[T.S.R:17092] India:Splurging On Stuff The Country Can Produce (Kotak Instl Equities Research)

Kotak Institutional Equities Research
India: Splurging on stuff we can dig out of the backyard? 
Massive persistent trade deficits will not only become inevitable but endemic.
 
Imports stood at $ 268 Bn in 2010, up from $ 48 Bn in FY2001 (CAGR 21 per cent), which means a trade deficit of $ 4 Bn in 2001 has risen to $100 Bn in FY2010. A third of imports are driven by Energy and a Tenth by Gold. India's import bill is now hostage to commodity price movements. In 2010 India spent $ 40 Bn on Capital Goods, $ 21 Bn on White Goods and $ 8 Bn on Coal and Steel-all avenues where India can indigenize if it has the will to get around to some hard decisions.
 
Commodity Conundrum
As India grows richer it's energy needs are increasing and so is the ability of its citizens to buy Gold, one of its most favoured assets. Our energy team estimates that India's Oil &Gas consumption will rise to 260 mn tonnes of Oil equivalent in FY15 from 190 mn tonnes in FY10. India will thus import 153 mn tonnes of oil equivalents in FY15.
 
The WGC estimates India's civilian Gold Reserves at Rs 36 tn at end 2009. Depending upon price movements Gold imports could double or triple over the next 5 years.Such high dependence on Oil & Bullion makes India hostage to commodity price swings.
 
Surprisingly India imported $ 21 bn worth of electronics in FY10. To which would get another $ 20 bn of telecom equipment being imported from Europe and China over the next 5 years.
 
Given the need for power generation India has started importing coal and steel. Unless India develops a telecom equipment cluster, an automobile engineering hub and sticks to the "not in my backyard syndrome" the country will spend larger and larger proportion of its forex reserves in importing goods that could have been made at home.
 
This could make massive trade gaps not only inevitable but endemic.

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