Jamal Mecklai: A birthday forecast

MARKET MANIAC

Today is my birthday. And tonight will be the longest of the year. Now, whether this means anything for financial markets, I'd be the last one to know, but it is perhaps a good day to reflect on the year gone by, and, far more excitingly, the year(s) to come.

This was the year that many of my predictions came true or almost came true. First off, my prediction that economic growth (in India) would always be higher than the most optimistic estimate has been proven true in each of the last six reported quarters. My forecast, back in 2003, that the rupee will hit 38 in five years, looks set to come true next year. While I'm waiting with crossed fingers to see if the rupee does hit 38 in 2008 "" I should probably buy a billboard to celebrate if it does "" the more gratifying thing is that I was able to identify way back then that the world (and India) had changed sufficiently to where the rupee could strengthen substantially (from the 46 or 47 it was at that time).

Of course, the world (and India) has changed considerably since then, and, at least as far as the rupee is concerned, it appears that the wild ride upwards this past year has served to shake some of our decision-makers out of their slumber. The impact of the rupee's sharp upsurge in April unleashed forces not seen since the rupee devaluation birthed the Bombay Club in 1991 "" indeed, it was interesting to see Mr Rahul Bajaj speaking out against the strong rupee in an economic daily this week.

Margin pressures as a result of the strong rupee have led to business and job losses in many totally export-dependent industries, like leather, handicrafts and the like. But, to my mind, rather than rupee strength, the main reason for these problems is the failure of government to provide services and infrastructure that support exports, and, to be sure, the failure of some companies to build businesses that are resilient to market changes. If, for example, our transportation infrastructure was as good as Singapore's and our financial markets were as liquid as the US, handicraft exporters would probably be profitable at even 30 rupees to the dollar.

I think we have to understand that India is now wa-a-ay beyond the point of no return in terms of globalisation "" in other words, global markets are already dictating a lot of what we can and cannot do, both in terms of business and in terms of government. And rather than wringing our hands and frittering our energies saying "but how does China manage to keep its currency weak", we need to focus on what it takes to continue to accelerate our growth.

In two words "" education and infrastructure.
Education needs a whole new focus "" perhaps by my next birthday. But on infrastructure, the good news is that the fumbling efforts of the past few years are at least preventing the gap from worsening despite hugely increased demand. More importantly, the public-private model seems to be coming into its own and, of course, investment in infrastructure is expanding in leaps and bounds. Granted that much of it is still focused on real estate, which remains a real quandary. When $5 million buys you, maybe 2,000 or 2,500 square feet in a modest building in South Bombay "" and, for the record, NCPA Apartments is a modest building in global terms when you compare construction quality, services, surrounding infrastructure and the like "" something is amiss. Will things equilibrate through a correction in real estate prices or the rupee or both?

Nobody believes that real estate prices can come down "" certainly not in Bombay, where "it's all actual users, no speculation". Perhaps, it's the whole non-tradable story "" just as haircuts can continue to cost ten or twenty times as much in New York (as in Bombay), maybe residential housing in Bombay can continue to cost several times what it does in New York. This can happen only if there are growing numbers of people willing to pay "" relatively "" premium prices to live in Bombay (and India) because of the economic opportunity. With 10% plus growth more or less assured for the next decade, this isn't such a tall order.

And the rupee? Well, no prizes for guessing that I believe it will touch 38 sometime in 2008 "" I said it five years ago, I may as well say it today. However, rather than a straight shot upwards, I think we will see some real two-way movement. There are already some signs of moderation in the rupee's strength "" for instance, the reserves are growing much more slowly, with the four-week average at its lowest level since August. Again, the dollar is showing some gumption globally "" I certainly expect it to be stronger next year "" which could keep the rupee's demand-supply based strength a bit subdued.

Using my birthday boy's licence "" which means "celebrate if I'm right and celebrate if I'm wrong" "" I'll forecast a range of 38 to 41 for 2008.