Loan Waiver for the Rich

Dec 31, 2008

In this issue:
» India's GDP will grow by 7.1% in FY09
» China's population heads back to villages
» Jim Rogers bullish on China
» Office rentals are on their way down
» ...and more!!

If the Centre's casual approach with regard to management of fiscal and budgetary deficits were not enough, even the state governments seem to have taken these yardsticks with a pinch of salt. The Chief Minister of Maharashtra has announced a fresh Rs 62 bn farm loan waiver for the 4 m farmers in the state who were not covered by the central government's Rs 710 bn farm loan waiver announced earlier this year.

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The package for waiver of loans up to Rs 20,000 is meant for farmers who own more than 5 acres of land and have paid their loan dues regularly. And therein lies the irony. While the Centre's farm loan waiver package was meant for those farmers who were poor and had difficulty in paying their dues, the state's package is for the relatively 'rich' farmers!

That is just the tip of the iceberg. This loan waiver package takes the number of farmers in Maharashtra who had benefited from either the state or central government package to 7.8 m and the total loan amount waived to around Rs 140 bn. While the intent of package is virtuous given that only 40% of farmers from the Vidarbha region benefited from the Centre's scheme due to their larger land holdings, the lack of resources to fund the same is a serious worry.

It may be noted that Maharashtra state's finances are already under strain due to the decision to accept the Sixth Pay Commission recommendations for which the government had to make a provision of around Rs 100 bn. So the question that we are asking is, "Where is the money?"

We still have one more quarter to go before FY09 ends, but projections are already being made on India's GDP growth rate for FY09. As per a survey conducted by ASSOCHAM on 250 CEOs in the country, the Indian economy is likely to grow by 7.1% in FY09, lower than the 9% growth achieved in FY08, and mainly due to the global economic meltdown and reduced demand on account of high interest costs. Not only that, these CEOs are of the opinion that growth could further slide to 6.5% in FY10 as the global economy worsens. While the signs of slowdown are there for all to see, India's growth is still the envy of the developed world, which has slipped into a recession fuelled by the worst financial crisis since the Great Depression.

Source: CMIE

"China lives in cities," would have been the appropriate words to describe the mass-scale urbanisation of our neighbour. But it was till the beginning of 2008. This year, which gets completed today, has brought about a reverse movement of population from China's cities back to villages. The reason - loss of jobs due to the impact of global crisis. As reported on CNN's finance website, more than 10 m migrant laborers have already returned to the villages as thousands of companies have been dragged under by weak global demand for commodities ranging from clothes to cars. This is but a small proportion of the 130 m people who have left villages (over the past thirty years) to work in manufacturing factories and construction sites located in and around China's cities.

With joblessness expected to swell further owing to the decline in overseas demand for all things Chinese, this reverse migration is expected to further put strain on a huge population of the country's poor. Call it the redrawing China's economic map?

When in trouble, confess. But this is not what Satyam's chairman Ramalinga Raju is doing. Rather he is seeking faith in his leadership from the company's 53,000 employees. In a letter he wrote to his staff yesterday, Mr. Raju said everything except his rationale for transferring cash to his sons' companies. "While the idea that we could diversify into an unrelated business was rejected by our investors, it was formed with the belief that doing so would not imperil our leadership in our core business or lessen our commitment to it, and that all stakeholders would benefit," he wrote.

Rather than tendering an apology for corporate governance malpractices, he boasted of the numerous awards that Satyam has won for good corporate governance practices in the past. While two-third of his team of independent directors has resigned, Mr. Raju still talked about the unanimous decision that the board gave to the proposed deals.

Satyam's saga teaches us a very important lesson in stock investing - need to give high importance to management and its practices. Hope events like these do not fade away from our memories so that we survive to tell the tale.

It's a testament to just how closely entwined the global economy really is. As factories shut in China because of reduced exports amid the global recession, it has had another indirect effect on India.

