Is India as risky as Greece or Portugal?

Nov 9, 2011

In this issue:
» The 'Big Lie' about US banks
» Are NPAs causing systemic risks to Indian banks?
» 2/3rd of properties in Mumbai cost more than Rs 10 m
» India's billion dollar IT babies
» ...and more!
----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

We are proud to present an exclusive publication - The Guide to Gold, a compilation of Bill's most popular articles on Gold.

Join Bill as he discusses the past, present and most importantly, the future of Gold as an investment opportunity. And find out if Gold is still the best bet for you...

Quick! Sign Up Right Away & Get this guide FREE!


When we speak of economies at the brink of sovereign default, Greece, Italy, Spain and Portugal are at the top of our minds. Unprecedented proportion of debt risks on the sovereign balance sheets of these economies has impacted their ratings and investor perception alike. In fact the government bonds in these countries are treated worse than junk bonds. But what took us by surprise was the ranking of Indian bonds on Blackrock Sovereign Risk Index. The index suggests that Indian bonds are amongst the 10 riskiest in the world. So much so that they are pretty much in the same league as bonds of Spain, Argentina, Hungary, Italy, Ireland, Venezuela, Egypt, Portugal and Greece.

Now, we understand that the Indian economy is currently not in the best of health. Lingering inflation problem, high fiscal deficit and slowing GDP growth have taken a toll on the country's sovereign rating. The country remains vulnerable due to its dollar linkage and dependence on oil prices. But the same cannot build up the case for such relegation. Economic experts opine that economic fundamentals in India are far better than in European nations. Running a fiscal deficit is not considered abnormal for a growing economy. Moreover, the reserves and maturity profile of debt are reasonable. In fact the short-term debt is backed by adequate reserves. Most of the debt is held internally and it is unlikely to be a worry so long as nominal GDP growth is higher than interest-rate growth. Thus we believe that just like India's sovereign ratings, the risk profile of Indian bonds too are an incorrect reflection of the economy's true potential. What is for sure is that the ratings fail to take into account the long term risks and upsides.

Meanwhile like most other rankings and ratings, this one too may cause investors in global markets to avoid Indian corporate debt. This certainly will impact borrowing costs for Indian corporates in the near term. But as the domestic bond market matures and domestic interest rates cool off, we do not think these ratings will be of much relevance. Having said that, we believe that investors should never take such ratings and ranking on face value without understanding the underlying logic for the same.

Do you think the debt risks in Indian economy are as serious as in Europe? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
Most emerging economies including India and China have accumulated large sums of foreign exchange over the past decade. China's hoard exceeds US$ 3.2 trillion. But this equation changed sharply over the past three months, with the spike in oil prices and foreign investors deserting emerging markets. Although China's forex reserves fell by less than 2% since August, the country saw its reserves depleting by a massive US$ 61 bn within a matter of 2 months. Also India saw one of the biggest drops in forex reserves. Meanwhile Saudi Arabia reaped its oil riches in dollar terms.

Data source: Economist

Imagine what would happen if the founding principles of your life, the ones that you used to survive until now are all proven wrong all of a sudden. Your world may come crashing down. A wave of massive uncertainty will occupy your brain, leaving your heart pounding and your pulse racing at far above their normal levels. Scary stuff, isn't it? This is perhaps the reason why despite numerous evidences to the contrary, a person tends to cling on to his deeply held beliefs. He just doesn't want to take the risk of changing his mind and falling prey to the uncertainty involved.

Labeled cognitive dissonance in the field of neuroscience, this is the exact same illness that is afflicting US banks and investment houses right now. They are just not willing to accept that they had a big role to play in the financial crisis of 2008/09 courtesy their lax practices. They have instead chosen to put the blame on the Government, arguing that it was the one who seemed to have forced everybody to go and give mortgages to people. Barry Ritholz, a famous columnist has come down heavily on this blame shifting tactic of the banks. He believes that they are as much responsible for the crisis as the Government if not more. He has termed this as the Big Lie and has implored people to ignore the same and instead, try and implement the Big Truth as early as possible. The Big Truth being that the world definitely needs more regulation and the banks do indeed need to be cut to size.

