From 1999 onwards, Indian companies used foreign capital inflows and an abundance of skilled, cheap manpower to generate sustained profit growth for the last ten years. This capital inflow has been cut-off due to the global financial crisis; while I continue to argue that India is under-leveraged, what will be the driver for future growth?
The first chart shows the cumulative inflow of foreign capital from 1999 to November 2009. The total peaked at Rs 246K crores in Dec 2007; since then there has been an exodus of Rs 50K cr.(click on image for sharper picture)
The second chart shows that Foreign flows by themselves were the 'Driver' of India's growth story. As soon as these flows started to reverse so did the equity markets and India GDP.
(click on image for sharper picture)
We know the problems facing the hedge fund and private equity players globally; sovereign wealth funds have also been hard hit. Declining oil prices will put pressure on Middle-Eastern investment funds. Redemption's and risk risk-aversion are still very much in evidence; Look at the TED spread, the developed world's corporate bond spreads and the 0% yield on US Treasury bills.
A substantial fiscal stimulus could have been the 'Driver' that propels India onto a new growth trajectory...but the administration in India has fumbled the ball..at least so far.
Any rally in the equity markets can only be sustained with growing earnings. Under the current circumstances easing of monetary conditions may stabilize the situation but they are not sufficient to Drive growth.
