This is the biggest fear for India Inc

Dec 9, 2011

In this issue:
» Euro crisis permeating to other parts of the world
» Farming is better than finance: Jim Rogers
» Companies will faces equity shortage of US$ 12.3 trln by 2020
» Transparency will hurt FMCG?
» and more!
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Business sentiments in India are running low. India Inc is in a gloomy mood. And they have a very good reason to remain sad. The reason for this is none other than our good old government. To the extent that Indian businesses actually think that the government is the biggest threat to their business. Government's inaction on issues like policy reforms has earned them this reputation.

Policy paralysis is something that has haunted India for too long. Land acquisition, power sector reforms, etc are just few of the many areas which are badly in need of reforms. The recent resolve on FDI had appeared to be a light shining at the end of the tunnel but it was quickly snatched away by the hands of the politicians. They preferred to adhere to populist sentiments instead. And this makes perfect sense because populist sentiments are all that the government has in its kitty to get reelected. So why take a sensible step and ruin those?

But it is not that the government has abandoned all the policies. Not at all. Sectors like telecom have seen a lot of action with regards to new policies. But these policies are aimed at filling up government coffers rather than promoting the business of the telecom companies. So the areas where the government has decided to carry out some action, has been more detrimental to the sector.

So the big question now is what next. In reality the chances are very slim that the government will pull up its socks anytime soon and change its ways. This is because the government has basically got two choices. The first is to go ahead with policy reforms. But this would not be in line with populist sentiments. And to make sure that these do not reflect populist sentiments, we have adequate number of politicians to create a hue and cry. This would ensure that the general public actually feels that the government is nothing but the big bad wolf. And the government would definitely not want this as it would kill any chance of their reelections.

The second choice is to do nothing. This would mean that any action or decision related to policy reforms would get deferred to after the next elections have taken place. But this is would mean that the current state of affairs would continue for some time to come.

Unfortunately for the country, Indian businesses think that the government would most likely go ahead with option two, i.e., do nothing. As a result, they are concentrating more on saving pitfalls rather than looking at expanding their businesses or driving growth. In other words they have resolved to fire fighting rather than marching ahead. And this is the worst possible thing that can happen to the economy and its growth.

Do you think that the current government will go ahead with any policy reforms? Share your comments with us or post your views on our our Facebook page / Google+ page.

 Chart of the day
While we are on the subject of governments, let us switch our focus towards the state government of Maharashtra. The state currently has around 85 public sector undertakings (PSUs). Most of these PSUs are not listed on the stock markets and are hence out of the public view. As a 'responsible government' the state of affairs of these PSUs is reported periodically to the finance ministry. But a recent audit of these units by the CAG (Comptroller Auditor General) has shown that there is a huge discrepancy between what is reported by the government and what actually exists in these units. Today's chart of the day shows the discrepancies highlighted by CAG with respect to the equity, loans and guarantees of these 85 units. Unfortunately as per CAG such events are not isolated in just Maharashtra. Once the state audits are completed, many such instances would come into light. But what would be done about it? Only time will tell.

Data source: Indiaspend

It began with Greece, spread to the entire Eurozone and is now threatening to hamper other regions as well. So acute has the debt crisis in Europe become that countries such as Hong Kong are beginning to feel the heat as well. If the situation gets worse, Hong Kong may have to probably guarantee some of the deposits in the banking system as they did in 2008 when Lehman Brothers collapsed. In such a scenario, stimulus measures would include tax cuts, subsidies for the poor and rolling back some property curbs. The subdued demand in the US and Europe is likely to take its toll on exports from Hong Kong as well. That is why the IMF expects Hong Kong's economic growth to slow to 4% in 2012, down from 5.75% this year. On the property front, residential prices had surged 70% since the start of 2009 on the back of low mortgage rates and an influx of mainland Chinese buyers. This led to the government imposing some curbs which could be rolled back should house prices once again slump. Although IMF sees a low probability of such an event in Hong Kong playing out, we are not too sure given so much uncertainty and the fact that no one had ever imagined Europe to be in the kind of slump that it is in now.

