|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 DECEMBER 2012
The biggest reason why India's GDP has slowed...
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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.
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)!
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.
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