Ghosts of the crisis could haunt India again

Sep 14, 2010

In this issue:
» Asian markets have gained 2 years after Lehman went bust
» Vodafone ruling leaves bitter taste in the mouths of MNCs
» India has excess foodgrains but no storage
» Indian govt. to release new series of the WPI
» ...and more!!

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The way they have recovered from the global financial crisis, one would think that the emerging markets have decoupled from the West. But is that really so? True, India and China for instance have reported strong growth in the past few quarters. This in sharp contrast to the US and Europe where there are talks of a double dip recession taking place. But for all the brouhaha surrounding their dazzling comeback, growth is likely to slow down once again. Especially those economies which rely a lot on exports are expected to face rough weather as deteriorating conditions in the West refuse to abate.

Take the current year for instance. While most Asian economies (excluding Japan) were in the pink of health during the first half of the year, the outlook for the rest of the year does not look that rosy. Now if you take the case of India and China, the latter has a much higher chance of witnessing a slowdown. Especially since it still depends on exports to drive growth despite efforts to spur domestic consumption. India, on the strength of its domestic consumption, is probably not likely to face the kind of slowdown that China could.

That said, while on the economic front, India could be relatively insulated from the West, when it comes to financial markets, India is very much integrated with the global markets. This means that even though India's growth story remains intact, a large scale withdrawal of money by foreign investors cannot be discounted. This is especially if conditions in the developed world worsen further. And the way the valuations in Indian stockmarkets have risen, a correction should surprise no one.

 Chart of the day
It's been almost 2 years since Lehman Brothers collapsed. The chain of events that it set in motion is now history. Not only did stockmarkets get a severe drubbing, but economies were adversely impacted as well. The developed world especially, has not recovered from the crisis. This has been amply reflected in their stock market performance in the last two years. As today's chart of the day shows, the stockmarkets in US, Europe and Japan have hardly set the pulse racing. In sharp contrast, Asian stockmarkets have galloped ahead. To such an extent, however, that valuations in many Asian stockmarkets are starting to look rather rich.

* From Sep 17, 2008 to Sep 8, 2010
Data Source: The Economist

Imagine earning a 50% return on your investment only to realise later that a good part of it will have to paid out as taxes on account of a change in law. The entire episode will leave a very bad taste isn't it? Something similar seems to be happening to companies who are keen to acquire assets in India. You see, the recent court ruling with respect to Vodafone has opened up a Pandora's Box of sorts. The episode has emboldened tax authorities to scrutinize a handful of past deals which had similar background to it. After all, who wouldn't want tax coffers to be richer by a few billion dollars?

But is this likely to go down well with MNCs looking to do business in India? Certainly not. FT has reported how M&A advisors in India are getting frantic calls from their clients who seem shaken by such retro-active changes in the law. We believe that they are indeed not to blame. As one banker rightly put it, "India is the place where everyone wants to be and companies will pay the tax premium to enter this market, but they don't like surprises." We hope the authorities are listening. The rules will have to be put out in black and white and not shades of grey.

Diversity is just one of the distinct features of India. The numerous paradoxes and ironies it is home to are two others. Take the latest one in the spotlight for example. Here, scarcity induced inflation and surplus induced rotting are both happening at the same time. On one hand, food inflation has been on a rampage for a while now. The government on the other hand, has simultaneously also been running short of places to store excess food grain.

As a result, it has resorted to storing this excess in open fields, covered by just flimsy tarps. Rotting and stealing is what has followed. The Centre's populist policy of paying a guaranteed minimum price for crops to farmers has meanwhile ensured that it kept buying additional supplies despite not having the place to store them. Evidently, this year's healthy rainfall is not the only thing that will alleviate India's food problems. A deeper and more structural solution is needed.

As US nears congressional elections, it has started taking a strong stand against outsourcing. First they hiked the US visa fees, which would impact the companies sending their workers to onsite locations. Then Ohio came up with the outsourcing ban. Now US President Mr. Obama has come up with the direct tax code, which if implemented will apply to all companies that outsource work out of US. While the new tax code will not impact the Indian outsourcing industry, it certainly has them worried. This is because of the deeper underlying message. US is adopting 'protectionist' measures, which will hamper the growth of the IT outsourcing industry in the years to come. Currently, the Indian IT outsourcing industry derives almost 70% of its total revenues from US. It is indeed sad to see the US politicians resorting to such gimmicks. Particularly, when they themselves have preached the benefits of globalization and open markets as a tool for global recovery.

