Gamblers not welcome in India - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Gamblers not welcome in India 

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In this issue:
» The dual problems bothering China
» The impact of Ambani verdict on Indian oil prices
» Another feather in the cap of Indian generics
» Bernanke's views on Greek debt crisis
» ...and more!

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They are the type of gamblers who not just gamble with their own money. But also with that of others. Commonly they seek entry under the garb of Foreign Institutional Investors (FIIs) or bring in their money via P Notes. These FIIs have a notorious history of bringing in speculative capital. Only a handful of them have an eye for long term investments.

The India central bank has had a tough time dealing with them over the past two decades. This is ever since the market opened up to foreign capital. The FIIs brought in US$ 7 bn in FY91. This gradually went up to US$ 107 bn during FY08, the year just before the subprime crisis. Again it dropped to as low as US$ 7 bn in FY09 at the height of the crisis. And once again, capital inflows to the tune of US$ 50 bn in FY10 have raised the RBI's concerns.

But the Indian central bank is at its proactive best. The RBI governor has not minced words in citing his disapproval of 'fair-weather' FII money. In a recent speech at an international forum, Dr Subbaro quoted few lines from a recent issue of The Economist. "Capital, like water, tends to flow around obstacles. Try to dam its movements at one point, and slowly but remorselessly, it will find its way around. To learn to 'dam' the flows so that the benefits of capital flows exceed their costs remains an intellectual and policy challenge for EMEs." The RBI therefore has its eyes set only on long term capital inflows.

At the recent Equitymaster Investment Summit, our founder Ajit Dayal also aired similar views on P-notes. Calling them 'terrible for the economy', Ajit reasoned that such funds do not help in building roads and houses or getting jobs for billions of people. The FIIs have got their own problems. They re-price and reassess their risk every single day. And that's what causes these wild swings in the Indian stock market. We are lucky to at least have a central bank with good foresight.

Do you agree with the RBI's stand on short term capital inflows? Please share your views with us.

01:05  Chart of the day
India recently posted its highest ever car sales figure in the decade. China, the world's largest automotive market, increased its car sales by a third. Yet, both these economies fall abysmally short in terms of comparison of vehicle ownership per 1,000 people. As today's chart shows, the fastest growing economies like India and China are way behind their Western peers in terms of vehicle penetration. No wonder the carmakers world over are enticed by the opportunity that these markets present.

Data source: SIAM, UN World Statistics

The implications of the Ambani verdict are still being analysed by the media. In our view, the thing to note is that the Ambani verdict affects only one part of the Indian energy sector. It affects the contract between the government and operator (the exploration and production company in charge). The verdict does not lay down a new regime of prices or distribution for oil & gas in India. It does not affect the imports of oil and LNG. It also does not affect the subsidy driven retailing. However, it does bring more clarity in the way contracts are enforced. Of course, that raises the question, why was there ambiguity in such vital areas in the first place? So, to sum up, the judgment brings more clarity in the power that the government wields over the upstream companies. Both in terms of pricing and distribution. But it does not impact the supply chain thereafter. Prospective foreign investors into the Indian energy sector will keep both these aspects in mind.

China is facing a problem typical of nations on the verge of a major transformation. China knows that it order to make its growth more sustainable, it will have to curb its reliance on exports. However, such transformations are easier said than done. And China seems to be learning this the hard way. Inflation and real estate prices are heating up in the dragon nation. But the authorities seem to be worried whether to take the required monetary action or not. Raising interest rates could hurt growth. Already, its exports have raised fresh concerns in the aftermath of the European debt crisis. And now, higher rates could end up hurting domestic growth as well.

On the other hand, not raising interest rates would keep driving speculation in assets such as real estate. And this may not be a good sign for the long-term as bigger the bubble becomes, greater the damage is. The country may not be taking any action right now. But it may have to make up its mind sooner rather than later. Otherwise, it could amount to too little, too late.

The month of March 2010 saw India's industrial output grow by a lower than expected 13.5% YoY. The reasons? A partial withdrawal of the stimulus measures by the government during the budget. As also a slow but steady monetary tightening by the RBI. Both of these seem to have taken their toll on industrial production. However, there also may be a positive side to this. It may deter the RBI from another quick round of rate hikes, as the IIP numbers are also seen as a proxy for demand led inflation pressure in the economy.

