What India needs to do urgently...

Feb 13, 2010

In this issue:
» India needs to reverse the stimulus package
» D Subbarao on the independence of central banks
» China hikes reserve ratio for the second time
» Four audit firms held guilty in Satyam scam
» ...and more!!

------- FREE Newsletter -------
Straight from the Hip - A Weekly E-Letter
"This weekly stock market column written by me has run for over 19 years on various platforms. I invite you to subscribe today for a fresh and thought-provoking perspective." - J Mulraj
Available exclusively to readers of Equitymaster. Sign-up Now! It's Free!

India is among the few countries which escaped the economic slowdown relatively unharmed. By now there is hardly any proof required to validate that claim. But for good measure, the latest factory output data seals it. As per a leading business daily, in December 2009, India's industrial production recorded the highest growth for a single month in close to three decades. Manufacturing grew by 18.5% Year on Year (YoY), propelled by capital goods (38% YoY), consumer durables (46% YoY) and intermediate goods (22% YoY). In our view, the record numbers must be seen in their proper context. In the same month in the previous year, factory output had contracted by 0.2%. Hence, there is a low base effect at play here. Hence, going forward the numbers will moderate to more normal levels.

But the key question is - will this provide the government the necessary push to start rolling back the stimulus package? In our opinion, it should. The worry over run away inflation and fiscal deficit are good enough reasons. Now, the robust growth numbers should provide Indian policy makers with the confidence to start reversing the low tax and interest rate regime sooner rather than later. After all, the dosage of even life saving drugs has to be reduced once the patient has recovered. Prolonging it will do the system more harm than good.

 Chart of the day
Even though 2009 was marked by the recovery of stock markets from the gut wrenching decline of the previous year, the story was different in other areas. The flow of foreign direct investment (FDI) - whether in the form of equity stakes, retained earnings or loans - declined sharply worldwide. As per the UN Conference on Trade and Development (UNCTAD), the flow of FDI was just over US$ 1 trillion in 2009, a 39% fall from around US$1.7 trillion in 2008. As today's chart of the day shows, the decline in FDI was the most severe in the developed world. The emerging Asian giants got away lightly. Despite the decline though, the US remained the world's top investment destination with FDI inflows of around US$ 140 bn.

Source: UNCTAD

Credit has to be given where it is due. Had it not been for RBI's astute reading of financial events, the sub-prime crisis would have inflicted far greater damage on the Indian economy. Hence, the independence of the RBI is something that has to be fiercely guarded. However, what if, this very independence starts to shake at its foundation. Such fears were raised recently by none other than the present RBI Governor D Subbarao. Addressing a research conference, Subbarao opined that the tensions between giving importance to economic growth and ensuring financial stability are not likely to go away easily. And this, he fears could weaken the independence of the central banks across the world.

Such a scenario can indeed emerge. Politicians have always been very keen to clip the wings of central banks. After all, once it is done, they can then keep on printing endless amounts of money to gain near term mileage and forget about its long term implications. The failure of some of the central banks to keep asset bubbles under check might have given them just the kind of opening they needed. Thus, the need of the hour according to Subbarao is for central banks to be more vigorous, responsive and accountable. Because any further slip up like the recent one and they may not be spared. The global economy too very strongly needs fiercely independent central banks. It just makes the world a much safer place.

A quick question. Which asset would the world run to if another global crisis takes place right now? It has to be the US dollar, isn't it? There is no substitute in sight. The Greece episode has once again brought to the fore concerns regarding the Euro while China's economy is still a fraction of that of the US despite all the bravado emerging from Beijing. Hence, despite all the money printing undertaken, the credibility of the dollar or call it whatever you can, remains pretty much intact. And it this credibility that economists like Joseph Stiglitz want the US Government to fully utilize. Nobel Laureate Stiglitz has argued that the likelihood of a default by the US is so small that it should keep printing and spending money because the world needs more stimuli. In fact, Stiglitz has called the idea of a default completely absurd.

While there could be some truth in Stiglitz's argument, the US Government could well be advised to not take this credibility for granted. If it breaks, it could suffer a virtually irreversible damage. And then, it would become almost impossible for the US to dig itself out of the hole that it finds itself in currently.

