Is India's growth story in danger?

Nov 26, 2010

In this issue:
» Near term outlook for Indian banking sector not so rosy
» Bribing scam. Will this lead to a crash in property prices?
» Centre criticizes ridiculous air fares in the peak season
» Impact of fertilizer subsidy on fiscal deficit
» ...and more!!

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00:00
 
'Rotten to the crore?', screams a headline on one of the world's most widely read financial magazines, The Economist. Indeed, India's scams are now grabbing international headlines as well. The content of the article though is nothing new. Besides presenting an excellent synopsis of the outbreak of recent scams in India, it does precious little. Of course, it harps upon the reducing moral standards in India. But truth be told, this 'holier than thou' attitude doesn't quite cut it with us. Especially at a time when morality has plumbed to new depths in the West.

India's malaise though, is too dangerous to be underestimated. If not stopped in its tracks, this problem of widespread corruption presents perhaps the biggest danger to the India growth story. Fortunately for us, we don't think the hurdle is too difficult to overcome. We derive this rather bold looking comfort from two facts. First, the presence of a reasonably well functioning democracy in India and also the presence of a well functioning trade and capital markets. Turn back the pages of history and one will come to know what we are trying to say. No other system has done more to lift billions of people out of poverty and improve their standard of living manifold than a democratic government and a capitalistic market place. Hence, India certainly is on the right path as far as these two systems are concerned.

Where we seem to have gone wrong is that increasingly, we have started mixing the two. And that is a dangerous combination to have. You see, democracy functions on the basis of the common interest whereas capitalism strives on personal interest. Hence, it is not at all advisable when politicians start getting closer to businesses. Because this amounts to them giving precedence to their own personal interests rather than that of the people they represent. Hence, the sooner they start distancing themselves from businesses and instead, start thinking about the common interest of its people, the better it will be for India. We believe that Indian society does have enough checks and balances to ensure that things are controlled before they get too out of hand. It is upon us, the citizens of the country to ensure that their sanctity is preserved.

Do you think the India growth story is at serious risk from the outbreak of these scams? Share your views.

01:25
 Chart of the day
 
Prices of gold and oil have moved in tandem in recent times. Commodity prices across the board have been going up since the announcement of QE2 by the US. However, recently, the relation between gold and oil seems to have broken away as they part in directions. Fears surrounding Euro zone and clashes in the Korean peninsula have caused investors to renew their interest in gold. However, oil prices appear to be cooling down as investors are now seeking safer investment opportunities. Today's chart of the day highlights the relationship of oil and gold prices in the recent past.

Data source: CNNfn, Kitco

01:48
 
As scams preoccupy news space across media, investor appetite for Indian stocks already seems to be on the decline. At such time, the scrutiny over the quality of assets in the banking sector could not be more ill timed. Thanks to greedy overtures by some banking officials, the sector is being held to ransom by investors. The RBI has never been comfortable with the sector's high exposure to real estate assets. And the latest development could ruin lending prospects to the same even further. Not to mention the thinning spreads that sector is having to contend with. Thus the time is ripe for investors to be on the lookout for some good bargains in the sector. The near term prospects for the banking sector are certainly not rosy. But it may be very opportune to buy some fundamentally strong banking companies during times of such crisis.

02:28
 
After an unprecedented rise in property rates, is a pricing relief for a genuine home buyer just around the corner? Well we think so. Post the housing loan scandal finance minister Pranab Mukherjee has directed state owned banks to go in for a critical appraisal for loans above a certain threshold limit. As banks would now be more cautious in sanctioning loans to the developers the move is likely to suck out the liquidity from the sector. This may force the builders to cut prices in order to improve their cash position. Until now the builders were holding on to the prices as they were able to manage their working capital cycle through either pre-sales or bank loans. With pre-sales dying down due to high prices and banks being reluctant to lend in light of the recent ruckus we believe price correction is just around the corner. Again with borrowing rates likely to become expensive as banks would now be reluctant to lend it could prove to be a double whammy for the developers. In such a scenario releasing inventory at lower prices could be the best possible alternative and a blessing in disguise for genuine home buyers.

03:08
 
The Indian airline industry was badly hampered by the global financial crisis. Especially since travel reduced and caused most companies to plunge deep into the red. But the scenario now seems to have changed. With passenger demand rising, airlines are leaving no stone unturned in raising airfares. In fact, in recent months, the rise in airfares has been so steep (up around 50%) that ministry of civil aviation is considering price bands for airlines. The civil aviation minister, Praful Patel, has claimed that the huge increase in airfares in recent times has been inappropriate and arbitrary. He further went on to say that airfares on every sector or route should have a lower and higher limit. This in turn must be notified in advance on the websites of airlines. Also, the price band will have to be fixed in consultation with the civil aviation industry. This might spell good news for harrowed travelers. But whether airline companies toe the line remains to be seen. Especially since these companies are already saddled with the burden of higher taxes on aviation fuel.

03:39
 
The fertilizer ministry has sought an additional Rs 300 bn to meet the rising subsidy bill, bringing the government's finances under stress. The ministry has projected a revised demand of Rs 822 bn as against the budgeted Rs 528 bn, citing hardening international prices of key inputs and imported fertilizers. The petroleum ministry could also seek extra funds to compensate oil companies for higher losses incurred in selling fuel at below cost.