Indian pharma generics players have one more reason to cheer about. They have already established a strong foothold in the US, European and the emerging markets. But now another market is likely to open up. This market is Singapore. Singapore has agreed to a greater market access for Indian generics. This is by fast-tracking the registration of drugs. Especially those drugs which have already received approval in US, Canada and the EU. Trade ministers from both the countries have also decided to further liberalise and facilitate movement of Indian professionals to Singapore. Indeed, Singapore is touted to be a big market for drugs. And so, launch of more drugs in this market will do its part in enhancing overall sales of domestic players. Especially since a lot of competition and pricing pressure has been observed in the US and European generics markets.

By the way the author of our recently introduced column 'Cool Hand Luke' has an interesting take on why the parents of Indian pharma MNCs are showing a keen interest in their Indian operations.

Global investors wildly cheered the European bailout package yesterday. And so did Ben Bernanke, the US central bank chairman. While the Greek debt crisis was a European problem, Bernanke thought that it could have hit US banks if left unattended. And that would have been grave for the country's financial system that is still recovering from the crisis of 2008.

What Bernanke is not ready to understand is that the crisis has come from debt and you don't escape it with more debt! As the New York University Professor Nassim Taleb said recently, "We're in a situation where we had a patient who we discovered had cancer a year and a half ago and all we've been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable. That's immoral!"

We believe the bailout may halt the landslide correction in global markets. But the debt crisis may come haunting back these nations sooner or later. Bernanke thinks otherwise, and is happy to see the problem evaporate, at least as of now!

Thanks to the uncertain cues from global stock markets, the Indian benchmark indices remained volatile throughout the session today. The BSE Sensex was trading nearly 88 points higher at the time of writing. Stocks from the banking, FMCG and healthcare space evinced the maximum investor interest. Other Asian markets except China and Korea closed in the positive. European markets have also opened higher.

04:50  Today's investing mantra
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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55 Responses to "Gamblers not welcome in India"


May 25, 2010

WOW.This is right. But , this depends on zeroing on a good growth stock first and then, staying put with it.
So is the case with marriage. If you find a good spouse and stay put, your marriage is successful. Else, lifelong, you can shuffle your spouses - to find the perfect one, at LAST.



May 16, 2010

I want to discuss about the Car sales... We cannot compare US & India for car ownership. In USA, CAR is the primary mode of transport. In india, Local transport and 2-wheelers are primarily used. Car, is a basic need in USA, its still a luxury in India.


Rushabh Baxi

May 16, 2010

Stand taken by RBI is correct. It must have will to implement and restrict such flow. Hope for the best outcome.



May 15, 2010

The heading 'Gamblers not welcome in India' is a fine joke. More than enough gamblers are in India... Please read Ecopy of the Business Standard dated one day before the last Cricket Finals.



May 15, 2010

RBI's stand regarding the FII's is Okay. But it won't work for long. Wait and see.



May 13, 2010



viral kothari

May 13, 2010

gamblers are not welcome. but it is not possible to go back and block foreign inflow. therefore best way is to impose taxes on inflows as well as out flow from country.


they should be even forced that atleast 25 % of inflow should be invested in infrastructure.


atleast 75 % of profits made should be compulsorily invested in infrastructure.



May 13, 2010

This is regarding chart of the day. I think it may not be fair compare India and US as is. In US, most of the population (may be more than 95%) is middle class and above. It is not the case with India. So, if we compare number of cars / our middle class population along with other countries, we might beat Russia and may be closer to UK.



May 13, 2010

I believe that quite a decent amount of money which comes in the stock market is actually the black money earned by the politicians, bureaucrats and the business community of the country. Thats a big reason why RBI and/or SEBI has found it difficult to restrain the use of such opaque routes. There are only some incremental reforms which are also designed to showcase that we are improving our regulations, but are actually eyewash!!



May 13, 2010

I disagree. No money should be stopped from coming in. Solution is not imposing higher taxes or finding who is teh investor. Find reasons for why that is taken out. People will take it out because that money can generate better return elsewhere. Who would not like to do that? Create enviornment so that whoever (including FIIs) invests feel that it will generate consistently better returns in long term. RBI/Govt is not able to develop that confidence in local people otherwise anyone taking money in out should not bother the markets

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