India, says the Financial Times, is living beyond its means. Imports are growing faster than exports. It carries a current account deficit of 4%. And the country is drowning in short-term foreign money that can be withdrawn at the first sign of a major hiccup.
So, has India lost its allure to stock investors? India’s companies are relatively expensive these days compared to other emerging-market countries. But their projected earnings should grow at above 20% rates and the economy is expanding at an 8%-plus clip.
Along with growth India sports a shaky balance sheet, a profile not unlike small-cap tech companies. And we all know those companies are high reward-high risk investments. That sounds about right for India. From the Financial Times…
There’s not a lot wrong with India’s rate of growth. The period between July and September was the third in a row in which Asia’s third-largest economy grew by more than 8 per cent, powered by private and public consumption. But there is a problem with the way that growth is being financed: by non-Indians, via financial markets.
If the past couple of years have taught policymakers anything, it is that depending on the kindness of strangers is a dangerous way to go. Yet India has never lived further beyond its means. Its current account deficit was a record 4 per cent of gross domestic product at the end of June, double the level of the Asian crisis, and will probably widen further: Tuesday’s databalance of payments crisis: a shock to confidence, a sell-off in the currency, a liquidity crunch and a sharp decline in output. showed more vigorous imports than exports. Worse, that shortfall is being increasingly financed by short-term capital, rather than more stable foreign direct investment. Nearly four-fifths of this year’s capital inflows – including an unprecedented $10bn inflow into rupee debt, and about $28bn into stocks – are non-FDI related, notes Goldman Sachs.
India isn’t for conservative investors. But for those willing to pay attention to any red flags popping up in India, Indian stocks can certainly pay off.
