Thursday, November 20, 2008

India's New Roads May Buffer Economy From Recession

thanks rony for this one...

India's New Roads May Buffer Economy From Recession (Update2)
Nov. 19 (Bloomberg) -- The 100 kilometers (62 miles) of rural roads India is adding each day may save Asia's third- largest economy from the worst of a global recession.

New roads built so far under the $27 billion program have brought urban markets within reach of 60 million village dwellers over the past five years, letting them earn money selling fruits, vegetables and milk that would have spoiled otherwise. They are now spending their cash just as the world economy falters.

``Rural demand is keeping the economy kicking along,'' said Shashanka Bhide, chief economist at the privately funded National Council of Applied Economic Research in New Delhi. ``Growth will slow in India, but not as dramatically as the rest of the world.''

Some of India's biggest companies are already benefiting: shares of Hindustan Unilever Ltd., the biggest maker of household products, and Hero Honda Motors Ltd., India's largest motorcycle maker, are up this year while the benchmark stock index has plunged 57 percent. Domestic spending will help cushion India from the worst global meltdown since the Great Depression, according to the Reserve Bank of India.

When the roads program is completed in two years, every village with 1,000 or more inhabitants will have access to all- weather roads, up from 40 percent when construction started in 2003. Spending on the project, run by the National Rural Roads Development Agency, was worth about 5 percent of gross domestic product when it was announced.

More Spending Needed

Even at its current pace of investment, India still needs to spend more to buoy growth. The South Asian nation requires $100 billion annual investments in its highways, railways, power systems, ports and other infrastructure for the next five years, according to the government. Inadequate capacity shaves two percentage points off the nation's growth each year, the finance ministry estimates.

Rural connectivity is increasing people's income and adding to domestic consumption, which makes up 55 percent of India's economy, compared with 37 percent of gross domestic product in China.

Hazari Lal Negi, 55, a farmer in the northern Indian state of Himachal Pradesh, says this year's crop of cabbages, potatoes, beans and cauliflower was his first not to perish on the way to market because of lack of transport.

``Earlier, we would have to haul our produce and walk all night to the nearest town to catch the early morning trucks,'' Negi said. ``We could sell only about a quarter of our produce and the rest got wasted. Now, we sell everything.'' Negi plans to expand into organic farming to boost his income.

`Consumer Boom'

``New markets are opening up for our products,'' said Pranay Dhabhai, chief operating officer at Haier Appliances (India) Ltd., the local unit of China's biggest home appliances maker. ``People's aspirations levels are rising with higher incomes. There's a huge consumer boom waiting to happen because penetration levels are so low in India.''

Haier, which opened its first factory in India last year, estimates that only 19.6 percent of Indian households have refrigerators, 27 percent own television sets and just 3 percent of homes have air-conditioners installed.

Sanjeev Chadha, chief executive officer of PepsiCo Inc.'s India unit, said the September-October period ``has been one of the best ever'' for sales.

Volkswagen Is `Optimistic'

``Buying power is coming,'' said Joerg Mueller, head of India operations for Volkswagen AG, which is building a 580 million euro ($730 million) car factory in the western Indian city of Pune. ``We are optimistic and happy to be here. We see a very positive future.''

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, fell 1.8 percent to 8773.78 at the close of trading in Mumbai today after gaining as much as 3.4 percent earlier in the day. Hero Honda rose 3.7 percent to 749.9 rupees, while Hindustan Unilever, the only company that has gained on the 30- stock Sensex this year, fell 0.4 percent to 234.25.

The International Monetary Fund expects India's economic growth to slow to 6.3 percent in 2009 from an estimated 7.8 percent this year. That's still faster than the South Asian nation's average 4.5 percent expansion since 1947.

China may grow 8.5 percent in 2009, compared with 9.7 percent this year, according to the IMF. The U.S. and the Euro area may shrink by 0.7 percent and 0.5 percent in 2009, the Washington-based lender said.

Consumption, Investment

``Overall, India is still poised to rank as the second- fastest growing major economy after China,'' said Rajeev Malik, regional economist at Macquarie Group Ltd. in Singapore. ``Consumption expenditure is poised to be resilient, but investment spending will be hit owing to scarce availability and higher cost of funding.''

Even though India has a domestic consumption-led economy, its growth may be hampered by slower investments by companies as borrowing options dry up in a global recession.

Investor appetite in the stock market has waned, with overseas funds selling a record $12.7 billion of equities this year. Foreign lenders are shying away from emerging markets like India, as Europe and Japan last quarter slipped into recession.

The rural roads program is financed by the federal government using revenue from an additional tax imposed on the sale of diesel.

``India can't be fully insulated from what's happening in the rest of the world,'' said Rajat Nag, managing director at the Manila-based Asian Development Bank. ``Infrastructure financing will be tight for a while.''

Toxic Assets

Nag said India's banks are well capitalized and can afford to step up lending. They have just $1 billion of toxic Western assets out of a total loan portfolio of $510 billion, according to the central bank. The global credit crunch has seen financial institutions around the world write off or lose $965.8 billion.

To stimulate investments, India's central bank has slashed lenders' reserve requirement in cash and bonds by 3.5 percentage points and one percentage point respectively, and cut interest rates by 1.5 percentage points in the past month.

``India is connected with the global crisis, but not as severely as other Asian countries,'' said K.V. Kamath, chief executive officer of ICICI Bank Ltd., the nation's second- biggest. ``We will have to get back to the consumers to get India back on a higher growth path.''


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