Are we too pessimistic about India?

Jan 28, 2011

In this issue:
» Soros thinks India's biggest problem is 'hot money'
» Indian banks to have cash problems?
» Small & mid caps shy away from equity markets
» Global managers gearing up for another global shock
» ...and more!!


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00:00
 
We all know how a few industry titans got together a few days back and shot off a letter to the Indian Government. Among other things, the letter talked about how these corporate heavyweights were at their wits end over complete breakdown of governance at all levels. In a rather interesting turn of events, this view has been questioned by another noted industrialist. Sunil Mittal, Chairman of the Bharti Group has opined that we Indians are becoming too negative about our own country. "India is a positive story today. It's growing at 9%. It is a trillion dollar economy. We need to keep our positivity intact", a leading daily quotes Mittal as saying.

Well, it is quite possible that Mr. Mittal is an ambitious and an optimistic gentleman and hence, seems to have overlooked some of the concerns plaguing India. It is also quite possible that the industrialists on the other side of debate are quite cautious and measured in their approaches and hence, the very same concerns bothered them greatly. As is evident, it is very difficult to arrive at an objective answer to this debate. There are very strong chances even our views are colored by how we think about things. How then should one approach the entire thing? To borrow the title from a recent book, we believe that we should be nothing but Rational Optimists. Too much negativity may not allow us to prepare solutions for the future whereas too much positivity may leave problems which are currently too small, too big to be tackled successfully in the future. And good governance is we believe one such issue. There is no doubt that this issue is being swept under the carpet by robust economic growth and strong demographics. But if not tackled at the right time, it could be the key reason behind India not realizing its full potential in the times to come.

Which side of the debate are you? Share your comments or post your views on our Facebook page.

01:15
 Chart of the day
 
The world is arguing over currencies. Everyday we read on how the US dollar and Euro are battling out on which one appreciates more. The US is busy blaming China for manipulating their currency. In the meanwhile, what has happened to our very own Indian rupee? Since its peak in March, the rupee has appreciated by nearly 12%. Today's chart of the day shows the trend in rupee dollar exchange rates since March 2009. Appreciation of the rupee against the dollar is particularly hurting companies which earn substantial amount of their revenues in US dollars like the IT companies. It translates to lower revenues in rupee terms. If the rupee continues to appreciate this way, these companies would be looking at tough times at least from the currency point of view. Let us hope for their sake, that this does not happen.

Data source: Trent

01:45
 
There is no denying the fact that a good portion of FII money that flows into Indian stocks is 'hot' money. FIIs are generally termed as fair weather friends - they come when times are good, and they move out when the tide turns. Their influence on Indian markets is such that a whiff of news on their intentions can make or mar the stock portfolios of Indian investors.

As we have seen over the past few months, FIIs have poured money into Indian stocks, thus taking the markets here nearly back to their previous highs. But this hot money can weigh heavy on India going forward. This is at least what the legendary hedge fund manager George Soros believes.

As per an interview with The Economic Times, Soros has said, "India has a very good dynamic among emerging markets and it also has domestically driven growth. But inflation is now an issue and hot money into India is very much a part of that issue. So that will weigh on India in a big way."

Soros' funds have been one among the FIIs into Indian markets in the past. His views thus ring an alarm bell about the intentions of foreign investors

02:45
 
Thanks to the recent volatility that has plagued the Indian stock markets, midcap and small cap companies have been at the receiving end. Many of them have seen stock prices fall much faster than that of its larger peers. Little wonder then that midcap and small cap companies are not too enthused about turning to the equity markets for raising funds for fear of their offers not getting the required response. The alternative course of action then seems to be debt. Many of these companies are finding debt the preferred route to meet their immediate fund requirements. This is through various instruments such as bonds, non-convertible bonds, commercial paper and fixed deposits. That said, smaller companies do not enjoy the kind of pricing that larger companies do. Thus, midcap and small cap companies more often than not will have to raise debt at higher rates. Plus, they will have to also generate sufficient cash flows to be able to repay this debt in the future. A difficult choice, indeed!

03:35
 
Meanwhile, the Indian markets are trading well below the dotted line, due to profit booking in the index heavyweights. All sector indices are trading in the red with consumer durable and realty stocks leading the loser pack. At the time of writing, India's benchmark index, the BSE-Sensex was trading lower by about 309 points or 1.7%. Mid-cap and Small cap stocks are trading weak as well. Most major Asian markets are trading on a negative note with Japan and Hong Kong ending lower by 1% each. Markets in China are however, witnessing buying interest.

03:55
 
The December quarter results for most banks have come in better than expected. Despite the scare of tight liquidity most entities seem to have locked in robust growth rates in loan book. For some this growth has been supported by accretion to low cost and term deposits. Others have resorted to borrowing from the RBI to facilitate balance sheet growth. However, it may help to keep the growth expectations from the sector tempered for the medium term. The RBI seems to be in no position to ease the liquidity scenario for the sector given the inflation risk. And deposit growth may come in only at higher costs. Thus banks will have to sacrifice growth for margins or vice versa in the near term. Having said that, the liquidity crunch in 2010 was also driven by telecom auctions and big ticket IPOs. In their absence day-today operations for banks may not be as difficult as it is made out to be.

04:20
 
Is the global economy on a recovery path? Is the worst over? We're not too sure. Several potential dangers are lurking around and waiting to send another global shock. Where the shock comes from could be anybody's guess. But we'll name some concern areas for you- Asset bubbles in emerging economies, soaring world commodity prices and the huge levels of state debts in Europe. These risks are plaguing business leaders too.