Global ratings firm Moody's today downgraded the outlook of the Indian banking system to 'negative' from 'stable' amid concerns over asset quality, capitalisation and profitability. Ironically it comes at a time when key Reserve Bank of India (RBI) officials have attempted to ease concerns over systemic risks to the banking system. Recently, the gross NPA to advance ratio amongst PSU banks in India increased from 2.2% last year to 2.3% in March this year. However, the RBI believes that the NPA level has not reached a point where it threatens the banking system. We concur that the high provision levels amongst Indian banks is what offers such comfort to the central bank. Nevertheless the NPAs are a drain on profits and shareholder returns. While the current NPA levels might not have reached alarming levels yet, it will be prudent if banks keep a careful tab on them considering the slowing growth rates, high inflation and expectations for further rate hikes.

If a recent study is to be believed, buying a home in Mumbai would continue to remain out of reach for an average citizen. Affordability factor is a proving to be a major hindrance for home buyers. Property prices have increased by about 10 times in the last decade, with 68% of the flats in the city now costing over Rs 10 m. This has kept majority of the buyers at bay. As a result, there has been a substantial rise in unsold inventory. However, considering the shortage of land parcels in Mumbai, builders are holding on to the prices rather than liquidating the inventory. They are confident that the real estate transactions would increase once the overall credit environment improves. Emergence of nuclear families and migration from tier 1-2 cities will also ensure that demand outstrips supply. However, we believe that prices in Mumbai are already near a bubble territory. Thus, unless the prices correct to a meaningful levels the evident strong demand argument would just remain on paper rather than materialize.

Rising food prices have been a bane for quite some time now for consumers across India. Despite monsoons being good this year, there has hardly been any meaningful relief for the average Indian. What has made matters worse is that the gap between the wholesale and retail prices of every day food items has only widened. And the reason for this has been attributed to higher transaction costs and labour charges. To cite an instance, wheat prices were down 1.62% from a year earlier in the wholesale markets in Delhi, but the retail prices were ruling 7.14% higher. The same trend has been observed for other essential food items as well.

What this means is that while the demand-supply mismatch has reduced on account of good harvests, profiteering has kept prices higher. Expecting a sharp decline in retail prices any time soon seems quite difficult. In fact, one of the issues is that most retailers are unorganised and operate on a small scale as a result of which the temptation to indulge in profiteering is great. The obvious solution would be to bring organised retailers and farmers on a common platform and thus get rid of intermediaries. When this will become a reality though is anybody's guess.

Outsourced services or business process outsourcing has been strength of Indian Information Technology (IT) companies. But of late, software products are also witnessing some interesting signs. Many Indian companies in this space have been doing well for quite some time. On the back of strong future growth prospects, now these niche IT companies have started fetching valuations upto US$ 1 bn. Online travel company Makemytrip, Mobile ad network company InMobi, online retailer company Flipkart are examples to name a few. Companies in data protection space such as Druva, in Customer Relationship Management (CRM) space such as Zoho and many others in different software products space are coming up fast as well. This will definitely not change the image of the Indian software sector, at least not in the near future. However, this shift is a good sign for the sector as a whole. After all, it is adding one more dimension to the future growth prospects of the sector.

In what has been an extremely volatile session, the indices in Indian stock markets today oscillated to either side of yesterday's close. At the time of writing, the BSE Sensex was flat hovering close to the dotted line. While FMCG and software stocks are in favour, banking and energy stocks are leading the losers. Other key Asian markets are trading a mixed bag while Europe has opened on a positive note.

 Today's investing mantra
"While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology." - Seth Klarman

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Is India as risky as Greece or Portugal?". Click here!

13 Responses to "Is India as risky as Greece or Portugal?"

madhav Pande

Nov 21, 2011

I dont agree with the analysis as Indian economy is fundamentally strong and the domestic growth story id still intact.



