BRICS Version 2

Mind the gap – India’s rich and poor

 

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Source of graph: http://www.business-standard.com/india/news/sonalde-desai-the-great-indian-poverty-game/469351/

 

By John Richardson

INDIA’S economy is expected to grow at its slowest pace for a decade as a result of political gridlock, tight monetary policy and the weak global economy, according to a Reuters’ poll of economists.

As we discussed in March, when the economy was beginning to show signs of serious stress, many of the small and medium-sized companies and the “one man bands” that make up a big proportion of India’s chemicals industry had not suddenly become overly negative. The reason was that they had not in the first instance been taken in by all the hype immediately following the Congress Party’s re-election in 2009.

But sober long-term expectations are often not the best way to make money in financial markets and thus, India, along with China Russia and Brazil, was part of the “BRICS Version 1″ story.

BRICS Version 1, which made some people a lot of money, failed to take into account:

*Unsustainable growth rates. India, as is the case with China, is struggling to deal with the economic distortions left over from its boom years, including the high inflation rate that has made the Reserve Bank of India very reluctant to cut interest rates.

*Failure to address underlying economic weaknesses. In India’s case they include poor infrastructure and the huge incomes gap between the rich minority and everyone else.

“I think we need to replace the ‘I’ in the BRICS acronym with Indonesia,” only half-joked a senior Indian petrochemicals industry executive recently.

In all seriousness, chemicals companies do need to work on “BRICS Version 2″ in order to prosper in India and elsewere.

India’s Version 2 probably nvolves accepting that political impediments to growth might never be resolved and that, therefore, recent GDP growth rates were the exception rather than the norm.

Version 2 also, without doubt, involves the realisation that behind the catchy headline, “India’s booming middle classes”, is a story of extreme price sensitivity among the vast majority of Indians who are likely to remain very poor by Western standards for many years.

Well-established players in the Indian market, who as we said didn’t get carried away by all the hype beyond, perhaps, skilfully playing financial markets, have been running their businesses on Version 2 for decades.

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