Thursday, July 03, 2008

Bad news ahead for India?

The Economist says:
Sharmila Wheelan, an economist at CLSA, a brokerage firm, forecasts that India’s current-account deficit will rise to almost 4% of GDP in the current fiscal year, and to 5.5% next year. Not only is the trade deficit soaring, largely as a result of higher oil prices; the overseas earnings of Indian IT services companies (two-fifths of which come from the financial sector) are likely to shrink this year.

The nature of the capital inflows financing a deficit also matters. Foreign direct investment (FDI) is less volatile than speculative capital inflows. If we assume that net FDI continues at last year’s pace, then it would more than finance the expected current-account deficits in Brazil and Mexico this year. In contrast, net FDI might finance less than one-third of India’s deficit and only one-sixth of South Africa’s, implying that their currencies are more at risk. The rupee has fallen by almost 10% against the dollar since late last year. Ms Wheelan forecasts that it will drop by another 9% by March 2009.

While in Foreign Policy, Yasheng Huang writes that India is the "Next Asian Miracle."

The only way both can be correct? The Economist is looking short-term, while Huang is looking at a much longer time horizon.

I think that Huang is overselling India. In fact, a perfect storm is brewing in India: elections are due in a few months; the ruling coalition is facing problems over the treaty with the US; inflation has kicked up to double-digits; and Pakistan seems to be getting more unstable. If India were a stock, I would sell now when it is high.

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