The Stalwart submits: We've joked about Morgan Stanley's Stephen Roach before, and how he delights in reminding folks about bubbles as if he were the first "Today real estate speculation resembles a time in the Netherlands when people were buying up tulips of all things...". But, of course, we've always basically agreed with his general viewpoint, that the U.S.' twin deficits render the state of the economy and the dollar unsustainable, and that a reckoning will occur at some point in the future.
Yesterday, Mr. Roach talked about one of our favorite subjects the Indian economy and made some interesting observations about the importance of the Indian consumer:
India is on the cusp of something big. After my third trip there in 18 months, I am as enthusiastic about India as I was about China in the late 1990s. While comparisons with China are inevitable, the case for India is very different. What excites me the most is the potential for an increasingly powerful internal consumption dynamic -- an ingredient sorely missing in most other Asian development models, including China. India’s constraints -- infrastructure, saving, foreign direct investment, and politics -- are well known. Yet on this trip, I saw visible progress on most of those fronts. Moreover, the consumption story -- the organic sustenance of sustainable growth and development -- casts India in a very different light.
Don’t get me wrong -- the Indian consumer is hardly a powerful force on today’s global stage. As the accompanying chart shows, India’s per capita income and consumption levels are about half those of China’s. But it is growth at the margin that always drives powerful macro and market trends. And the Indian consumption story is, first and foremost, one of accelerating growth off a low base. The potential comes from the structure of the Indian economy: Private consumption currently accounts for 64% of Indian GDP -- higher than shares in Europe (58%), Japan (55%), and especially China (42%).
India’s transition to a 7% growth path in recent years is very much an outgrowth of the emerging consumerism of one of the world’s youngest populations. The increased vigor of private consumption provides a powerful leverage to the Indian growth dynamic that is rarely found in the externally-dependent developing world. This came through loud and clear on my recent travels through India.
Over a span of four days, I met with a number of corporate executives, investors, and senior government officials. Everywhere I went, the focus was on the Indian consumer. I met with the managements of a good cross-section of India’s major consumer companies -- Hindustan Lever (softgoods), Pantaloon (retail), Raymond Textiles (clothing), and McDonald’s (fast food). I also spoke with executives from banks and drug companies -- all of whom have important consumer businesses. And I met with leading industrial companies such as Reliance, where a major five-year initiative has just been announced for the development of nationwide chain of hyper-stores and super-markets. I even went to the Phoenix shopping mall in Mumbai, which was bustling with activity. I have made similar trips to malls in China. There was one key difference between these two experiences -- the locals were buying in India. This is consistent with what I heard from most of the consumer companies I saw -- solid acceleration in same-store sales comparisons over the past six months.
This is interesting. Because Inda has thriving domestic markets, they needn't take a mercantilist weak-rupee policy, like China for whom a stengthening of the Yuan might be perilous to their exporters. While some might worry that a strengthening rupee jeopardizes their call-centers, and other export operations, it's hard to imagine the currency strengthening past the point at which the underlying economy can no longer thrive.
The strong Rupee was the subject of an interesting editorial in the Hindu Business Line last April:
NDIA'S economic growth objectives will be better served by a strong rupee vis-à-vis the US dollar. The equitability, consistency and speed of growth will be favourably affected by the `strong rupee' policy. In the main, it is pro-poor, pro-employment and pro-growth. It is not surprising that the incumbent government has recognised the merits of the strong rupee.
The strong-rupee policy is inclusive and expansive. It will spread the benefits of growth across nearly 200 million households, and especially across the 74 million households at the bottom of the purchasing power pyramid. The consumption of basic goods will rise as a result of the strong-rupee policy. Basic goods constitute a significant part of the consumption basket of poor households and generate almost 94 per cent of the employment in poor households.
The estimated positive impact rises with the strengthening of the rupee. At Rs 43 to the US dollar, the nominal annual growth in purchasing power deployed on basic goods would be about 14 per cent. The aggregate annual growth in purchasing power would be about 20 per cent. At Rs 40 to the dollar, the growth in basic goods would be about 18 per cent. The aggregate growth would be about 22 per cent.
Read the whole thing, it's worthwhile. Of course, the rupee hasn't strengthened much since then, currently trading up to Rs 45 to the dollar. There are also reasons to think that the rupee is fundamentally weak, as outlined here.
Still, the compositional diversity of the Indian economy gives me optimism. Should robust U.S. demand evaporate, India should fare better than the other wholly export-driven economies. This should also be a lesson to the currency-suppressing mercantilist economies. The longer you suppress your currency, the longer you subsidize your exporters to the detriment of importers and the domestic economy. This may have beeen a good strategy over the last couple of years, as there's been an abundance of dollars flowing forth from U.S. coffers, but as the risks to the U.S. heighten, so to do the risks to an undiversified, U.S.-dependent economy.
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