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November 14, 2008

"Indian Recovery to be Faster"

In his "Cautiously Optimistic" post, Arun Uday of HSBC PE points out why "India is far better positioned to be first off the blocks on the path to recovery".

If one considers the five major relevant economic blocks – US, EU, Japan, China and India, the former three are plagued by severe systemic issues (such as excessive leverage, low savings rate, inordinate consumption levels etc) that will take a long period of time to get resolved. Now, in comparison to China, India has some significant characteristics that will play in the latter’s favour. For starters, as is oft repeated, exports form a far smaller component of India’s GDP compared to China’s.

Apart from this, India also has a lower operating leverage in comparison to China. China’s model has always been to build huge capacities, which worked very well in boom times, enabling it to attain economies of scale and enjoy great cost savings. However, in times like this, excess capacity can become a millstone around your neck and result in higher fixed costs.

The fact that India is primarily a services led economy in contrast to China being a manufacturing economy also helps. The other areas where India scores over China are greater capital efficiency and also deeper management expertise in dealing with capital constrains of the kind we face today. (Merits to add here that the one area where China scores over India is its superior balance sheet (forex reserves and also budget surpluses), which afford it with the option of spending their way out of the crisis of the kind recently announced).

Also, one of the key constraints, which has affected economic activity in the recent past, which is the shortage of credit should also get resolved in due course given the absence of any systemic problems. In fact, credit from domestic institutions has actually registered a 30% increase last quarter and it is the lack of availability of global credit, which has been the cause of paucity of capital. With the global credits slowly limping back to normal and also given the interest evinced by the debt FIIs in recently announced SEBI registrations, the availability of credit should improve with time. Finally, and this is the most important point – the falling commodity (esp. oil) prices are bound to have an immensely positive impact on our economy.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in