The man who saved India - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The man who saved India 

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In this issue:
» Y V Reddy saved India from the financial crisis
» Despite Obama, US Inc. still committed to India
» Tech Mahindra looks at lay offs
» Is Google a monopoly?
» ...and more!

Ever wondered why we don't hear of former RBI governor Y V Reddy anymore? That's because he has not been in India ever since he stepped down late last year. Everyone around the world wants to hear the man who protected India from the worst effects of the global financial meltdown. During his term as the RBI governor Dr. Y V Reddy detected the signs of overheating and did not allow banks to take risks he himself did not understand. Even when they were labeled as financial innovation. As a result, barely US$ 1 bn of India's US$ 800 bn banking assets have turned toxic as per a leading business daily. Compare that with what has happened around the world. He also curtailed banks' exposure to the real estate sector - the epicenter of the crisis. In hindsight, his conservatism on capital issues played a huge role in protecting India from the financial tsunami.

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In fact, Nobel economist Joseph Stiglitz has said if America had a central bank chief like YV Reddy, the US economy would not have been in such a mess. Is it any wonder that the world listens to him and not to Alan Greenspan anymore? We believe credit must be given where it is due and Dr. Reddy certainly deserves it.

Obama's 'Buffalo, not Bangalore' remark was aimed at U.S. companies taking advantage of US tax rules despite substantial overseas operations. That has not stopped Honeywell International from opening its second R&D centre in Bangalore. The company makes jet engines and home-security products. In fact, its CEO, Dave Cote, has said, "We are committed to India as a manufacturing location, export hub and most importantly, as a center of engineering and R&D excellence". He adds, "Our presence here has grown from 1,000 employees in 2002 to 10,000". Given that the company projects its revenue from India to almost double to US$ 1 bn in the next 3 years, the company can hardly be expected to toe Obama's protectionist line. India became a destination for US Inc. because it made compelling business sense. It will take a great deal to reverse the process.

Obama's announcement does not seem to have gone down well with Azim Premji, chairman of Wipro, either. He is of the opinion that the protectionist measures of the US government are a matter of concern. This is especially so when the US President was all for expanding free trade at the recent G20 summit. However, Premji prefers to adopt a wait and watch policy with respect to how the changed tax structure in the US will pan out in terms of its impact on Indian IT players. As far as the overall business environment is concerned, while Wipro does not expect any dramatic recovery, which is hardly surprising given the scale and scope of the global crisis, it does envisage some signs of revival in the second half of the current fiscal.

Now that Tech Mahindra has secured Satyam in its fold, the former is leaving no stone unturned in sprucing up the business and shedding excess flab. This means downsizing operations and Tech Mahindra intends to kick off the process beginning with Satyam BPO (the erstwhile Nipuna). 60% of the support staff in the BPO is set to face the axe. Further, Tech Mahindra has decided to use Satyam's existing marketing, HR and other support functions for the BPO too instead of having a separate set-up. The target is to save about US$ 200 m in costs, which means that more layoffs in the future cannot be ruled out. Given that many departments in Satyam were overstaffed, it is only natural that Tech Mahindra would want to go in for slashing jobs. Thus, while Tech Mahindra's strategy in this regard is pretty clear, Satyam employees continue to be fogged by an air of uncertainty.

As per a leading business daily, Jet Airways will start a new no-frills carrier called Jet Airways Konnect. The fares for the service will be 10% to 15% lower than the normal Jet Airways economy fares. The company has not launched the new service under its JetLite brand due to pending litigation with the Sahara group. It may be noted that market share of the more expensive full service carriers has fallen due to the economic slowdown.

We believe the airlines industry is value destructive. As Warren Buffett once said, "Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." If only, our air carriers paid heed.

When we talk of natural monopolies, the usual suspects tend to be utilities like power, gas, waterworks etc. Dominant firms in such industries can easily notch up huge market shares and thwart competition. No wonder then, these industries tend to be regulated around the world.