With uncertainty in the global environment increasing everyday people are flocking to take shelter in other asset classes like commodities. Although the commodity prices have dipped recently, Jim Rogers, an eternal commodity bull has urged people to stick to real asset classes. He opines that world economy can either get better or worse from here. If it gets better people owning commodities and natural resources would benefit from the current shortages and if it doesn't equity markets would correct further. And in either case commodity, as an asset class, will emerge as a clear winner. Further, bailout packages doled out by government to revive their economies would mean paper currencies can further weaken in the near term. And in such an uncertain environment where both equity and currency appear to be struggling, commodities can prove to be a perfect hedge. Rogers also emphasizes on owning a farmland as commodities will rule the roost in the next decade. May be in the future it will be farmers, and not bankers who will drive Ferraris.

Ghosts, werewolves and vampires are what people would usually find scary. However, according to McKinsey stock market investors also find equities scary. The consulting firm expects that companies across the world may face a US$ 12.3 trillion shortage by 2020. Investors seem to be shying away from public equities. There are two main reasons for this. Emerging market economies are expected to hold more financial assets going forward. However since they keep most of their savings safe in bank deposits, equities may be left behind. Plus, an aging population in developed countries and growth of alternative investments are reducing equity appetite.

The lack of equity capital may have some undesirable effects in the future. It could force companies to take on more debt. Once the economic environment turns negative this could force firms into financial stress. But, can Indian retail investors save the world? Households are the largest class of investors in India. They hold 42% of US$ 2 trillion financial assets. Equities only accounted for 8% of these assets in 2010. If equity penetration in India increases, it may provide some relief for companies relying on equity for their funding needs.

Consumer goods companies have been using different packaging strategies to market their products. This came handy especially in the time of stubborn inflation when these companies did not increase the prices of their products. Rather, they reduced the pack sizes to compensate for the higher input costs. Consumers largely do not perceive these small changes in the pack sizes. As a result, it looks like a win-win situation for both the consumers and the companies. Companies get to save their margins and consumers, in perception, get away from paying extra. However, companies misuse this flexibility. When input prices ease they restore to the normal pack sizes and start campaigning that the consumers are getting more in the same prices. This kind of alert message they never flag when they silently reduce the pack sizes.

But all this is set to change. The government has decided to increase transparency for the consumers. And they are doing this by removing the packaging size flexibility and imposing the use of standard weights. Their idea for this is that the consumers have every right to know the right prices that they are paying for the products. But this would lead to troubles for the companies in the FMCG space. This is because they will not be able to defend margins during tough times by simply changing the pack size like they used to. Nevertheless from the consumers' perspective, this is definitely a welcome move.

In the meanwhile, the stock markets are trading below the dotted line after opening the day deep in red. At the time of writing, the BSE Sensex was down by 322 points (2%). Stocks in the auto space were witnessing maximum losses. However, stocks in the capital goods and power sectors were witnessing buying interest. Other stock markets in Asia closed on a weak note as well with indices in Hong Kong, Korea and Japan leading the losses. Europe too has opened on a subdued note.

 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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8 Responses to "This is the biggest fear for India Inc"


