Is there an economic crisis in India?

Oct 14, 2013

In this issue:
» Is dollar losing its reserve currency status?
» Banking reforms coming soon...
» SEBI issues draft guidelines to revive REITS
» Govt PSU stake sales stuck again
» and more....

The dramatic depreciation of the Indian Rupee raised alarm bells. It also made the Indian Government who was in denial mode, wake up and take note of the crisis India is in. The primary reason for India's current economic crisis is a deceleration of growth. The UPA-II's tenure has been marked by political populism, financial profligacy, policy paralysis and corruption, instead of sound executive decisions to strengthen the economy and boost growth. All the economic growth indicators have reached decadal lows. International rating agencies have also been critical of the government's functioning placing India almost at the bottom of all socio-economic indices.Inflation is too high. The twin deficits (Current account and fiscal) are at alarming levels and need to be brought down.

And yet, there seems to be light at the end of the tunnel. The Indian economic scenario may not be, after all, that dark and disappointing. In fact, according to the RBI chief, Raghuram Rajan, India is not facing any economic crisis. Although the economy has slowed, the country's forex reserves are large enough. He also said that there is no chance of India needing the help from IMF for the next five years. India's external debt to GDP is 22%. India has reserve of US $280 bn which is 15% of GDP. This means, the country can pay three-fourth of its debt from its forex reserves. Currently short term external debt stands at 10% of GDP. So, the country has enough reserve to take care of that.

Although Mr. Rajan might be right in saying that India has enough forex reserves, but the country still face many problems. Not approaching the IMF for emergency funding cannot be a reason for India to remain complacent about the low growth and fiscal mess. In fact the sooner the government gets its act together the better are the chances of India's recovery.

Although the Union government has undertaken some reforms, more needs to be done. What India really needs and desperately so is an environment where unnecessary regulation, corruption and red tape is done away with. The failure of public private partnership has been the key reason for India's infrastructure story not making any headway. But once the government shows some resolve to sort out bureaucratic hurdles in time bound and transparent manner, investments in both infrastructure and manufacturing will become forthcoming. And that would automatically kick start the chain of economic activity the country has been starved of over past two years.

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 Chart of the day
There seems to be no respite for the Indian auto industry yet. In the first half of FY14, most segments across the auto space has seen a fall in volumes. This has particularly been more pronounced in the case of two wheelers. While the domestic market has continued to face rough weather, exports have not provided the much needed solace either. Slowdown in the economy, firm interest rates and fuel prices have acted as a dampener on demand. The industry's fortunes are closely linked to that of the economy and unless the latter picks up, auto volumes are likely to remain subdued. The silver lining in the cloud is that monsoons this fiscal have been good and should provide some relief to the otherwise beleaguered auto sector.

Sharp fall in 2 and 4 wheeler sales over past 6 months
Data source: Siam

Not so long ago, the US dollar was the world's reserve currency. Each and every foreign transaction was denominated in US dollar terms. International trade was carried out only in US dollars. Even when neither of countries involved in the trade was US, the currency of trade was US dollars. But things seem to be changing. As per BBC, China has signed a deal with the European Central bank. The deal essentially allows the central banks of the countries to settle trade in local currencies rather than in US dollars. China has earlier signed similar deals with Australia and Brazil as well.

From the perspective of the countries involved in such deals, the benefits are many. The countries involved avoid swings in exchange rates. Their currencies get more liquidity in the international markets. But most importantly, they become less reliant on the US dollar for bilateral trade. It is this point that has caught our attention.

Since the US Fed embarked on its ambitious quantitative easing (QE) program, the threat to the US dollar has just been growing. Reckless money printing has undermined the value of the dollar as countries have sought to diversify their assets in other currencies. This has opened up the possibility of other currencies becoming the world's reserve currency. One possible candidate is the Chinese Yuan. But the country has quite a few problems that it needs to resolve before its currency can take this status. This is the situation in most of the countries across the world. Therefore the US dollar's status is currently safe. But if US continues its program for long and the dollar continues to lose its value, the day where it loses the reserve currency status, is not that far away.

