Why is India Inc. looking for a quick fix?

Jul 10, 2012

In this issue:
» Ajit Dayal's views on Indian businesses
» What the Chief of bourses cannot do
» Chinese slowdown is different from India's
» Resale property market is seeing interest
» ...and more!

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Now that India's economy has displayed signs of a slowdown, the burning question is: Should the Reserve Bank of India (RBI) cut interest rates? Many honchos of India Inc. and some leading banks certainly think so. At least that was the crux of the discussion when Mr. Rangarajan, who heads the the Prime Minister's Economic Advisory Council (PMEAC), met with the captains of Indian industry.

But why is India Inc. asking for rate cuts in the first place? Does it really believe that such cuts will bolster growth in the economy? Or are they looking for quick fixes? The central bank is reluctant to cut rates. And quite rightly so. India's biggest worry is inflation. And as long as that remains high, there is not much headroom for the RBI to cut rates. The situation is unlike China where inflation has come down and so the central bank there can consider easing monetary policy. What is more, monetary easing in the US and Europe has hardly done much in jump starting growth there. The problem lies with the Indian government which has been unable to rein in deficit or introduce some much needed reforms.

The Indian government has not been renowned for ground breaking reforms in the past either but the economy has still grown at a healthy pace despite it. This has largely been due to the entrepreneurial spirit of India Inc and its ambitions to make a mark in the global arena. And there is no reason why this mindset should change going forward. Indeed, India Inc. has better chances of success if it focuses more on long term growth prospects. This is through innovation and increased customer satisfaction. Asking for short term solutions is not likely to do anything other than create more problems in the longer term. Plus, if demands have to made on anybody it is the government which has failed to do its job in creating a climate conducive for growth and investment.

Do you think that India Inc. is right in asking the RBI to cut interest rates? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
FY12 was a challenging year for the Indian auto industry. High interest rates and fuel price hikes took its toll on the industry. The scenario has been subdued for the first two months of FY13 as well. Today's chart shows that in April-May 2012, two-wheelers clocked the highest growth at 11% YoY. Passenger vehicles also fared relatively better with growth largely coming in from utility vehicles (up 51% YoY). The slowdown in the economy took its toll on commercial vehicles though. Medium & heavy CVs registered an 11% YoY fall in volumes. However, there was some respite for the CV segment in the form of a healthy 20% YoY growth in light commercial vehicles. Exports, which did quite well in FY12, have failed to take off so far with growth coming in at a tepid 3% YoY.

Data Source: SIAM

What's wrong with India? This was amongst the first few questions put forward to Ajit Dayal, our founder, in the latest webinar that was held to discuss the future of the Indian stock markets. And in a way that only he can, Ajit outlined the need for businesses to be compassionate. He has argued that the assumption that India needs animal spirits is completely wrong. What India needs instead is a sensible policymaking that takes cares of everybody's needs.

As per him, India does not reside only in urban cities. But it also resides in farmlands and forestlands. Thus, it is imperative that everybody's interests are looked into and not just those of the big businesses. The fact that the Government is spending too much time on what the big business needs and too little on what an average Indian needs also needs to be looked into as her him.

Conflict of interest between the owners and regulators has been a long standing issue in financial markets. But as markets mature, investors need to be more careful about vested interests. Stock exchanges have had a radical makeover in the past few years. Following global trend, Indian stock exchanges are now shedding their image as a public utility services. They are now pursuing profits and seeking to get listed.

However, according to the Securities and Exchange Board of India (SEBI), the chief of bourses cannot hold shares in the exchange they run. Also, the exchange should be listed only on the rival's board. Such actions will ensure that there is no insider activity with regard to the exchange's shares. But all said, the fine line between public service and profit motive could get blurred once the exchanges get listed. Hence, SEBI needs to be extremely careful before encouraging such a move.

Since the dawn of the global crisis, the two nations that had been the frontrunners of growth were India and China. The world watched as the two countries dished out fantastic growth numbers year after year. But in recent times, both countries have started giving hints of a slowdown. Interestingly both have similar problems. Both countries had rolled out an economic stimulus when the crisis had hit the world. Both countries saw a spurt in growth thanks to the stimulus. But both forgot to rollout reforms to ensure that the growth would continue into the future.

For China, the stimulus rolled out by them found its way into the infrastructure and real estate sectors. In the absence of controls, it led to a massive property bubble which the country spent the next 2 years trying to get rid of. Now, it has started to rollout reforms albeit at a slower pace. India on the other hand saw a huge influx of cheap money from abroad. This led inflation to spiral upwards triggering the central bank's hawkish stance which still continues. At the same time the hugely unpopular policy paralysis of the government hurt business sentiment. This has led domestic as well as foreign investors to adopt a cautious attitude and has led investment coffers to start drying up. As a result, the growth would continue to slowdown at least till the government takes a solid stance.

The problem is that due to the larger base and higher income levels, China can do with a slowdown for some time. But the same cannot be said for India. It needs to grow. And needs to grow soon.

The property market basically has two segments. One is the under construction segment while other is the ready possession segment. And right now, it is the under construction segment that is suffering the most. The under construction home sales across the country have virtually come to a standstill. However, on the other hand, the resale property market is actually buzzing. It may be noted that right now, 70% of the people who apply for loans are buying near ready properties. This is in stark contrast to last year where 70% of the people bought under construction properties. That's because right now, most projects are facing execution delays. Thus, home buyers have turned apprehensive about buying under construction properties. It may be noted that roughly half of the residential projects that were scheduled for delivery between 2011 and 2013 are likely to be delayed by 18 months. Amidst such uncertainty, buyers are willing to pay a premium for ready possession.

