India's (ir)relevance in global economy

The world’s largest company by market capitalisation, Apple sold 5 million of its latest product iPhone 5 in just over three days.

The phone was sold primarily in the US, Europe, parts of Asia and Japan. It will be launched in China only one quarter later. The launch date for India is not announced yet.

Why so? India is just a speck in Apple’s sales while China is a huge market, accounting for over 12 percent of the company’s total sales. Apple outsources its manufacturing to Asian companies that have facilities in Taiwan and China.

The bottom line is India does not figure in Apple’s map yet.

[caption id=“attachment_469302” align=“alignleft” width=“380”]  Foreign businesses from telecom to automobile manufacturers are struggling to either make or grow profits. Reuters[/caption]

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The question being raised globally now is ‘is India overhyped’?

Once touted as the only rival to China and a key member the BRIC (Brazil, Russia, India and China) group, the country is now perceived to have failed to deliver on its promise.

This perception about India is derived from the images-of scams, tainted politicians and businessmen, political imbroglio marring efforts to improve government finances, bailouts of state-run companies that became bankrupt because of politicians and a crumbling infrastructure with potholed roads, overcrowded trains and bankrupt airlines-that appear globally almost on a daily basis.

At the London Olympics, the only headline India made was the jaywalker who joined the Indian contingent.

India’s potential as a strong market is also being eroded. Fidelity, one of the world’s largest fund managers, exited the country without a blink of an eyelid blaming lack of earnings visibility.

Foreign businesses from telecom to automobile manufacturers are struggling to either make or grow profits.

Foreign insurers are yet to see money even after 10 years of being in the business here. Among foreign companies, banks are the only ones making profits in India and that is largely due to a highly profitable treasury business.

The reason for the erosion of India’s competiveness is the increased cost. Rising real estate prices, which are at record highs on the back of unchecked flow of black money into the sector, is one of the prime reasons for increasing business costs.

Rising property prices coupled with inflation driven by fiscally weak governments doling out subsidies by the dozen is making wages rise.

Maruti, the country’s largest car manufacturer, raised wages by 50 percent at a time when the country’s automobile sales are declining.

Vehicle sales for the first five months of financial year 2012-13 have grown by just around 5 percent indicating a slowdown in the sector.

The rupee’s depreciation of over 20 percent against the US dollar over the last one-and-half years has eroded the value of foreign investments in the country.

Coupled with weak business outlook, the rupee’s fall has hurt the profitability of even the strongest company.

India is at a stage where it needs foreign capital but is not able to do enough to attract it. Opening up FDI for retail and aviation is fine but it will not make big retailers or big airlines come into the country in droves.

Wal-Mart can afford to lose money in India but it will not risk big losses. It will open a few stores to establish its presence but that’s about it.

Rising property prices and declining footfalls offer no great future for such stores in the country.

The airline sector is unprofitable with unhealthy competition and lack of pricing power taking a toll on the players. Add to this the government’s plan to bail out Air India by infusing Rs 40,000 crore, a figure almost thrice the aggregate market capitalisation of the sector. All these troubles will ensure that foreign airlines do not enter the sector in a great hurry.

It is true that foreign portfolio investors are still hoping to make money in India.

FIIs have invested over $17 billion in Indian equities and debt in calendar year 2012.

One just hopes that India can eventually prove FIIs right in investing here. But for that the country has to work hard to re-establish itself at the top of the pecking order globally. Only then will Apple take the Indian market seriously.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.