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Holy Lollapalooza!
An Indian Growth Story
By Umesh Luthria

The word Lollapalooza belongs to North American slang and means "something outstanding or unusual" and it's exactly how one would like to name the India Growth Story.
Move over 8 percent growth, the economy has now shifted gears to move up to 9 percent and the Chinese growth rate of 10 percent is just waiting to be scratched if all goes well fingers crossed. But, that is what the lollapalooza effect is all about just about everything is going right agriculture, services, manufacturing are all doing well. The political climate and the rupee are stable. Incomes, investments (foreign and domestic) and the stock markets are rising. One can see development everywhere. Real estate is on fire and there is so much pent up housing and commercial demand that will keep construction as a front runner for the next five years. In terms of technology, India has become the global offshoring sweat shop like China has become in the manufacturing area. There is so much money floating in the market that it is being taken for granted. Honestly, at this stage, it would be very silly to express any doubts specially looking at facts like the country has excellent young demographics with the majority of its populace between the age group of 25 45 with an ever increasing disposable income. This group is not averse to consuming or taking on debt (something associated with the success of the US economy) and as a result the world economy is out to welcome the “New Indian” as a power house in the making.
Then, I heard Dr. Phillippa Malmgren, the Chief Executive Officer of the Canonbury Group (UK) at a conference organized by the International Quality & Productivity Centre (Singapore) on “Investment Opportunities in Indian Real Estate & Infrastructure” in Mumbai on the 4th and 5th of December 2006. The Canonbury Group advises the investment and business community about the impact of global politics and policy on markets and large corporations, heads of governments, and major investors take what Dr. Malmgren has to say very seriously. She has three major concerns that may impact the economy and it's not India's infrastructure (the lack of it); corruption (our dubious high rank) or terrorism (with which India has coped very well). The serious threats being:
1. Global interest rate fluctuations.
2. The IndoUS nuclear deal.
3. Energy security.

Indian vulnerability to:

A) Foreign capital.
It is true that fund managers in developed countries are so flush with funds that they are being forced to slide down the risk ladder and deploy the capital in emerging markets including India. The lure of very high returns compared to the meager returns in their home countries compensates the risk taken. But in the last one year or so the U.S. Federal Reserve; most European Central Banks and the Bank of Japan have all raised interest rates. With developed markets offering better returns and emerging market margins getting squeezed on the rising and sometimes “insane” valuations and vanishing off shoring benefits, it will be sooner rather than later the flow of money may start showing signs of receding as high risk and not so high returns do not really make good investing for fund managers, nor for their investors. A pull back of foreign money also means weakening of the currencies of these emerging nations which in turn lowers earnings of foreign money and causes more rush to repatriate capital.
While the prophets of good tiding argue that raising interest rates is not a sustainable formula at least for the US economy as it will hurt many sectors including housing a major contributor; the US economists are not so worried. They feel that having learnt lessons in the past, the US economy is not so dependant on the housing market anymore. And, in any event, the housing market is now at a level where it is quite mature and there is a lot of money being made in the housing refinance market. The US Fed is also quite happy that most Central Banks around the world are now getting away from their dollar dependence to other stronger currencies giving the US a more localized dollar impact than a global one.
India's growth story has been fueled with a lot of domestic and foreign speculative money and the danger is that once the money sitting on the fence that is fueling this speculation cycle disappears the market will have a lot of tears to shed. An interesting point that caught everyone's attention is that the regulators in a lot of economies concerned about speculation fueled growth (including India) have started scrutinizing markets from a policy and transaction point of view. Use and misuse of tax treaties, corporate reporting, market listings; investment anomalies are all being looked at very carefully and such practices too will ensure that short term profit takers look elsewhere.

B) Geo political developments.
There is a lot at stake for a whole lot of countries in terms of the IndoUS nuclear deal. Once accorded, India will have access to every hi-tech development including military from the US as the deal comes with a status of most favourable partner for India. This is most discomforting for the Russians and the Chinese. China has tried every trick in the book including virtually setting off the US-China trade deficit in order to get the status. But they have been denied the same. On the other hand, the Russians India's traditional allies are not too happy about the cozy commingling of the US and Indian defense arms in terms of joint exercises. India on the other hand too has expressed displeasure at the Russians getting close to Pakistan and even closer to China vide the Shanghai Cooperation Organization Treaty of 2001. There are obvious fears that the US technical and financial might coupled with India's tech savvy and industrious population might is a very formidable cocktail specially when viewed in the context that despite the prior coldness between the US and Indian governments at heart the Indians as a population were more attracted to the US than any other nation. From India's point of view, it does not understand why the US is willing to open its heart at one level to India and offer it the most favoured nation status; yet oppose the largest democracy in the world from claiming a permanent seat on the United Nations' Security Council while it's second most fear China, is willing to support its claim for the same.
Clearly, new equations between traditional foes are being formed globally and not all of these equations are necessarily for the better nor ironically very clear.

C) Energy Security
Among the major worries for India is the realization that its growth is energy reliant. Nearly 70 percent of its energy required is met through imports. While Nuclear energy is the panacea for cheaper, cleaner energy it will be at least a couple of decades before nuclear energy will appear as any significant portion in India's energy pie. Until then, India will be reliant on oil and gas a resource largely in the hands of the Middle East Sheikdoms and Islamic countries where the people are becoming increasingly weary of the US and its policies. India's other major trading partner, defense ally, and a major oil and gas producer Russia is keen on supplying energy to India but is putting its own conditions on how close India should get with the US.
At one level, India will have to walk the diplomatic tightrope very carefully to contain the geo political and energy security risks and at another make sure that despite criticism the policy makers and regulators make sure that the various markets do not go off the handle. Any one of these could trigger an economic catastrophe. Difficult choices no doubt, but ones that will require to be taken for the lollapalooza effect to continue else like the revered “Holy Cow” even the revered economy will get slaughtered.