The key to India's future growth is...

Jan 20, 2010

In this issue:
» Huge opportunity in generics for Indian pharma
» Banking sector should be monitored, says Krugman
» Wall Street analysts dismiss 'new normal' GDP trend
» India Inc. displays innovations for the mass market
» ...and more!!

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The global financial crisis may have wreaked havoc on the developed world of US, Europe and Japan, but India escaped relatively unhurt. A vibrant domestic market and an independent central bank were among many of India's strengths that helped it tide the crisis. This is not to say that there were no hiccups at all. Monsoons played truant hampering crop production. As a result, food prices have soared and higher inflation looms large. However, stockmarkets witnessed a stupendous rally in the past one year. Even Indian companies, whose businesses were largely impacted in the latter half of FY09 and early FY10, are once again looking to spend on a big scale.

Take the case of the PSU majors SAIL and NTPC for instance. Both have outlined huge capex plans over the next few years. These entail billions of dollars as investment. For funding such huge investments, debt will certainly play a prominent role. No doubt investments are critically needed to spruce up India's infrastructure.

But here we believe that execution risks could be an impediment to India's growth going forward.

This is not something new. The power sector is a fitting example. Despite acute peak power shortages in the country, the pace at which power infrastructure has ramped up has been poor at best. And while the finger in this regard gets automatically pointed towards the government, companies too have been guilty on not executing orders on time. Therefore, as far as huge capex plans of companies are concerned, execution will be the key. Otherwise, on a micro level, higher debt and mounting costs will eat into profits and strain cash flows. On a macro level, there will be no meaningful contribution to India's growth.

 Chart of the day
Competition in the global pharma generics market has considerably heightened over the last few years. This has led to severe price erosion of branded drugs. This is because once the patents are lost, many players vie for a share of the drug's sales. Indian generics players are not only competing with foreign players but also with each other in this global arena. One thing is clear. The opportunity in generics is immense given the increasing pressure on governments across the world to cut down on costs. And as today's chart of the day shows, drugs worth billions will lose their patents over the next three years. This is a huge opportunity for Indian pharma companies, which are largely focused on generics, to grow their revenues from the generics market by increasing their product launches.

*These are forecasted figures
Data Source: The Economist

In a recent issue of the 5 Min., we highlighted how bankers in the US apologised for their mistakes - of playing a key role in bringing down the US financial system. But some of the comments have certainly left a bad taste. It has made us wonder whether these guys really feel sorry for what they have done.

Take the case of one of the CEOs who proudly claimed later that a financial crisis is something that happens every five to seven years. Not surprisingly, many experts, including the likes of Paul Krugman have taken a strong exception to this. In an article in the New York Times, Krugman has argued that if this is the kind of argument bank executive can come up with, then it would serve the administration well to not seek any advice from Wall Street at all.

He further adds that it was only after we forgot the lessons from the previous banking regulation that the financial system became dangerously unstable. And it was time to return to some strict monitoring of the banking sector.

As economies globally let the dust settle after the global meltdown, they now seek to absorb the 'new normal'. This term has been coined for suggesting the new economic scenario that is different from the past. But more importantly it emphasizes on the economic variables that are set to change. The ones that were abnormal in the past but are likely to be 'normal' in the future. These vary from GDP growth rates to interest rates to debt levels and currency strengths.

Conservative economic experts ranging from our own ex-RBI governor Dr. Y.V. Reddy to world's biggest bond fund manager Mr. Bill Gross have warned about the 'new normal'.But there don't seem to be many buying into their views. Dr. Reddy for example believes that that the future will be a lot different from what the world saw two years back. At the same time, Gross believes that the US GDP will not grow beyond 2% over the long term.

But the Wall Street, as ever, refuses to buy into conservatism. Even if it means a difference of 0.5%. The Wall Street analysts have dismissed the 'new normal' GDP trend. They refuse to let the figure drop below 2.5% for the future estimates. The fact that S&P 500 index is up more than 25% since May 2009 shows that investors have been betting on the more optimistic outlook. We are not sure if the Wall Street guys are once again targeting hefty bonuses by luring unsuspecting investors. Meanwhile, we in India should ideally be all ears to Dr Reddy's warnings.

