10% growth in 'Zombieland'?

Mar 6, 2010

In this issue:
» Europe weighs the prospect of not helping Greece
» Wages set to rise the fastest in India
» India rises to the top ten in the world for industrial production
» Get ready to pay more for a new home
» ...and more!

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At The Summit, get your personal investment queries answered by none other than the masters of the financial universe - Bill Bonner and Ajit Dayal. And also get insights on how to plan your investments for the next 10 years with Bill's 'NEW Trade of the Decade'. We guarantee, you won't find nuggets like this in your newspapers or on your regular business channels.

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In the wake of the credit crisis that erupted in 2008, developed countries have together found their economies floundering. The West has since been busy just maintaining status quo. 'Growth' is now widely expected to come from the East. Enter China, the supposed king of growth. All kinds of growth figures that come out of China, including GDP growth, are mind boggling to say the least. China is expected to churn out double digit GDP growth rates for years to come.

While the world looks at China to propel global growth for many more years, Bill Bonner, author of 'The Daily Reckoning' has an interesting take on it. He sums up China in one expressive word – "Zombieland". He coins this word based on his observation that millions of square feet of shopping space and several roads and bridges in the dragon nation have no users!

Indeed, there are many reasons to be circumspect of China's growth. Some facts should reveal why. Investment spending in China increased 200% since 2001, making it by far the world's biggest buyer of raw materials. Further, Chinese output is less than 10% of the world's total, but China consumes an alarmingly high proportion of commodities. Last year, even as 90% of China's growth came from fixed investment spending, 25% of the commercial office space lay empty in Beijing.

So while the developed countries over consumed themselves into trouble, we believe that China now stands the serious risk of over investing itself into trouble. All the infrastructure and manufacturing capacity that is being created, risks not only destroying China's, but also the global marketplace. A few years from now, when it is done with is humongous capacity creation and consequent stimulation of demand, where will demand continue to come from? What's worse, supply will be many multiples higher than it is today.

Thus, the million dollar question that arises is: are we hoping for 10% GDP growth from an economy that can be best termed as 'Zombieland'?

 Chart of the day
Today's Chart of the Day pegs India's per capita GDP against China's. What's perhaps is most striking about it is the increasing gap between the two nations' per capita output since the early 1990's. But as with any other data, it would be most important to view this too in light of certain other facts. Chief among this is the fact that India's GDP is a more steady and solid consumer driven one. Whereas China's is an almost entirely investment driven one. Which of these is more sustainable and will bring in more prosperity to its citizens is therefore an easy question to answer.

Data Source: Earth Policy Institute

The TBTF (Too Big To Fail) saga has been adequately played out in the global subprime crisis. However there seems to be another phenomenon unfolding in Europe. That of Too Small To Bail (TSTB). And the lead contender of this title is not a corporate but an economy - Greece. As per European leaders, despite the sovereign debt crisis in the Greek economy, it must be left to fend for itself through its austerity measures. In other words, the economy is not worthy of an expensive bailout. Economists fear that the euro's credibility is threatened, and leaving Greece to fend for itself could unnerve credit markets further. Problems could then spread to other euro zone states such as Spain or Portugal. However, the EU leaders believe that Greece's economic woes were largely self-made. They also contend that speculators in the market are feeding on the country's woes. Having said that, if Greece turns out to be the first instance of TSTB, inefficient corporates may better watch out.

Why are the expats heading back to India? Why are foreign professionals keen to take up an assignment in India? If you have these questions in mind, we probably have some answers here. While a fast growing market, challenging business dynamics and new opportunities are certainly enticing, there is more to it. As per Reuters, wages in India will rise the fastest in the Asia-Pacific region, going up by a tenth in 2010. This contrasts with developed economies where many firms are still freezing or cutting salaries. As demand continues to lag in the world's largest economies, there could hardly be any better place to work than the second fastest growing economy.
India seems to be making increasing strides when it comes to industrial production. Otherwise what would explain the fact that the country has emerged among the top ten countries according to a report by Unido. US and China may lead the rankings but India has managed to zoom past Canada, Brazil and Mexico. What is more, the sectors which have propelled India higher are leather and leather products, footwear, coke, refined petroleum products among others. However, if one looks at the manufacturing value (MVA) per capita then a different picture emerges. Take the case of Brazil and Mexico. The MVA per capita for these countries is US$ 631 and US$ 1,093 respectively. In contrast, India pales in comparison at US$ 283. Thus, despite the improvement in rankings, India still has challenges that it needs to address.