Retailers are already cashing in on the sale season for festival merchandise. For a consumer driven economy like India these periods are a substantial boost to economic activity. But there is yet another sale on the cards. One that has a scope for direct impact on the economy in much larger proportion. Anticipation of banking reforms so far has been anchored to issue of new bank licenses. However, as per RBI governor Dr Rajan, the opening up of India's banking sector promises as much excitement. The policy framework for the entry of foreign banks in India is overdue. However, once unveiled in the next few weeks it could unleash the possibility of several Indian banks featuring in the shopping list of their foreign counterparts. Dr Rajan has promised to make the scope of business for foreign banks in India much larger. One that will also allow them to takeover smaller banks in the country. However, the scope would depend on the reciprocal nature of incentives provided by banking regulators overseas. Hence if Indian banks are allowed to do more business abroad, the opening up of the sector here will be more prompt. The coming months could definitely witness a lot of activity in Indian banking. However, investors would do well to not get carried away by optimism and take a rational approach.

Which Indian banks will be attractive to their foreign counterparts? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks.

Is it possible to build a strong structure with weak foundations? Certainly not. Even if it is built, there is a strong likelihood of the structure collapsing. We believe this is a perfect analogy to describe SEBI's recent efforts to promote Real Estate Investment Trusts (REITs). As per reports, the market watchdog has just issued draft guidelines to set up REITs in the country. The initiative no doubt is much appreciated. However, we greatly doubt whether it will bring in the required investors when laws governing real estate in India remain very weak. As per McKinsey, land market distortions costs India as much as 1.3% of lost growth a year. Indeed, things like unclear ownership, counterproductive taxation and inflexible zoning, rent and tenancy laws has led to India emerging as one of the most overpriced real estate markets in the world. And thus, the priority will have to be correcting this anomaly. Introducing investment avenues like REITs without taking these factors into consideration will not bring in the required results as per us.

The government's efforts to reduce its fiscal deficit appear to be reaching dead ends. One avenue it was always banking on was divestment in state run companies. Indeed, the target set for this fiscal was to raise around Rs 400 bn through various stake sales. Half of the fiscal is already over and only 3.3% of the target seems to have been met. Thus, making it quite obvious that the government will fall short of its target by a long way. This is nothing new. Ambitious targets set in the previous fiscals too have hardly been met. Besides weak market conditions, resistance to stake sales by government departments has been the reason why the divestment exercise has been such a damp squib. Meanwhile, the government is desperate to raise revenues. Tax collections have been poor which means that the government will have to drastically cut down on unproductive spending. How long this sorry state of affairs continues to remains to be seen.

In the meanwhile, Indian stock markets continued to trade in the green. At the time of writing, the benchmark BSE Sensex was up by 63 points (0.3%) with software and oil and gas stocks leading the gains. However, stocks in the metal and consumer durables sector were facing maximum selling pressure. Most of the Asian stock markets were trading higher led by Japan and HongKong. The European markets opened on a mixed note.

 Today's investing mantra
"Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage." - Peter Lynch

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9 Responses to "Is there an economic crisis in India?"

Richard Gere

Oct 21, 2013

In the Current Meantime with India I think that Indian Economy is improving and will be improving if there will be proper policies from governing entities. Though local Government has been failed in all aspects of running an economy of such a big country but investors are looking to market with a positive intent to get improve soon as the recent time has been quite critical for dividend stocks investors and for the companies itself in India. Most of them are under performing and declared negative results felling into loss.

Like (2)


Oct 17, 2013

Before Rajan took over as RBI Governor India seemed to be facing serious economic crisis, with the market and Rupee both heading Southwards. However, immediately after his assuming office as RBI Governor, now everything seems to be hunky dory. Rupee is almost back to its old level and market is touching new highs.

One may ask what is going on. What has changed in two weeks? So called Experts, Traders and Speculators are playing havoc with the market. We should not be surprised that one day suddenly the market once again starts going Southwards on some filmsy pretext.

