The biggest reason why India's GDP has slowed...

Dec 4, 2012

In this issue:
» LIC's value of investments sees big erosion
» Chinese property market seeing renewed interest
» Central banks step up pace of buying gold
» 2012 not a good year for real estate
» ...and more!

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It is a truth well acknowledged that ramp up in capital spending and infrastructure goes a long way in taking a country's growth to the next level. This was quite evident in India as well. Indeed, there were many reasons why India's GDP growth soared between 2003 and 2008. One of these was that capital spending by private firms rose in that period from 10% to 17% of GDP.

But the country has not been able to sustain this for long. And one of the reasons why the Indian economy has slowed down is because of the slump in corporate investment to around 10-12% at present. So is this downturn just a part of the economic cycle or does it signal a wider structural problem? Two major factors have had a negative bearing on investments in the country; the first is corruption and the second is debt.

As far as the first is concerned, evidence of corruption is widely prevalent in capital intensive industries such as power, telecom, mining, energy, construction and the like. But eliminating this will be a tall order given that politicians themselves have vested interest in these industries and so the willingness to do away with corruption will be minimal.

That takes us to the second factor notably debt. While not all companies forming part of India Inc. have too much debt on their books, once again companies belonging to sectors such as telecom, power, construction and infrastructure are highly leveraged. As per an article in the Economist, a sample of 80-odd of the biggest listed firms showed that net debt rose from US$ 29 bn in March 2007 to US$ 163 bn in March 2012. No doubt these companies will have to improve operational efficiencies and cash flows if this debt has to be brought down. Otherwise, massive debt will only dent profits owing to higher interest costs with little left to pump into capital investments.

The other route is to raise equity which will not always find favour from promoters because it will dilute their equity. But they may be forced to do so if banks pile on pressure in terms of repayment of debt. This will leave no option for these companies but to come up with other solutions to cut down debt rather than bank on lenient terms such as restructuring or rolling over loans.

On a much macro level, the government will have to take measures to make the climate more inductive for capital investments by pushing through reforms and implementing them. This may seem like a considerable challenge considering the vehement opposition it is facing from other political parties right now. However, it is left with no option but to take a tough stance in the longer term health and interest of the Indian economy.

Do you think that slowdown in capital investments has been the biggest reason for India's economic slowdown? Share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
When it comes to GDP growth both India and China have fared better than their peers in the developed world although both displayed noticeable signs of slowdown. But if one were to compare growth in industrial production, the dragon country is way ahead of India. As today's chart of the day shows, growth in industrial production in September 2012 was the best in China. In India, sluggish condition in the industrial sector is one of the reasons why GDP growth has slowed down than what it was in the past.

Data Source: The Economist

That bailing out the government from its fiscal profligacies is a mandate for key PSUs is well known. However the quantum of losses small investors have to bear for the same is indeed blood boiling. Take the instance of holders of LIC's traditional insurance policies. Firstly, there are millions of them. Secondly, for many policyholders, particularly ones in hinterlands, the LIC policy may be the only investment that they have made. Hence mark to market losses to the tune of 51.7 bn incurred by LIC on investments made using these funds is shocking. The reason why LIC dips into the traditional insurance funds is also noteworthy. It is spared of mark-to-market (or MTM) accounting losses arising out of decline in investment value. That way it can subscribe to public issue of PSU at whatever price the government determines. While that helps the government bridge fiscal gaps, policyholders' interests are sacrificed. As against this, accounting for MTM hit is mandatory for unit linked insurance policies (ULIPs).

The government had raised Rs 305 bn between February 2010 and March 2012 from three divestments. As per Economic Times, the market value of these investments slipped even though the Sensex gained 21% during this period. More such issues are lined up for 2013. The IRDA, meanwhile, is not willing to make LIC more accountable for the use of funds. Hence, for LIC policyholders we have just one advice. Caveat emptor (Buyer beware)!

