Is India really going to be the good news story for the next quarter century? So it would seem, if the recent Goldman Sachs report on the BRIC countries (Brazil, Russia, India and China) is to be believed.
The report has been perfectly timed, because three of those countries (the exception is Brazil) are headed for 7 per cent growth this year.
Also, optimism rides high when stock prices are soaring, and over the past year, it is India's stock market that has under-performed! Brazilian stock prices have risen 97 per cent in dollar terms, and Russia's by 75 per cent, compared to a measly 45 per cent in India.
The question is, is there more at work here than a happy combination of excess global liquidity and a good monsoon? Reports that have a half-century span, as the Goldman Sachs one does, need to get more than their timing right, they need to have a fundamental understanding of societies and economies.
For instance, Standard & Poor's is believed to have said that bad loans by China's banks total a staggering 50 per cent of gross domestic product.
Surely, then, the chickens must come home to roost -- as they did in booming Japan over a decade ago when its banking system turned belly up.
What, for instance, is the risk of China becoming another Indonesia, which was seen as the safest among the South East Asian economies in 1997, long after Thailand and Malaysia were reeling, until its currency became suddenly unhinged and threw its political system into turmoil?
As for India, the macroeconomic numbers remain stubbornly reluctant to support the new boosterism. Industrial growth is tepid, exports are slowing, and the GDP growth number will climb past the 6 per cent mark only after the harvest.
The World Bank, in its annual report on India (released three months ago), warned that growth over the coming five years would not cross 5 per cent! And it is sobering to know that the US invests less in India than in Ireland, and does more trade with small Central American countries than with India. Is this really the economy that is going to blitz the world?
I have two interim hypotheses. First, if the stock market boom is feeding the new optimism, the Goldman Sachs story will keep finding new takers.
Because many stocks continue to trade at moderate price-earnings ratios even as profits continue to soar; so the prospective P:E ratios are positively modest.
For the Sensex stocks as a whole, the P:E ratio is just 17.5. In other words, there is still headroom for this rally. But since I am no stock market expert, let's turn to the second, more important hypothesis.
This is that India is not about to become a tiger economy, which is one with a sustained GDP growth rate of more than 7 per cent (which India in fact managed in 1994-97).
There is, for instance, no reason to expect any acceleration in agricultural growth rates because nothing has changed: the investment famine of the past decade continues (stunting irrigation, for instance), there are no new technological breakthroughs and there is precious little reform.
That accounts for a quarter of GDP. For the second quarter of GDP, which is industry, there is change for the better as more companies achieve global competitiveness and as new sectors chip in; today it is automobile components, tomorrow it will be textiles, the day after it could be processed food.
In services too, which account for half of GDP, we are likely to see faster growth because of the telecom boom, new retail activity, accelerated growth of financial services, the sustained housing surge, the enormous potential in software and IT-enabled services, and the better road network.
The point is that the new momentum in industry and services is in fact enough to make India the good news story of the decade and beyond. Because the World Bank is wrong and India's medium-term growth rate will cross the 6 per cent mark. And sustaining 6 or 6.5 per cent growth is actually good enough.
In roughly three decades of 6 per cent growth, the US transformed itself from an essentially rural economy at the time of the American civil war, into the most powerful economy in the world. So I would bet that Goldman Sachs is right, at least about India.