»5 Minute Wrap Up by Equitymaster

On This Day - 26 NOVEMBER 2010
Is India's growth story in danger?

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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'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.

 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

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.

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.

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.

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.

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.

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%.

 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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