This could shave off 2% from India's GDP growth - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

This could shave off 2% from India's GDP growth 

A  A  A
In this issue:
» FDI in retail makes some headway
» Will Big Pharma's expensive buyouts yield results?
» China's imports drop to 2-year low
» India Inc's forex risks
» ...and more!

---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.

--------------------------------------------------------------------------------------------------------------------

00:00
 
Priding itself on being a GDP juggernaut has stripped China of several other economic vitalities. The double digit growth rate that the dragon economy boasted of was primarily on the back of government funded investments at frantic pace. But the same led to inefficient usage of capital and disproportional reliance on Western economies, particularly the US. India on the other hand has modeled its economic growth based on domestic consumption. This has made it more resilient to global shocks and its growth more long term return oriented. However, the double digit growth rate has remained elusive for it thanks to the crumbling infrastructure. Without sizeable investments in that space, India is unlikely to sustain even the 8% growth rate that it clocked over the past few years.

Critical capacity additions in the country have suffered in the hands of policy inaction and tight liquidity. Electricity, metals, mining and engineering capacities have been stalled to administrative hassles, In fact as per data from the Centre for Monitoring Indian Economy (CMIE), investment proposals plunged to a five-year low in 2011. New investment proposals dropped by 45%, while those from the private sector slipped by 48% YoY. If this continues, the average GDP growth for the next two to three fiscal are estimated to be at least 2% lower than the anticipated 8% YoY.

There are certainly hopes that a looser monetary policy by the Reserve Bank Of India (RBI) will ease interest rate pressures and encourage investments. But low growth itself can trigger a viscous cycle of low consumption and low utilization rates. This will dissuade businesses from eliciting investments.

We believe that while it is unrealistic to expect India to catch up with China's pace of investments, capacity additions will continue at a modest pace, albeit with some volatility. Policy reforms can certainly help India leapfrog to the next phase of growth. However, even a gradual move in that direction can help the economy offer a good platform for India Inc. to meet its long term growth targets.

Do you think lower investment will lead India to a viscous cycle of lower growth? Let us know your comments or post them on our Facebook page / Google+ page.

01:15  Chart of the day
 
Data source: Mint
Indian companies accumulated sizeable foreign debt by way of ECBs (external commercial borrowings) and FCCBs (foreign currency convertible bonds) over the past few years. This was when the domestic interest rates were steep and the corresponding rates in offshore markets were at a reasonable discount. So much so that the interest differential even made up for the forex risk. However, with the interest gap narrowing and foreign exchange risk at its peak, the companies are saddled with huge risks on their balance sheets in the name of forex debt. As today's chart shows, Indian companies have steep forex debt repayments to make over the next 4 years.

01:48
 
Something is better than nothing. That's the line that the Manmohan Singh - led government seems to be living by at the moment. A severe political paralysis has so far made it extremely difficult for the Indian government to bring in any meaningful reform. You will recall that the government did put in some half-hearted attempts to prop up the overall business sentiment by announcing in November 2011 that it would allow 51% foreign investment in multi-brand retail. The opposition and the Left parties vehemently rejected the idea, and forced it into the bin. So now, the government has announced some reform in an area that would not invite too much uproar.

As per a leading financial daily, the government has issued a formal order to fully open India's single brand retail sector to foreign investment. In other words, a company like Nike Inc would be able to fully own the stores that it operates in India. Earlier the ownership was capped at 51%. For the remaining 49%, the retailer would have to find an Indian partner. That wouldn't be the case going forward. This is great news for a lot of single brand foreign retailers who have been shy of partnering with Indian firms. This reform is, however, insignificant from a macroeconomic point of view. The Indian economy needs a lot bigger and bolder reforms.

02:33
 
Acquisition of companies by the pharma industry at hefty premiums has been nothing new. Readers would do well to recall that 2006 was one such year when Indian pharma players went on a shopping spree abroad and acquired targets at expensive prices. And one is witnessing a similar king of trend right now albeit in the global pharma space. Global pharma players have been facing some challenging times recently as their research pipelines are drying up and they do not have potential blockbusters to fill in the gap. Moreover, a wave of their branded drugs losing patents have resulted drug prices falling steeply as generic companies make most of this potential. Many of them have responded by venturing into generics themselves and this has been either by partnering with Indian generic companies or buying those companies.

