Is India in crisis?

Feb 19, 2011

In this issue:
» Ghost of debt haunts realty companies
» India's pharma exports to grow to Rs 500 bn
» Mr. Bernanke turns defensive
» "Pricing power" most important: Buffett
» ...and more!

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Budget time two decades ago. India stood on the brink of a crisis. It was the crisis of survival. To survive, India could no longer continue its closed economy. At that time, Dr. Manmohan Singh stepped in with his grand liberalization programme. It was a success. India not only survived but also went on to become one of the fastest growing economies in the world.

Fast forward to 2011. It is budget time again. And again India stands on the brink of a crisis. But this time the crisis is not for survival but a crisis for growth. That's right. The crisis this time around is on how to achieve growth.

The drivers for growth are still intact in the form of a growing middle class population, vibrant industrial sector, robust service sector, etc. However, unfortunately, the road blocks on the path of the growth have just grown bigger. The quantum of resources available to the government to invest in the areas that would drive growth, are just getting more and more limited. For instance, the government needs to cut back on subsidies and use the money to invest in infrastructure and debottlenecking the supply side glitches. The latter are the main reasons behind the growing inflation. However, cutting back subsidies is not politically viable.

So what are the options available to the government? They could raise tax rates but this would pinch the pockets of the common man who is already reeling under higher inflation. And if this happens, he would cut back on his consumption which in turn would affect growth.

So as we said earlier, India is again on the brink of a crisis. And all eyes are turned to its Finance Minister to help the country out of this situation. Will he succeed like the mighty Dr. Singh of 1991? Only time will tell.

What do you think India needs to do to achieve the 10% dream growth rate? Share your comments with us or post your views on our facebook page.

 Chart of the day
India's economy has been growing at a stellar pace in recent times. And its people have shared this growth. Today's chart of the day shows how the per capita income in India has been on the rise. Per capita income is the total GDP of the country divided by the total population of the country. True that it does not present an accurate picture as it does not capture the income divide in the country. But nevertheless, it is still a good proxy for the overall growth in the living standard of a country's population. And by this measure, Indians are prospering.

Data source: IMF

Do fallen real estate stocks tempt you? Looking at the economic scenario we don't think they should appeal to you. Huge debt, slow pickup in sales, involvement in scams all together has further raised eyebrows and clearly rules out a revival in the fortunes of the struggling sector. Some leading real estate companies are now being probed for their alleged involvement in the 2G scam. Not too long ago the companies from the real estate sector were involved in the bribe for loan scam. Going forward, tough regulations towards lending to real estate companies along with the rising interest rates will impact new demand and the borrowing cost. Amidst all this uncertainty we believe that investment in the sector should be avoided.

Indian pharma companies did not have much to cheer about in FY10. The global economic slowdown left its mark on the pharma industry as well as companies chose to rationalize their inventories. As a result of which sales growth was rather tepid. That said the scenario is set to change over the next 2-3 years. An increasing number of drugs are set to lose their patents presenting huge opportunities to Indian generics players focusing on the overseas markets especially the US. Not just that, governments across countries are also keen to accept generic drugs in a bid to reduce overall healthcare expenditure. And so the Pharmaceutical Exports Promotion Council (Pharmexcil) opines that pharmaceutical exports from India will touch Rs 500 bn in FY11. This translates into a healthy growth of around 20% YoY. Of course, most of these players will have to contend with increasing competition and price erosion which is a regular feature in the global generics markets. That is why those players focusing on limited competition products or niche ones will have the edge over their peers.

Everyone knows what mess the easy money policies of the US have caused the world over. Now there could not be a more obvious thing to have happened. The US Fed Chairman Mr. Bernanke still strongly defends the US policies. You may want to call it inconsistency-avoidance tendency. We'd like to be the first ones to call this phenomenon the Bernanke bias.

Anyway, let's hear a little bit of Mr. Bernanke's arguments. They are nothing new really. Just a repeat telecast actually. He continues to throw the blame on the surging growth in developing economies for the trouble in the US. It is the emerging markets, according to him, which are responsible for the run-up in global commodity prices. Of course, these allegations are aimed at China.

We'd like to conclude this little note with a famous Hindi cinema dialogue: "Those who live in glass houses, should not throw stones at others!"

We'd like you to answer this. While evaluating a business, what is the single most important parameter that you consider?

Well, the Godfather of investing, Warren Buffett, offers you a maxim you cannot refute. According to him, that one most important parameter is "pricing power". And this one thing is so important that he sometimes doesn't even consider the management in charge of the business. So why is "pricing power" so important for a business? Let us explain a bit.

One, if the business can raise prices without losing its market share then it surely has a very strong advantage over its competitors. It means that the company can easily pass off any rises in costs to the customers. Hence, there is no need to compromise on the margin front. And such a business not only survives, but even manages to thrive in times of economic downturns, when many a competitor goes under the water. The other important advantage of a business that has pricing power is its lower dependence on management performance. Pricing power alone assures that more than half the battle is won.

This lesson is very apt in the current high inflationary economic scenario where margins are under constant pressure. Have a look at your own stock portfolio and ask this important question: Do these companies have pricing power? We believe this one question has the power to make or break fortunes.

The week that went by was a good one for both Asian as well as the European markets. China and Brazil (each up 3.5%) were the biggest gainers of the week followed closely by Hong Kong (up 3.4%). As you can see from the chart displayed below, the Indian markets was one of the leading gainers this week with its benchmark index, the BSE-Sensex, posting a gain of 3%. Easing political tensions in Egypt led to broad based buying across the globe. While drop in food inflation lifted the Indian markets, developed markets registered modest gains for the week as upbeat corporate earnings forecast overshadowed China's latest monetary tightening move.

