The next big crisis will be...

Feb 12, 2010

In this issue:
» After banks, it the turn of entire countries
» RBI action on inflation pushed till April
» Faber predicts Chinese slowdown
» Money for social development left unspent
» ...and more!!

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"Hurray! The crisis is over", everyone seemed to exclaim in the latter half of 2009. But it is rapidly turning out that the declaration was premature. The banks collapsed the last time round. It seems, this time it will be the turn of entire countries. The last time, governments stepped in to rescue banks. It will be interesting to see who rescues the governments.In an interesting article, The Economist notes that in Europe, Portugal, Ireland, Italy, Greece and Spain (termed PIIGS) are struggling to repay their debt. In Asia, China has tightened its monetary policy to check asset bubbles. Brazil has begun reversing its stimulus. Closer home, the RBI has tightened reserve requirement for banks. The impact has been evident in the stock markets worldwide in the last few days.

There are fundamental problems in the western world. The governments are sitting on too much debt and economic recovery is mostly driven by government stimulus. Fortunately things are much better in countries like India and Brazil where domestic demand is robust. The one question everyone asks of policymakers around the word these days is, "When will you withdraw stimulus packages?" In our opinion, the answer should be "Soon", in the case of India. As for the developed nations, they will have to wait. Their economies are too fragile at this stage. Of course, this is assuming that some of them won't fail outright. If and when that happens, investors are in for another roller coaster ride. We would advice you to keep your list of favourite companies ready.

 Chart of the day

Note: For FY09
Source: Mint

Speaking of the RBI, it has asked banks to lend based on a new pricing system from the next financial year. They have been asked to use a 'base rate' instead of the current 'benchmark prime lending rate' (BPLR), which is not considered transparent. Currently, blue chip customers avail loans at below BPLR rates. In the future, banks will be able to lend only at or above the base rate even to the blue chip customers. The base rate will be calculated by adding the cost of deposit, impact of cash reserve requirements, margins and other charges. As today's chart of the day shows, the cost of deposit varies across categories of banks. As a result, there will be a great variety in base rates as well. However, RBI feels that the new system will be more responsive to monetary policy. Under the BPLR system, banks often didn't pass on the monetary policy changes to the customers.

In recent months, food and fuel costs have captured a large chunk of the monthly budget of an average Indian middleclass household. Thanks to that, the disposable incomes in most households have been reduced to a pittance. If the government and the RBI have their way, the average Indian will have to live with a bigger hole in his pocket for sometime. The government's inability to improve food supply and curtail price rise has been well documented. Overhauling the public distribution system is a long drawn process with unconvincing results. The onus on RBI to control excess liquidity-induced inflation seems to have also been pushed until April. A further rise in fuel prices will only worsen matters for the consumer. While economists may be predicting a 7% plus growth rate for the economy, it remains to be seen whether the food cum fuel inflation will leave any room for consumption growth.

And the debate about whether China will slow down or not continues to rage. Marc Faber is the latest to throw his hat in the ring. In an interview to Bloomberg, Faber has opined that the Chinese economy will slow down meaningfully this year and in fact, even has the potential to crash because when the loan growth slows down, it will become difficult to take a call on how the economy will react. Faber thus joins a long list of financial experts who, for quite some time now, have been arguing about the overheating of the Chinese economy. While we are no experts on the Chinese economy, we believe that the dragon nation cannot continue to keep on pumping billions of dollars into the economy no matter how strong the finances. Thus, there has to be a slowdown in loan growth and when that happens, the economy should also slowdown. This could certainly be good news for users of industrial commodities. Already, China seems to be having excess capacity across a range of industrial commodities and if there is any further slowdown, prices could correct meaningfully.

The current government has often made much hue and cry about allocating funds for social development projects. However, the irony is that money allocated to several such projects remains unutilized. A leading newspaper report has in fact pegged such a sum to around Rs 1,000 bn or about 2% of India's GDP! And this is just out of the money allocated to various ministries between FY06 and FY08. The report cites statistics from the Comptroller and Auditor General (CAG).

What's worse, the CAG has pointed out that there are doubts even about whether all the amounts shown as spent in government accounts have actually been spent! So there you are. One can now understand why the government has not been able to do much for the socially deprived despite promising big sums for their upliftment.

The need of the hour is capital so that the wheels of the economy keep moving. One of the sources of capital is foreign direct investment (FDI). As per a leading financial newspaper, in a move to ease foreign investments, the government has permitted the Foreign Investment Promotion Board (FIPB) to clear proposals with a total foreign equity investment of up to Rs 12 bn. This is up from Rs 6 bn. Moreover, this only applies to equity investments and not to the total project cost as per the earlier practice. Therefore, the total project can potentially be much higher. We believe that this is a positive step as it simplifies rules and improves the transparency of the FDI regime while boosting investor confidence.