As decibel levels rise about China's economy entering a bubble phase, the country's policymakers are working to curb such a buildup. In order to tame inflation, the Chinese central bank has tightened credit off take for the second time in less than five weeks. This, it has done by asking large commercial banks to increase the amount of cash they park with the central bank. It will leave fewer funds with these banks to lend and support the bubble that seems to be building in the country's property and stock markets.

However, some experts like Andy Xie, the former chief Asian economist at Morgan Stanley, believe otherwise. As per Xie, China's moves are insufficient in deflating the bubbles . As he has told Business Week - "I think it's too late for psychotherapy. We need real medicine like raising interest rates."

SEBI is set to launch 1,500 to 2,000 super-ATM centers across the country in the next 12 to 18 months. These super-ATM centers will help investors invest in mutual funds, access information regarding the schemes, send queries and receive information at a press of a button. We believe that this is a positive step as it will help the ordinary investor access information more easily. At the same time it will help the mutual fund industry grow by providing them the last mile connection with their investors. It may be noted that access is one thing, making an informed decision regarding the most suitable investment is quite another. Nevertheless, we believe this is a step in the right direction.

The Satyam fiasco was not only about greed at the high corporate places. It was also about faith in the accounting and audit system in corporate India. This system forms the backbone of much of the financial data that investors, regulators and analysts use. If people cannot trust the financial statements of companies, a great deal of our financial edifice would crumble. Hence, while tracking the fate of Mr. Ramalinga Raju, it is equally important to ask "what happened to the auditors?" Turns out, they are facing strict action. As per a leading business daily, ICAI, India's accounting rule maker has held four Hyderabad based audit firms guilty in the Satyam scam. While action has not yet been decided, we believe it is only proper that those who break the trust reposed in them aren't allowed to walk away scot free.

After witnessing a decline for over three weeks, the world markets ended last week on a positive note. The Asian markets were amongst the top gainers during the week. While concerns over some European nations defaulting on their debt payments were on investors' minds, the news of rescue plans did manage to overpower the concerns. In addition, the fact that stocks turned cheaper (on the back of the sell off witnessed over the past few weeks), also played a role this week. India's benchmark index, the BSE-Sensex ended higher by about 3%.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance

 Weekend investing mantra
"A good business is not always a good purchase - although it's a good place to look for one." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "What India needs to do urgently...". Click here!

5 Responses to "What India needs to do urgently..."


Feb 15, 2010

We are a highly taxed nation.Every year, every finance minister feels compelled to increase tax rates.We actually need a freeze on taxation rates, slabs etc for a 5 year period at existing levels which are not at all LESS by any standards. On the other hand, what we need are effective channeling of the expenditure so that REAL RESULTS accrue from them. For instance, if only NREGS is run free of corruption, an in a manner that increases productivity also apart from employment - India will achieve stupendous and unbelievable results in our rural areas. But, what is now happening is mere distribution of sums - among labourers and among distributors.Nothing more is happening in many places.


Kersi Pirojshah Mahudawala

Feb 13, 2010

The Government should not push to start rolling back the stimulus packag in hurry as the growth is still not balanced in all sectors.No doubt the worry over run away inflation and fiscal deficit are good reasons for withdrawl but the Govrnment should not act in hurry and should wait for some more time.



Feb 13, 2010




Feb 13, 2010

Conceding the fact that India's industrial production has recorded high growth during the month of December 2009, it may be too premature to start rolling back of the stimulus package. What we are reminded of at this juncture is the good old saying "One swallow does not make a summer".



Feb 13, 2010

A argument to keep the stimuli going.

The Indian government cannot take a decision in isolation when Dollars are being printed in abundance.

The Indian needs more money in his wallet to invest in Indian businesses. If not then the dollar funded foreigner gets to easily invest in India and own businesses and profits generated by it at a pretty cheap price (paper and ink cost).

More Indian rupees are needed to counter this flow. Interest rates should start going down even further and fund flows should be eased. Allow Indians to easily borrow and invest in Indian and foreign businesses. If possible borrow $ at very low interest rates and provide to the Indian businessman to expand businesses...

Equitymaster requests your view! Post a comment on "What India needs to do urgently...". Click here!