In the meanwhile, the Indian equiy markets continued to trade well above the dotted line during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 90 points or 0.5%. Stocks from across sectors were trading firm with those from the consumer durables and auto spaces leading the pack. FMCG stocks however remained the top underperformers. Stock markets in other major Asian economies ended on a negative note with Japan and Hong Kong ending lower by about 0.4% and 0.1% respectively.

 Today's investing mantra
"Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'?" - Warren Buffett

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    8 Responses to "Why is India Inc. looking for a quick fix?"


    Jul 11, 2012

    Instead of demanding RBI to reduce the interest rates, the better solution would be to demand the Government to pass on the recent decrease in crude and commodity prices to the common man. The price of crude oil in Indian Rupee terms has come down by 5% since the start of this year. China has reduced its petroleum prices for the third time this year. But India keeps on increasing the petrol prices. This leads to massive doses of inflation. And this forces RBI to maintain the high interest rates. The solution is there for all to see but nobody wants to demand it. Start with the reduction of petrol prices and the prices of all goods and services will start to moderate. And very soon, inflation will be reined in. And it will set the stage for reduction in interest rates.

    Like (1)


    Jul 11, 2012

    Quick-Fix or Long-Fix.It seems to be No-Fix for the economy. RBI is continuing its tight rope walk balancing between Inflation and Interest rate as per classical economic theory. Our PM, being an economist, understands this but other members of UPA do not seem to ! Industrialists in India are prone to cry foul of "high interest rate" as the malady at all times. Planning commission has been carrying the burden of NehruMahalnobis command-economy Russian model. Our 80% population has been living a "comatose" life for the last 2000 years , be it under Mughals,British or Congress Party ! And we all say "Mera Bharat Mahaan" ( except those who are able to Quit India.

    Like (1)

    Ravindranath Dudwadkar

    Jul 11, 2012

    We Indians now careless about utility & requirement & lacking in Future planning,Instead of putting attaintion to fulfil basic need of food water & electricity we run to construct more roads
    Every waste land or unused land to be converted in yeilding land by plantation by govt aid or private big houses contribution & giving them on lease to utilize for better for people of india

    Like (1)

    Joe Britto

    Jul 10, 2012

    The past few months has witnessed a deadlock in politics and almost no major reform has been done by the Centre. India Inc is desperate as it wants reforms at the speed of 1990's.The main hopes for this rests with the Finanace Minstry and quick and bold decisions by the Prime Minister.Since Dr. Manmohan Singh is now playing a dual role it should be possible to witness a spate of reforms .If quick action is not initiated in the right direction and manner,then the economy could slip and growth fall below 5% which will tarnish the image of India Inc. It will drive investors & FII out permanently thus ending the India Growth Story.

    Like (1)

    B K Nandi

    Jul 10, 2012

    DOMRU is an instruent that monkey chanter uses to dance monkey. RBI has this DOMRU and it can make different sound by shaking it. But it can not change number of stones pieces inside it. That is the job of government. When Sonia government failed totally in doing that what different sound of DOMRU would do. RBI already surrendered long back, changing this or that will not do much to the economy, now stones pieces in the DOMRU need to be changed and for that government has to have proper policies.

    Like (1)


    Jul 10, 2012

    Most of India's economic problems are attributable to supply side constraints in all spheres. These constraints exist because the ability of entrepreneurs to ramp up capacity to take advantage of high demand (the primary cause of inflation) is severely affected. Reasons are well known - antiquated inter State movement of agricultural produce, stranglehold of middle men, pernicious taxation systems (foot dragging on implementation of the national GST is a prime example), pernicious license permit raj, vested interests who thrive on shortages, the list goes on. The UPA Government has lost the political will to implement change that can cut through these constraints. Political exigency prevents the Congress to take a leaf out of the experience of Gujarat where the much reviled Modi has ensured that supply side deficiencies are removed by encouraging entrepreneurs (which for the most part has meant small scale businessmen and even housewives) to unleash their energies and prosper.

    Like (1)

    M CA

    Jul 10, 2012

    The Capitalist/politicians in India in particular and in the world in general are serving their own vested interests. Only divine intervention can save the fate of public at large. In India, Madam Gandhi and her family are the most powerful personalities. They control PM, PRESIDENT of India , COUNCIL of ministers and in fact total power in India. Can some one ask this Madame as to what is her vision for India, what is the road map and what is the action plan. Except wielding the absolute power and planning to continue to wield such power, what is the tangible contribution to better the present and future of this country. the country needs total overhaul in the present political management of this country. THERE IS CHARACTER DEFICIENCY IN THE PEOPLE WHO MANAGE THIS COUNTRY. Unless, this deficit is solved, there cannot be lasting solution.

    Like (1)

    Kishan Sharma

    Jul 10, 2012

    What is Mr Dayal's recipe for helping the poor? It is good to have a bleeding heart, but it is better to find proper ways to ensure that your heart does not need to bleed. The recipe is surely not the doles that this misguided govt believes in. Mr Dayal must have heard the famous saying: "You give a fish to a hungry man, you feed him only once; but teach him how to fish and you feed him for life." So provide an enabling environment and the poor will take care of themselves; there will be no need to bleed your heart any more for them.

    Like (1)
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