KEY POINTS:
It was a favourite tag-line for old-fashioned horror movies: expect the unexpected. Wait for the monster to emerge from the lake just when audiences are settling down comfortably in their seats.
The Indian economy isn't by any stretch of imagination a horror story. On the contrary, it's faring better than anyone might have expected in these uncertain times. But the surprises are emerging like the monster from the lake at the most unexpected moments.
Take a look at the Indian rupee and its unruly dance with the US dollar in the last few months. As the rupee began climbing against the dollar - it jumped 12 per cent in 2007 - it forced the analysts and economists to whip out their calculators and do their sums once again.
First on the casualty list as the rupee rose was India's all-important software industry which earns in dollars and reports results in rupees. India's software czars dolefully predicted that many small firms would be forced to the wall if the rupee climbed further against the dollar and everyone appeared certain that the rupee was poised to rise inexorably. In January, Goldman Sachs didn't pull its punches: "We expect the Indian rupee to appreciate further against the US dollar in 2008."
Here we are in May and the rupee has slumped to 42 rupees ($1.29) to the dollar after hitting the 39 rupee mark earlier this year. None of the analysts can look back and say they expected this one (though they are still saying in the long run that the rupee will rise). In fact, many were forecasting the Indian currency would strengthen to about 36 rupees to the dollar by mid-year or more.
"Having appreciated pretty much against a soft dollar since August 2006, the tide has turned for rupee, with the Indian currency falling by more than 7 per cent since its closing high in early February this year of 39.4," says HSBC economist Robert Prior-Wandesforde.
And now another monster is coming out of the lake. Remember those lovely days when we all worried about US$100 ($130) oil and how it would wreak havoc with the world economy? Here we are at around US$128 and counting.
The Indian Government has dealt with rising oil prices in its own inimitable fashion. It has forced the state-run oil companies to sell oil below market rates. This way the oil companies take the hit and consumers don't feel that pain. As a result, India's three state-owned oil companies have racked up revenue losses of US$19 billion in the past fiscal year. This strategy might have worked in the short run but it could be about to backfire. As oil prices keep climbing the oil companies cannot absorb all the losses. So we are getting to the point where prices will have to be hiked.
What that will do to the economy is anyone's guess but it isn't going to be a happy scenario. India also puts high taxes on petroleum products and that will add to the pain considerably.
And remember now that the rupee is falling against the dollar, the rising oil prices are hurting all the more especially as India imports 73 per cent of its crude oil. Luckily, India isn't counting its pennies any longer and has a huge foreign exchange stash of US$313 billion.
For the politicians, the economic ups and downs couldn't have come at a worse moment. The general elections are due early next year and a clutch of state polls are scheduled in the coming months. Inflation, as any politician will tell you, isn't a vote-winner and it has now hit 7.8 per cent. The Congress-led coalition Government is desperately looking for ways to stop inflation rising and avert a voter backlash.
Even Finance Minister P. Chidambaram, who usually keeps his cool, is sounding a bit rattled by the fast-moving inflation figures. "These are difficult times. Inflation moving up from 7.61 per cent to 7.83 per cent [in a week] is indeed worrying," he said.
What can the Government do about inflation? It has jawboned the steel manufacturers to hold back on price hikes (although the steel manufacturers complain that they can't hold the price line when iron ore is getting costlier). The Steel Authority of India, one of the country's biggest steel manufacturers, is government-owned so it has been forced to fall in line even though under protest.
By contrast, the Government hasn't had that much luck with the private sector cement manufacturers who are in no mood to keep down prices when costs are climbing.
What's the good news amidst all this economic uncertainty? The positive tidings are that wheat crops are on target so India shouldn't add to the crowd of buyers on the international market. Also, the weathermen predict that the annual monsoon will be on time and may even be better than normal.
Besides that, the giant flood of investment that's pouring into the country isn't likely to screech to a halt in the immediate future. Large corporations around the globe are looking - rightly or wrongly - at India as the great white hope. "The high economic growth genie is firmly out [of the bottle] and has made India a 'cannot ignore' market for foreign investors," says Deepak Lalwani, director, Astaire & Partners, a London-based brokerage firm.
Other foreign analysts too are still optimistic about India. Take a look at Moody's Investors Service which reckons that the Indian economy can withstand all but the worst shocks.
In its latest report released last week, Moody's said ultra-bullishly: "The Indian economy's external fundamentals are strong enough to withstand a wide range of potential shocks, including sudden reversals in short-term capital flows, a sharp slowdown in global growth, and weak government finances, or a slowing in structural reforms on account of a fractious political landscape."
Bullishness is still the operative word in the Indian corporate world too. India's biggest mobile phone company Bharti Airtel is seeking to take over Johannesburg-based MTN, Africa's largest cellular operator, and the price tag could be in the region of at least US$22 billion or more if Bharti goes for a full buy-out.
If the deal comes off, Bharti will be the world's sixth-largest mobile service provider.
But once again, it's important to remember that the world economy is a bit like a horror movie.
Everything seems okay, but keep an eye open for that monster that clambers out suddenly from the lake.
* This is Paran Balakrishnan's last column for the Herald.
