Will this be a significant milestone for India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this be a significant milestone for India? 

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In this issue:
» IMF lowers growth forecasts
» Why gold prices fell so precipitously...
» PSU banks to see employee costs rise
» Rogers gives his view on currency devaluation
» ...and more!

As far as milestones go India's GDP is likely to reach US$ 2 trillion this fiscal. Indeed, as per an article on Firstpost, the Prime Minister's Economic Advisory Council (PMEAC) expects India's GDP to grow to US$ 2,126 bn in FY14. This is assuming that GDP grows by 6.4% during the fiscal. But is this really feasible considering the myriad of challenges that it has to deal with?

It would be interesting to note that India's economy could have touched that mark in either FY12 or FY13. But problems such as slowdown in GDP growth, rupee depreciating steeply and policy paralysis made the goal of breaching the US$ 2 trillion mark that much more cumbersome. None of these issues have gone away completely. Thus, despite this even if that milestone is reached, the country cannot just sit back. It has a much more serious challenge of ensuring that the economy grows by 8-9% on a consistent basis over the next decade. And that can only happen if the Indian government undertakes some dramatic reforms.

So far the signals have not been that encouraging. Land and labour will be important factors in driving India's growth but reforms there have hardly been forthcoming. Indian labour laws continue to remain rigid. And labour issues seem to have only worsened given the increase in the number of strikes in the manufacturing sector especially automobiles. Land continues to be mired in bureaucracy, red tape and corruption and further rise in costs. Then there is the problem of the worsening current account deficit (CAD). Despite the fall in gold and oil imports, CAD in absolute numbers is still set to increase and is likely to remain a thorn on the government's side.

The challenge for the Indian government will be to balance its growth objectives and bring the deficit down. While some reforms have been announced, implementation of these has faced hurdles in Parliament. With elections around the corner, it would hardly be surprising if not much is done on this front. The US$ 2 trillion mark may still be reached, if not this fiscal then probably next fiscal. But India can be a force to reckon with only if it takes its growth to the next level and if the fruits of this growth are shared by most sections of society.

Do you think that the Indian economy can reach the US$ 2 trillion mark this fiscal? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
If one looks at the GDP forecasts made for 2013 by International Monetary Fund (IMF), China and India still top the table. That is not really surprising. But as per the Economist, what is interesting to note is that the IMF has been compelled to lower its growth forecasts for most of the countries over a period of 6 months. As a result, the world economy is expected to grow by 3.3% in 2013. Despite endless money printing measures by the central bankers in the developed world, growth in these countries will remain tepid at best. Plus although relatively speaking, growth in China and India still looks good; both these countries have problems back home to deal with meaning that it would take some time for growth to revert back to pre-crisis levels.

Data Source: The Economist

What do you do when you spot an asset bubble? Well, there are two things that one can do. One is to stay away from it. And the other is to buy into it in the hope that it will go on further, helping one make a killing in the process. What more, the killing can also be converted into a super-killing if one uses leverage to participate in the asset bubble. But it works the other way too. If the bubble pops instead of getting bigger, then the leveraged guy better exit fast or there's a real chance he would lose heavily.

Now, as per a certain Mr James Rickards, this is precisely the reason why gold prices fell so precipitously recently. He is of the view that the gold bull run of the past few years saw a lot of speculators jumping onto the train. Quite a few even use leverage to do so. And thus when prices fell, these guys panicked and sold off their gold in a hurry, causing even greater fall.

However, Rickards believes that almost all the speculators are now done with their selling. And thus, gold has reached what looks like a bottom to him. The explanation does make a lot of sense to us. However, we may not want to go into its details. All we know is gold isn't done going up in the long run. And thus, still deserves a small place in your portfolio.

Public Sector Units (PSUs) in India have some typical set of problems. But the case of PSU banks is unique to the sector. Lending to unviable sectors, offering cheap credit to the needy, restructuring bad loans and providing for hefty pensions are not the only problems that they face. Competing with their private sector peers is a constant challenge for them. More so when their staff is ill equipped to meet the challenge. The human resource issue is set to get more critical for Indian PSU banks. As per an article in Mint, nearly 20% of the staff at these banks expected to retire by 2015. Another 5 to 10% will retire by 2020. No wonder, it prompted the Reserve Bank of India (RBI) to call the 10 years to 2020 as the 'decade of retirement'. It has forced the government to ease promotion rules in the PSU banks. But that also may not help the PSUs to hire or retain talent. Particularly with the new banking licenses n the cards. What therefore remains certain is that the manpower costs of PSU banks would go up substantially in the coming years.

The central banks around the world are printing money like there is no tomorrow. This has led to a flood of cheap money and competitive devaluation of the currencies. This devaluation is expected to make exports cheaper. Therefore all countries are following suit because they don't wish to be caught on the back foot in case their exports become less competitive. The result is that everyone is printing more money. And this has made legendary investor Jim Rogers to question the sanity of such a move. He feels that the competitive devaluation of the currencies by the banks is nothing but a race to insanity.

The process of money printing has increasingly made cheap money flow into all asset classes. This in turn has inflated the prices of all of the assets. Whenever the money printing stops or when the investors lose faith in the process, the bubbles in all asset classes will burst. Though this may not happen in the short term, it will definitely take place one day. And that day all asset classes will come tumbling down.

We have high regard for opinions of people who are willing to stand out of the herd and make bold decisions. Noted economist Nouriel Roubini is certainly one of them! It is worth noting that he was one of the few experts who saw the 2008 financial crisis coming.

An article in the Economic Times notes that Mr Roubini who is known for his bearish views, is relatively upbeat about India. As per him, India has a strong advantage over China and European economies in the exports of services. And to keep this competitive advantage intact, India must invest in human capital and skilling building.

On the flip side, he raised concerns about India's manufacturing sector. In his view, India should find ways to compete with China. The latter has been flooding India will cheap goods. This has resulted in a massive trade imbalance with China. While he offers a rate cut as a short term solution, he believes India needs to solve structural issues in the manufacturing sector.

We do agree with Mr Roubini on most counts. The interest rate cut, however, will depend on how inflation pans out. If the current trend in commodity prices persists, the RBI might have room to cut rates. But playing with monetary tools is always a short term solution. Much more needs to done on the policy and infrastructure front to sort out long term issues.

The Indian equity markets traded well above the neutral zone throughout the day. At the time of writing, the BSE-Sensex was trading higher by about 140 points or 0.7%. While stocks from the auto , oil and gas and metal sectors were amongst the most favored, those from the information technology and realty spaces were amongst the top under performers. As for the BSE Mid Cap and BSE Small Cap indices, the same were up by about 0.6% and 0.2% respectively. Stocks markets in rest of Asia ended the day on a mixed note with China down by about 0.9%, while Hong Kong and Japan ended higher by 0.5% and 0.4% respectively.

04:56  Today's investing mantra
"I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies."- Peter Lynch
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1 Responses to "Will this be a significant milestone for India?"

girish shah

Apr 27, 2013

noureil roubini is a totally fraud economist who has been yelling of the us down fall from 2007 /8

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