Are these 3 letters answer to India's woes?

Nov 28, 2011

In this issue:
» India still attractive to foreign investors
» China's interest in dilapidated UK infrastructure
» FDI in retailing a big boost to Indian IT
» Minority shareholders to find more voice in decision making
» ...and more!
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When at the pit of a gargantuan problem, most of us like to look for quick fix solutions. At times the solutions are simple and easy to implement. But alas, not always! If passing resolutions would be the answer to safeguarding the interests of a trillion dollar economy, we would be living in a different world altogether. The government's much delayed approval to allow foreign direct investment (FDI) in Indian retailing is being touted as the next tranche of 1991-like reforms. Besides getting foreign exchange, the same is expected to create jobs, reduce debt and deficits and curb the fall of the rupee. In fact some have even bet on FDI in several other sectors being the key to India's economic strengthening. Unfortunately we do not belong to that camp.

What happened in 1991 was not just a resolution to open up India's bureaucratic industrial set up. The economic liberalization was the outcome of policymakers, entrepreneurs and investors desiring to break away from a shackled existence. Besides the reforms, there were the intent and determination to bring in efficiency, quality and better shareholder returns. The result of this was improved socio economic well being.

As we stand today, FDIs may bring in some much desired long term investments and foreign exchange. But if one checks the progress of projects in sectors like steel that have attracted the maximum foreign investment, the results are appalling. Policy inaction on land acquisition and sourcing of raw materials like coal etc have stalled projects that should have been commissioned years back. Sectors like power have scarcity of funds as the least worry. Inefficient state electricity boards and poor coal mining policies have brought the fate of this once sun shine sector for investors to pitch darkness. Retailing sector itself may not be able to make the best use of the proposed FDI if the issues concerning logistical bottlenecks are not resolved at the earliest.

That India needs to pile up more foreign exchange given the volatility in currency markets and risky fiscal deficit position is a no brainer. But opening up more avenues for FDI cannot be the solution to all problems. A nimble approach to resolving policy bottlenecks and making the stakeholders on projects more accountable may give a better headway to India than even the biggest FDIs.

Do you think that opening up more sectors to FDI can resolve most of India's economic problems? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
When it comes to financing options, Chinese companies have had the best of both worlds over the past 2 years. Raising funds from capital markets and bank financing that is. As a percentage of respective GDPs, besides China, UK is the only economy that has seen private sector credit grow in tandem with market capitalisation of stocks and bonds. On a relative basis, as today's chart shows, private sector corporate credit not just in India and Brazil but also in developed economies like Japan and the US has lagged behind.

Data source: Economist

It is said that a rising tide tends to lifts all boats. It is only when the tide goes out that one realizes which of these boats have the ability to stay afloat. If one considers the Indian economy instead of one of the boats, it can be safely presumed that it is indeed the one that has managed to stay afloat under all conditions. In other words, the Indian economy has certainly managed to weather the global financial crisis. Little wonder, it has become the toast of the world with investors flocking to its shores to make their investments. As per a study done by Ernst & Young, India has emerged as the second most preferred destination for foreign investors, next only to China. And if the most recent decision to open up the retail sector is anything to go by, the investor interest in India will only rise in the coming years. So, what are the sectors that these investors should look at? While quite a few of them look attractive, the accounting and consulting giant singled out defence and healthcare as the two sectors showing a lot of promise currently.

Buying crumbling infrastructure and broken down roads doesn't exactly seem like an attractive investment proposition. But this is exactly what China's US$ 410 bn sovereign wealth fund is doing. China Investment Corporation (CIC) plans to invest in dilapidated infrastructure in western markets. One of its primary targets is the UK. The British government is looking at UK pension funds as well as sovereign funds in the Middle East and Asia to help finance upgrades of roads, railways, ports etc. This works well for both parties as UK's infra gets a makeover and China gets to diversify its investments away from US treasuries. But, China's growing clout in overseas markets has to be carefully watched. The world is already flooded with 'Made in China' products. Everything may soon have an 'Owned by China' stamp.

The plea for calm continues to fell on deaf ears in the parliament over the burning issue of new Foreign Direct Investment (FDI) policy in the retail sector. While this uproar continues, besides retailing firms and other beneficiaries, the Indian software companies are also keeping their fingers crossed for the new retail FDI policy. Actually the policy mandates a minimum investment size of US$ 100 m and at least 50% of the investments to be in back-end infrastructure. With foreign partners coming into the play and a rise in multi-channel retailing, this new policy would lead to a lot of investment in information technology space.