In the meanwhile, most of these global players have also been looking to acquire smaller biotechnology companies given that biotech is the next happening thing in the pharma space. But with many companies vying for the same targets, valuations have soared. Latest case in point is Bristol-Myers Squibb Co's deal to buy Inhibitex at a 163% premium, considered to be the most extreme example to date. In India itself, Abbott Laboratories bought the domestic business of Piramal at a hefty premium. While Piramal has certainly benefitted from this, Abbott has a lot of work on its hands to justify such a premium. While pharma companies have ample cash to buy out companies, going in for such mergers at lofty valuations are bound to pose a major challenge in terms of generating adequate returns in the future.

03:05
 
Is one of the most important wheels of the global economic engine showing signs of coming off? Certainly looks like it. Bloomberg reports that China's import growth fell to a two year low in December, sending some mild tremors across the world. What this has done is that it has led the country's trade surplus to widen, reigniting debates whether the surplus is coming at the expense of other economies. For the US though, this is no longer a speculation but a fact and hence, it is likely to mount pressure on the dragon nation to let the Yuan appreciate at a faster rate against the US dollar. But it would be interesting to see whether China rises to the occasion, especially at a time when its own domestic demand is slowing and its exports also facing stiff competition from other countries. If the past is any indication, the Chinese Yuan will perhaps continue to appreciate at a modest pace, which will in turn keep up the pressure on the exports of other nations.

03:41
 
The steep fall in Indian Rupee has led to troubles for quite a few companies. But some of the worst hit are those that have taken on ECBs (External Commercial Borrowings) in their books. Naturally if the value of rupee depreciates, the loan size for such companies increases. Nevertheless there is a way around this and that is hedging. But as per a report of the Reserve Bank of India (RBI) only 40% of the total ECBs in India are hedged. Many companies prefer not to hedge their foreign currency risks to avoid the financial costs related to such transactions. However, the lack of hedging increases the risk related to these companies particularly when the rupee depreciates sharply as it has done in recent times. As a result RBI has told banks through which the companies avail the ECB route, to ensure that the companies hedge their forex exposure. Further the apex bank has mandated banks to monitor the unhedged portion of the ECB of large companies whose forex exposure exceeds US$ 25 m on a monthly basis.

04:16
 
The slowdown in Indian economy is expected to have a significant impact on the consumption and shopping pattern. And real estate seems to be the one to bear the indirect brunt. As per a reputed real estate consultancy agency, the commercial vacancy rates in retail segment may go up from 21% last year to 25% in the India's top seven cities.

A similar phenomenon was seen in the crisis of 2009 when around 2,000 retail stores were shut. However, the impact will be mellowed down this time as there has been a shift in the way retail spaces are hired - from fixed rent paying model to revenue sharing model. Hence, this time, it will be just unprofitable stores that will be shut down. However, a lot of reshuffling is expected during the period of correction as retailers want to make good use of this time to shift from poorly planned second class malls to ones that are well developed and managed.

04:32
 
The Indian stock markets remained choppy throughout the session today and hovered close to the dotted line. While commodity stocks continued to find some favour, selling pressure in IT, pharma and telecom stocks capped the gains. At the time of writing, the BSE Sensex was trading flat. Indices across other key Asian markets closed a mixed bag while those in Europe have started on a negative note.

04:56  Today's Investing Mantra
"You do not gain as much from periods of unusual prosperity as you lose in periods of depression when you are in business. That is almost an axiom" - Benjamin Graham
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?
The '26% Secret' to Buffett's First Billion
August 11, 2017
This is what led value investors Mohnish Pabrai and Warren Buffett to their first million and billion.

Equitymaster requests your view! Post a comment on "This could shave off 2% from India's GDP growth". Click here!

2 Responses to "This could shave off 2% from India's GDP growth"

Ashutosh Bose

Jan 14, 2012

Yes, lower investment in infrastructure will lead to lower growth.

Like 

HS GOEL

Jan 11, 2012

the word GDP is for the enlihtened one who have money to spendon private tutions grand scale parties in one shape or the other we in street wonder for next day/weeks bread medicine why WHY should govt emloyes get a raise for days gone buy why should be there free food for the people who dont WORK why should MP /MLAS BE PAIDfor the days they donot work and so on list is long we will stillsurvive and raise our heads we are a strong willed NATION REGARDS TO ALL HS

Like 
  
Equitymaster requests your view! Post a comment on "This could shave off 2% from India's GDP growth". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407