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India Equity Research Reports, IPO and Stock News
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GameChanger
The X Factor: Made In India. We make a case for a dramatic increase in exports
notwithstanding the country’s robust capital inflows that are being used to finance the
current account deficit (CAD). Voracious consumption demand is being met, in many
cases, by imports rather than by domestic capacity development and expansion. India’s
export industry has been constrained by historical, policy and infrastructural problems:
remittances and IT services offer some succor. It is critical for India to develop its
manufacturing base for both consumption and export – this would shore up its CAD as
well as provide employment for its growing demographic ‘dividend’.
Balance of Payments: Capital account to the rescue
India’s reserve accretion has been driven by surpluses on the capital account. Capital account flows
have comprised mainly net foreign institutional investment (FII) (US$91 bn since FY2001), rivaling
net foreign direct investment (FDI) (US$81 bn since FY2001). FDI flows remain constrained in
capital hungry sectors like insurance and retail even as outbound flows increase dramatically. On
the current account, India’s geography of trade has changed meaningfully over the past decade.
Exports: Traditional sectors decline; IT/ remittances rise
Exports of goods at US$174 bn in FY2010 are up from US$44 bn in FY2001 (CAGR: 16%), driven
by engineering goods exports which rose by 21% CAGR to US$38 bn in FY2010. India’s
traditional exports — leather (US$3.3 bn in FY2010), textiles (US$8.9 bn) and readymade
garments (US$10 bn) — have seen anemic growth at 5-7% CAGR, limited by a lack of scale and a
constraining small-scale industry policy. Agricultural export growth has been slow at 12% CAGR.
IT sector and inward remittances provide comfort.
Imports: Splurging on stuff we can dig out of the backyard
Imports stood at US$268 bn in FY2010, up from US$48 bn in FY2001 (CAGR: 21%), which meant
that a US$4 bn trade deficit in FY2001 has expanded to around US$100 bn in FY2010. With a
third of imports driven by energy needs and a tenth by gold, India’s import bill is hostage to
commodity price movements. In FY2010, India spent US$40 bn on capital goods, US$21 bn on
white goods and US$8 bn on coal and steel – all avenues where India can indigenize if it has the
will to get around to some hard decisions.
Constraints: Land acquisition, labor laws, unstable policy regimes
Given the abysmal yield from land in agriculture, the opportunity to convert land to industrial use
creates significant value. However, land acquisition is hugely contentious in India. India is only now
recovering from debilitating effects of reservations for small scale industries — in its wake other
countries built scale in low-cost manufacturing. Indian manufacturing companies have moved to
more capital-intensive production driven by harsh labor laws. The deteriorating business
environment is not helping.
GameChangers: Progressive export policies, political will, indigenization
We see key gamechangers for a lower CAD as (1) restoration of government-business confidence
and a conducive business climate, (2) sustainable manufacturing-led Special Export Zones (driven
by better infrastructure and competitive advantages, rather than simply cheap land and tax
benefits), (3) indigenizing via technology transfers or local production requirements/incentives and
(4) increased and easier FDI inflows into capital hungry sectors can help create a stronger BOP
framework.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GameChanger
The X Factor: Made In India. We make a case for a dramatic increase in exports
notwithstanding the country’s robust capital inflows that are being used to finance the
current account deficit (CAD). Voracious consumption demand is being met, in many
cases, by imports rather than by domestic capacity development and expansion. India’s
export industry has been constrained by historical, policy and infrastructural problems:
remittances and IT services offer some succor. It is critical for India to develop its
manufacturing base for both consumption and export – this would shore up its CAD as
well as provide employment for its growing demographic ‘dividend’.
Balance of Payments: Capital account to the rescue
India’s reserve accretion has been driven by surpluses on the capital account. Capital account flows
have comprised mainly net foreign institutional investment (FII) (US$91 bn since FY2001), rivaling
net foreign direct investment (FDI) (US$81 bn since FY2001). FDI flows remain constrained in
capital hungry sectors like insurance and retail even as outbound flows increase dramatically. On
the current account, India’s geography of trade has changed meaningfully over the past decade.
Exports: Traditional sectors decline; IT/ remittances rise
Exports of goods at US$174 bn in FY2010 are up from US$44 bn in FY2001 (CAGR: 16%), driven
by engineering goods exports which rose by 21% CAGR to US$38 bn in FY2010. India’s
traditional exports — leather (US$3.3 bn in FY2010), textiles (US$8.9 bn) and readymade
garments (US$10 bn) — have seen anemic growth at 5-7% CAGR, limited by a lack of scale and a
constraining small-scale industry policy. Agricultural export growth has been slow at 12% CAGR.
IT sector and inward remittances provide comfort.
Imports: Splurging on stuff we can dig out of the backyard
Imports stood at US$268 bn in FY2010, up from US$48 bn in FY2001 (CAGR: 21%), which meant
that a US$4 bn trade deficit in FY2001 has expanded to around US$100 bn in FY2010. With a
third of imports driven by energy needs and a tenth by gold, India’s import bill is hostage to
commodity price movements. In FY2010, India spent US$40 bn on capital goods, US$21 bn on
white goods and US$8 bn on coal and steel – all avenues where India can indigenize if it has the
will to get around to some hard decisions.
Constraints: Land acquisition, labor laws, unstable policy regimes
Given the abysmal yield from land in agriculture, the opportunity to convert land to industrial use
creates significant value. However, land acquisition is hugely contentious in India. India is only now
recovering from debilitating effects of reservations for small scale industries — in its wake other
countries built scale in low-cost manufacturing. Indian manufacturing companies have moved to
more capital-intensive production driven by harsh labor laws. The deteriorating business
environment is not helping.
GameChangers: Progressive export policies, political will, indigenization
We see key gamechangers for a lower CAD as (1) restoration of government-business confidence
and a conducive business climate, (2) sustainable manufacturing-led Special Export Zones (driven
by better infrastructure and competitive advantages, rather than simply cheap land and tax
benefits), (3) indigenizing via technology transfers or local production requirements/incentives and
(4) increased and easier FDI inflows into capital hungry sectors can help create a stronger BOP
framework.
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