And who would benefit from all this? In all likelihood, Indian software majors such as Infosys, TCS and Wipro. Currently these companies fetch 12 to 15% of their revenues from the retailing space. They are already working with the foreign retail companies in the overseas markets. Therefore, they are well poised to win the new deals from the retail companies in India as well. Hence, this new FDI policy in retail sector augers well for the Indian software sector.

The shipping industry is one of the leading indicators of the state of affairs in the global economy as it accounts for 80% of international trade volume. So a recession in this industry signals a slowdown in the world economy as well. Indeed, most global container ship operators have been bogged by problems of a glut in supply, high costs and tepid demand. All this has had a telling impact on freight rates which have fallen quite sharply. And to shore them up, these companies are contemplating cutting down shipping capacity. But whether this will have any significant impact on pushing rates up remains to be seen. The root of the crisis seems to be the deepening Europe debt crisis and rising fuel prices. Because the crisis in the European region has shown no signs of going away anytime soon, the outlook for the global economy and the shipping industry has also become highly uncertain. Indeed, the World Trade Organisation cut its 2011 trade growth forecast to 5.8% from 6.5% predicted earlier. Thus, only when a revival in the flagging fortunes of the global shipping industry is evident, can we then say that recession is probably ebbing.

A lot of things read better in theory than in reality. Take shareholders for instance. Theoretically, a shareholder is an owner of the company to the extent of his shareholding. Sounds very potent, isn't it? But in reality, non-controlling minority shareholders have little power or influence in a company's decision-making process. Non-controlling shareholders are retail investors and institutions who are neither promoters, nor do they have any board representation. The lack of a common platform or a means to raise their voice often leads to their interests being sidelined.

SEBI (Securities & Exchange Board of India) seems to have finally awakened to the issue. The regulator is considering the idea of setting up a platform to bring together the dispersed minority shareholders. Institutionalisation of the voting system, facilitating participation in general meetings through electronic means, etc. are some probable initiatives that the market regulator is considering. We believe this is move in the right direction. Such a common platform can help shareholders to understand a company better, make them aware of the significance of their voting rights, and thus, help in improving corporate governance.

After starting off on a buoyant note, Indian stock markets managed to hold on to the momentum today backed by buying interest across auto, banking and commodity sectors. At the time of writing, the BSE Sensex was trading higher by 395 points (up 2.5%). Indices across other key Asian markets also closed higher while Europe has opened on a positive note.

 Today's investing mantra
"You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don't have that cast of mind, you're destined for failure even if you have a high I.Q." - Charlie Munger

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4 Responses to "Are these 3 letters answer to India's woes?"


Nov 30, 2011

The foreign companies are expected to bring better management and certainly not better than AMUL CO-OPERATIVE. Than why not copy this model for essential food products? The force of the money will eliminate more people and the producer margin will decrease due force of bulk. The profits generated will move out of the country, the long term loss. Before allowing the foreign companies in this field let them commit the profit generated will be ploughed back in India. The expected result, none will opt.


Dharam Dev

Nov 28, 2011

About your comment on powerless say of minority shareholders, i would say that we should consider a cap for promoter's shareholding to 40% or so as is done in the case of Banks in India with much lower cap. Such measures would increase power in the hands of minority shareholders. How about such a measure?


Ramana Kumar

Nov 28, 2011

Govt is creating long term problems while looking for short term solutions. Currency weakness is a short term problem. Opening FDI may bring in Dollars, but only over the medium term. It may in fact create long term problems for millions of families in the country. It is said there is tremendous wastage in current Indian retail system. Is there enough un-biased research to back this claim ? What are the wastage ratios for US Style retail ? What are the costs to society ? Is there any research at all on this ? Perhaps foreign companies are using this opportunity of weakness in Indian economic situation to push thru their agenda.


Digambar Kulkarni

Nov 28, 2011

If FDI comes to retail markets:

1. If forein exchange X comes, 0.7X wiil go to the Multinational and 0.3X will come to India. Thus India will be benefitted but the Multinational will be benefitted more;

2. The intermediatory in the business wiil be wiped out. He will have to find other type of work, till then there will be unrest....politicians will take undue advantage of it, the sufferer will ne the Nation!

3. The consumer will pay more for the same goods adding to the inflation.

4. The producer will get a better price. The profit earned by the intermediatories so far will be shared by the producer and the Multinational. The Multinational, who will have better financial strength, will ensure that he will be benefitted more than the producer.

5. Quality of products will have to improve.

6. We should welcome the change. All Economies, as it is ,are connected. The developoig economies are affected by the developed world. Accept the Change and work it to the economic success of our Nation.

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