India emerging as important economic force

Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.

April 1 (Bloomberg) — When David Burton, the International Monetary Fund’s top boss in Asia, was recently quizzed about the most important economic developments in his region, there was a winner tucked away among all the ho-hum questions.

“Is India the new China?” Laura Wallace, the interviewer for IMF Survey, an in-house publication, asked Burton.

Yesterday, it became a prescient question, as an Indian government report showed that the $547 billion economy grew 10.4 percent from a year earlier in three months to Dec. 31. Not only was it the fastest rate on record for India, it beat China’s growth in
any quarter over the past eight years.

Thus, India became the world’s fastest-growing major economy. Simultaneously, the Indian rupee rose to its highest in four years against the U.S. dollar, making a lot of imported goods that were outside the reach for a majority of the country’s 1 billion people
suddenly look cheaper.

What does it mean for the rest of the world?

Ask miners and farmers from Australia and Indonesia to Brazil and South Africa. Economic activity in China has pulled up global prices of commodities ranging from soybeans and aluminum to cement and steel. Now imagine India, which has the only other billion-
people economy in the world, beginning to enjoy the same kind of clout in the global economy as China. Demand for commodities will go through the roof.

A caveat is needed here, and IMF’s Burton supplies it.

“India is definitely emerging as a force in its own right,” Burton, director of the lender’s Asia-Pacific operations, told Wallace. “But India isn’t as open as China, which probably holds it back and keeps it from having as big an impact on the global economy.”

Openness to Trade

China bought $413 billion of overseas-made goods last year, compared with India’s imports of less than $70 billion. Even discounting for the fact that about half of what China buys from rest of Asia is then assembled and exported to the U.S., there is still
a wide gap between the two countries’ openness to trade.

“When I talk to managers of funds they say India is the land of brown paper bags — no contracts,” says Barry Hughes, chief economist at Credit Suisse Asset Management in Sydney. “If you think China is a growth story you can put your money into BHP Billiton,”
explains Hughes, referring to the world’s biggest mining company based in London. “You can’t do that with India.”

That may change more quickly than investors expect. In the past decade, India’s imports have risen more than 150 percent, revealing the tip of a potentially large source of demand, which has so far remained submerged under high import tariffs, a weak local
currency, and restrictive labor laws that hinder job growth and spending power.

On all the three fronts, there are signs of improvement.

Tariffs, Currency

The peak import tariff rate fell to 20 percent in the fiscal year that ended on March 31, from 150 percent in 1992. The Indian rupee climbed 1.18 percent to 43.56 against the U.S. dollar yesterday, after the ruling party said it favors a “steadily strengthening”
home currency. The rupee has risen almost 9 percent in the past 12 months.

India is also setting up 14 so-called special economic zones, modeled on the hugely successful export-oriented regions in coastal China, where companies will have greater freedom to hire and fire workers.

“India is a better structural story than China for the next couple of years,” says Eddie Wong, chief of strategy at ABN Amro Asia Ltd. “The Chinese economic cycle has clearly peaked. Meanwhile, the Indian economy is firmly on a rising trend.”

Accelerating economic growth, along with rising standards of living, have already started creating new opportunities for overseas companies.

Just last month, International Business Machines Corp. won a $750 million computer-services order from Bharti Tele-Ventures Ltd., India’s No. 2 cellular services provider. In February, Hewlett-Packard Co. bagged a $150 million order to link the computers of
Bank of India’s 750 branches. ABB Ltd., Europe’s largest electrical engineering company, won a $13 million order from Tata Steel Ltd., India’s No. 2 steelmaker. Boeing Co. and Airbus SAS are vying for a $2.1 billion 43-polane order from Indian Airlines Ltd.,
a state-owned domestic carrier.

Middle Class

India has some way to go before it can catch up with China, where 250 million people now belong to what can be called a “middle class,” with family assets of between $18,000 and $36,000, according to a Chinese Academy of Social Sciences study, reported by
the state-owned Xinhua news agency this week. Comparable numbers aren’t available for India, although businessmen like Mumbai-based Jamshyd Godrej estimate that only 5 percent of Indians, or 50 million people, have any spending power.

Steve Jobs, the chief executive at Apple Computer Inc., may have to wait a little before his company’s retail store in Bangalore — Apple’s first in India — makes money.

For financial investors, however, the time to make their bets is now.

“It’s certainly time for all international investors to take a look at India,” says Jacob van Duijn, chief strategist at Robeco Groep NV, a Dutch company that manages $134 billion worldwide. “It could be one of the big winners for the balance of the decade.”

Goodbye brown paper bags.

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