Starting tomorrow, the government will be releasing the new series of the wholesale price index (WPI). WPI is used to measure inflation in India, and the new series will have 2004-05 as the base year and not the currently used 1993-94. What is more, the new series will have 676 items compared to the 435 commodities earlier.

These are plain numbers. But what is important here is that the new series will make the inflation number more meaningful. Some of the products that would be in the new series are television sets, canned meat, washing machines, computers, readymade and instant food products. Some others include mineral waters, dish antennae, gold, silver, telephone instruments, ice-cream, flowers and microwave ovens. Interestingly, these products of frequent consumption are not there in the current index. And thus the real inflation that consumers have had to bear was not something that we used to hear. Hopefully, things will be more transparent and rooted in reality now.

If only real life mapped with text books. It would be so much better for everyone, especially the economists. So much brain power analyzing the world's largest economy and yet no one's the better for it. In fact, forecasts for US economic data are all over the map. They are causing confusion about whether the actual readings are better or worse than expected. And what that means for growth prospects. In fact, Reuters reports that it polled data from more than 80 economists. It found the range of estimates for some common indicators - employment, housing and GDP - widened dramatically in 2010. In our view, analyzing the economy is very difficult. It is an enormously complex system with lots of moving parts. That provides a lot of scope for surprises. Hence, investors would do well to focus on companies on a case to case basis. What is generally called bottom-up investing. They must ensure also that there is a sufficient margin of safety.

After the strong rally yesterday, Indian markets continued to sustain positive momentum in today's session as well. The BSE-Sensex was trading 148 points higher at the time of writing this. Stocks from the auto, consumer goods and IT space saw good gains. Sentiments were mixed in the rest of Asia's major markets. China and Hong Kong were among the gainers, while Japan was at the receiving end.

 Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham

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5 Responses to "Ghosts of the crisis could haunt India again"


Sep 14, 2010

Mr Dayal,
Thanks for the nice chart after 2 years of Lehman collapse.If we can get add Gold"s performance over these 2 years we will see that this has done about +46% in USD terms...beating all the stocks.
DOW Gold ratio is currently at 8.25 and went below 3 in 1980/81.If history is a guide,it is likely to go below 5 at least.That would mean +55% appreciation in Gold maybe played out over 2 to 5 years.



Sep 14, 2010

I think,Present WPI CACULATION of 676 articles is not appropriate.Because inflation is a figure which relates with primary goods those affects the basic life and more often BPL people.most of goods presently added cannt be catagorised as primary goods.The demand-supply equation will not be properly synthesised.I can say its a new financial game played by hnble f/m pranab mukhargee & co to show their image clean.At this current inflation data(according to new WPI),lower and middle class people will struggle more.Govt shld check more on liquidity otherwise one more blunder may be waiting.



Sep 14, 2010

About outsourcing. It seems the greatest voratory of Free trade forgets all about it when it feels the pinch. Outsourcing was a necessity arising out of the need to cut costs and be competitve. Otherwise, the wages are so high in US that they would be uncompetitve in international trade. If they stop outsourcing, will they not becoming uncompetitive and again lose out in international trade, thereby even losing more jobs.

And what if a country like India were to hit back by insisting that the air force fighter pilot planes order or the order for supply of nucler power plant would only go to the company that is willing to set up a plant in India so as to boost employment in India ?

By taking such a step against outsourcing, US is cutting its nose to spite its face. Where are the thinkers in the free society of US ?



Sep 14, 2010

DA rate can decrease and will probably be lower rate with new WPI than old WPI, because many mass consumption items being included now may not have much volatility like TV, washing machine,telephone set( Its prices decrease actually),Computer,mineral water, ice cream etc.,



Sep 14, 2010

Unless I am wrong DA is linked to WPI and with new WPI reflecting reality, DA is bound to increase, right?

Fairly significant burden or not...?

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