As for the other markets, France and Japan closed the week in the green and were up 2.2% and 1.4% respectively. US was up by 1.0%, while UK and Singapore closed the week with modest gains of 0.3%.

Data Source: Yahoo Finance

 Weekend investing mantra
"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed." Benjamin Graham

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21 Responses to "Is India in crisis?"

Sujit Banerjee

Mar 1, 2011

Taking bits and pieces from the comments of many commentator I should say in a human body if the Brain and Heart does not functions properly a human being is considered to be unfit. This is the state of affairs in our ruling system. Someone has talked about Singapore which I have seen first time in my life in 1981{ the country that got seperated from Malayasia in 1965 because its ruler's had the foresightness and above all the desire to develope this Island nation without any natural resources to a country of such a standered of living for its citizen that the world is talking about it since 1980's) and now also I am watching in 2011. I being a Merchant Navy Chief Engr since 1990's was told by my Captain then in 1981 while going out at Singapore with shore pass to be very careful about not spitting or littering on street side or crossing roads when there is signal indicating not to cross and above all if you are intercepted by police for any fault better to appologise rather than trying to BRIBE( which is very natural in India specially that what is wanted by our police force) him which will make me put behind the bars minimum for aperiod of 10 years. Such was the standard of discipline.}.
Now what to say when so much of exposer has taken about CORRUPTION and by people at higher ranks but NO ACTION (only eye wash) capital punishment has taken place. So what to talk about economic growth? IIM-A graduates are hired at Fat salaries to nicely design products for ULIP's to cheat common man( deduct 30 to 40% of your investment on the very First year as management service charges without giving any service at all and compell you to keep on investing for further 3 to 4 years). Bring back Swiss Bank stashed money,use it for development,capital punishment for all those who have done it so that no one in future dares to do it again.We will not not see R.K Mishra the finalist of LEAD INDIA Programme by Times of India to head the country. RAHUL GANDHI ( Hame Karna Hoga - Kub?) will be our next PM. Wah . Great India.



Feb 20, 2011

Market has been opened up for other countries in 1991 and success is still being tasted. This time they can provide "India is flat" for Indians.

Remove red tapes and regulations that is helping politicians and top few waelthy businessmen.

Allow anyone to open up education institution and run it for profit.

Hold auction and pay market rate to procure land from owners.

Privatise transports(rail and road). Do not restrict # of licenses.

Reduce all taxes gradually to nil and tax only on the basis of sq.ft of land owned and cu.ft of building built, if warranted then a % of amount from all bank accounts.

Gradually bring down use of paper money and implement process to achieve 100% didgtal transfer of money.

Implement 0% waste method in any process or pay for the clean-up.

Form a group with membership on obtaining relevant certificate (police, law, administration, education, doctors, engineering, sports). Have a process for each group to select anyone within their group for a post through e-vote. Ex: lawyers across india voting to select CJI.

Lot more are there but the above is enough for this decade.



Feb 20, 2011

indian economy is a peanut economy . it will only swell ,,,, not grow ......


Adi Daruwalla

Feb 20, 2011

Well your comment re people in glass houses would sound better for Bernanke if it went this way. "People who live in glass houses, should change their messed up clothes in the basement."
Also before the budget hits the public if the government wants the people (junta) of Mumbai and India to be happy and give them another innings at the center, THE GOVT SHOULD MAKE THE LIFE OF THE COMMON MAN EASY. PROVIDE FOR DOUBLING OF ALL LOCAL RAILWAY LINES, WR CR and Harbour BY OVERHEAD RAILWAY,(immediate)plus continue with metro rail projects, WATERWAY PROJECT FROM NARIMAN PT TO BORIVILI AND VIRAR, SHEWREE to NHAVA 12 LANE BRIDGE, plus with 4 track METRO, broadening of roads, GST common for all India, removal of inter state octroi, provide more multilevel parking and not fudging the statistics while taking into account future planning, i.e. where a 200 feet road is required a 60ft road is built. We need the 200 feet road not some sham job.


sunilkumar tejwani

Feb 20, 2011

government need not tax any more, but should cut wasteful expenditure & stop corrupt programs in the name of social welfare schemes which never reach the intended beneficiaries.Even UID appears to be somewhat expensive & least beneficial for a common man. Instead it will fill the coffers of big IT companies & issuance of such cards will not serve any meaningful purpose. Further, black money stashed in Swiss banks should be brought back, this can wipe out entire deficit of the government, & will also provide funds for infra development to achieve better GDP growth. But does the government have any political will?
Agreed, that huge petroleum & cooking gas subsidies are burning a big hole in the coffers of the government, but surely there is a way out. We need a Singapore model of public transport, development of efficient public transport & a policy in place to curb private ownership of vehicles.


sarat palat

Feb 19, 2011

It is no doubt that India will overcome this crisis. However, in order to have a better standard of living and a sustainable economic development, it is better to have a population policy. The effect of this will not be immediate but in the coming years definetely it will show positive results.


jignesh thakkar

Feb 19, 2011

Chart shown for performance of the markets is not proper its showing indian markets down by 0.2%..



Feb 19, 2011

India needs to go back to progressive taxation



Feb 19, 2011

1. Cancel all 2G licenses granted by Raja and Co. Auction the spectrum again in a fair process after returning money to those companies who bough spectrum with deceit and corrupt practices.
2. Provide money to poor, not subsidies.
3. Bring back money stashed in Swiss bank accounts.
4. Implement industrial reforms like 100% FDI in retail sector.
5. Make housing more affordable buy cutting big builder and politician nexus.


vijay srivastava

Feb 19, 2011

One of the best article I read since long time.Gives insight to understand the things at macro level and it's reflection in the micro level.
I am better informed to take decision for my portfolio after reading this article.

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