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US$ 4.3 bn booster dose for India

Sep 23, 2009

In this issue:
» IPOs are coming back
» China's 'gold'en ambitions
» India's GDP growth pegged at 6%
» Gold likely to touch the US$ 2,000 mark
» ...and more!

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India's economic growth and infrastructure development hopes are set to get a booster dose from none other than World Bank. As per a business daily, the World Bank has approved loans of US$ 4.3 bn for India to help finance India's infrastructure development. The loans are part of the World Bank's commitment to lend US$ 14 bn in crisis-related lending for Asia's third-largest economy over three years through 2012. The bank has also approved US$ 1.2 bn for India nodal infrastructure financing company - India Infrastructure Finance Co. Ltd (IIFCL) - to spur private financing for public-private partnerships in infrastructure, and to stimulate the development of a long-term local currency debt financing market. To expand the volume of credit available to Indian companies, the World Bank would also provide US$ 2 bn to India's banking sector. In addition, loans to the tune of US$ 1 bn have been approved to address India's acute power shortages by assisting the Power Grid Corporation of India in its investment programme.

We believe that while funding may not be an issue for India's infrastructure plans, execution delays and cost overruns may keep it from fructifying. Having said that, the World Bank's willingness to lend a hand to India's growth plan is at least indicative of a change in the world economic order.

 Chart of the day
Foreign institutional investors (FIIs), in recent times, have been instrumental in propelling India's stockmarkets higher and what is more, in dragging them down as well. In that sense, they have been labeled as 'hot' money, and any drastic movements in them have the propensity to cause wild fluctuations in stockmarkets. But given the poor state of India's infrastructure, what the country really needs is long term money which can be channeled into various development projects. This would be Foreign Direct Investment (FDI). Today's chart of the day depicts that India lags its peers as far as FDI as a percentage of GDP is concerned, which means that India seriously needs to ramp up foreign direct investments if it wants to make any headway in infrastructure development. The positive thing is that in absolute terms FDI has been rising and this has increased from US$ 5.8 bn in 2004 to US$ 23 bn in 2007.

Data Source: United Nations Human Development Report

The global financial crisis hit the US economy hard, compelled the Obama administration to unveil gargantuan stimulus packages, sent the fiscal deficit soaring to above the US$ 1 trillion mark and put immense pressure on the dollar. And in the process caused China a lot of jitters. China in recent times has been questioning the status of the dollar as the reserve currency and is looking to move some of its assets away from US Treasuries. Having said that, displacing the dollar may not be that easy given that other currencies are also under pressure as their underlying economies have also been hit hard by the slowdown. China, in the meanwhile, is considering buying 403 tonnes of gold being offered for sale by the IMF provided the price is right and the return is relatively high. Given that gold has already breached the US$ 1,000 mark, the market value of the 403 tonnes on offer from the IMF works out to be around US$ 13 bn.

As reported by Forbes, China is the world's biggest producer and buyer of gold and has lifted its own stocks of gold to 1,054 tonnes this year from 400 tonnes when it last reported its holdings in 2003. Thus, it is obvious that the intention of contemplating purchasing this gold from IMF is part of its strategy to diversify its assets given that some of its investments are not doing too well. We believe that in an environment where inflation looks set to rear its ugly head, investing in gold as a wealth protection measure is the best bet given that paper currencies are losing value. China seems to think so as well.

And while we are on the topic of gold, Don Luskin, Chief Investment Officer of Trend Macrolytics also believes that investors should buy gold to counter inflation. Given the nature of stimulus packages, it is widely believed that we'll be staring at runaway inflation if central banks do not get their exit strategies right.

In his view, some commodities like gold and silver are inflation plays while some, like crude oil, are plays on the industrial cycle. Mr. Luskin believes that fiat currencies (i.e. whose value is based on the government's word) are impossible to control. In fact, no country has a good history of managing inflation. Thus, if it is inflation one is worried about, gold is the best bet. In fact, experts believe that the yellow metal is headed towards US$ 2000. It is not a question of 'if' but 'when'.

