Morgan Stanley on India trumps Goldman on China

India's stock market almost lost control this week, and it was a great thing for the nation.

So intense was the euphoria over prime minister Manmohan Singh's election triumph that trading had to be halted for the rest of the day for the first time. The record 17 percent surge in the sensitive index said it all: India now has a unique opportunity to get its act together.

The question is, will it? The odds are that India will do so now that Singh has a clear mandate free of the small-party bosses that have stymied India's reform process.

India's election is notable on many levels relevant to investors. It showed that the country remains an oasis of stability in a reeling global economy. It also indicated that India's so-called demographic dividend is affecting politics.

The role of Rahul Gandhi, 38, in rallying the ruling Congress party to victory marks him as a prime minister-in-waiting.

India also proved it can confound expectations about the trajectory of its $1.2 trillion economy. Anyone betting last week that China was way ahead in the race to be Asia's next economic superpower now has reason for pause.

Here, Morgan Stanley's prediction for India's economy may prove more reasonable than Goldman Sachs Group Inc's on China. Morgan Stanley made headlines this week by boosting its India growth forecast for next year to 5.8 percent (matching Goldman Sachs's call), from 4.4 percent previously.

Goldman Sachs did the same last month when it raised its China forecast for next year to 10.9 percent from 9 percent.

If the optimists are right and the global recovery is beginning, then China may be safe. Investors haven't made a lot of money betting against China with its double-digit growth and soaring stocks. That may change if highly export-dependent China has to adjust to a world of weak demand and sluggish growth.

Not that India can thrive if many economies embark on a multiyear process of spending less and saving more. India doesn't have a China-like pile of cash to throw at its economy.

India's reserves are $246bn, compared with almost $2 trillion in China.

India has a bad-neighbourhood problem, too. It borders Pakistan, Nepal, Myanmar, Bangladesh and, of course, China. Toss Sri Lanka into the mix and India is located in a pretty challenging part of the world. Singh will have his work cut out to keep the peace both economically and diplomatically. A key difference, though, is that India isn't the slave to exports that China has become.

And William Nobrega, the co-author of ‘Riding the Indian Tiger', isn't exaggerating when he calls India's election "an absolute game changer".

Singh, an Oxford-trained economist, is a former central bank governor and mastermind of the 1990s market changes propelling India's rapid growth. He has made little progress since 2004 in attacking an inefficient and often corrupt administrative system that keeps prosperity from reaching those who most need it.

That may be about to change. Until now, Singh needed to win support from the communist allies who choked his market-opening efforts. It has been like running a massive and complicated economy with two or three limbs tied behind your back.

Now, the prime minister has two forces in his favour: a mandate for change and a sense of urgency to unshackle an economy with vast potential.

If ever there was a time for India to stand and deliver, it's now. Good news on India's macroeconomy can only be sustained by major changes to the microeconomy. Improving infrastructure and reducing corruption must be priorities.

India ranked behind Albania, Burkina Faso and, perhaps more importantly, China in Transparency International's latest Corruption Perceptions Index.

Singh and Congress party chief Sonia Gandhi should aim high and move India fully beyond junk status.

This week, Moody's Investors Service, which places India two levels below investment grade, indicated that the South Asian nation has a chance to improve its fiscal situation after the election.

Similar noises came from Standard & Poor's, which assigns India a BBB-long-term credit rating, the lowest investment- grade level. Higher ratings will lower India's bond yields and free up more money to reduce poverty and improve education.

And while Singh tends to the economy, there are signs that the next generation of Indian leaders is stepping up. Singh is 76 and the opposition-party leader he defeated, Lal Krishna Advani, is 81.

Here, rising star Rahul Gandhi, son of Sonia Gandhi, marks a generational shift in Indian politics.

Rahul Gandhi personifies India's future.

About 30 percent of the nation's 1.2 billion people are younger than 15, while less than six percent are older than 65. Economists call it India's demographic advantage over China or Japan.

The key, of course, is creating enough good jobs to utilise that vast workforce of the future. Singh's to-do list is a daunting one and markets shouldn't necessarily expect a smooth ride. Now that India is free to make tough decisions, the economy is poised to take off.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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READERS' COMMENTS

India Shining!!
Posted by Mohit Khera, Dubai, United Arab Emirates on Monday 25 May 2009 at 09:40 UAE time


With the recent developments in the stock markets last week at this time of economic crisis in the rest of the world, it appeared that India is shining. However, India must adopt a cautious approach for growth. Manmohan Singh's victory and return as a Prime Minister for the 2nd time is a symbolic change in Indian Politics which has been welcomed by one and all. Rahul Gandhi driving the campaign and getting the congress a stupendous win is an indication that he is indeed a capable leader. One can see him as future Prime Minister of India. Well said in the article that India has challanges both strategically and geographically as it is surrounded by neighbours where the current situation is not conducive. Terrorism , corruption, hunger, poverty are major challenges India still faces. However, with selfless and honest leaders like Manmohan Singh, no doubt that India is and India will be on a growth path in the right direction. Let us hope that the dream of ex-President Abdul Kalam comes true which said that I wish to see India a developed nation by 2020. A true Indian....!!

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