Has India lost its magic? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Has India lost its magic? 

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In this issue:
» India's crude production has gone up in FY11
» Will petrol cars see a de-growth in India?
» Should BRICs trade in their own currencies?
» Euro troubles not over. Spain could reignite the crisis
» ..and more!


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00:00
 
In the dark 80s, India was considered as a land of snake charmers and red tape. The outside world viewed it as a mystic land where doing business was not just unprofitable but also impossible. The 90s saw a sea of change with the dawn of the liberalization era. By the year 2000, India was the new hot centre for investment capital. Its huge population base was no longer scary but presented an attractive opportunity. Global companies were setting up shop. The economy started to grow at a gung ho pace.

But the fear at the back of the mind of every investor was how long will this continue? Come 2011, the magic seems to have fizzled out. Growth is back at sub 7%. The country is fraught with problems related to corrupt politics, reform paralysis, high interest rates, fiery inflation, etc. And all this has combined to hurt the economic growth. Not to mention that the government's indecisive policy actions have sent investors scurrying to the bushes. Bowing to coalition demands the government has rolled back more than one policy that was to the benefit of the manufacturing sector.

It is not just policy inaction that has hurt India. The government's concentration on populist reforms can best be described in one word- overkill. As a result important issues like public services, road transport, power are being completely overlooked. Let us not forget that these together form the backbone of any economy. To say that these are underdeveloped in India is still saying too much.

But the point here is that hasn't this always been the case in India? Were politicians ever honest? Were they ever looking at anything beyond vote banks? The answer to this is no. But even then India has managed to grow at a decent pace. This was largely due to the after effects of the huge reforms undertaken in early 90s. However, like all good things the effect of that has slowed down. What India needs now is the right kind of leadership to lead it in the next phase of growth. A leadership that is proactive and committed to the country's long term growth.

The thing is that India still has a lot of 'magic' left in it. The country has a healthy middle class that is driving consumption growth. It has a huge 'demographic dividend' which is willing to work and add to the growth of the economy. With the right leadership it can get back on track.

Do you think India has lost its magic? Share comments with us or you can also comment on Facebook page / Google+ page.

01:35  Chart of the day
 
Crude oil prices have been exploding in recent times. This has sent India's import bill soaring. But at the same time, it has also added pressure on domestic crude oil producers to step up on production. As shown in the chart of the day, the crude oil production in the financial year 2010-2011 (FY11) has shot up substantially to 37.7 MMT (Million metric tonnes). The level has remained quite flat at around 33-34 MMT since FY03.

Data source: The Financial Express

02:00
 
Indian auto companies have faced heavy weather in the fiscal year so far as firm interest rates and fuel prices impacted demand and thereby volume sales. On the fuel front especially, since petrol prices have been freed, the price of this fuel has only gone upwards. Meanwhile, the government has not yet done away with the subsidies on diesel. And so the price differential between petrol and diesel has only widened.

Thus, in an environment where demand for cars in general has waned, that for diesel cars has seen an increase. Further, there was uncertainly prevailing in the industry with concerns that the government would impose an additional tax on diesel cars. No such move was announced by the Finance Minister in his latest Budget speech. And so, auto companies are now gearing up to ramp capacities for diesel vehicles. Given that oil prices are still firm, a further hike in petrol prices cannot be entirely ruled out. This makes the case for diesel that much stronger. Hence, auto companies such as Maruti Suzuki expect growth in passenger cars to be driven by diesel variants. This means that petrol cars could see de-growth in the medium term.

02:50
 
Later this month, New Delhi is expected to host the fourth annual summit of the leaders of BRICS nations. For the uninitiated, the S in BRICS stands for South Africa, the other four being already well known we suppose. Coming back to the summit, looks like the group means some serious business this time around. Amongst the many ideas doing the rounds, the one that sounds quite promising is the idea of the member nations trading with each other in their own currencies. Clearly, the advantages of such an arrangement are manifold. It will make forex reserves more diversified. Not to forget the reduced dependence on fundamentally weak currencies like the US dollar and Euro. Lastly, any flight to safety movement will not have as adverse an impact on currencies of BRICS as it does now.

Well, the idea is indeed a sound one. But how about going one step further and having a common currency? If problems in the Euro zone are any indication, a unified currency concept should not be touched even with a six-foot pole. A unified monetary policy is impossible with member nations having diverse political as well as fiscal policies. However, moving away from the dollar and Euro and trading in each other's currencies does indeed look like an option worth exploring we believe.

