Europe's debt crisis could be India's gain

May 11, 2010

In this issue:
» Gap between WPI & CPI to reduce
» Rs 400 bn disinvestment target looks difficult
» Investors like India despite dismal reforms
» The impact of Greece bailout on oil prices
» ...and more!

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The global financial crisis subprime crisis wreaked havoc in economies, markets and companies across the world. At that time the crisis had originated from the subprime fiasco in the US. And now there is a sense of deja vu as a crisis of equally serious proportions is playing out. But this time the focus has shifted to Europe. The Greek debt crisis has seriously undermined the recovery in the European region. This at a time when the region has not fully recovered from the financial crisis. The crisis has been so deep that even the sustainability of the Euro is being questioned.

The interconnectedness of countries across the globe has significantly increased. This means that the debt contagion has the potential to infect other economies as well. The subprime crisis amply demonstrated that. Now strictly in the Indian context, how will the European sovereign debt crisis impact India? More importantly, will it be as large as the global financial crisis?

India's chief economist Kaushik Basu is of the view that the debt crisis in Europe may turn advantageous for the country's capital markets. This is because foreign investors would look to park their money into safe havens. And India would then benefit. But this is only if the crisis is contained at the present level. However, if it snowballs into an overall global meltdown, then India cannot remain immune to its impact. Because then foreign investors would pull money from the Indian markets to cut down losses elsewhere.

We too believe that the Greek crisis has the potential to pose short term risks. This would be in the form of increased volatility in the financial markets. But India's growth has been nicely chugging along and prospects in the future also look strong. And so the possibility of long term repercussions from this crisis seems a tad remote. The thing is that valuations in the Indian stockmarkets are already looking a bit rich. And so, if increased volatility does prompt foreign investors to flee India, then Indian investors will be presented with a good opportunity to pick up quality stocks at attractive prices.

 Chart of the day
There has always been disparity as far as the inflation numbers in India are concerned. The difference primarily has been on account of the weightage given to food items in both the WPI and the CPI. And this gap became more pronounced in FY10. In that fiscal, the consumer inflation (CPI) zoomed to 11.7% on account of rise in food prices as monsoons played truant. The fall in wholesale inflation (WPI) was on account of overall meltdown in commodity prices in wake of the global financial crisis. But today's chart of the day shows, that this gap is expected to considerably narrow down in FY11. This is because food prices are expected to cool down as supplies increase.

Data Source: CMIE

We thought the success of SJVNL IPO did some good to the government's confidence in its disinvestment plans. But that does not seem to be the case. The government's plan to fill in the budgetary gap seems to be way behind target. It had earlier budgeted Rs 400 bn from disinvestment of stake in PSUs in FY11. But the muted response to the initial offers and small ticket sizes of the issues does not seem to have filled in its coffers to the required extent. Also it fears losing investor appetite for PSU IPOs if there are too many small ones approaching the market within a short period. SJVNL as well as the upcoming Engineers India IPO are expected to fetch only Rs 10 bn each, for instance. MMTC is the only issue that could help fill in the gap. With the projected fiscal deficit of 5.5% in FY11 entailing government borrowing of Rs 3.8 trillion, the government can hardly afford to miss its disinvestment targets. While 10 more PSUs are expected to be lined up for capital issues, raising Rs 400 bn seems like an uphill task.

Barring emerging nations like China and India, investors in the rest of the world are starved for growth. Their markets are mature and almost fully exploited. Not much scope there. It is this pursuit of growth by these investors that has led them to India. This is despite the fact that the Indian government has so far had a dismal track record on the reforms front. The Congress was returned to power in 2009 with a unanimous mandate for reforms. But progress has been anything but fast. The government is slowly firming up plans to sell stakes in PSUs. Auctioning of 3G mobile spectrum is on track after much delay. Tax reforms are finally supposed to take effect in 2011. The goods and services tax is behind schedule. The deliberations over freeing of fuel prices never seem to end. It's a mixed bag. But one thing is for sure. Slow reforms do not seem to be a big deterrent for foreign investors. Reforms or no reforms, in the first three months of 2010, foreign investors poured over US$ 6 bn into the Indian stock markets.

The trick is in how you frame the question, we are taught. For example, will the global economy continue to recover? Difficult to answer. Many experts believe it will. Many don't. But ask a related question - will the demand for oil continue to go up? This question, we find, is much easier to answer. And the answer is yes. Oil and gas drives the world. As transport fuel, kitchen fuel and feedstock for the organic chemicals industry. Not to forget their use for heating and electricity. Moreover, a large part of the world population - Chinese and Indians - is discovering a more energy intensive way of life. In the short term, the bailout of Greece will help push crude oil prices upwards feels OPEC, the cartel of oil producing countries. Perhaps. But in the long term, it is almost certain they will. With over 70% of India's crude oil requirements coming from imports and a subsidy driven pricing structure, the real worry is how the government's finances will be able to absorb the shock.

Global investors wildly cheered the European bailout package yesterday. But there were two noted economic experts who frowned. We are talking about the New York University Professor Nassim Taleb, and his fellow economist at the same university, Nouriel Roubini.

"The crisis came from debt and you don't escape it with more debt," Taleb told international media. He added, "We're in a situation where we had a patient who we discovered had cancer a year and a half ago and all we've been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable. That's immoral!"

Roubini, on the other hand warned - "Now that we are on the verge of a precipice, they realized they had to pull resources together, act together, otherwise the risk was the collapse of the euro zone. Virtually every advanced nation, including the United States, faces the same prospect."

These days it pays to be 'too big to fail'. The Fed did it last year and now it's the EU's turn. We believe the bailout may halt the landslide correction in global markets. But the debt crisis may come haunting back these nations sooner or later.

After the surge witnessed yesterday, Indian stock market languished in the red for a larger part of the day led by sustained selling activity across index heavyweights. At the time of writing, the BSE-Sensex was trading lower by about 50 points (1%). Most Asian indices were trading in the red. The European indices have opened on a mixed note. Losses were largely seen in the metals and oil & gas stocks.

 Today's investing mantra
"An argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit?...face up to two unpleasant facts: The future is never clear [and] you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values." - Warren Buffett

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7 Responses to "Europe's debt crisis could be India's gain"


Sep 27, 2011

It is really gainful to india but our labour law are to be amended so that when require we hire the manpower & when slow down we can fire also.


Devang Mehta

Sep 26, 2011

Dear Sir

I am a subscriber to Equity Master Mid Cap Ideas.

I fail to understand the reason of rising dollers inspite of troublES IN US economy and increase in supply of dollers by Fed Reserves. Could you send me your views for such and sudden rise in dollers to rupee value

Devang Mehta


Vikas Gadgil

Jan 21, 2011

India will gain only when people will get the impression
that there is political stability and Govt. spends on Infrastructure development,RBI Policy and now Budget is in Feb. all these factors are important for India`s gain



May 25, 2010

It could be India's gain. India is stable, and growing. It would be in the interest of the FIIs to park their funds in India.



May 12, 2010

Everybody is speaking about big things, But I didn't yet understand how a huge corporate's already gained profit and assets over the years are getting vanished on a fine morning



May 12, 2010

I think Mr. Taleb is correct.
Now it is the turn of the citizens of these Nations to stand up to the challenge and save their National prestige by hard work and honesty.


laxman dadlani

May 11, 2010

very good and logical

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