What India Power Cuts Indicate

IMFChinaIndiaAug82012.jpgBy John Richardson

India, along with China, seems unlikely to deliver the contribution to global economic growth expected by the International Monetary Fund as late as April of this year (see above chart).

In the case of India, last week’s power cuts that affected more than 600 million people, point to deep structural problems that could well affect the health of the economy for many years to come.

Energy networks need hundreds of billions of dollars in new investment to sustain India’s economic rise, says the Financial Times in this article.

“But the banks are hardly in a position to provide the funding. They are already overexposed to energy companies in frail health, raising the spectre of loan defaults,” warns the newspaper.

It describes a “toxic combination of inadequate fuel supplies, debt-laden power generators and bankrupt state electricity boards”.

Anil Ambani, chairman of Reliance Power has even gone as far as to warn that power sector-associated debt problems mean that India faces “our version of the US subprime crisis”.

As India and China continued to boom post Lehman Bros, few people, especially in the financial sector, were interested in asking the hard questions about whether their growth was sustainable.

This was a great story that made investors lots of money, provided they got their entry and exit timings right.

Similarly in chemicals and polymer markets, producers and traders made great money from the strong contribution to global consumption growth post-2008 that was provided by India and China, while privately admitting that it might not last.

Where do we go from here?

India isn’t, obviously, going to collapse. It is just that expectations need to be tempered.

Context is also important here and the essential context is that, despite India’s tremendous recent growth, it remains a long way behind China.

“In the case of PVC, for instance, per capita consumption is just 1.5 kilograms compared with China’s 10 kilograms,” says a source with an Indian PVC producer.

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