A timely warning from the RBI Governor

Nov 18, 2010

In this issue:
» Agflation is the new inflation in town
» G20 meetings have never achieved anything feels Rogers
» Sectors that are creating more and more rural jobs
» The return of the Indian consumer
» ...and more!!

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India has come out of the financial crisis with its reputation intact and is looking to grow even stronger in the years ahead, believes the Government. They are of the opinion that India does not need major structural reforms like higher levels of foreign investment or improvement in the lagging agricultural sector. A double digit growth can be achieved even without these reforms, they believe.

The country's foremost monetary authority, the RBI Governor however thinks differently. As per Financial Times, the RBI Governor has warned that the country needs a 'quantum step' in investments to achieve the ambitious double digit economic growth rate forecast.

Indeed, this statement by the RBI Governor pits him against another formidable luminary Dr Manmohan Singh. But we believe the RBI Governor could well be right here. A few small reforms could no doubt help us grow our GDP at above average rates in the near term. But we will undoubtedly need massive investments if we were to have a sustainable double digit growth rate. To put things in perspective, China's investment rate is about 55% of the size of the economy. In comparison, India spends just 35% of its GDP on investments.

Furthermore, just thinking about greater investments may not be enough. India also needs massive infusion of funds from foreign sources. And mind you, it is not the volatile foreign inflows from FIIs that the Governor is talking about. These, we believe, are of little use. What we instead need is greater FDI. Sadly, the same is getting very little attention from our policymakers. Thus, the next time someone talks about double digit growth rates in India, do not believe him unless he comes up with evidence of how the huge investment and financing needs are going to be fulfilled. A harsh but a rather timely warning from the RBI Governor we believe.

 Chart of the day
From its March 2009 lows, the P/E of the BSE Sensex has gone up around two times. A fantastic achievement indeed! But as today's chart of the day shows, there have been quite a few sectors that have seen their P/E multiples go up even more than the Sensex. At the forefront are sectors like Realty and Consumer durables where expansion has been of the order of 4 times. In other words, a gain of 300% from expansion in P/E alone. Other sectors like Banks, capital goods and metals have not done badly either, going up more than 2 times each. Indeed, such buying opportunities are very few and far in between.

Source: CMIE Prowess

It's the return of the Indian consumer. Two years after the Indian consumer started downtrading in response to the economic crisis and higher commodity prices, the trend has reversed. As per a report by Booz and Company, Indian consumers have started uptrading and are buying premium personal products and foods. This increasing sophistication in buying habits stems from higher income and the desire to look good. As a result, there is a strong demand for premium personal products and health and wellness foods with several categories growing by double digits. With the consumer goods market expected to grow by 17% annually to become almost 5 times its current size by 2020, India is seen as "strictly not to be missed" by international MNCs. While the Indian consumers are going to be spoiled for choice, the real winners will be companies which can anticipate demand rather than follow the trends.

Inflation, hyperinflation, deflation and stagflation. If coming across such jargons in business dailies on a regular basis makes you feel like an economist, brace yourself for some more. The latest trend in price rise of food items globally may induce experts to coin the term 'agflation'!

Going by statistics, world food imports will cross a landmark US$ 1 trillion this year. Thanks to surging prices of agri commodities, the global cost of importing food items is expected to jump 15% YoY. The sharp rise in grain, sugar and oil seed prices, in particular, has caused a major concern to the United Nations. The price increases largely reflect scarcity in export supply. However at the same time, global competition for securing foodstuffs in short supply is set to intensify. In addition, world output of grains like corn, barley and rice are expected to drop by around 2% this year! Certainly, difficult times ahead for growing economies with larger populations. Despite higher income levels, they may be incapacitated in ensuring adequate food supply.

The US government and the central bank have been at the receiving end ever since the financial bubble burst in 2008. There has been a widespread backlash against their policies. Many claim that these policy-makers first brought the US economy down on its knees and are now sowing seeds of a future crisis by saving bad banks and companies.

