9% GDP growth...a mere dream? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

9% GDP growth...a mere dream? 

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In this issue:
» Chinese banks' aggression gives the government cold feet
» US I-bankers laughing their way to the bank
» US$ 5.4 bn of FDI on its way to India
» Mark Mobius on impending rally in emerging markets
» ...and more!

General elections 2009 have manifestos ranging from combating terrorism, to unemployment to inflation. We have seen interests in the third, fourth and possibly even a fifth front. However, what is conspicuously absent this time is any focus on infrastructure development, the key reason why India managed to clock GDP growth rates in excess of 8% in the first two years of the 11th Five Year Plan. Why is this issue nearly absent from election manifestos this time? Has it become cliched? Or has the investment dried up?

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Two years back, Morgan Stanley, JP Morgan and Blackstone group together committed US$ 11 bn for investment in Indian infrastructure projects. The government of India's plans of spending US$ 500 bn on infrastructure during the 11th Plan period, with one-third of the funding coming from the private sector, was applauded. However, India's acclaimed infrastructure investment program is struggling to find private investors today. While some investors who have been battered by the global financial crisis now find debt-heavy Indian infrastructure projects too risky, others find it unremunerative. The National Highways Authority of India (NHAI) for instance is seeking to build 60 new road projects under the public-private partnership model. It has not received a single private bid on 38 of those. The Blackstone group has pulled out of the US$ 5 bn India Infrastructure Fund. At this rate, with its crumbling infrastructure, will the Indian economy ever see 9% GDP growth rates again?

Meanwhile, China which proclaimed to have overcome the slowdown impact is now seeing red with the record high sums lent by some of its biggest banks. As per the Wall Street Journal, the explosion in China's bank lending this year as compared to the sharp contraction in credit in the Western countries, has been crucial to shoring up its economic growth. The Chinese government is nevertheless concerned with the size and unusual structure of the lending so far this year. In the first three months of 2009, China's banks have disbursed 4.6 trillion yuan (US$ 640 bn) worth of loans, which was nearly equal to the entire lending for 2008 and equivalent to around 70% of the nation's GDP for the quarter. Further, nearly 30% of these were working capital loans, which the government suspects that companies have borrowed and invested in stock and property markets.

As per Economic times, the current economic slowdown has left a lot of passenger car companies in India with excess capacities. Worst hit have been marginal companies like GM and Mahindra Renault, who were trying hard to improve their position in the Indian markets when the crisis erupted. Thus, while these players have readied capacities, buyers seem to be absent from the market. Although leaders like Maruti and Hyundai are also facing capacity issues, the proportion of unutilized capacity is a lot less than the fringe players. It should be noted that the Indian car market was expected to reach 2.5 m cars by 2010. But as per the business daily, the slowdown will reduce the number by half a million units thus leaving the companies with unutilized capacities. There is no need for alarm bells though. The fact that the country will continue to remain one of the most attractive auto markets over the long-term will give them enough time to make money provided they get their strategy right.

While employees around the world are caught in the quagmire of a severe economic recession, those on Wall Street who helped create the problems in the first place are still breathing easy. Or so it seems from the compensation levels of Wall Street'ers who've managed to hold on to their jobs. As seen from the graphic below, sourced from The New York Times, some of the biggest Wall Street firms will spend about the same on employees in 2009 as they did before the eruption of the financial crisis. This can be gauged from the percentage of revenues that these firms have allocated towards employee compensation during the quarter ended March 2009. The biggest rise in such a percentage is expected to be seen in the two survivors of the investment banking debacle - Goldman Sachs and Morgan Stanley!

Image source: The New York Times

Mr. PMS Prasad, the man in charge of Reliance Industries' upstream activities, has in an interview stated that the company's KG basin gas will change the structure of Indian energy industry. It will save India a great deal of foreign exchange, promote new gas based projects and propel the installation of new gas transportation infrastructure. With added supply, usage will move beyond the power and fertiliser sectors to areas like refining, petrochemicals, steel and city gas. While we agree that natural gas holds a great deal of promise; clear policies, fiscal incentives and transparent regulations will still be needed for effective execution.

During the difficult times in the past fiscal, neither the Indian government nor Indian companies have, however, been particularly transparent with regard to their operations. Leaving the Satyam episode aside, even excessive leveraging, pledging of shares by promoters, cancellation of orders and fiscal mishandling were shoved under the carpet for too long. At such times, it was interesting to come across a detailed track record of the US government's bailout programme on CNN's website. Probably we need to take some lessons here.

The Indian government recently cleared 22 proposals that will bring in about Rs 5.4 bn of foreign direct investment (FDI) into India. These proposals include Tikona Digital Networks' proposal to bring in Rs 2.3 bn into the country, Nokia's plan to set up the first single brand retail JV with HCL Infosystems to sell handsets and accessories, Yamaha's proposal to transfer its business operations to a new company in India and Kolkata based Electrosteel Castings' proposal to bring in Rs 1.6 bn of FDI. Some ray of hope about faith in Indian economy's long term prospects.

Mark Mobius, the guru of emerging markets has reiterated his stance that the current rally is indeed a rally that is building a base for the next bull market. Speaking to Mint, Mobius opined that all the factors viz. valuations, flow of funds, money printing by governments across the world point towards a big rally and hence, once velocity of money (rate at which money circulates in the system) improves, the markets might also take off in a big way. However, this does not mean that the markets might not test the lows of March, it very well could but according to Mobius, it will be a part of the base building process and the worst is probably over. True to his moniker, he also sounded more hopeful about the emerging markets than the developed economies and felt that the year 2010 could well usher in another bull market.

The economic recovery sentiments in global markets seem to have been battered by the worries of the spread of Swine flu. The Indian benchmark BSE-Sensex led the pack of losers in Asia and closed the day with losses of around 3.3%. The BSE Midcap and Smallcap indices shed 3.7% and 3.5% respectively. The European markets have also opened deep in the red.

04:55  Today's investing mantra
"A market downturn, doesn't bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity." - Warren Buffett
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