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Watch Out! A Huge Bubble is Building Up in India...

Jun 1, 2016

In this issue:
» Economy on a firm wicket
» Jewellery companies heave a sigh of relief
» Market roundup
» ...and more!
0:00
Ankit Shah, Research analyst

There's something very wrong about India's economy. I can feel it. The government won't admit it. It says the latest GDP data 'proves' we are the fastest-growing economy in the world.

Maybe. But I don't see it on the street. The common man doesn't seem to be doing much better now than he was a few years ago.

Take rural India for example. It's a hard life for people in India's villages, even in a year when the rain gods are kind. In the last two years, the rain gods have not been kind. So it's safe to say that over two thirds of the population is not getting ahead financially.

What about the rest of the economy?

In urban India, it is true that salaries have risen. But then again, so have prices. Keeping up with inflation is not easy for India's urban denizens.

The government certainly hasn't provided any economic stimulus in the last two years. They haven't passed on the full benefits of the fall in crude prices either.

Banks too have not passed down the RBI's rate cuts to the man on the street.

India's corporates are not investing because they're struggling to grow. Profit margins are at multi-year lows.

Manufacturing has yet to pick up. There are huge underutilised capacities across many industries.

PSU banks are still drowning in NPAs.

Exports are down.

Imports are down.

Remittances are down.

And worst of all, rapid job growth is still a distant dream.

So why is India the world's fastest growing economy? There must be some reason.

The answer to this riddle is deceptively simple. But I can't take the credit for figuring in out on my own.

I'm an avid reader of Vivek Kaul's Diary. I believe Vivek has found the answer.

He has uncovered a crucial factor contributing to India's growth: debt. According to Vivek, India has a massive debt problem.

It is a bubble. There can be no doubt about it. And like all bubbles, this one too will burst. At the heart of the bubble lies the government. Irrespective of which party is in power, the bubble only gets bigger. And as the government's role in the economy grows, the bubble inflates.

Readers of The Vivek Kaul's Diary will know that Vivek has already unearthed some aspects of this problem.

  • The questionable GDP numbers
  • The major problem with LIC
  • The mess in PSU banks
  • The government's bailout of steel firms
  • The repeated hikes in excise duty on crude oil
  • The dismal situation of income tax collections
  • The social unrest caused by the lack of jobs

In other words he has connected many dots. Debt is a common thread in all these problems. Slowly but surely Vivek has put the pieces together. I believe a clear picture is emerging. A picture that explains how these are all linked to India's debt bubble.

But the best is yet to come! Vivek has informed me that he has something big on his mind. Something that will blow the lid of the debt bubble... and expose the lie. This got me really excited.

I can't reveal too much at the moment. But I can say that Vivek has put in a lot of hard work. And he has put together something that is truly eye-opening.

More to come. Watch this space.

Which according to you are the biggest lies of the government? Let us know your comments or share your views in the Equitymaster Club.


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2:31 Chart of the day

The economy is showing early signs of recovery. At least this is what the latest government data seems to suggest. The economic growth engine accelerated in the fourth quarter of FY16. Powered by strong growths of 8.6% and 9.3% respectively in manufacturing and mining, the GDP grew by a robust 7.9% in the last quarter of the financial year 2015-16. The recovery was also aided by the agricultural sector that rebounded and recorded a 2.3% growth in 4QFY16 compared to a 1.7% contraction in the previous year period. As a result of the smart uptick in the last quarter, the GDP growth for FY16 stood at 7.6%. This is not only faster than the growth of 7.2% recorded last year but is the highest growth rate in last five years. Therefore, India continues to be the fastest growing economy in the world, ahead of China that clocked growth rate of 6.7% in March 2016 quarter.

India's resilient growth amidst a global slowdown is attracting a lot of attention. Recently the Prime Minister of Singapore hailed India as a beacon of hope and the potential to drive the world economy for the next 10 years. According to him, the world economy can now depend on India for the growth push and it is not just China the world needs to depend on.

However, India's new-found growth optimism needs to be taken with a pinch of salt. While consumption has improved in FY16, capital investments continue to remain low. The Gross Fixed Capital Formation in the country grew by a slower 3.9% in FY16 compared to 4.9% in FY15. And the World Bank's change in the classification tag for India is clearly a wake-up call. The World Bank recently changed the status of the country from 'developing' to 'lower-middle income' based on poor performance on parameters such as electricity generation, sanitation facilities and labour force participation rate. Therefore, clearly the country needs to focus on inclusive infrastructure development if it has sustain the growth momentum in future.