But there is one man who differs in his views. And he is Warren Buffett, the legendary investor and one of US's most influential voices in the financial field. The New York Times carries an open letter written by Buffett to the US government, thanking it for saving the country from a deeper crisis. Though Buffett has peppered his letter with some general criticism for the government as well!

He concludes his letter by saying, "Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through - and the world would look far different now if you had not."

Incidentally, Buffett was earlier seen taking sides with some big Wall Street banks like Goldman Sachs and Ben Bernanke. So his paean for the US government just shows his consistency of thoughts, though many might not agree with it...including us!

The rural India no longer needs to migrate to the cities to gain employment. New sectors like telecom, microfinance, rural BPOs, etc. are providing them with lucrative opportunities in their own home towns. In earlier days big cities like Delhi and Mumbai were the hot destinations for the youths of the rural world, especially for the educated ones. However, very few of them did well. Higher cost of living ate into their incomes leading to lower standards of living and almost negligible savings.

With the new wave of rural BPOs and micro financing, companies in these sectors are now actively seeking people in the smaller towns. Even telecom companies are providing opportunities to the rural community in the form of managing and maintaining their numerous telecom towers. If this continues, then soon the migration from rural to urban India would stop. And the economic divide between the two would start to even out.

Jim Rogers, the world-renowned investor and commodity bull, recently voiced his criticism against currency manipulation and the G20, which he thinks is a waste of time. Rogers believes nothing has or ever will come out of the G20. "It'd be better off if they just met in a bar, had a few beers and went home." He further states, "Anyone who is intervening in the markets is a manipulator by definition." He advises market manipulators to stay away from the economy. He sums up his views with a simple yet seemingly difficult-to-adapt lesson: "Any economy which saves and invests and works hard always wins out in the future over countries which consume, borrow and spend."

Meanwhile, after plunging deep in the red during the earlier trading hours, the indices have managed to recover lost ground with the BSE-Sensex trading only marginally lower at the time of writing. Banking heavyweights like ICICI and HDFC Bank were seen adding the maximum pressure. Other major Asian indices however closed strong today. Europe has also opened on a positive note.

 Today's investing mantra
"With short-term money returning less than 1 percent after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity." - Warren Buffett

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2 Responses to "A timely warning from the RBI Governor"


Nov 18, 2010

hmm... comments are getting better...kudos to 5min wrap-up...'quantum step' in investments need not have to rely on FDI...'right step' on governance itself can provide that. I would definitely think this is in the realm of PM and Sonia Gandhi rather than depending on some other country FDI. Mother of all scams - Black Money Domestic Investment (BMDI) can adequately provide the 'interim step' to bring in the FDI 'quantum step', if u really want to give the fruits of indian growth to foreigners.



Nov 18, 2010

No doubt we need investments in large scale, if we want sustained double digit growth. Also, no doubt we dont want the FII/PN kind which will fly away as fast as it came, should there be a glitch along the way, even if it were short lived, which is inevitable (what with Mayawati and Lallu sporting ambition of becoming PM!).
But then I believe we can do even without FDI!! Going by the response to 9.5% (not far from PPF rates, which will remain at a premium plus to real rate, as long we have left-overs of Comrades around!) SBI bond with a lockin of 10 years & IPO responses, if proper tax incentive is given, Indian individuals, NRIs included will happily fill the investment-need out of their savings. Then there are moneyed Kalmadis and Rajas; a little imaginative way of unearthing the enormous ill-gotten black money, India could have from within 200% of its capital need for capital (plan expenditure). That by the way can produce enough tax revenue for the Govt to spend on dig-a-whole-and-fill-em-up kind of Yojanas like MNREGA or more kursis for Coalition king makers & the associated addition of, by definition, unproductive Babus (well, all of it popularly known as wealth re-distribution, to the needy!).
Why would we want the fruit of capital invested, go to foreigners at all?!?
Wonder if the mandarins at Planning Commission can come up with a scheme that can suitably be coloured by the Politicians so that the scheme looks sufficiently 'inclusive' (the current buzz word, for anything to pass!) yet providing the much needed Capital to re-build India?! Well...thanks to our politicians, we have a strong tack record of missing the bus, consistently!!

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