03:20
 
There seems to be no end to the woes for the Eurozone economies. This is particularly true for the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). Greece is still not out of the woods despite several rescue attempts made by European Central Bank. But what is more disturbing is the health of the Spanish economy. Earlier, most economists were predicting that Italy may be the next Greece. However, the recent rise in Spain's 10-year government bond yield suggests an altogether different story. It has surged to 5.4% at the end of February 2012, 0.4% higher than its Italian counterpart. The main reason for the same is widening fiscal deficit in the Spanish economy. First, Spain missed its 2011 budget deficit target. Then, it tried to revise its 2012 budget deficit estimate from 4.4% of GDP to 5.8%. This was enough for investors to start losing confidence in the Spanish economy.

Not only investors but other European economies, especially Italy are also concerned. Italy has been trying hard to come out of its bad economic phase. Any fallout from Spain would push back the whole region to the crisis situation. And it would hurt the corrective measures taken by the Italian government as well. But will Spain go Greece way? Only time can answer.

04:10
 
Gold prices have seen a spectacular rally over the past decade. But in recent months, prices of gold have come down. This is due to the positive economic data coming out of the United States, which showed that the country's economic recovery is gaining momentum. This combined with a buoyant equity market and receding fears of European debt crisis has prompted investors to take money out of the bullion.

So, is the gold's bull-run coming to an end? Not according to Barclays Capital who sees this most recent sell off as an opportunity to buy the precious metal. They believe gold will head towards USD $1,850 per ounce due to inflation concerns and currency debasement. They also believe that lower Russian exports will lead to supply deficit in the market, thus pushing the prices of gold further north. Also, there is a possibility of further quantitative easing (QE3) by Federal Reserve which could also provide boost to gold prices.

Amongst the other world markets, Singapore was down by 0.7% while Japan was down 1.2% during the week. France was the biggest loser registering losses of 3.3% during the week.

04:45
 
In the meanwhile, the Indian stock markets continued to languish after opening the day on a weak note. At the time of writing, BSE Sensex was down by 240 points (1.38%). Stocks in the realty and banking space were leading the losses. The other major Asian stock markets closed the day on a mixed note with Hong Kong and China closing in the green while Taiwan and Indonesia ended the day in losses.

04:55  Today's investment mantra
"The individual investor should act consistently as an investor and not as a speculator." - Benjamin Graham
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6 Responses to "Has India lost its magic?"

kcguptarewa

Apr 12, 2012

India has not lost yet but will certainly loose the magic with the type of leaders and the mentality of the public that is prevalent in India.The public has to change first,the leaders will be bound to change.The bureaucratic mindset has to be forced to change otherwise all will be a futile exercise.The present leadership has virtually failed.

Like 

Shreedhar

Apr 2, 2012

Whatever the reasons are told hear for india loosing its magic, are all 100% correct. first we the people have to change which automatically changes the system which eventually changes the leadership, for example when there is no corruption in the masses [which is a huge population] it can easily control the class people
who are few compared to them in turn they can control the leaders

Like 

Nerkuppai Thumbi

Mar 28, 2012

One important stake-holder in the scheme of things - bureacarcy - was left out of reforms. The bureacrat is capable of ensuring/restoring status-quo. The villain of the piece is the bureacrat, which the media and the common man on the street either do not realise or takes lightly: unless reforms in the batch promotion of IAS is replaced with more rational performance-linked promotion, there can be no long-lasting changes.

Like 

shirish patwa

Mar 26, 2012

I fully agree with the views expressed in the article.What surprises me(pains me)is that unlike European countries and U.S. the economic slow down is not the result of depression.It is because of the lack luster performance of the Government ,the corrupt politicians and lack of vision in the Government have nailed the growth engine of our economy.The problem is totally man-made.Whatever growth India manages is not because of the Government policies but despite them.And this is in spite of an Economist heading the Government.If he has an iota of self respect and sense of well being of the country at his heart he should quit at once.The country is great to throw capable alternative.

Like (1)

Govindaswamy Dhayalamurthy

Mar 26, 2012

Though India has all potential to keep its growth, the lack of Leaders who are committed to the growth of India and with vision not centered on their own growth India will loose not only the magic but also the real GROWTH

Like (1)

Deva

Mar 26, 2012

This country is always a place full of opportunities. Even after scams with mind boggling numbers and one after the other, the economy has not gone to dogs. Still people are able to go about and doing things they usually are doing. One question is as Indians we do not enjoy much from Government as part of the Government's social responsibility. Definitely right leaders will take us a long way but that again will be a pipe dream with regional parties coming in the forefront and the national parties squabbling within them for prime posts.

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