India Inc. is entering a new growth phase

Feb 25, 2010

In this issue:
» Wall Street bonuses are seeing an uptrend
» The solution to the current global mess is...
» Economic Survey is upbeat about India's future
» Volcker prescribes euthanasia for financial firms
» ...and more!!

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Looks like India Inc. has left the ghosts of the financial crisis far behind it. Most companies which were wary of spending at the height of the crisis are now in the mood to loosen their purse strings. Many expansion plans appear to have been lined up across industries. This means that India Inc. could be entering a new growth phase.

The need to expand and grow business would lead to creation of more jobs and demand for machinery and infrastructure. All this would then culminate in a strong growth of India's GDP. So which companies are planning to go on an expansion spree? As reported in a leading business daily, companies across industries such as cement, paper, tyre, paints, automobiles and consumer durables have in the past three months announced capex plans. These are totaling to around Rs 500 bn over the next 2-5 years. What is more, many more companies are still in the process of firming up plans. Yes, agriculture was a letdown this year. But industrial production has certainly picked up. Therefore, if agricultural activity picks up next year and earnings of Indian corporates grow nicely, it would certainly go a long way in bolstering India's economic performance.

What companies need to be careful about though is that in their exuberance of expanding, they do not stretch their balance sheets. The ill effects of such a practice were there for everyone to see when the crisis unfolded. Why companies, even countries are being weighed down by excess debt. And in India especially, since inflation is soaring, the possibility of higher interest rates looks increasingly likely. Therefore, as long as the Indian companies stay well within their means there is no reason why they should not grow at a strong pace going forward.

Editor's Note: Don't miss our budget special edition of The 5 Minute Wrapup tomorrow!

 Chart of the day
2008 is certainly a year that Wall Street would dearly like to forget. After all that was when Lehman Brothers collapsed, the crisis escalated and big institutions including investment banks had to be bailed out by the government with tax payers' money. Not surprisingly, total bonuses doled out in that year also nearly halved from that in 2007. Since then, bonuses paid to financial companies have become a raging debate and a political issue. Especially, since many of those that had to be bailed out chose to give generous amounts to their employees igniting an outrage. As today's chart of the day shows, with corporates having seen a small revival in 2009, total Wall Street bonuses also increased. However, will they touch the highs of 2006 and 2007? We believe, not for some time atleast.

*These are estimates; Data Source: The Economist

The Finance Minister tabled the Economic Survey 2009-10 in the Parliament today. In summary, the survey has sent out positive vibes for India's economic future over the next 3 to 5 years. This is notwithstanding the immediate concerns of inflation and stimulus withdrawal. With respect to the former i.e., inflation, the survey has warned that food prices would continue to rise further over the next few months. In the same breath, it has also recommended a gradual rollback of stimulus measures after assessing the impact on each sector.

Amidst all this, the survey seems extremely positive on India touching a double-digit growth rate over the next 4-5 years. As for the current and next financial years (FY10 and FY11), the survey has projected GDP growth of 7.2% and 8.75% respectively.

With the full effects of the economic reforms of the 1990s working through the system, the Indian economy has moved to a higher growth path. Overall, the key issues confronting India today are the sustainability of high growth with moderate inflation, and the inclusive nature of such high growth. The inclusive nature of the growth itself will be conditioned by the progress that is made in the areas of education, health and physical infrastructure. For this, the government needs to rise to the challenge of maintaining and managing high growth, bolster growth through fiscal prudence and high investment. Also, it needs to improve the effectiveness of its intervention in critical areas such as education, health and support for the needy.

Ok, so we managed to unleash the mother of all stimuli and saved the world from going into another depression. But now what? How do we get out of the mess that we created for ourselves? Martin Wolf, Chief Economics Commentator at Financial Times, has tried to arrive at a solution. We will not bore you with details. All that Mr. Wolf has argued for is a huge surge in investment activity in countries with high fiscal deficits. A huge surge in demand in emerging countries will also do just fine as per him.

Now, over to the implications of such steps. Higher investment would lead to higher than normal GDP growth and this in turn could make debt repayment possible. Indeed, a fine solution we would say. However, the execution may not be that easy. It would require a radical rethinking on the part of developed nations. But there are no signs of the same emerging so far. Instead, policymakers seem to be assuming that everything would be back to normal soon. Clearly, something has to happen to force them out of their current complacency. We cannot hope to solve a problem created out of excess debt by using more debt. As Wolf rightly points out, let us not repeat past errors. Let us invest in the future instead.

As everyone looks forward to the Finance Minister's budget speech tomorrow, India stands on yet another threshold of proving itself as an emerging economic power. Despite having mere 2.2% of the world GDP, the domestic consumption driven economy's relative resilience to global economic shocks has invited the interest of global business conglomerates. The credit for the same has gone to liberalised policies and pro-reform government planning. However, some economists opine that the people at the helm of economic planning seem to have now taken India's double-digit growth potential for granted. The very reformists who envisioned India's liberal economic policies are now shy of pushing reforms ahead. Protectionist measures like the one recently implemented by banning Chinese power equipment suppliers are expected to make India's infrastructure growth expensive and time consuming. It remains to be seen how far the economy manages to take the faulty policies in its stride without losing focus on growth.

Speaking of the budget, we had conducted a poll on the Equitymaster website wherein we asked our readers whether they are waiting for the budget before taking any investment decision. The results were pretty interesting and close. For 49% of our readers, the budget was an important event based on which they would decide the future course of action with respect to their investments. Those who did not think the budget to be the chief determinant of their investment decisions were close behind at 46%. We are of the opinion that while the budget is certainly an economic important event, it should form one of the factors and not the only factor to determine future investment decisions.

As we have spoken many times, the bailout of large banks in the US has created a moral hazard. It's called 'Too Big To Fail'. No matter what speculative trip investment bankers embark on, they know the government will come to its rescue. Paul Volcker, the former Federal Reserve chairman who is advising US president Obama on financial sector reforms has a solution. Euthanasia. Euthanasia or mercy killing is a hugely controversial subject in the medical world. The debate boils down to whether a terminally ill patient be left to suffer? In the case of financial institutions, the question is whether a failed institution be bailed out with taxpayers' money? While we are no medical experts, our view on financial Euthanasia is clear. We are for it. After all, unprofitable private businesses shut shop without much fuss. Errant financial institutions should meet with the same fate, especially if they keep repeating their mistakes.

While the Indian indices traded in the red for the larger part of the session, strong vibes sent out by the Economic survey led the indices to stage a comeback although volatility persisted. At the time of writing, the BSE-Sensex was down by around 6 points. Losses were largely seen in oil & gas and FMCG stocks.

 Today's investing mantra
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." - Warren Buffett

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