Reforms will not happen fast - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Reforms will not happen fast 

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In this issue:
» Asian economies will come back strongly
» Demand for real estate is coming back
» Stock of repossessed vehicles have increased
» China's economy is struggling
» ...and more!

"We will take the reforms agenda forward, but not at the cost of development and not at the cost of state firms." This statement by one of the leaders of the Congress party and published in a leading daily highlights the importance of tempering one's optimism over the re-election of the UPA government. Let us not forget that this is the same party that came out with social schemes like the farm loan waiver and the rural employment schemes. Hence, to expect a reforms overdrive from the new government will be akin to asking for a little too much. Of course, the scenario is a lot better this time around as there are no left parties to take two steps backwards for every one step that the UPA government will take forward, but the fact remains that a move towards more reforms is likely to progress at a slow pace at best. Furthermore, unlike 1990-91, where problems were India specific, a synchronized slowdown has engulfed the world and this will give the government more leeway to implement their plans. In a nut shell, reforms will happen but not as fast and they are not likely to be as big-bang in nature as is being expected in certain quarters.

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China's government removed lending restrictions and unveiled a US$ 586 bn stimulus package in November 2008 to shore up its economy, and now expects the country to grow 8% during the current year. But investment advisory firm Oppenheimer & Co. begs to differ. It opines that China's economy is 'struggling' and may very well fall short of the government's growth forecast this year as export demand has taken a huge hit. That is, even though the economic stimulus is helping, export demand is still weak. The dragon nation's overreliance on exports is common knowledge and the slumping demand from the recession hit developed countries is taking its toll on this vulnerable aspect of China's growth.

The excesses of the previous boom just don't seem to stop hurting the Indian commercial vehicles (CV) manufacturers. Just as there were signs that the demand is picking up in FY10 after a dismal FY09, there comes another dampener. As per a leading daily, stock of repossessed vehicles has increased significantly as compared to the same period last year. Repossessed vehicles are those vehicles that are confiscated by the financiers if the truck owners are unable to repay the loans. With industrial activity slowing down considerably during the last two quarters of the previous fiscal, many truck owners had to operate at a very low capacity, thus leading to loan defaults. This in turn forced financiers to repossess their vehicles. Now, with the banks in a hurry to clean up their balance sheets, these vehicles are being liquidated at a significant discount, thus hurting sales of new vehicles. Demand is especially high for heavy tonnage vehicles and hence, it is this segment that truck makers like Tata Motors and Ashok Leyland will find hard to grow in the current fiscal.

Besides the US and European economies, the global economic slowdown has left no stone unturned in hampering the Asian economies as well. However, as per an article in the Economist, Asian countries are likely to come back strongly despite their heavy dependence on exports to the US and Europe.

Take the case of the fiscal stimulus in Asia, which has been bigger than in the other economies. As stated in the Economist, China, Japan, Singapore, South Korea, Taiwan and Malaysia have all announced fiscal packages of more than 4% of GDP for 2009, which is twice as large as America's stimulus this year. What's important to note is that Asians in the past have saved considerably more than the Americans. This means that additional income, which will accrue to the former as a consequence of these stimulus measures, could be spent rather than saved thereby bolstering consumption. In the longer term, however, the key to growth in Asia are various steps that the Asian governments will take in boosting infrastructure.

As the Economist states that even if exports contribute nothing to growth, if the domestic demand grows at the same rate as it has done in the past five years, then emerging economies in Asia could witness an annual growth of almost 7% over the next five years. While this may not be as good as the growth logged in the past couple of years, it is definitely much better than what the US and European economies could hope to achieve.

The real estate sector had participated both in the previous boom and the bust that followed. So, it is interesting to track what's happening there in light of the recent rally in equities. As reported in a leading business daily, the demand for real estate is coming back. However, it is still in the 'affordable housing' segment. New affordable projects from DLF, Unitech, Parsvnath, Lodha and Puravankara have done well. Demand is also up for flats ready-for-possession as opposed to those still under construction. Other factors helping demand are lower interest rates for housing finance from financial institutions and construction-linked payment plans from developers. However, industry insiders still view the demand as sporadic and not quite a revival.

Return the money and escape the restrictions - that seems to the thought process of the surviving Wall Street banks. As reported on Bloomberg, Goldman Sachs, JPMorgan Chase and Morgan Stanley plan to repay the US government US$ 45 bn of the bailout (TARP) money they had received. It may be noted that the banks want to return the money to escape restrictions on compensation and hiring practices that the bailout program entails. Some observers believe that it is a great way to attract customers, personnel, and capital. Interestingly, the government doesn't mind as long their supervisor (in this case-the Federal Reserve) approves. It seems Wall Street will never let go of their fat pay packets, no matter what.

Now that the UPA is back in action what are some of the things that it is set to do? As reported in a leading business daily, one is that the government may needle banks to lower lending rates as part of a fourth stimulus package, which is likely to be announced within 100 days of its formation. The aim obviously is to bolster domestic demand and pull the economy from the slowdown. Having said that, given that the country's fiscal deficit in FY10 is likely to account for over 6% of GDP, the stimulus package this time around may not include fiscal benefits in the form of tax cuts. While the stimulus packages announced between December 2008 and February 2009 have started yielding results, the full benefits of the same are yet to be realized. More importantly, banks have been asked to bring down interest rates as they have refrained from doing so despite liquidity being injected into the system.

Banking seems to be back in vogue. If you are in the US, there is no better time than the current one to start a bank. This is because even the US government wants you to make money. It wants you to make enough profits so that the losses from the sub-prime crisis can be wiped off and credit supply to the sectors starved of liquidity could once again be restored. In the first place, there was no need for these banks to be rescued. They should have been left to go belly up. For the kind of risks they took, they deserved it after all. But it was not to be. By virtue of their size, the banks posed such a big systemic risk that they had to be rescued. And now, they are once again back to taking risks. How do we ensure that the mistakes of the past are not repeated?

Economist has the answer. It calls for smarter regulation and more capital. While the former should be framed in such a way that the interests of the management are aligned with not only the shareholders but other stakeholders as well, stringent capital requirement standards would ensure that banks are in a position to absorb more losses in bad times. Although these factors may slow down the growth in credit, the magazine argues that over the long term, they would ensure faster growth. We couldn't have agreed more.

The Indian markets closed marginally higher today led by gains in the BSE Bankex (up 7%) and BSE Capital Goods (up 6%) indices. On the global front, while the Asian indices closed firm, the European indices are trading in the positive currently. As reported on Bloomberg, crude oil prices rose by 2.5% to US$ 60.5 a barrel as gains in the stock market increased optimism that the global economy is recovering.

04:55  Today's investing mantra
"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." - Warren Buffett
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1 Responses to "Reforms will not happen fast"


May 19, 2009

todays write-up seems to be a condensed version of the Economist !!

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