If Economy was in a crisis did the crisis vanish away just because Rajan is at the helm at RBI or have we allowed speculators and manipulators to rule the roost?

Like (2)

Ashok Machalla

Oct 15, 2013

What actually this country needs is reforms in the mindset of the ruling elite who should draft and implement policies in the best interests of the country and should not confine their thinking to petty domestic political gains and not look for cover to hide their mistakes under related developments e.g. recent rupee recovery against dollar (after a steep fall) is temporary and the exercise is likely to be reversed once the crisis in US administration gets resolved. Ultimately, fundamentals of national economy would come to rescue and the statements of leaders and economists can only be the encouraging elements and not solutions.

Like (2)

Umesh Sharma

Oct 14, 2013

The first reform they can think of is to set banks free of government interference.All the banks should be privatized and handed over to people capable of managing them.this will make the banks stronger and politically motivated lending, harming the very existence of banks, through ever growing N P A s will come to an end.Otherwise all the reforms will be only on paper and banks will continue to suffer

Like (5)

Abhiram Sharma

Oct 14, 2013

There is no economic crisis, need is to control non productive expenditure and corruption. Every day news comes failure of administration result man and property loss. what is the use of such governance expert in making crisis, no responsibility, no punishment or minor punishment or long court decision to make them guilty till such time they enjoy the benefit. Govt organisation is one among them where once authority qualify and join avail maximum benefit, strict rule require to prevent economic crisis .Strict rule is needed for commission & omission.otherwise the day is near that economy will collapse and will have no money to enquire. what is the use of such punishment or declare person guilty after 17-20 years

Like (5)

H K Prakash

Oct 14, 2013

Crises is caused MAINLY by Pseculiar Party in its mad determination to win elections at any cost. Free/ cheap power, LPG, diesel, water, rice, sari, dhoti, TV, cycle,....Absurd imports like coal, pasta/pizza, other food items, gold, silver. Free imports of mainly poor quality rubbish from China (do you know China exports 10 times what it imports from India?). Actually our Purchase Parity Rate of R to $ is said to be R 17-18 to one $. Pseculiars need to to improve or they should be thrown out in 2014. Jai Hind!!!

Like (3)


Oct 14, 2013

It is NOT, provided the WIll at the top level and sincere implementations & Execution at Middle & Bottom level. Simple example of Blending the ETHANOL with Diesel & Petrol is going to save Billion's of USD in a single year apart from the Pollution Control & FARMERS benefits i.e. MASS BENEFITS.


Like (3)

Ganesh Sastri

Oct 14, 2013

If IMF needs emergency funding which are the countries it will approach? China, Middle East countries, Germany ? Will India be one of them? The answer is obvious. Dividing debt by GDP is an ABSURD FRACTION. India cannot repay its debt ( which is in a currency that it CANNOT PRINT) with its GDP. It can repay ONLY with FUTURE TRADE SURPLUSES. There is NONE in sight. The article talks of an absolute amount of FX reserves and debt ( short term and total) as % of GDP. Why does it not mention total FX debt in absolute amounts? Against FX reserves of $ 280 B, total FX debt could be well over be $ 400B. How does RBI plan to repay $ 120B? AS the article says India's problems are MASSIVE TRADE DEFICITS, MASSIVE INFLATION AND MASSIVE CONSOLIDATED BUDGET DEFICIT OF Central, State Governments, PSUs ( Central and State). Prepare consolidated financial statements of all these four and the picture will be clearer. It is like looking at a holding company on a standalone basis and ignoring subsidiaries' hollowness.

Like (2)


Oct 14, 2013

Face value of Mr.Raguram Rajan can not be taken for granted. So far from past ten year the entire govt is telling lie to the nation and to cover up they are looting the nation in different sugar sticks( FSB,DBT,FDI,LRB, Scams) and they converted the parliament in to a ordinance factory. Present smoothing of dollar is also may have some sort of duping the people. Only time will tell the truth. We must not trust blindly for eco data. We also suspect the gold in RBI whether it is still there or not.

Like (2)
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