January 2008 was a memorable month. It was when the bull market rally finally caved in. It was also when the much touted Reliance Power IPO came out and failed to live up to the huge expectations of investors. Now that the markets have left their lows far behind, the IPOs are back. As per a leading business daily, Anil Ambani plans to come out with another huge IPO of about Rs 40 bn in about two months. This time around, he plans to sell around 10% of Reliance Infratel (RITL) - the tower company that owns most of Reliance Communications' tangible assets. While the draft prospectus is yet to be filed, the strength of the company's business model (dependence on parent) and the valuations remain to be seen.

While IPOs serve a very important purpose of mobilizing savings and raising capital for companies, they are aggressively marketed and tend to come when markets are buoyant. Of course, it would be foolish to have a negative opinion on all IPOs on a blanket basis. However, in our opinion, it would be prudent for long term investors to remember the saying, 'caveat emptor' - let the buyer beware.

Although there are mixed views on the rate of economic recovery in the US, the risk of high unemployment looms large. Given this backdrop, the Fed chief is willing to take no chances with respect to monetary policies that can dampen growth. The Fed chairman Mr. Ben Bernanke was quoted earlier this month saying that the worst US recession since the Great Depression was "very likely over", but that the recovery would be slow and would take time to create new jobs. As the Federal Reserve meets this week against an improving economic backdrop, the US central bank is seen in no hurry to raise interest rates.

India's GDP growth in FY10 has been a matter of contention with the main point of discussion being whether India will be able to register a growth of 6%. Just when the country was beginning to get its act together after a relatively tepid growth in FY09, deficient monsoons this season turned the tables and many were compelled to re-look at the assumptions that were made for India's growth this fiscal. While the CMIE and the UNCTAD are of the opinion that the growth this fiscal will be a tad below 6%, the government and the RBI are confident that India will be able to log in a growth of 6% plus. The Asian Development Bank (ADB) seems to concur with the latter and has raised India's FY10 growth forecast to 6% on higher public spending, stronger factory output and improved business confidence. However, this comes with a caveat and that the fiscal deficit is rising.

Further, the ADB expects Indian economy to grow by 7% from the previously estimated 6.5% in FY11 on hopes of better rainfall and a rebound in exports. The ADB is of the opinion that India's growing fiscal deficit (6.2% of GDP in FY09), following a public expenditure-led growth strategy, poses a risk to the economy and could crowd out private investment. While the Indian government aims to bring down this deficit to 5.5% in FY11 and further to 4% in FY12, it will be a challenging task indeed!

Volatility reigned on the bourses today with the BSE-Sensex trading largely in the red although there were some futile attempts to move into the positive. At the time of writing, the Sensex was trading lower by 7 points (0.04%). While FMCG and healthcare stocks found favour, stocks from the IT and capital goods space bore the brunt of profit booking. At the time of writing, the Asian markets were trading on a mixed note. Europe began the day on a positive note.

 Today's investing mantra
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." - Warren Buffett

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4 Responses to "US$ 4.3 bn booster dose for India"

K.G. Rao

Sep 24, 2009

Apropos the $4.3bill loan, there is much to puzzle the lay reader. Our state owned banks are quite well managed and have withstood assaults like "Loan Melas" a la Mr Janardan Poojary and have been able to write off Rs 15000+ crores of bad debts. India has US$ 265 billion forex reserves. Giving US$ 2 billion to banks for re-capitalisation is a fleabite. Why, then, do we
need a measly $2bill from the WB?

India has been able to weather the downturn in the economy largely because of the fiscal prudence advocated by the Reserve Bank. On the other hand,to give a loan of US$ 2 billion,the WB will impose so many conditionalities under the guise of liberalisation that the system may well deteriorate.

The other puzzling feature is the loan component for Railways. Why does IR need external funding/loans? Did not Lalu Prasad leave an accumulated surplus of (according to Business Standard)US$ 6 billion?

Could Equitymaster comment and educate us neophytes.


Sachin Kaushik

Sep 24, 2009

This is to appreciate ur efforts to give remarkable insights not in Indian Economic conditions but also in global economy. I daily wait for ur mail to come and to get a daily dose of the market conditions.



hemendra shah

Sep 23, 2009

In the long term (between 36 months to 60 months),the gold
price is likely to beyond US$2000....It is very likely to
cross US $ 3000...but comparatively silver will give better Returns.


anil nakra

Sep 23, 2009

dear sir
when we have so many business channel and advice is almost same then why we spend money to subscribe you , no body is ready to take responsibility as you are not taking it
as cleat in disclaimer

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