October 06, 2003

Declining Cost Capital in India

Edward Hugh directs us to the Zoo Station which quotes Rajiv Lall of Warburg Pincus on the effects of the declining risk premium in India:

Zoo Station: (Via Pseumo) I got this story on interest rates in the mail, and I thought it made for a fascinating read. Rajiv Lall, of Warburg Pincus, writes in the Business Standard on the dramatic impact the lower cost of capital has had on the Indian economy, to the extent that he predicts that India will start to outperform China in the next 5 years:

Over the past three years, borrowing rates have declined by about 600 basis points for most medium to large sized enterprises in the country. Whereas such companies were paying 14 per cent on one-year loans three years ago, today they are paying only 8 per cent. Borrowing rates for some of the largest corporates are up to 200 basis points lower.

Consider the following: Every 10 per cent fall in interest rates leads on average to a 30 per cent increase in profits before tax (PBT) for larger Indian corporations. For firms in manufacturing that operate with higher levels of debt relative to the average for all companies (companies in the less asset intensive service industries can operate with lower debt-equity ratios), the impact on PBT of declining interest costs is likely to have been even larger.

Given that borrowing costs for larger corporates have fallen as much as 40 per cent in the past three years, profits before tax for these companies have more than doubled, raising returns on equity to well above the cost of capital. Suddenly, even manufacturing activity is looking like an attractive proposition in India.

Posted by DeLong at October 6, 2003 07:48 AM | TrackBack


Notice that India is quickly becoming the automobile parts manufacturing base of the world.

Posted by: anne on October 6, 2003 10:14 AM

Wow, this is great, important news -- for anybody wanting to reduce poverty in the world. Imagine India and China both competing to be "fastest growing"; or even fastest growing with more than 200 mil people.

Thanks for another fine note, Brad.

Posted by: Tom Grey on October 6, 2003 10:29 AM


The Looming Shrimp War

The nasty catfish war with Vietnam has tempted American shrimpers to engage in some trade mischief of their own. Using spurious allegations of unfair trade practices, American catfish farmers have been able to hoodwink the federal government into slapping tariffs of up to 64 percent on Vietnamese catfish. A group of shrimpers from eight Southern states is now preparing to file a claim requesting a similar tax on imported shrimp.

Americans believe in the free trade game until they start losing at it. Then we accuse the other side of cheating. That is the message these baseless dumping cases send to the rest of the world. It is understandable for people to seek protection when their livelihoods are adversely affected by trade. But as a nation that benefits from freer trade, the United States cannot afford to continue encouraging these cases. They antagonize poor farmers and laborers around the world who discover that the world's superpower does not really believe in what it preaches.

Trade laws allow domestic industries to seek protection to keep imports from being "dumped" into the United States, either below their cost of production or below their price in their countries of origin. True dumping should not be tolerated, but these claims are judged by Commerce Department officials, who tend to be highly solicitous of domestic lobbies. Vietnam is an enticing target for such cases. It is also the second-largest exporter of shrimp to the United States. Because Vietnam is considered a "nonmarket economy," the department is free to ignore actual production costs and determine what they theoretically ought to be, making it even easier to establish that imports are being dumped....

Posted by: anne on October 6, 2003 01:38 PM

For India to pass China in several years requires quite a number of other factors --cultural change aside.

Even in the days of US embargo, China had powerful export capabilities and expertise. Yet China's takeoff needed the arrival of Japanese and Taiwanese, and latterly S. Korean industries to set up more modern factories, bring in technology, and provide market outlets.

The gush of East Asian capital into CHina took place in the background of the massive revaluation of the Yen, and then the Taiwan dollar and Korean won, when those export powers had to get their industries to cheaper bases.

Some might also argue that an important ingredient was the government's determination to extract technologies and part-ownership out of investments, and a willingness to repress organised labor and political activeness while accepting low standards of working conditions for labor.

While the Indian milieu certainly has its unique attractions and advantages, and the domestic market is as hungry as CHina's, I'm not sure that there is the combination of circumstances that could propel India so fast.

Posted by: paul on October 7, 2003 08:30 AM


While I agree that India is not going to displace China as the Asian growth engine anytime soon, the proper point of comparison is not today's India with today's China, but the India of 10 years ago (hobbled by "swadeshi socialism" and the "license raj") and India of today. The declining cost of capital is a very good sign.

The difference between the "Hindu rate of growth" (2.5%) and today's of about 5% will have very dramatic effects over the next ten years if it can be maintained. Here's hoping this is so.

As I guess it does for anne, this "tra-catfish" fiasco makes me angry. The protectionist threat is growing substantially, powered by a politically driven White House and Democratic candidates pandering to their base (and basest instincts). Where are the free-trade Dems and Republican voices? This is one issue where common cause can be made.

Posted by: Daniel Calto on October 7, 2003 09:41 AM
Post a comment