According to CNNMoney, US regulators are beginning to wonder if Google is a natural monopoly. That seems like a bit of a stretch. After all, isn't the internet a perfectly competitive market place? But 76% dominance of the search market does raise the question whether there's more than meets the eye. However, the company presents several points in its defense. First, 'competition is just one click away'. If internet users turn to Google, it is due to the power of habit and not because the company prevented them from turning to other search engines. Second, it doesn't lock anyone into its software like Google Docs. The software formats are open, so users can move content to rival products.

Because of these reasons, regulators have not been able to make a convincing case so far. Their best chance would have been if Google partnered with a rival like Yahoo. But that's not on the cards. For now, everyone simply has to acknowledge the fact that it is a great business - with a strong competitive advantage.

If the global economy has to have any real chance of recovery, the US financial institutions need to be nursed back to good health. Thus, a huge sigh of relief may have been heaved yesterday when the US Government announced that if 10 out of the 19 biggest banks in the US manage to raise capital to the tune of US$ 75 bn over the next few months, the US banking system will have enough capital at their disposal to survive even a 'worst case' economic scenario. There had been no official estimates of the likely losses that the largest banks would suffer and hence, private investors were a little reluctant to commit money so far.

The results of the stress tests however, are likely to bring some positive changes. Banks could get more leeway in raising private capital. Infact, a clutch of banks including Goldman Sachs have already successfully raised capital. The US Government endorsement will further make it easier for others to follow suit.

If all the banks concerned do indeed manage to replenish their capital base, does this signal the end of the woes of the financial markets? Unlikely. For one, there are a few experts out there who believe that the tests were not applied with enough rigor and hence, the losses could mount further. Secondly, there has been no word on what would happen to the other 8,000 odd smaller banks that as per estimates, still handle a third of the general business lending that local economies thrive on. We may have gotten thus far but it looks like there is still a fair distance to go.

Results of the stress test
Not known Institutions that need capital Amount Institutions that do not need capital
Fifth Third Bancorp Bank of America Corp. US$ 34 JPMorgan Chase & Co.
KeyCorp Wells Fargo & Co. US$ 15 American Express Co.
PNC Financial Services GMAC LLC US$ 11.5 Goldman Sachs Group Inc.
SunTrust Banks Inc. Citigroup Inc. US$ 5 Bank of New York Mellon Corp.
  Morgan Stanley US$ 1.5 MetLife Inc.
  Regions Financial Corp. Unknown Capital One Financial Corp.
      State Street Corp.
Source: CNNMoney

With domestic car makers grappling with poor sales for most part of the last fiscal, the current fiscal couldn't have begun on a better note. At least on the exports front. As per a leading daily, with a few developed nations like Germany, UK and France offering incentives for small, fuel efficient cars, order inflow for small car makers in India is on the rise. "Demand for compact cars with low emission norms is rising globally. We have bagged large orders from Germany, France, Italy and the UK, where customers are getting incentives to buy compact cars", is how the MD of India's largest car manufacturer Maruti Suzuki chose to put it across. And it's not just car makers that are likely to benefit, even auto parts makers are poised to reap benefits of this move by the governments of some of the developed nations. At nearly 3.4 lakhs, India's car exports grew by a strong 54% in FY09. The number is all set to be eclipsed in the current fiscal.

The Indian markets closed 2% lower today. Apart from India, most major Asian indices closed in the green, while the European indices are trading firm currently. As reported on Bloomberg, Crude advanced to US$ 57.6 on speculation that the recession is easing.

04:46  Today's investing mantra
"In 1954 the Dow was up 50 % and the country was in a recession. It was the best year I ever had in my life. It's a big mistake to say business is bad, therefore I shouldn't buy stocks. That usually is the time to buy stocks. And when everything is wonderful, it's not usually a very good time to buy stocks" - Warren Buffett
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1 Responses to "The man who saved India"

rajarshi dey

May 9, 2009

completely agree with your views as well as propose to honour him the highest level for civilians. thank you sir. you saved us to becoming a begger.

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