The Indian government recently, and quite suddenly, decided to clamp down on the supply of power generation equipment from China. As per reports, last year the government tightened visa regulations in a move that forced at least 3,000 Chinese workers on power projects to leave the country. Subsequently, it put in place strict new limits so that no more than 1% of a project's work force can be foreign nationals. More recently, the CEA (Central Electricity Authority) asked government controlled power generation companies to use only Indian equipment on all upcoming projects. Reports suggest that now the government is also looking to tax imports of equipment from China.

No doubt that this will give a booster shot to current and potential power equipment makers in India like L&T and BHEL. But at the same time, it must also be noted that India is still in the nascent stages of having the capabilities to make more efficient supercritical equipment. This is an area that the Chinese have a lot of experience in. Thus, this sudden U-turn in stance by the Indian government may also bring along with it delays in scaling up India's power generation capacity.

The Indian markets remained closed today on account of Mahashivaratri. At the time of writing, the other key Asian markets were trading a mixed bag. While China and Japan were trading up by 1.1% and 1.3% respectively, Hong Kong and Singapore were in the red. Europe had also opened on a mixed note.

 Today's investing mantra
"Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied." - Benjamin Graham

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11 Responses to "The next big crisis will be..."


Feb 15, 2010

Most state governments know how to dole out money or goods freely.This has been a great vote-catching device in all states. But, they do not know how to draw up developmental schemes and implement them at all levels.


J. A. Lakhkar

Feb 14, 2010

Ban on using Chinese equipment in power projects has not come a day soon !! India is making a laughing stock of itself by claiming to aspire to become superpower on one hand and importing practically all capital goods required for infrastructure development as well as defense goods on the other hand. CVC's ban on BSNL's purchase of telecom equipment by cancelling the 93-million lines tender is a blessing in disguise - Indian telecom sector needs to get into equipment manufacturing and system integration, rather than running call centers. When is India going to harness its technicians to worthwhile tasks, rather than pushing them out of the country to pursue careers in other countries and in the process enriching them ??


ramkrishna misra

Feb 13, 2010

very informative



Feb 13, 2010

Why markets remained closed on account of Mahashivaratri - Are we all Sadhus that we have to go to Kumbh for Holy Dip, or have the Sadhus begun trading on the stock market. Even the Post Office was open.



Feb 13, 2010

Thanks a lot. Really you are giving very good tips for investments and I request you to please give daily trading tips also.



Feb 13, 2010

As rightly pointed out, food and fuel prices have soared high and the common man has been put to great hardship. There are clear indications that there will be a further steep hike in the fuel prices. This in turn will certainly have a chain effect. So, the next crisis is in the offing and in due course one will come to know how big it is going to be.


Kersi Pirojshah Mahudawala

Feb 12, 2010

It is unfortunate that money allocated to several projects remains unutilized and it is even more unfortunate that all the amounts shown as spent in government accounts have actually been spent.The Govrnment should monitor and ensure that the money has been used for the purpose it is meant.



Feb 12, 2010

Reading yr comments on the crisis in the manufacture of Indian made Power Equipment,and clamp down on the manufacture of chimese made Eq.Did it take the Wise Head in INdia so long to understamd how they ley let China let loose its reign of teror of substandard goods, wheras in fact we have the same and in fact better manufacturers of the same commodities.Why is it that we only follw and lag behind them? This smells of of an awful bi9g damn lot of a conspiracy to subvert the Indian Manufacture and promote the Chinese which on any given day are abyssimally poot, and yet the Govt. of India has not had the gumpt and will and nerve to promote the Indian Co."s who are far more superior andhave the skill and the brains to give INdia what she wants. To whAT EXTENT ARE THE powers that be mired in corruption that it will not let its own Country stand up and be counted?To what extreme is CORRUPTION ingrained that our so called leaders are not willing to stand up and be Counted? Do yhey have the Guts and Gumpyion to allow India to stand up and shine? Words cached in superficial language by our so called leaders are fine,because the common man who understands is not willing to stand up and call them to Account. OUR Country has brilliant brains and guts and gumption! Is there anyone who has the will power and the guts to call the Govt. To answer? Let us do it before it is too late.Corruuption has crept into each and every levl of our Soc. I do not know whether in my life time I will ever see the same eradicted. But I hope and I pray that people like wuill comeb forwaRD AND LEAD A MOVEMENT TO UNSHACKLE THE CHAINS OF CORRUPTION.ENOUGH IS ENOUGH. Can u find the way?



Feb 12, 2010



pramesh srivastava

Feb 12, 2010

the real problem that will stay for long is food inflation.despite the efforts govt cant do anything about it.we need another green revolution and it has to kick on real fast.the stocks who sre multibaggers in the making are food stocks.guys watch out.accumlate slowly ten yrs from tday they will be some 20 fold returns.

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