Tuesday, November 24, 2009

Outsized capital inflows?

A lot of people are getting anxious about a scenario with outsized capital inflows hitting India. The historical time-series is illuminating:

 Quarter Billion USD Percent to GDP 12/2004 12.6 7.4 03/2005 8.2 4.6 06/2005 5.8 3.4 09/2005 10.5 6.2 12/2005 0.8 0.4 03/2006 8.4 4.2 06/2006 10.7 5.7 09/2006 7.9 4.2 12/2006 10.8 4.8 03/2007 15.8 6.7 06/2007 17.8 7.4 09/2007 33.2 13.6 12/2007 31.0 10.7 03/2008 26.0 8.7 06/2008 11.1 4.0 09/2008 7.6 2.8 12/2008 -4.3 -1.6 03/2009 -5.3 -2.0 06/2009 6.7 2.7

In the latest quarterly data (Apr/May/June 2009), net capital inflows worked out to $6.7 billion or 2.7% of GDP. These are not big numbers. What are big numbers? 10% of GDP is a big number, which was breached for six months in this history. At the time, this corresponded to above$30 billion a quarter of net capital inflow. In future quarters, the physical magnitude will depend on how big GDP is at the time. My rough sense of 10% of GDP in the Oct-Nov-Dec 2009 quarter is that it will be $30 billion. To get to these numbers, we'd need to get back to an environment like Jul-Dec 2007 in terms of optimism about emerging markets in general and India in particular. So far, this doesn't seem to be what is in place. 8 comments: 1. Dear Ajay Good point. I guess, maybe, that could also serve as a determiner of overstretched rallies! Regards Roshan 2. man, you are confusing. Am I the only one wondering 10% of GDP is not 30 billion USD? 3. It does not make sense to annualize percentage numbers when you have the true numbers for all quarters in the series. 4. Here's how to think about it. India's GDP is roughly a trillion dollars a year. This is roughly$250 billion a quarter.

So 10% of GDP of a quarter is roughly $25 billion. This is all "roughly". The more careful calculations, discussed in the blog post, yield numbers like$30 billion.

GDP is a flow, not a stock, so when you think a quarter at a time, you have to divide by 4.

5. I think we should look at the optimism in relative terms, and India does look comparatively more promising than most of the developed and developing countries. And that probably is the reason for inflows and thats why there are concerns about these inflows increasing in the near future.

6. Dear Ajay

Thank you for an interesting article. I know nothing about economics or finance and have to frequently google financial terminology to understand it in plain english. Doing that on your article lead me to this one.

http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_elm/documents/publication/wcms_114304.pdf

As usual FUD-speculation and ground reality are always different.

warm regards
George

7. I think on the basis of past quarter performance we can in India.

8. i think you have done the good work regarding the investment in India.

Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticising me is perfectly okay; uncivilised language is not. I delete any comment which is spam, has personal attacks against anyone, or uses foul language. I delete any comment which does not contribute to the intellectual discussion about the blog article in question.

Please note: LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.