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India’s Budget: Going Beyond The 2% Who Own Shares

Business, China, Company Strategy, Economics, Environment, India
By John Richardson on 27-Feb-2015


By John Richardson

ANYBODY who invests in the Indian stock market might well regard today as a buying opportunity ahead of tomorrow’s announcement of India’s latest budget.

Or, of course, it might be an opportunity to go short if you think that India’s Prime Minister, Narendra Modi, will disappoint the business world through the content of his first full-year budget.

The $64,000 real question, though, should be whether the budget will have any real lasting value beyond enabling people to make a quick buck out of the rise or fall of the Mumbai Stock Exchange, given that only around 2% of India’s 1.28 million people actually own equities.

If you are part of this lucky 2% you will be paying close attention to whether:

  • Import duties on metals are reduced. Analysts say that India needs large amounts of iron ore and copper etc. so it can boost the scale of its manufacturing industries.
  • A tax break on small cars, trucks and buses is reintroduced. A temporary tax cut expired in December and vehicle prices have gone up as a result.
  • The consumer tax system is simplified. The government has said that it will roll out a single goods and services tax that would replace lots of different regional sales and value-added taxes. This could add 1-2 percentage points to India’s economic growth.
  • Import taxes are lowered on coal. This would allow power companies to import more coal and other fuels in order to help tackle India’s electricity shortages.

Analysts also hope that at least the right noises, if not the right policy announcements, are made during the budget over relaxing land acquisition and labour laws that are said to be holding back India’s industrialisation.

But the lucky 2% and everyone else in India need to also worry about the following:

  • More than half of India’s population lives in places with such polluted air that each person loses an average of 3.2 years in life expectancy, according to a recent study by researchers from the University of Chicago, Yale and Harvard. In total, 660 million Indians could lose 2.1 billion years as a result of air pollution at enormous cost to the country’s economy, the researchers found.
  • A World Health Organisation study last year found that 13 of the 20 most polluted cities in the world are in India, with New Delhi’s air the world’s worst.
  • Research has shown that India’s air pollution problems may cut agricultural production by a third.

China also has horrible environmental problems  – but at least there has been a payback for China: Many, many millions more increasingly better-paid jobs in manufacturing than is the case in India.

So should India really be talking about mass-industrialisation, measures to boost automobile and other retail spending and more coal imports when it already faces such severe problems with pollution?

The famous buzz word “sustainability” might be your response. But as China is discovering, it is very hard to create enough employment whilst also growing manufacturing and services industries in both sustainable and cost-effective ways.

The other crucial issue is whether there is much space globally for a big expansion of Indian manufacturing – and, indeed, a rapid expansion of manufacturing in any other country and region outside China.

I think that there is very little space because, as I discussed on Wednesday, what happened in China in 2001-2014 was very much a “one off’ story for demographic and other reasons.

Plus China has huge overcapacities in many manufacturing industries – and has both the ability and the need to export those surpluses to the rest of the world. In such a deflationary environment, it seems unwise to be even be talking about mass industrialisation anywhere else – at least for the next few years.

One of the ways by which India’s economy is often measured against China’s is through comparing consumption of chemicals and polymers. As people get richer the world over, through better economic prospects, per capita chemicals consumption increases.

The type of chart I have included above is thus often used to show how India has “fallen behind” China.

This particular chart shows that in 2014, China consumed 30 million tonnes of purified terephthalic acid (PTA) – a raw material used to make polyester clothing, pillowcases and drinking-water bottles etc. – compared with just 4.3 million tonnes in India. Why this is a worthwhile comparison is that, as we all know, India and China have very similar-sized populations.

You can also see from this chart what is likely to further increase “China envy” in India:  In 2000, China accounted for 20% of global PTA consumption but by 2014 this had risen to 54%. Meanwhile, India’s share of global PTA consumption crept up ever-so slightly from 6% to just 8%.

But attempting to follow in China’s footsteps in today’s world is bound to end in failure.

India instead needs to pursue its own, unique  growth model – and a good start would be for Modi to make this his No1 budget priority: Repeating his 2014 pledge that every Indian will have access to a toilet by 2019, whilst also making the funds immediately available so this can happen.

If 600 million Indians – half of its population – no longer had to defecate in fields, which is the case today, the boost to human health and so economic growth would be huge.