For India, the risk of a potential shock is remote

Aug 25, 2010

In this issue:
» Land banks for industrialisation
» Indian pharma to look for more patents
» How about a traffic jam that lasts 25 days?
» Small investors shun mutual funds
» ...and more!!

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Global markets are once again reeling under the scare of a double dip recession. Home sales in the US are at multi year lows and jobless claims have hardly reduced. The tremors are being felt in the Indian capital markets as well. There are strong chances that should a capitulation happen in developed markets; their Indian counterparts too may come under severe pressure.

In the midst of all this, some words from one of the most conservative central banks in the world are reassuring to say the least. It clearly dismisses the risk of a potential economic shock for India anytime in the near future. Thus investors looking at long term wealth creation from Indian stocks need to do little beyond reading the RBI's latest annual report.

Better fiscal situation and good monsoons are high on the RBI's rationale for higher growth prospects. But that said, the RBI, typical to its nature, has not sidelined the disclaimers either. They come in the form of high inflation and volatile capital flows. These, the RBI feels, pose meaningful risks to the economy. We can certainly trust the central bank to take care of these issues. Thus, investors looking for attractive long term bets in Indian stocks need to make the most of every opportune correction.

 Chart of the day
The government's execution of infrastructure plans drawn for 5 year periods have little to impress. The case is particularly sorry in the case of addition to power capacities, which incidentally is one of the most critical infrastructural requirements. While during the first 5 plan periods, the power capacity additions were close to the targets, the gap has on an average been 36% of targets over the last 5 plan periods. Lack of funding, insufficient supply of coal and poor execution has marred the Planning Commission's ambitious forecasts.

Source: Planning Commission

Make no mistake about this. If we are to challenge China's might, we will have to undertake large scale industrialisation. And land acquisition is one of the biggest hurdles that we face in this regard. For unlike China, we cannot ride roughshod over private property rights and start acquiring land left, right and centre. Thus, creation of land bank over time has been trumped as one of the best strategies to overcome this hurdle. Not surprisingly, a high powered committee has been set up by the centre to recommend state specific investment promotion strategy. This committee will have land bank creation as one of the major issues of deliberation in a meeting to be held later this week.

A leading daily reports that the committee will have industry ministers of various states. Here, they will put forth their ideas on how best to go about creating land bank consisting of available waste and fallow land. Productive agriculture and fertile land will be left out. What more, the committee will also plan the design of a single window mechanism so that procedures to start and run a business could be eased. We believe that both the steps are in the right direction. However, a lot depends on their successful implementation.

MNC pharma companies have developed a newfound interest in India. They are highlighting this by acquiring big chunks in domestic pharma companies in recent times. However, this trend has also started ringing alarm bells in the ears of the Department on Industrial Policy & Promotion (DIPP). For it is in favour of making a provision for allowing Indian pharma companies to manufacture patented medicines. This is because of its concern that these MNCs could then collude to raise prices. And thereby create problems for consumers.

At present, the Indian patent law has a provision called 'compulsory licensing'. It is a system whereby the government allows third parties to produce and market a patented product. This is without the consent of patent owner. This provision can typically be invoked in case of a national emergency. But the changing landscape of the Indian pharma sector has compelled the DIPP to come out with such a proposal even at other times. However, as with many proposals in the past, whether this sees the light of day remains to be seen.

Most of us have been stuck in a jam at some point of time and stood cribbing our hearts out for the number of hours wasted. But imagine being stuck in a jam for over 10 days? And knowing that you would probably get out of it in another 15 days or so. Well this is exactly what has happened in China. The Chinese government in its drive to expand infrastructure is constructing a 4 lane highway that connects Beijing to the Chinese region in Inner Mongolia. But while expanding this highway, it did not take into account the increased traffic in the region that has been brought about by the opening of coal mines in the area. Result - there is a traffic jam that extends to almost 100 km. The authorities have been working for the past 10 days to clear it but they have stated that it would take them another 2-3 weeks to get things sorted. China has recently displaced Japan to become the 2nd largest economy in the world. Is this jam the side effect of expanding too fast?

Mukesh Ambani knows it. That is why Reliance Industries is investing heavily in this sector. We are indeed referring to shale gas, which has gained prominence in the US energy basket in the last few years. Now, as per a leading business daily, the US has offered India and China its full expertise and technical knowhow in shale gas exploration. This will help the Asian giants exploit the full potential of the resource and reduce their dependence on foreign oil. If and when it happens, it will aid their efforts towards energy security.

For starters, the US Geological Survey will do a resource assessment of certain shale basins in India. It will also provide workshops to train Indian geophysicists on how to do their own assessments. It remains to be seen how India reacts to the offer. In our view, it should welcome any technical assistance it can receive. At a time when the oil ministry keenly invites foreign players to explore oil & gas blocks in India through the New Exploration Licensing Policy, there is no reason to decline the offer. If fruitful, the immediate impact of shale gas will be to reduce the dependence on imported LNG. It will also provide an alternative to coal. Of course, much also depends on whether there are any strings attached to this offer of assistance by the US.

Small investors are fleeing the markets! Wait, we are referring to the US markets and not the Indian markets. As per a report on CNNfn, US retail investors withdrew a huge US$ 33 bn from stock market mutual funds in the first seven months of this year. And their money is now moving to safer instruments like bonds. The report even suggests that if this pace continues, more money will be pulled out of the US mutual funds in 2010 than in any year since the 1980s. Well, this is with the exception of 2008 when the global financial crisis peaked.

As we know, the rise of the individual investors has been one of the phenomena driving the US capital markets over the last few decades. As Americans became more responsible for their own retirement, they poured money into stocks with big faith in the US economy. As such, the turnabout in their attitude against stocks is unusual. But this could clearly be a sign that they are losing faith in the US economic recovery. If that's the case, it'll be tough for US companies to raise the much needed capital from equity markets.

After opening below the dotted line, Indian indices have moved further into the negative territory taking cues from their global counterparts. The BSE-Sensex was trading 65 points lower at the time of writing this. Stocks from the auto and metal space saw the maximum profit booking today. Sentiments were negative across the rest of Asia with China, Japan and Indonesia leading the pack of losers. European markets have started on a cautious note.

 Today's investing mantra
"In the financial world it tends to be misleading to state, "There is no free lunch." Rather the more meaningful comment is, "Somebody has to pay for lunch." - Martin Whitman

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