The rest of the world is sitting up and taking notice of the innovation and ingenuity shown by Indian companies like never before. A recent report in London based business daily Financial Times is testament to this fact. A trend arguably brought in the limelight by Tata's Nano, tons of other products and services customised for India's mass market are making their appearance.

The Financial Times report cites some areas where Indian innovations are springing up, including solar power, mobile telephony, medical equipment and toilet technology. Indian engineers have also invented a battery-powered, ultra-low cost fridge resistant to power cuts, an automatic teller cash machine for rural areas and even a flour mill powered by scooter. The Indian entrepreneur certainly seems to be in his prime. With Indian companies coming of age in the eloquent fashion that they have, looks like now it's just a matter of time that the benefits start pouring in.

Noise about China's realty market being in a bubble just got louder. And the one to join in now is none other than the perennial bull on the country - Jim Rogers. As he's told Bloomberg, Rogers believes that Shanghai and Hong Kong property prices may fall after being driven higher by speculative demand. However, in the same breath, Rogers is positive on the Chinese government's attempt to restrict lending to the sector. As for the rest of the Chinese economy, well, Rogers continues to believe that it's "hardly in a bubble."

Of all the worries that the Indian government must be facing, high food prices must be high on the list right now. There is little the government can do about it though, as per a leading business daily. You see, supply of agricultural commodities continues to lag behind demand. That causes speculation to drive up prices. Be it sugar, potatoes or pulses - all are suffering from low production. As a result, food prices are unlikely to come down any time soon. In fact, our best hope of lower food prices is a bumper crop in the coming season. In the meantime, greater co ordination between the centre and the states will help. It's high time they did that. After all, food prices hurt the poor the most. And that usually translates into a heavy political price.

Meanwhile, after witnessing considerable volatility, the BSE-Sensex was trading lower by 37 points (0.2%) at the time of writing. While oil & gas stocks led the pack of losers, gains were seen in auto and metals stocks. While most Asian markets were trading mixed at the time of writing, European markets are also witnessing a mixed trend.

 Today's investing mantra
"The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." - Warren Buffett

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7 Responses to "The key to India's future growth is..."


Feb 4, 2010




Jan 21, 2010

It was a good well-rounded report taking care of all aspects. I agree food prices are likely to be the determining factor in the future and in my opinion the Union Food Minister needs to be more careful before making comments. Do you think there is an ulterior motive ? First sugar and now milk - isn't it becoming too frequent and much too close to each other.
Looking for more reports like on PSU disinvestments. Thanks Kaveri


Vinay Ambekar

Jan 20, 2010

Dear Sir
Equity master has several times suggested that news channels should be switched off, or kept on mute to cut out all the "noise" generated by them - with all the views of all the "experts" on the various channels. However, in every other edition of 5-minute wrap, views of some of the experts like Faber, Roubini, Rogers, Mobius are repeatedly quoted. Yes, these gurus may be above everyone else, but simply giving a 1-line snippet without backing that with either the full article (to help us understand the whole picture) or with your reading of the view, does not serve much purpose.



Jan 20, 2010

5 minutes wrap up is just brilliant, It Provide a very clear and good knowledge in such a less time its great.


s n gupta

Jan 20, 2010

In my opinion Food prices can be controlled if the hounerable agriculture minister keeps his mouth shut when ever he opens his mouth he opens for inflation or has definitely a vested interest,first Rice sugar dal and now milk,may god can save indian public from such food ministers.


M Narasimha rao

Jan 20, 2010

This broadly covers all points /developments and summarises well with inputs from experts,News paper Reports,Govt. announcements etc.
However to increase utility, pl. make this after the market/trading closes.
Also pl.put the actual closing index with previous day's figures.(curently u are saying closed -- points higher or ----points lower etc.


Sritanu Chatterjee

Jan 20, 2010

Dear Sir,

The article reminds me about Ajit Dayal. In one of the investor's summit which I attended he said "We do not provide much importance to what is said by the Indian Institutions, whether it is RBI or CMIE or NCAER. But when the same thing is told by some institution in Wall Street then we feel confident to accept the views". All the reports about innovations in India that is now being published by Financial Times as part of their BRIC series have already been the cover stories of BusinessWorld magazine.


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