The Ministry of Finance had raked in more than Rs 1,000 bn from the auction of 3G and broadband airwaves against a budgeted Rs 350 bn, but most of the extra funds have already been absorbed by the higher subsidy burden. The government has already committed an additional expenditure of more than Rs 750 bn in the current fiscal through two supplementary demands for grants. However, the Finance Minister does not think it will have much impact on fiscal deficit as all additional expenditures relates to developmental outlay.

04:11
 
Troubles for the Euro zone appear to be far from over. Ireland's recent acceptance of bailout funds from the IMF and European Union seems to have controlled the situation as of now. However, it does not appear to be a long term solution. As per Morgan Stanley's global economist, the contagion effect is imminent in Europe. Countries are so deeply buried in debt related problems that sooner or later they would end up screaming the need for a bailout. This would lead to a contagion effect as one country after the other starts to go down like a game of dominoes. Whether they rely on the European Union to bail them out or not, they will definitely need funds in the days to come.

04:32
 
In the meanwhile, the Indian markets were trading in the red, but much higher than the day's lows as buying activity picked up during the post noon session. The BSE-Sensex was trading 44 points lower at the time of writing. Stocks from the banking and IT spaces were in favour at the time, while those from the realty and consumer durables were amongst the top losers. As for rest of Asia, markets were trading weak with China, Hong Kong and Japan trading lower by about 0.5% to 1%.

04:50
 Today's investing mantra
"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." - John Templeton

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44 Responses to "Is India's growth story in danger?"

Dayanand Jamalabad

Nov 27, 2010


There is a complete breakdown of the entire society and value system. This will surely be soon replaced most probably by a massive destruction as Man is not willing to change

Like 

vijay

Nov 27, 2010

Yet another scam...By Next week or month, we all will forget (like we have forgotten- bofors, Fodder scam, hareshad mehta scam) and things will be back on track. There is ome disturbing factor though. Earlier the business class was not so much involved in it. Today the Money and the Power have come together. None other than Mr. Tata has said that he is worried, not as a businessman but as an ordinary Indian.

I am more worried for the future generation...

Let's hope that some day there will be a ray of hope...

vijay

Like 

Mahavan Kutty

Nov 26, 2010

Corruption at the political and Babu's levels and not having an effective investigating agency (the CBI is controlled by the ruling party) lack of accountability on the part of govt institutions will definitely go slow India's growth.

Like 

ravishankar

Nov 26, 2010

Our Country is on a dangerous path. The food prices have soared, education has become a day light robbery and forget about owning an apartment. Even if a working couple bring home 1.5 lakhs after all the deductions of income tax, it is impossible for them pay back the housing loan. A simple calculation of servicing a home loan of rs. 50 lakhs, with an interest rate of 8 percent amounts to 4 lakhs as interest alone. Then comes the principal. In case if any of the working couple loose the job (which is very much possible) then they run into all sorts of problems. Definitely one day or other there is going to be big sub prime in India, and we cannot afford it.

Like 

ramkishan sonthalia

Nov 26, 2010

Corruption is influencing every where. Price cut by Claris in their IPO is one kind of corruption case. The authorities has cleared the issue by not functionong their duty properly (could be cleared by accepting bribes). Please read the news appeared in VCCircle:-
"India's Claris Lifesciences Ltd has cut price band and extended the closing date for its 3-billion rupee initial public offering, two sources with direct knowledge of the matter told Reuters. The company has set a new price band of 228-235 rupees and the closing date now stands at Dec. 2, said the sources who declined to be named. The earlier price band was 278-293 rupees and the issue was suppose to close on Friday."

Like 

shriniwas

Nov 26, 2010

I agree with your views

Like 

A.K.Chatterjee

Nov 26, 2010

Sir, India involves a major problem in it's democratic system that it becomes a country of justice delayed & justice denied. Here poor people cann't do anything against the torture of rich people while the poor is 85% & the rich is 15%,and there is no mid-standard at present. It makes rising of corruption as well as social coup in disguise of many types of antisocial activities.
Thanks.

Like 

P Natarajan

Nov 26, 2010

Unchecked and high volume corruption by the callous politicians will certainly put the growth at serious RISK.But as long as the people are ready to vote for monetary gain,nothing much could be done. The politician needs to amass wealth and part with a part of it to buy the vote !

Like 

CHANDRASHEKAR

Nov 26, 2010

I certainly do not agree with this statement as India Growth story is just a crap story which been presented by PM Manmohan Singh & FM Pranav Mukharjee even before these scams outbreak. These two gentlemens always recited this story just to grab FII investment in this country. If you observed & tracked the HIGH (POSITIVE)INFLATIONs & (NEGATIVE) INFLATIONs you will observe only growth in manipulated inflation figures. Ordinary man on street has been presemted with different types LOANs for an artificial growth to such an extent that most of people today live credit. Don't know what would happen to their dependents if sudden death occurs to them. Consider all those cases of suicides by ordinary people who could not sustain the effects of this so called GROWTH STORY.

Like 

J. A. Lakhkar

Nov 26, 2010

"No other system has done more to lift billions of people out of poverty and improve their standard of living manifold than a democratic government and a capitalistic market place." Wrong - it should read a 'functioning government and a capitalistic market place' to include China with India.

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