Nov 11, 2011

Govt of India, like govt of USA has been pushing banks and LIC to dabble in stock markets to keep the market valuation artificially high. If you check on Yahoo Finance on US stocks, you will find that almost all leading names:CocoCola, pepsi, Boeing, Yum Foods, P&G, Heinze, Kraft, Pfizer, Johnson & Johnson, Unilever, and almost pharma companies pay a better dividend and have lower P/E than Indian companies in similar fields.The fact is that companies like Kingfisher and Bharti Telecom, DLF etc. are not worth the price they demand and the market is likely to crash with its own weight. The swings in value of InRupee vs.US$ only helps people like Soros to gamble (which he did with Malaysian Ringgit)and while the Govt of India has a reputation to keep its promise at any cost, the fact remains that all is not well with economy and the govt fighures that r published are false.



Nov 10, 2011

The true picture of our economy is different from the one projected by the Government. The various scams that have cropped up and the huge black money that we hear, had damaged our economy. The Government had printed the currency in exchange,but that has lead to devaluation of the Rupee.The non productive expenditure of the Government in various schemes is another cause of concern. Third is the game of politicians, most are not loyal to the nation. They are more concerned about their own survival and progress. I fear we are heading towards a situation similar to European Nations, those nations are small, we are a big country so it will take longer for us to realize the impact but the symptoms have started appearing. The disaster is inevitable.


Mandar Nikam

Nov 9, 2011

Indian economy will certainlly slow down in coming years.Due to high inflation and wrong economic policies by UPA.Reforms are required in economic policies and hope are "economist" PM will understand that.



Nov 9, 2011

To hell with these stupid rating agencies. Nothing but a bunch of clowns spewing financial jargon that eveb they don't understand. These sames agencies classed CDO as AAA and look what a mess that created. Let them keep barking while India continues its march to prosperity.


sudhir apte

Nov 9, 2011

in my opinion Indian govt's finances are in worse shape than those of Greece or USA If you relate fiscal deficit or interest burden to total revenues of the govt instead of to the GDP of the country then you will get some shocking ratios and results. And since payback capacity is a function of your income and not that of your GDP, the poor rating of Indian bonds is perfectly justified. I am sure our hotshot economist prime minister is aware of this reality and thats why he dared to say that all petro product prices need to be decontrolled Unless the political parties gather courage to take such unpleasant steps, need and time to mortgage our gold is not very far away


Asit Kumar Mitra

Nov 9, 2011

There may be some limited impact of condition prevailing in Greece,Italy, Portugal,Egypt, USA and in some western countries on Indian economy specially in the stock and bond markets,foreign borrowing, outsourcing and also imports,because of appreciation of Euro and US$,effect may be less owing to the our mixed economic system , timely intervention by the RBI,infusion of funds by the government in public sectors banks to check such eventualities.Crisis in the capitalist world will have little impact on our rural economy .However,the inflation and high food price rises are major concerns in our economy



Nov 9, 2011

Hello Sir,
Black money draining in to other nations,
Enormous Scandals & scams among politicians,
Spurt in automobile increase, & consequences of Big oil import,
Lack of proper infrastructure,
Stupendous so called welfare schemes,to loot the common man,
Under valued Education system (no university has got international ranking),
Too many diversities & our political people`s cunning trickery play to harvest their election vote game,
Reducing agriculture interest among farmers because of Scandalous stimulation of 100 days work scheme,
poor Law & Order & low value of justice system & so many are there to mention , why the reason our nation will also face serous crisis in coming days ahead.



Nov 9, 2011

Indian bonds being clubbed alongwith Greece, Portugal etc is a completely flawed argument. All the countries mentioned above have significant sovereign issuance at the external debt level. While India does have external debt (40% of GDP, which is very small relative to the countries compared with), it does not yet have external bond issuance at the sovereign level. And, if one doesnot have the external debt problem, then where is the problem of rolling over debt; local debt is relatively easier to roll.

In short, the analysis not only lacks thought, it is misleading.



Nov 9, 2011

Viewed through Indian eyes, sure India may not be as bad as Greece etc. But then view it through foreign eyes who also add corruption,poor governance, splinterd politics to factors mentioned by you - and come to conclusions which we as Indians may not like.

Equitymaster requests your view! Post a comment on "Is India as risky as Greece or Portugal?". Click here!