The Indian dream: Fake or real?

Jan 10, 2009

In this issue:
» Where is India heading?
» Inflation of a different kind at Satyam
» Fraud rocks Indian markets
» ...and more!!

After an awful 2008 which saw India come face to face with the reality of a severe economic slowdown, 2009 was expected to bring some respite. At least that was what was hoped. However, the first full week of this year has been terrible. As if the slowdown in economic activity, fleeing away of foreign investors and the subsequent crash in the stocks markets in 2008 was not enough, 2009 has brought with itself the unearthing of corporate India's biggest fraud. Doubts are now being raised on the veracity of corporate governance practices that India has boasted about all these years.

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Now, while India's best companies continue to struggle, questions are also being raised about the legitimacy of the dream that India had promised to be just a year back.

We, as realistic as we can be, still believe in the economic power that India has the potential to be in the future. Even at an annual growth of 5% to 6%, India will continue to be among the fastest growing economies of the world. High household savings rate, an increasingly larger English speaking and educated population and a deeply ingrained entrepreneurship mindset will make India's future bright, notwithstanding the occasional bumps that we will be subjected to.

Of course, things can get even worse over the next few months as you will come to know on reading this letter further, but the hope of a bright future remains.

Inflation is on a rise! Well, before you think it as a typo, let us clarify that we are not talking of the price inflation figure, which is in fact falling. Rather, we are talking of the 'inflation' that marks the Satyam saga. While inflation of profits and cash has already been talked and wondered about, what has come out now is equally shocking.

As per The Economic Times, even the employee numbers on Satyam's books were inflated! Yes you read that right...even the employee numbers were inflated. The company reportedly did it to siphon off funds in the name of non-existent employees. "The figure of 52,865 associates could actually be a much smaller number, with the additional numbers used for other purposes," says the newspaper report.

So now, who else do you blame apart from the management, auditors, and directors? The company's HR department? Or the banks that maintained corporate savings accounts of these (fictitious) employees?

In the meanwhile, Ramalinga Raju has finally given in to law's hands. He has been arrested for his involvement in one of India's biggest corporate frauds at the country's fourth largest software maker. Rama Raju, the Chairman's brother and Satyam's managing director was also arrested. These two now faces charges of criminal breach of trust, criminal conspiracy, cheating, falsification of records, and forgery.

Some leading international publications have likened Satyam's case to Enron which was also accused of forging documents and falsifying actual performance. The Economist, for instance, states - "The task of rehabilitating corporate India is daunting. It has long basked in the reflected glory of its information-technology firms. Run by cerebral, clean-living professionals, they employ India's brightest youngsters and serve the bluest of blue-chip companies. These digital ambassadors have lent corporate India a certain 'mystique'. But that reputation rests largely on the efforts of one or two companies, such as Infosys, which are impeccably run. Investors delude themselves if they think standards in most Indian technology firms, let alone the rest of its 9,000 listed companies, are close to those set by Infosys."

And where does the problem lie? The Economist report continues - "India's financial-reporting standards are high, its principal regulator, the Securities and Exchange Board of India, is independent of the government, and its business press is enthusiastic. But enforcement is weak, loopholes large, and shareholder activism is lackluster. There is virtually no voting by poll at AGMs, and meetings are often held in remote locations."

Coming to price inflation, India's wholesale price inflation fell to 5.91% for the week ended December 27, 2008 (6.38% in the week ended December 20). The decline has been on the back of cheaper manufactured items and food. This is the lowest inflation figure in ten months. It may be recalled that inflation seemed like spiraling out of control just a few months back. At that time, there were several voices that highlighted the role of spike in commodity prices. "It will eventually come down," it was said. And so it has happened, the price of crude has nosedived from its highs.

This must be welcome news for central bankers, who can now focus on measures to promote growth without the fear of stoking inflation. In fact, the RBI is widely expected to cut benchmark rates again in its next quarterly policy meeting on Jan. 27.

While a reducing inflation levels might soothe sentiments, we remain concerned about the fiscal deficit situation that will worsen given the government's stimulus packages which are not really expected to stimulate the economy. By spending way beyond its means in troubled times like these, the government might do some good for economic growth in the medium term. But in effect, it is sowing seeds of high inflation in the long run. We keep our fingers crossed!

Despite the stimulus packages announced by the government, Trade Minister Kamal Nath is of the view that the country's exports and industrial output figures are likely to worsen over the next six months. However, he is also of the belief that the stimulus will help in curbing the damage.

The minister may have made these statements considering the current scenario, both in the global and domestic markets. The export and industrial production figures do not paint a good picture as well. In fact, it may be noted that exports numbers have recorded declines in the past three months, while the industrial production numbers recorded contraction for the first time in over fifteen years. In addition, declining overseas and domestic demand has led companies across sectors to resort to production and job cuts.

The Satyam scandal wore heavy on the Indian markets during the latter part of the holiday-shortened week. Not only India, but most equity markets around the world had their fair share of negative news to keep them void of any gains. However, for India, the obscenity of the fraud at Satyam rocked investor confidence, and became a big drag on the markets' performance this week. India was the biggest loser among key Asian markets, falling almost 5.5%.

This was followed by Hong Kong where some large companies forecasted losses and a missing of quarterly targets. Korea was the lone gainer in Asia, led by the country's central bank cutting interest rates to a record low, saying the economy is deteriorating 'rapidly'. Stocks in the US declined the most (4.8%) amongst world markets on the back of an increase in unemployment rate to nearly 16-year high.

Oil dropped about 11% with the widespread anticipation of a deepening recession consequently leading to a further fall in demand for crude. The negative sentiment was strong enough to shadow signs that OPEC is fulfilling supply cuts announced last month, as also the ongoing Middle East political tension.

Source: Yahoo FinanceSource: Yahoo Finance

Weekend investing mantra
"We are suspicious of those CEOs who regularly claim they do know the future - and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers." - Warren Buffett

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