008. Rising tax revenues from better tax administration and economic expansion helped New Delhi make progress in reducing its fiscal deficit for three straight years before skyrocketing global commodity prices more than doubled the cost of government energy and fertilizer subsidies. The ballooning subsidies, amidst slowing growth, brought the return of a large fiscal deficit in 2008. In the long run, the huge and growing population is the fundamental social, economic, and environmental problem.

Labor Market Overview:

In raw numbers, India’s employable workers are highly abundant. Out of the population of 1.1 billion people, about 400 million do not work in agriculture. This large population is matched by a large educational network of over 10,000 colleges. India has over 25 million college graduates, and 7.5 million of those are in science and engineering. It turns out 2.5 million new graduates each year. However, this does not mean that skilled labor is readily available. A 2007 McKinsey survey found only 25% of India-trained engineers and 15% of finance and accounting degree holders are considered qualified to work for multinational companies.

Experienced managerial and technical personnel are in high demand as a result. Salaries are rising sharply every year, and job-hopping and poaching are common. Salaries are still significantly less than in the US overall, though in some industries, such as IT, salaries for top positions can be in the range of US salaries.

Compensation Levels

Salaries in India vary widely by education, experience, language ability, and industry. As shown in the charts below, an entry-level IT hire may earn as little as US$2,000 annually, while an engineer freshly graduated from a reputable university will easily make US$14,000. In the most job-hungry sectors, salaries for particularly experienced staff have actually risen to equal or, in some cases, surpass American levels. IT managers with 15 years’ experience, for example, command about US$220,000. In general, though, pay for functional heads is generally about a quarter of American levels.

Pay levels continued to rise quickly in 2007. According to the Financial Express, in the period of April-September 2007, India’s top 500 enterprises paid an average of 22% more in compensation to all their employees than a year before. Another survey, by Hewitt Associates, found that executive salaries rose by 15% in 2007.