Dec 17, 2011

My sensible and quite knowledgeable brothers of Inda has already pointed out the trouble of this country in Bits - but if we sum them up it amounts that UPA II after getting mandate for the 2nd time in 2009- where India has seen even in Bengal CPM continued loosing base ( gave a KICK at the back of KARAT & Comrades of 3rd Alternative with Bunch of JOKERS:Mulayam,Mayawati,Lallu --- etc) was only an indication people Believed MMS will do something for the people of India. They never knew that the CONGEE Bas--rd's has used MMS to get back in power and carryout their Usual Business of LOOTING - Scams after Scam- giving ample oppertunity for opposition - who are equally power Hungry Wolfs.If UPA II ( mean to say CONGEE ) were clean then this Scams would not have taken place and Black Money would have come back giving no oppertunity for the opposition to Stall the Parliament.They all knew Oppositions have their Aans Full of SHIT as equally they have. Had their Aans were Clean - then CBI would have allowed to run after the Opposition like Grey Hound Dog's.That's the reason both Ruling & Opposition are not ready to allow CBI to let go out of their Clutch.
The News Report says even Ratan Tata says, Tata group could not start Airlines a Jt.Venture with Singapore Airlines because they didn't Greased the Palm of these Bas--rd's.
My request to Equity Master since having access to the Business Barons of India - who became Billonier from Indian Soil why not open the Pandoras Box of these Politicians in Public - Admit that they shifted the money to Swiss bank because of Undue heavy tax structure since 1950's but how the Politician Monkeys have stashed so Much ? Let them help Team Anna to form a new Party " RESURGENT INDIAN FREEDOM PARTY" - giving people to elect all CLEAN,HONEST,COMPETENT candidates 475 out of 545 MP's and 7000 out of 9000 MLA's in comming elections for Parliament and State Assemblies - and let India progress with whatever REFORMs ensuring people don't loose job but have alternative source of earning . So that all these HIV affected Political Gangs are washed away( like it happened in Bengal 235 to 65) Strong punishment for all these politicians ( Hang to Death, confiscate of their properties including their relatives- this what people of India wants). Would like to have APJ Abdul Kalam as President - Ratan Tata as PM and people like Narayan Murthy + other competent personalities - whose proffession is not POLITICS( Policy of TRICKS ).
EQUITYMASTER - Kindly do this Favour to the people of India - Tell these Barons to Help Team Anna to fight these ROUGES Politically and give people an ALTERNATIVE.
SUJIT BANERJEE ( Marchant Navy Chief Engineer by proffession sailing since 1981- seen the people of the world of 6 continents - Capitalists, Communists,Rich & Poor - read the Indian history of Freedom Struggle - knew who gave Blood and who all are enjoying the Fruit).
Would expect some response from your end.



Dec 9, 2011

We have a bunch of politicians irrespective of the COLOR & CREED have no vision about the country but have a very bright and rosy vision about their own self. Even the party they belong they do not show anything towards it also. When we have such a bunch sitting and sleeping when somebody seriously discuss or howl and stop the proceedings of the esteemed parliament, what can we citizens of one of the oldest civilization and the biggest democracy expect? So we also do the same like our leaders. Take case of Koodumkulum nuclear power plant or Mulaiperiyar dam or any such infrastructure projects on account of any reason we can find. Should we God save the country or what?????



Dec 9, 2011

very interesting articles.


sarvotham yerdoor

Dec 9, 2011

This Govt. has turned itself into a lame duck with hardly any will to go ahead with serious issues affecting governance and economic management.The only thing being concentrated upon is how to win elections and save the functionaries from the ongoing corruption cases. The opposition parties are equally irresponsible in their behavior and are bent upon opposing anything and everything - good or bad.



Dec 9, 2011

In America, politicians end their speeches by saying, "God Bless America." In India, all I can say is, "God Save Us... from our politicians." The government needs to decide whether to lead, follow or get out of the way. Since its too incompetent to lead and too egoistical to follow, the only answer for it is to GET OUT OF THE WAY!



Dec 9, 2011

Hello Sir,
Is it FDI the only option to promote growth in the country!Nothing else is in bad shape other than this!!
If we really concentrate on locally existing problems of
Black money, Scams & Scandals, proper distribution of commodities & Goods, fair educational developments, inequality reduction not on the basis of populist policy, proper employment creation on the basis of fair valuation, ETC. are few i mention, Still many inside reformation are in due.If & when they come, to the realization of country`s Original need there is lot more are remaining to be attended.FDI is not problem at all.


abhay Dixit

Dec 9, 2011

The politicians the world over are worried about next elections only. Even some of the developed countries have the same problem. Does this make democracy only option just because non other is better?



Dec 9, 2011

When was this government committed for the betterment of industry or people? If it was, there were several opportunities. As always, they will decide to do something when a minister concerned has millions to loot - be it the telecom reforms for the benefit of telecom minister and his party supporting the coalition government, or decision on irrigation/food imports to help the agricultural minister etc. They are not bothered to bring back black money, no intention to curb corruption, no ability to limit inflation despite high interest rates etc. At the same time, the government plays its hand to control institutions like RBI (who keep the rupee weak to facilitate politicians foreing money to return for UP elections) or CBI (who act against those who go against the government.
We are one foolish bunch of people to be investing in the markets knowing all of these ills in our economy, polity and society.

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