Tuesday, October 16, 2007

in the comfort zone

India has wealth-building consumers rather than export riches. In today's market, that's a good thing.

By George Wehrfritz and Jason Overdorf
Newsweek (October 21, 2007)

By many measures, the economic picture in Asia looks pretty good. Despite subprime-induced global recession worries, stock markets from Hong Kong to Mumbai hang at dizzying heights and today's growth rates are faster than they've been in a decade. Of course, this prompts the question of whether the region is headed for a big fall—there's no avoiding the fact that cash-strapped American shoppers still undergird all the major economies. With one exception: India. As a credit crunch unfolds in the world's financial centers, the country of 1.1 billion is arguably Asia's most sheltered economy. The reason: "India is the only economy in Asia driven primarily by domestic demand," says Christopher Wood, chief strategist of the Hong Kong-based brokerage CLSA.

In short, India's weaknesses have become its strengths. The country's oft-lamented inability to challenge the Chinese manufacturing juggernaut means that today's growth isn't as tied to ever-increasing toy, apparel and electronics exports. The relatively high cost of borrowing in India is one reason its roads and bridges are so bad, but that looks almost like a plus compared with China's near-zero interest rates and widespread overinvestment. And India's vibrant service sector is more insulated against a global slump than Chinese manufacturing. Services historically fare better in down markets, because of their lack of inventory issues.

Not that India set out to become recession-proof. While China's boom was planned from the center and executed by state companies, India's welled up from the private entrepreneurial and business classes, set loose by market reforms in the early '90s. Unlike China, India never forced consumers to funnel their savings to state export industries. The result is more flexibility and more balance, with India's GDP growth running at a 9 percent pace in 2007 for the third year running, sustained mainly by domestic consumption and a burgeoning middle class.

Already, India's domestic market is larger than South Korea's, at about $370 billion. By 2025, concludes a recent study by the McKinsey Global Institute, its consumer class will swell tenfold from today's tally of 50 million, making it the fifth largest market on the planet. This year India's per capita income will break through the $1,000 threshold on its way to tripling by the late 2020s. "India's lower level of investment relative to GDP has meant that consumption has played a bigger role in its growth story," says the McKinsey study. "Consumption in India is closer, proportionally, to developed countries such as Japan and the United States than it is to China."

China's spending on construction of roads, factories, condos and other infrastructure is approaching 50 percent of GDP, compared with India's healthier 32 percent. China's trade surplus is also roughly twice India's in percentage terms and, in 2006, China took in $63 billion in foreign direct investment to sustain its manufacturing boom, whereas India grew slightly slower but needed just $16 billion from abroad to do it. The net effect is that India's economy will feel less pain should the global economy weaken. "India's exposure to the global trade cycle is one of the lowest in the region," concluded a Morgan Stanley report to clients, issued in mid-September, "and therefore the impact of slower foreign trade [on India's economy] is likely to be one of the lowest."

Policymakers deserve some credit. Reserve Bank of India has kept the economy on a lean burn, setting interest rates in the 6 percent range, which is low enough not to stymie economic activity but high enough to discourage profligate investments. Elsewhere in Asia, ultralow rates—be they 2 percent mortgages in Hong Kong or near-zero loans from China's state banks—have driven overinvestment in both real estate and industry. And whereas India's passbook savings rates of 3 to 4 percent encourages household savings, negative returns in China have driven money into the only high-yield option available to average households: speculative stock and real-estate plays. Because India's boom has not been driven by dirt-cheap money, analysts argue, it is therefore more resilient to global credit tightening.

Recent forecasts back up the picture of Indian economic resiliency. One from Citibank in September analyzed the likely impact of a U.S. recession on Asia's two giants. The bank estimated that its 2008 GDP growth forecast for China would fall from the 11 percent level to 8.5 percent, whereas India's would dip about half that amount, from 9.4 to 8.1 percent. A new study by the Organization for Economic Co-operation and Development concluded that, by further liberalizing its labor markets, India could push its sustainable growth rate above 10 percent by 2011. Pai Panandikar, president of the the RPG Foundation, a prominent economic think tank in Mumbai, wrote last week that a U.S. recession would hit goods exporters hardest, while driving American companies to cut costs with further use of Indian software and technology services. "It is possible that the growth of merchandise exports may dip, but the [demand for] service climb," he argues.