Can the Revival in Economy Be Sustained?


3:44

Demand for gold has waned in 2016. After hitting a seven-year low in the first quarter of 2016, gold demand remains weak. A jump in gold price coupled with a strike by jewellers had earlier dampened buying. The jewellery industry had been on a strike from March 2016 till mid-April to protest against the one per-cent excise duty imposed on gold jewellery by the Union Budget 2016. But even after the withdrawal of the strike, the demand has not picked up. As a result, bullion dealers and jewellers have been saddled with huge unsold stocks of gold and even the gold imports have fallen considerably. The government has recently rolled back the threshold limit of Rs two lakhs for imposing tax on cash purchase of gold jewellery. Therefore, cash purchase of jewellery of upto Rs 5 lakhs will now not attract tax collected at source of 1%. This is likely to provide some relief to the jewellery industry that had been hit by low demand and unsold stock.

4:45

Indian stock markets opened the day in the green and continued to trade firm. The BSE Sensex was trading higher by 115 points (0.4%) at the time of writing. Telecom, and FMCG were the biggest gainers.

4:56 Today's investing mantra

"Price is what you pay. Value is what you get." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Madhu Gupta (Research Analyst).

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11 Responses to "Watch Out! A Huge Bubble is Building Up in India..."

manohar kantak

Jun 18, 2017

Every Government has been doing the same thing, today we are seeing cumulative effect of all their past actions. India is a big country with people having different attitudes. Shutting down Air India will lead to media hijacking the Government . The unemployment problem , the employee strike and hunger strikes, fellow politicians joining the orchestra to make it more realistic. So also the case with MTNL and other PSUs. We cannot expect a single government to do away with all problems in such short period. It is possible in a nation where 100 percent population is patriotic.

We have to allow the bubble to burst and then change the government and wait for the change, or a war has to break out. That is the normal economic solution for such situation.

Like 

Viswanath

Jun 6, 2016

Price rise, inflation happens and observed immediately but not the growth. Its like the huge tides happening in middle of ocean, only small and faded ripples are seen at the shore. So for the growth to be visible in remote parts of villages would be in terms of assets (agricultural lands) appreciation, and some ring roads around those villages, people in villages having sufficient money to be more relaxed etc..

Like (1)

prabakaranboopal

Jun 3, 2016

I also share the same view as vivek kaul. His article r enlightening and speaks with reason. It is true the GDP do not reflect the field situation. So I am also waiting for d good time. But will it come?

Like (1)

Prashant Pathrabe

Jun 3, 2016

Ankit Your analysis of the country's economic situation and the argument that the bubble is going to burst is fine.It makes logical sense.BUt I find there is some contradiction.On one hand Equitymaster is talking of this bubble and saying the stock markets are probably going to crash.On the other hand there is a recomendation that the stocks will go up and Sensex will go up to 40,000 level.How do we reconcile this contradiction?

Like (4)

prashant

Jun 2, 2016

The Cash and Current Investments of PSUs are in what Rs Crores: Rs billion ?????

Like (4)

RAJENDRA I WAGHULDE

Jun 1, 2016

I do not agree on some of the points. Regarding LIC, returns as per your article are around 7% but as compared to other investment policies like HDFC saving assurance plans these returns are far better. I personally experienced this.

Like (1)

Ronak Vyas

Jun 1, 2016

You are talking about bubble and the other person in equitymaster is talking about 70% upside in market in next three years. Is this joke or what ? Whom should i trust and with which person should i go ?

Like (7)

Prakash R Mirpuri

Jun 1, 2016

The questionable GDP numbers
The major problem with LIC
The mess in PSU banks
The government's bailout of steel firms
The repeated hikes in excise duty on crude oil
The dismal situation of income tax collections
The social unrest caused by the lack of jobs

All of the above are unquestionably true.
There seems to be no real growth. Inflation is the only growth,

Like (7)

krishna Murthy

Jun 1, 2016

Observation is hard truth, but Govt is not lying, but not disclosing the bubble. The state govt ( Like TN, KN, Up,B etc) borrowed money from the public institutions in exponential ways and not putting the money on real productive use. All the money borrowed is used for unproductive and looting purpose only. Hence the bubble is hard truth.

Like (7)

a.n.kuriakose

Jun 1, 2016

eye washing GDP growth and other eye washing data's to fool the for vote bank .Biggest lies of infrastructure, digital india, zero bank account opening etc. previous govt.'s build on policy(leave the scams) with new dressing present govt getting the claps from the poor/ignorant people. it is only a oratory gimcs.

Like (7)
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