As per Bloomberg, China's power production slumped 9.6% in November, the second consecutive month of decline. Also the country may face a surplus of power within the next two years as demand falls and more capacity as per the earlier plans comes online. With this turn of events, China's need for new power generation capacity addition is expected to dip sharply. This is leading China's State Nuclear Power Technology Corp. to aggressively scout for orders outside its own country; in places like India, South Korea, Brazil, Myanmar and Mozambique. The company has recently won contracts to design coal- fired power plants in India and will design two generators of 1,980 MW (mega-watts) each in India. The Indian power generation equipment companies can expect some serious competition.

The Chinese export juggernaut may be slowing down. But it has not dimmed Jim Rogers' enthusiasm for the country's equity markets. The outspoken investment guru and one of the biggest bulls on China, has continued to accumulate shares in Chinese companies. However, he is doing it slightly differently this time around.

As reported by Bloomberg, Rogers is buying Chinese shares that are traded in Hong Kong and Singapore as they appear cheaper than Yuan denominated stocks in Shanghai. In other words, apart from gains in market cap, Rogers is also eyeing the arbitrage opportunity. Although fully aware that China is indeed slowing down, he believes that some parts of the Chinese economy will not be affected at all by what is happening elsewhere. He is particularly interested in Chinese agricultural and infrastructure companies.

In an economic environment where every conceivable price indicator is heading southwards, how can office rentals remain immune? As per The New York Times, office rentals in Manhattan, one of the world's priciest business districts, have fallen faster recently than any other time in the past twenty years. And the reasons are not difficult to find. With a lot of firms especially in the financial industry folding up or incurring significant headcount reduction, the supply seems to be exceeding demand by a wide margin.

Not everyone is complaining though. For firms, who used to be routinely priced out of the market by financial firms like hedge funds, this is indeed a very good time to lock in long-term rentals at lower prices. Situation at Nariman Point, India's very own Manhattan is no different. As per reports, rentals in 'Grade A' buildings are down by as much as 25% and vacancies have also shot up. Law of averages at work!

And while we are on the topic of real estate, while 2008 has finally come to an end, the woes of home owners in the US, particularly those with mortgages on their properties, do not seem to have ceased. Most states in the US continue to report sales that consist of distressed properties such as foreclosed homes and short sales. The distressed sales which accounted for a large proportion of total real estate sales in US in 2008 were at a steep discount to the overall average market price and exaggerated the depth of price declines.

In fact as per CNN, the 20-city S&P Case-Shiller Index which tracks real estate prices dropped for a staggering 27 months in a row. In October 2008, 14 of the 20 cities set fresh price decline records and nearly 85,000 people lost their homes to foreclosure, adding vacant inventory to an already overburdened market. What seems to have also caused crowding out of sellers in the market is the fact that buyers still have to make 20% down-payment to purchase properties on mortgage. Given the tight liquidity situation, this seems to have become a huge deterrent. The Obama led government is expected to offer lucrative tax incentives and foreclosure prevention plans in its stimulus package to be announced in a couple of months.

Dominance in one market does not automatically translate into control over another. It is a reality that companies have to live with. Not that they don't try. But snatching market share from an early player is always a tough ask. For instance, P&G is an American powerhouse. But when it comes to India, it is the Anglo-Dutch giant Unilever which walks away with the honours.

Now, P&G's chief operating officer, Robert McDonald says India is critical for the company in the next 5 years. He believes there is a lot of scope for the company to push for growth. After all, the average Indian spends less than US$ 1 per year on P&G products, as compared to the average Chinese who spends US$ 3.

As per a leading business daily, Mr. McDonald is meeting customers and outlets in India, in line with the company's philosophy of getting close to the customer. He sees several opportunities in this tough environment: efficient resource allocation, advertising, acquisitions and expanding product categories. Clearly, India is high on the radar for the US$ 84 bn colossus.

The Indian markets closed lower today by 1%. BSE Bankex and BSE Oil & Gas (down 1% each) contributed to the decline. While the Asian markets closed mixed, the European indices are trading in the green currently. As reported on Bloomberg, crude oil fell by 2% to US$ 38 a barrel on speculation that US stockpiles are increasing as recession cuts demand. Gold fell by 1% to US$ 866.9 an ounce.

Today's investing mantra
"If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes. " - Warren Buffett

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