On Monday, the Indian stock market sent a strong message of the economic vibrancy in the country to visiting U.S. Treasury Secretary Henry Paulson by driving the BSE Sensex to a record high of 20,000 points.

The BSE Sensex is an index of 30 large and actively traded stocks on the Bombay Stock Exchange.

After hitting a high of 20,024.87 in intra-day trading, the market ended up 3.82%, or 734.5 points, to close at 19,977.97. It was the third-biggest single day gain for the Sensex.

Traders were optimistic about rate cuts at the U.S. Fed meeting on Wednesday. Domestic institutional investors were also active in the market.

The Sensex has gained 2,417.69 points or 13.77% in six days.  

Over the last 10 months, the rise in the Sensex - which ended 2006 at 13,786.91 - has been amazing.

The Indian economy and its stock market has been growing gangbusters just as the U.S. economy is in a meltdown because of the self-inflicted sub-prime mortgage disaster, high oil prices, Iraq catastrophe and effete political leadership. 

Religare Securities president for equities Amitabh Chakraborty told Reuters:

India is no longer an option but a compulsion for an overseas investor, and money will flow like water as we are a very lucrative market. 

Coincidentally, U.S. Treasury Secretary Henry Paulson was in Bombay, India’s commercial capital, on Monday to address the U.S.-India CEO Forum Infrastructure Conference.

Kerala is that odd state in India with a high rate of literacy and life expectancy, higher quality of life compared to other Indian states and possibly the highest rate of migration of its people in search of better prospects.

The Kerala model of high investment by the state in education and healthcare for its population has been touted as a humane alternative to market-driven development where people become mere commodities in the rush for profits.

But with few industries or service sector opportunities in Kerala unlike neighboring states like Karnataka or Tamil Nadu, the leftist-oriented state has several million migrants working in other Indian states or abroad, mostly in the Middle East. We’ve personally encountered natives from Kerala working in Cologne (Germany), Chicago, New York and elsewhere.

The Kerala model and the migration of its people is the subject of an interesting New York Times article in its Friday edition:

“Remittances from global capitalism are carrying the whole Kerala economy,” said S. Irudaya Rajan, a demographer at the Center for Development Studies, a local research group. “There would have been starvation deaths in Kerala if there had been no migration. The Kerala model is good to read about but not practically applicable to any part of the world, including Kerala.”

Can the Kerala model resonate well without the $5 billion that its workers send into the state every year. Probably not.

And what about the social cost of migration on those left behind. Suicides are apparently very high in the state, according to the NYT piece.

China will continue to remain the preferred investment destination for businesses - not India - over the next five years, according to a new report.

China will continue to significantly outpace India in attracting foreign direct investment between now and 2011, according to the report from the Economist’s Economist Intelligence Unit.

FDI inflows into India are set to grow further over the medium term, but will remain well below potential because of continuing political resistance to privatisations, inflexible labour laws and poor infrastructure.

In contrast, China will have projected inflows of $87 billion in FDI per year in 2007-11, according to the report.

India is attracting greater FDI in the services sector but apparently seeing declining FDI in manufacturing.

The new report is titled World Investment Prospects to 2011: Foreign direct investment and the challenge of political risk and produced jointly by the Economist Intelligence Unit and Columbia Program on International Investment.

The Indian economy may be growing up at a fast clip but it’s not lifting all boats equally.

Management consultancy firm Hay Group has put out a new report that the wage gap between managers and clerks is increasing in India.

The pay gap multiple between managers and clerks in India is 7.4 in 2007. This means that the gross base salary of managers is 7.4 times that of clerks in India.

The wage gap multiple was 7.0 in 2006 and 6.3 in 2005.

We think the gap is likely to persist and grow in India as the Continue Reading…

In an op-ed piece in today’s Wall Street Journal (subscription required), economist Arvind Subramanian questions the wisdom of providing foreign aid to poor countries.

In a piece titled Farewell to Alms (borrowing from Hemingway’s famous Farewell to Arms), Subramanian, a senior Fellow at the Washington DC think tank Center for Global Development argues that foreign aid damages governance and makes the receiving economy uncompetitive.

Subramanian seeks to debunk the Burnside-Dollar thesis that foreign aid works best when accompanied by good policies and effective local institutions. He argues in the WSJ piece that:

[A]s researchers pored over the data, it became increasingly difficult to maintain that there was any systematic relationship between aid and long-run economic growth.

Citing his research with Raghuram Rajan, Subramanian argues that in countries getting foreign aid, the export industries underperformed.

In Subramanian’s view, providing foreign aid distracts Continue Reading…

India’s economy grew a scorching 9.4% in the year ended March 31, 2007 up from 9% the previous year, according to the country’s Central Statistical Organization.

Taking note of the growth, the Wall Street Journal (subscription required), however, sounded a note of caution over the future.

Some economists warned that higher interest rates, introduced to damp inflation, could slow economic growth in coming months. In addition, the strengthening rupee, which reached a nine-year high against the dollar earlier this week, could crimp the financial results of Indian exporters by making dollars earned overseas worth less when converted back to rupees.

The Journal reported that India’s economy has grown at over 8% for the last four years and would continue to grow at least at 8%.

The New York Times today has a story on how India’s airline industry is growing “at breakneck speed” but having a hard time making money.

India’s outdated airports are staggering under the crush of passengers and flights, let alone giant planes, and the arrival recently in Delhi of an Airbus 380 required that the grassy edges of the runway be mowed and picked clean of rocks.

The NYT cites analysts that severe competition is causing airlines to lose $10 to $15 per passenger on every flight.

One analyst told the Times that 15% of the capacity had to vanish for the airlines to make money.

Consolidation also seems to be gaining momentum with Air India-Indian airlines merging and Jet Airways agreeing to buy Air Sahara.