The global economic crash is still fresh in our collective memories. And one of the keystones on which the US built its "house of cards" has found its way into developing and emerging economies. What are we talking about? You may have guessed it. Cheap money it is! And given that we are bad history students, it is difficult not to repeat the mistakes of the past. Surging asset prices in emerging economies, especially China, remain quite a concern.

As if this was not enough, the jitters of rising commodity prices are being felt almost everywhere. Soaring food costs have already triggered fears of political unrest in some developing countries. And given the incredible pace of urbanization in emerging economies, the pressure on commodity prices will see little reprieve. So we prefer to keep our fingers crossed and to maintain our vigil. We're curious to see when and where the next crisis comes from.

04:55
 Today's investing mantra
"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." - Warren Buffett

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24 Responses to "Are we too pessimistic about India?"

JS Pandher

Jan 28, 2011

Dear Sir/Madam,
What big industrialists are worried about is really true.People sitting in big offices may not realise it but it is a hard truth that everage Indian has been marginalised.He hardly has any hope of getting justice.If India really aspires to be a super power it has to have a better governance in place and licence Raj has to relent.
Thanks

Like 

snm

Jan 28, 2011

There is a lot of merit in what George Soros has to say on hot money. As I see it, this is a negative sum game for local investors/institutions. Hot money flows in, raises markets and expectations of local participants, then flies out faster than it came in taking with it profits 'contributed' by the local investors/institutions who are left behind licking their wounds.Its high time that this FII money is regulated by GOI/RBI/SEBI both in terms of volumes and minimum residence time plus gains taxed same way as their hapless victims - the locals.

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Mukta R

Jan 28, 2011

I do not think this is a pessimistic view. Our corporate sector has done exceedingly well despite government apathy, and lack of support on many fronts. Now if it does not pull up its socks.... failure of governence, and failure to develop supportive infracture will really create a bottleneck for the GDP growth. Thanks to our active media its a wake up call to our government....We have police force which lags decades behind their international counter parts.. when will this ever be modernised???? How many Sonawanes and Dubeys should sacrifice their lives to awaken this pathetic governance????

Like 

A.P.Fonseca

Jan 28, 2011

Without good governance and accountability, even India`s
sustained 9% growth rate CANNOT be sustained in the long
run. Also, of what use is this growth rate if 50% of the
population cannot improve their status. Most of our business tycoons have a myopic vision based on herd mentality. Although they are aware how the other half of India lives, they merely shrug their shoulders, while declaring " we are trying our best ". And do not forget the Babus and the law enforcers, who also sing the same tune.

Like 

Mohandas

Jan 28, 2011

I believe it is a rational appraisal that the huge potential of growth and prosperity for the nation is constantly being undermined by the ever increasing size of corruption in the interfaces of bureaucracy and all public agencies without exception and in the Corporate sector, greed of a few to amass wealth beyond reason instead of ensuring the people at large benefit.If only the poor and vulnerable people were properly catered to by the agencies assigned those tasks then they would have been great productive assets of the nation instead of them being viewed as burdens of the society, which they are not. In developed societies, every one counts. Corruption is the visible face of the disease. The bigger issue is our attitude towards fellow citizens and our lack of passion to care and share. A little value for discipline in every sphere as a way of life will do wonders. Time we all stressed on our 'obligations' rather than just the 'rights' enshrined in the constitution. Let us remember all people every where are corruptible but all are not. What determines who is corrupt is the strength or weakness of his/her moral fibre. It is the corrupt who look for corruptibles with some weaknesses.

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sundareswaran bhanu

Jan 28, 2011


A SEPARATE DEPARTMENT for evaluating , fixing and approving prices of all goods/products and services including
agricultural produce should be formed in the Govt.,to control exhorbitent price rises by producers/sellers and
hoarderes.Now it is a free for all situation to increase prices at their will,as Govt.has no control over them.
All banks should be nationalised.
very effective ways to control and stop speculation in all fields should be devised to avoid crashes.

Like 

ak

Jan 28, 2011

It would be better if Equitymaster concentrated more on its recommendation rather than sending all these marketing mails on its services. Markets are tanking daily and still after 1 week on friday, we get a hold recommendation on a stock. Can't you guys find any buy recommendations?

Like 

sethu

Jan 28, 2011

Country is governed by crooks.A suspected corrupt person is chief of Vigilance commission.Black money held in swiss Bank accounts this govt.seems to be protecting the Hoarders.Gap between Rich and poor are widening in this country.Ministers are chosen by Radias and Tatas and Journalists and our PM is just a puppet.Food inflation is so high.Land grabbers too many.law and order in many states is bad.
Mittal may be abeneficiaary so he says things are OK.Realistically things are very very Bad in india.

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DD

Jan 28, 2011

Mr. Mittal is absolutely wrong. Objective answer to this is of course possible & that is "NO" to Mr. Mittal. Let me prove it in brief (not exactly ha ha ha)
Bad governance is not that bad if is due to negligence because it could be repaired with slight strictness. but when it is for notorious reasons (corruption) it could not be corrected. Everydody knows, a bad highway will slowdown your move. If Mr Mittal is sitting on 2nd sky & is happy then he should realise that he could have been on 7th, if things were ideal.
finally-If a person is still satisfied with this corrupt system, it sounds that this system suits him !! (titan by Entice !!). This for sure is Henchmen approach!

NO Mr. Mittal- its not the case I know but "opposition for opposition sake" is Dismal for a country.
If you appriciate this system then "making of Mittal"(expected biography of you) would be worth reading ! I am waiting (for a change in your gesture /your biography)

Like 

Joseph

Jan 28, 2011

Scams and Corruptions is age old, the difference now is it has become transperant and is seen by all.

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