Paran Balakrishnan: Why Goldilocks is hitting the bubbly

Indian stockbrokers aren't usually big drinkers but last week many were finally reaching for the champagne. After months of "will it, won't it", the Bombay Stock Exchange index, the Sensex, went romping past the 10,000 mark.

The Sensex has been on a roll for more than two years and rose 42 per cent in 2005, making it one of Asia's best-performing markets. It took just 48 days to climb the last 1000 points.

The champagne was still gushing skywards when the Indian Government threw in an extra piece of good news. It said the economy was doing better than expected and growth should touch 8.1 per cent this year, higher than earlier predictions. Manufacturing is expected to surge 9.2 per cent and services 11 per cent.

Even agriculture, the weak spot in the Indian economy in the past decade, had bounded forward from last year.

Corporate salaries, too, are rising faster than anywhere else in Asia. Indian executives probably still earn less than other Asians, but, heck, it always feels good to get a chunky pay hike.

Understandably, euphoria is the order of the day. Some economists are cheerily saying that India - like many other parts of the world - is having its "Goldilocks" moment. For those who don't immediately see the connection between nursery tales and global finance, the Goldilocks moment means that the economy, like the porridge, is not too hot, not too cold but just right.

In these circumstances, the Indian corporate world probably chose the right moment for a spot of hard selling.

In January, delegates to the World Economic Forum at Davos found themselves blitzed by "India Everywhere" marketing led by the Finance Minister and a delegation of India's corporate chieftains. On the menu for visiting delegates were heaps of Indian cuisine, music and reams of statistics about why the country is a great investment destination.

"All the buzz at Davos this year was over China and India ," said Time magazine.

Is the euphoria justified? The answer, as always, is yes and no. Back in the 1980s an Indian economist, Raj Krishna, coined the derogatory term, "The Hindu rate of growth".

He reckoned that a complex raft of socio-religious factors kept India from high growth and condemned it to grow at only between 3 per cent and 5 per cent a year.

"The Hindu rate of growth" is now a thing of the past. If the Government's latest forecast comes true, India will have had an average growth rate of more than 8 per cent for the past three years.

The sharemarket, in turn, has responded by climbing from around 3500 in September 2003 to its present five-figure level.

So, what's going right? For a start, there's India's world-beating software industry which is keeping up its 30 per cent growth rates and inching forward to the front rank to challenge global giants like IBM, Accenture and EDS when it comes to high-tech contracts.

Then there are overall exports - traditionally the weak point of the Indian economy. They've been growing at an average 24 per cent for the last three years. Even with a booming global economy, that's not bad going. In fact, considering that exports were always India's Achilles heel, it's quite an achievement.

At another level, rising salaries have combined with low interest rates to spark a housing boom in most Indian cities.

Simultaneously, the manpower- intensive high-tech companies are also building new office blocks as fast as they can. All this has turned construction into one of the country's fastest-growing sectors and its brick-by-brick growth is expected to touch 12 per cent this year.

The world has, of course, taken note and foreign money is pouring in like never before. Only a few weeks ago, Microsoft, Cisco Systems and AMD all announced hefty investments in the Indian market. The mobile phone companies - Nokia, LG and Samsung - attracted by a telephony market that's moving at the speed of sound, are all pushing ahead with plans to manufacture handsets here.

What's the downside to all this economic euphoria? Can the party last till the dawn of prosperity for one billion people on the sub-continent?

Well, for a start, there's the unavoidable fact that India has now become more like the rest of the world. In other words, it's slowly being integrated into the global economic system.

Why is that a negative? Think back to the 1997 Asian crisis when the fast-moving stars like Thailand and Malaysia were battered by the global downturn. In those days, while the Thais sold their Mercs at bargain basement prices and stopped buying Johnnie Walker by the crate, India was utterly unaffected by the upheavals that traumatised its near neighbours.

More importantly, there's a giant political risk hanging over the country. The ruling Congress Party won only 155 seats in the 543-seat Lower House and it doesn't take much to figure out that its hold on power is tenuous. Crucially, it's also extremely dependent on the communists, who are stalling economic changes.

So the Government has been struggling to open the retail sector to foreign investors like Walmart and French giant Carrefour, which are waiting eagerly for the green light to enter India's new malls.

More recently, efforts to privatise the hopelessly overcrowded airports at Delhi and Mumbai have run into one difficulty after another - including a nationwide strike.

For the time being, however, nobody is worrying about political risks or anything else for that matter. In fact, one leading business commentator noted this week that "India's internal confidence levels are running ahead of reality".

And who cares about Cassandras once the party's under way? In January, retail investors - late as usual - poured money into the sharemarket as it approached the five-figure mark. And, after crossing the 10,000 mark last week, the market didn't even stop for breath and powered forward another 100 points by Friday. The brokers hardly had time to crack a new bottle of bubbly.

* Paran Balakrishnan is associate editor of the Telegraph, Kolkata.