What comes next in the resilient India story? Ironically, it could be a manufacturing boom akin to China's in the 1990s. India's huge domestic market, ultralow average wages and potential as an export platform to the Middle East, Africa, and Europe are attracting interest like never before, as manufacturers seek to limit their vulnerability to future political or economics changes in China. A handful of foreign carmakers such as Ford, General Motors, Hyundai and Suzuki have already opened plants, aiming to service customers abroad, as well as India's own large and rapidly growing domestic market for small cars. Lucrative Korean electronics and white-goods ventures already dominate the local market. In a new survey of more than 300 global manufacturing companies released last week, European consultancy Capgemini found "very keen interest" in India as a manufacturing base, says Roy Lenders, the report's author, who predicts that "India could challenge China as the manufacturing center of the world in the next three to five years." Such a shift would soak up millions of surplus rural workers, thereby widening the country's already formidable consumer base. "Thinking of China as a benchmark for successful development is still very strong in India," says Shankar Acharya, an economist with the Indian Council for Research on International Economic Relations. China has been growing much faster than India, for much longer. But the eventual lesson of this period of global uncertainty may be that India should just build on its own strengths, not worry about China's.

URL: http://www.newsweek.com/id/43340

bowling for big bucks

A burgeoning middle class is giving the nation's beloved slow sport, cricket, new sex appeal

By Jason Overdorf
Newsweek (October 21, 2007)

By today's sports logic, cricket should be dead. In its purest form, the game takes five days to play. Its upper lip remains so stiff that a batsman who declares himself out when the umpire blows the call gets cheers instead of boos. Its heroes aren't giants, either of height or girth. Some players, like Australian spin bowler Shane Warne, look like they have just set down a plastic cup of beer and climbed out of the bleachers.

But strangely, cricket is thriving. Over the past month or so, two new cash-rich professional leagues have been unveiled, ESPN Star Sports has launched a 24-hour cricket channel and a new, faster-paced version of the Cricket World Cup is gaining steam. Based on sponsorship rights being paid to the International Cricket Council, it's likely that cricket over the next few years will earn well in excess of $2 billion, twice what it has since 2000. The reason: new competitive forces within India, and a cricket-crazed Indian middle class, are making the sport big business. Australia may have won the last two World Cups. But James Fitzgerald, ICC spokesman, says, "It's no secret that India is becoming the sport's financial powerhouse."

Cricket is the cultural unifier of India, the most populous and most passionate of the cricketing nations (which also include England, Australia, New Zealand, Pakistan, South Africa and Sri Lanka). Even bigger than Bollywood, televised cricket matches can capture 60 percent or more of the Indian viewing audience, some 450 million people. Yet the country has won a World Cup only once, thanks in part to the sclerotic Board of Control for Cricket in India, which has been failing to promote talent over the past few decades. Political concerns dictate the selection of the national team, and local and state feeder teams are chronically underfunded.

Media tycoon Subhash Chandra, chairman of India's largest listed television company, Zee Entertainment, aims to change all that. Last month he unveiled plans for a breakaway Indian Cricket League, with a $1 million prize for the champions and player salaries as high as $400,000 (top players in domestic leagues currently make about $32,000 in India, and rarely more than $80,000 even in England).

The Board of Control responded swiftly, threatening to ban players who join the new league from the international squad. When that proved unsuccessful, it announced 40 percent raises and revealed plans for its own new conference—the Premier Cricket League—which will include players from many nations and pay out $3 million to the winning team.

The new leagues will be backed by global advertisers, including Unilever, LG, Hutchison, Honda and others eager to reach Indian consumers. Average Indian incomes will triple by 2025, making India the fifth largest consumer market in the world, according to the McKinsey Global Institute. Cricket, notes Guru Prasad Rao, vice president of the Mumbai-based media-buying firm Network Media, "is the one language that unites the country." Ad rates for matches are skyrocketing. Spots for a recent India-Pakistan championship game sold for $25,000 for 10 seconds (prime-time movies net $5,000).

Sponsorship rates are rising, too. Indian mobile operator Reliance Communications and PepsiCo India have reportedly paid between $60 million and $100 million apiece for rights to various contests over the next eight years, more than double what was paid between 2000 and 2007. Similarly, ESPN Star Sports is reported to have paid $1.1 billion for the broadcast rights for a package of games including two Cricket World Cups between 2007 and 2016.

What will it all mean for the sport? Just as football's English Premier League attracts the world's top players through powerful franchises backed by fanatical fans, the future could well see India displace both England and Australia as the home of the biggest cricket matches and best players.

In the short term, there will simply be more cricket—a lot more. In a country where replays of classic cricket matches draw better ratings than live broadcasts of other sports, ESPN Star Sports recently launched a 24-hour cricket channel—which will show domestic matches from Australia and England—to supplement its two existing sports channels. "I did not know how to fulfill the demand for cricket with just two channels," explained ESPN Star Sports' managing director Jamie Davis. "Forty-eight hours of cricket a day is not enough." Not for India.

URL http://www.newsweek.com/id/43341