It is a known fact that over the last decade China has come to command a hefty share in the consumption of major commodities. So much so that commodity prices are driven by demand from the dragon nation. This demand for major commodities such as copper and iron ore has been majorly driven by the scorching growth of the Chinese property market during this period. If we join the dots, we can confer that China's real estate market has far-reaching implications for global commodities and effectively, the world economy.

While many experts having been raising the red flag and prophesying a crash in the Chinese property market, some recent data points at the contrary. As per an article in the Financial Times, the Chinese property market is witnessing renewed interest. And this is not limited to home buyers alone. In recent weeks, investors have been buying equities and debt linked to Chinese real estate. In fact, in October 2012 new house prices increased in 35 out of the 70 Chinese cities tracked by the national bureau of statistics.

How should one read these developments? Was the property crash warning just a wrong call? It is unwise to read too much into short term data. Moreover, Chinese government data is often unreliable and dubious. In our view, the property bubble in China is indeed real and unsustainable. It is just a matter of when the bubble will burst.

It is easier to preach than to practice. This phrase holds true for the central banks around the world. They have been preaching on how gold is a pointless investment given its low yield. The idea behind these statements was to discourage people in their country from buying gold. Therefore it would be expected that they too should ideally be selling this pointless investment. But the truth appears to be far from it. As per World Gold Council, central banks have bought more gold in the period of January to September 2012 as compared to what they did during the same period last year. Interestingly it is the developing and relatively poorer countries that are investing in gold as compared to the developed ones. The reason is obvious. It is the opening of the money printing machinery by the US and Europe. This would lead to a depletion in the value of forex reserves of countries across the world. Therefore gold would act as a good hedge during such times. Contrast this with the position the people of these gold buying countries are in. With economic growth slowing down and inflation at high levels, the people need a hedge against adverse times as well. This is why they are buying gold. So why are the central banks trying to discourage them from doing so? After all, they too are doing exactly the same thing.

2012 was a dull year for property markets. Price appreciation in this year slowed with the top 7 cities witnessing a rise of only 1-3%. Highest rise was seen in Pune and NCR. However, Bangalore and Hyderabad saw a modest rise in property prices. Though there was no price correction which was widely anticipated slowdown in price increases is more than welcome. It is interesting to note that despite launching 160,000 odd residential units prices in India's top seven cities did not correct. This number is higher than about 154,000 odd units that were launched in the previous year. No correction despite heavy supply signifies that the demand for real estate in the top seven cities of India is really high. However, in some cities like Mumbai prices have reached unsustainable levels. Thus, it would not be wrong to assume that the prices might correct sooner if not later.

In the meanwhile, the Indian equity markets traded in a volatile manner today. At the time of writing, BSE Sensex was down by 12 points (0.1%). Auto and IT stocks were the top losers. Asian stock markets traded weak with the exceptions of Taiwan, China and Hong Kong.

 Today's Investing Mantra
"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing" -Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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2 Responses to "The biggest reason why India's GDP has slowed..."


Dec 5, 2012

India's growth will never happen unless the deep-rooted malaise of corruption is removed. Our whole society is corrupt - it starts from the desire (and actual action) of a person to take a short-cut to get ahead of the other beside them, which in turn is a result of the gap between demand and supply, which further is a result of over population etc etc, there are so many interrelated factors that my head spins thinking of them! I also want to point out that the very concepts of growth and economics need to be redefined!

Like (6)

Umesh Sharma

Dec 4, 2012

Indeed corruption is the greatest evil this country is facing to day.The real reason why various projects do not get moving fast is corruption.The man in the seat wants his cut up front before anything else.The reason why corruption is thriving in India is because government jobs are not given on merit per-se but on other extraneous considerations.It is easy to ply an inept worker the way one wants to as he has to survive.It is moot point whether jobs bring changes in culture but they do not stop the person in getting his pockets filled up by using his powers whether he earns his salary or not.

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