Given that corruption rules the roost in India, the fact that there is abundance of black money should come as no surprise. What's more, this black money appears to have been parked in several countries. The government has obviously decided to crack the whip with respect to this matter. Infact, according to the PM, the government has identified 20 countries where Indians could have parked black money. Further, there is an increased possibility the it would soon sign agreements with these nations to unearth this black money. Whether the government is successful in its efforts is something that remains to be seen given that its talks with Switzerland in this matter have not fructified to much up until now. But we certainly believe that the intentions of the government are in the right direction.

In a move that could prove to be a deterrent for the real estate industry, construction services have been brought under the service tax net. So be ready to shell out more for your dream house from now on. The recent budget proposal aims to levy a service tax of 10% on the price of the apartment if entire payment is made before the completion of construction. However, tax would be levied only on 33% of the agreement value. As realty companies typically pre-sell flats before completion of construction, this proposal is likely to hit the realty players in a big way. In an industry which is already paying an indirect tax in the range of 14-16%, the levy was not what the doctor ordered for. This move will discourage home buyers as the already high prices of the apartments are likely to increase further by 3-4%. Most realty companies will try to pass on the increased burden to the end consumer. Although majority of the developers have criticized this move and want a rollback in service tax, it seems that the FM is no mood to listen to them.

The world markets ended positive this week with the exception of China. The release of US Nonfarm Payrolls Report, which showed that the unemployment rate stood at 9.7% down from 9.8% in the previous week, provided confidence in the improved job environment. Further, sentiments in Europe were upbeat after European leaders expressed confidence in the austerity measures by Greece to pull the country out of its debt crisis. In India, the sentiments were buoyant as the markets expressed confidence in the Union Budget measures extending the market rally. A combination of these factors ensured that world markets ended upbeat this week.

India ended the week higher by 3.4% over the previous week. The top gainer this week was France, up by 5.4%, followed by Germany, UK and Brazil, which gained 5%, 4.6% and 3.5% respectively. Japan was up by 2.4% while US was up by 2.3%. Singapore and Hong Long closed the week with a gain of 1.4% and 0.9% respectively. The only loser of the week, China was down by 1.2%.

Source: Yahoo finance, Kitco, CNNfn

 Weekend investing mantra
"A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results." - Warren Buffett

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5 Responses to "10% growth in 'Zombieland'?"

Rajeev Maheshwari

Mar 8, 2010

This has a reference to your column on unearthing of black money. Let the earlier be settle exposed in Bofor, Fodder's case and many others. It is known to all that most black money is generated by Politician. If they have desire, it can be resolved. Anyone is involved in money scandal should not be allowed to contest election.



Mar 7, 2010

Will FM listens to Equity master to curb Black money in real estate...

If the Stamp duty and registration amount is taken on the actual cost of home than India's fiscal deficit can come down to 4.5%. But 80L aparment is registered for 45L only...

ya thats the truth in mumbai !!!

Medium class people crying and Govt giving way to park black money in real estate...



Mar 7, 2010

The common man will consider it to be the greatest achievement of the UPA government headed by the truly honest Dr.Manmohan Singh if it is able to unearth the enormous quantum of black money reported to be safely parked by several Indian big guns in certain foreign countries, notably Switzerland. This issue has been continuing to be elusive for quite some time.

Perhaps, the government has found in the construction industry a goose laying golden eggs. However, the prevailing public opinion is that the contemplated levy is very high and that it could have been much less than what has been proposed.


Kersi Mahudawala

Mar 6, 2010

The Govrnment should consider removinng service tax on construction industry at the time of passing the Budget otherwise construction industry will sufer heavily and buyers will suffer still more and their cost will increase by atleast 3%.
The Government should also consider providing mor incentive to construction industry like increasing the limit of interest on housing loan to atleast Rs. 2.00 lacs for tax purposes,increasing the limit of interest
subsidy etc.


Mahesh Soni

Mar 6, 2010

This has a reference to your column on unearthing of black money. although the Prime Minister says that he is in contact with 20 countries to make treaties about exchange of information, every common man in the country knows that most of the black sheep will be politicians and powerful businessman and burocrats.In such a scenario do you think, they will dig their own grave? This Tamasha will keep on going for eternity. You and me would be around to see it.

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