»5 Minute Wrap Up by Equitymaster

On This Day - 30 DECEMBER 2011
Does India support entrepreneurship?

In this issue:
» 2011 second worst for BSE-Sensex in 14 years
» These 6 sectors will lose infrastructure status in 3 years
» Lack of this basic need caused protests across the globe
» Right time for infra companies to raise capital?
» ....and more!
-------------------------------------------------------- India In Crisis --------------------------------------------------------

The Indian Economy has hit a rough patch. And based on media reports it almost seems certain that our future is doomed!

But is there an opportunity in this crisis that you can benefit from?

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The Indian economy which had earlier shown much resilience against several external storms now seems to be weakening under the weight of its own problems. Though it could be argued that the concerns engulfing the domestic economy at the moment will correct over time, that the long term prospects of our economy are still robust, there are some worrying signs that cannot be discounted. How we as country deal with these issues will determine whether India becomes Darling or Damned.

Let us ask you a simple question. What is one of the basic prerequisites for an economy to really grow? Without any doubt, it is investments. You need entrepreneurs to put money in projects that will generate revenue and employment.

There are important factors like entrepreneurs and growth opportunities that India has to its merit. In fact, a lot of major private sector business houses are sitting on ample cash. So the next obvious question is this- Is India Inc investing? The answer to this is not very encouraging.

Consider this-the Piramal Group led by billionaire tycoon Ajay Piramal is sitting on a huge pile of cash after Piramal Healthcare sold off its generic drugs operations to US pharma company Abbott Laboratories for a whopping amount of about US$ 3.7 bn. The irony that Mr Piramal is dealing with is that he is operating in one of the world's fastest growing economies and is yet struggling hard to put that money to some productive use.

As per him, the problem isn't opportunity but India. For instance, he wanted to expand one of his chemical plants. However, he was told that it would take a lengthy process of 5 long years. Now, the same thing could have been accomplished in China in 2 years straight. All this is thanks to a slew of problems such as corruption, red tape, political paralysis, changing government policies, lack of reforms, lousy approval processes, land acquisition problems, etc. As a result, doing business in India is becoming increasingly difficult not only for small entrepreneurs but even big corporate houses. It comes as no surprise that India ranks amongst the world's worst countries at encouraging entrepreneurs.

If India is not business-friendly, there is no way we can dream of growing at 9-10 percent instead of the 7-odd percent we seem to be recording currently. It is time the Government refrains from taking the growth for granted and undertakes some meaningful reforms to encourage entrepreneurship.

Do you think India supports entrepreneurs? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The year 2011 is certainly not going to be a very memorable one for investors. In fact, in 2011, the BSE-Sensex recorded its second worst performance in the last 14 years, second only to 2008 when the US financial crisis struck. The benchmark index has tanked by about 24% than its previous year's closing, making it one of the worst performers in the global stock markets.

Data source: Ace Equity

The tag 'infrastructure' was once the ticket to stardom and wealth for India Inc. Much like the tech bubble when every company wanted to have 'dotcom' after its name, the heydays of infrastructure saw entities ranging from construction to power to mining to cold chains calling themselves infra players. The tag not just allowed them to seek financing from domestic and foreign players at relatively discounted rates, but also earned them policy favours from the government. However, with a tight budget for infrastructure funding and 4 years after the Deepak Parekh committee suggested so, the government has decided to streamline sectors that are eligible to come under the infrastructure cap. In doing so, several sectors have been disbanded as well, the key ones being oil refinery and production, mobile telephony, hotel and mining sectors. In fact others such as ships, aircraft, road-based public transport and agriculture marketing also failed to meet the criterions. We believe that this is a step in the right direction as the government embarks on a more realistic planning for infrastructure financing during the 12th Plan period.

If one wants to acquaint oneself with the most influential person in any given year, the Time magazine provides an excellent clue. And this year too, it does not seem to have disappointed. With revolutions being the order of the day, it has very rightly chosen the 'Protestor' as its person of the year. Although the word is very generic and does not allude to any one person, it could very well have been a gentleman called Mohamed Bouazizi. Indeed, he was the one whose sacrifice by way of self-immolation produced the spark that eventually engulfed continents ranging from Asia and Europe to the US and Russia. And what was he protesting for? A life of dignity and the ability to earn two square meals a day. That's it, nothing more. It is certainly the paradox of our times that while we are supposed to live in an era of unprecedented wealth and prosperity, a mere loaf of bread sparked the kind of revolution we saw in 2011 and may even continue to see in 2012. Does anyone have an answer to this anomaly? We believe that most of it has to do with the fact that while we have grown enormously prosperous, welfare of each and every individual has not kept pace. By way of political oppression, lack of property rights and other such inhuman means, the gap between haves and have-nots has only widened over time. And with most pleas to correct the same falling on deaf ears, protests seemed to have acquired the status of the means of last resort.

Indian firms have had a bad year in 2011. Higher interest rates have not just hurt their net margins but have also hurt their expansion and investment plans. As a result, many of them turned offshore to get cheaper loans. However, as global crisis continued to spread its tentacles, overseas banks have become cautious with their lending. As a result, overseas borrowing has all but dried up for anyone other than the highest rated borrowers. This has put several smaller and comparatively riskier companies in a dilemma. They have to either resort to taking expensive rupee debt to fund their expansion plans. Or end up facing a period of stagnant growth. For those looking to restructure their existing debt, things are even worse. They either risk taking on more expensive debt or defaulting on their existing loans. Not a happy choice no matter what angle you look at it from.

Infrastructure companies looking to raise long term funds think that this is the right time to do so. Since interest rates have peaked, many of them are contemplating issuing infra bonds, which they believe will be well subscribed to by investors. And the evidence supports this. For instance, National Highways Authority of India's (NHAI) tax-free bond issues got applications worth more than Rs 200 bn for a subscription of Rs 50 bn. Companies such as Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC) are set to follow. The high rates of interest are bound to be attractive for investors, though not necessarily for issuers. At the same time, given that the RBI has paused its rate hiking spree, there are expectations that the interest rates will fall going forward. However, the cut in rates, if it does happen, may be gradual as it all depends on how fast inflation comes down.

The latest food inflation numbers may just make your mouth water. After being in double digits for a greater part of the year, even touching 19.1% in January, food inflation is now at a 6 year low. Food inflation has dropped to a benign 0.42%, thus reviving hopes of interest rate cuts next year. The drop in food prices to a multi-year low was on account of lower prices of fruits and vegetables. At the same time, fuel inflation has also slowed down to some measure. Even though, the falling rupee is threatening to keep fuel prices high. Either way, a moderation in food and fuel inflation should help tame stubborn inflation which has continued to remain above 9%.

In the meanwhile, the Indian stock markets traded quite strong today backed by global cues. At the time of writing, the BSE Sensex was up by 120 points (0.8%). All the sectors were trading in the green. Barring Singapore (down by 0.4%) and Taiwan (down by 0.1%), all the Asian stock markets too were on the positive side.

 Today's Investing Mantra
"Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack." - Peter Lynch

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