Wednesday, December 06, 2006

Sensex Breaks on Through 14k… but Will the Run Last?

Just months after a May-June 2006 market meltdown to 9,000, Bombay’s Sensex index just crossed the crucial psychological 14,000 barrier for the first time ever, thanks to overwhelming strength in earnings growth from companies in IT, banking, telecom, infrastructure, construction and capital goods. This comes just months after we called for a breakthrough of the 13,000 level on optimistic predictions for the Indian economy.

But, has India become the next China? Not quite yet. Still, the numbers are impressive. In fact, GDP grew at an 8.9% clip for the quarter ended June 30. If it can maintain 8% growth this year, “that would be the fourth straight year it has reached that benchmark, making it one of Asia’s fastest-growing economies after China,” according to BusinessWeek.com. India’s GDP grew at a 9.2% clip in July-September 2006.

Even better, according to Bloomberg.com, “Growth in India’s economy is benefiting from Prime Minister Manmohan Singh’s decision to increase spending on roads, ports and other infrastructure by a quarter to 992 billion rupees ($21 billion) in the year that started April 1 in a bid to attract overseas manufacturing companies and spur growth to 10 percent over a decade. That will help cut poverty in a nation where 35 percent of 1.1 billion people lives on less than $1 a day.”

But while the economic news remains positive, India could be in store for some tough times. India inflation “rose a sixth of a percentage point to nudge the central bank’s ceiling of 5.50 percent… fanning economists’ expectations of another rate hike,” according to Gulf Daily News. Worse still, “Equity and housing markets look overbought and the current account has moved sharply into deficit. Besides interest-rate hikes by the Reserve Bank of India, little is being done by the government to orchestrate a soft landing,” according to The Economist.

According MonstersAndCritics.com, Ajay Dua, secretary for the department of industrial promotion and policy, says India faces three scenarios over the next 20 years: “There’s the ‘Bolly World’ scenario, which envisions “initial economic success, but which was not sustained. At the other end of the scale was ‘Pehla Bharat’ or India First with leapfrogging infrastructure, poverty alleviation, higher incomes and increased share in world trade. In between these was the ‘Atakta Bharat’ horror, which as the name implies, saw the country literally getting stuck as governance collapsed, the economy stumbled and social inequalities widened.

And, according to DailyIndia.com, “Starting by saying he [Ajay] was ‘not in fear’ of the first, Ajay Dua, secretary (industrial policy) in the commerce ministry, went on to admit that ‘a whole lot of action is required’ to transit to the other. He also conceded to major shortcomings in the six key areas the Pehla Bharat model was predicated on. Be it poverty alleviation, agricultural and rural development, healthcare, access to education, leapfrogging infrastructure or adequate governance, Dua admitted, ‘we are not moving fast enough.’”

While the economy, according to Dua, has doubled during the last 15 years, consumer demand grew threefold, the manufacturing sector grew by 12% and the foreign trade jumped by 8%. Agriculture (an industry upon which 60% of India’s population relies) only grew 3%. IT growth has not trickled down to the farming sector. Twenty-six percent of Indians live below poverty levels. And terrorist attacks are impacting economic growth.

Worse, while the Indian economy continues at its blistering pace, India is facing a shortage of skilled workers in all fields, “and this could hamper its economic development,” according to Minister Manmohan Singh, as quoted in the International Herald Tribune. His comments, according to the source, “run contrary to the general picture of India portrayed by the government, which prefers to promote the image of an Indian economic renaissance based on the availability of low-wage skilled workers.”

The bullish rallies in India have been quite impressive. But how much longer will they last?

Ian L. Cooper,
Founder, Early Alert Trader and Death Cross

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