India, a big outperformer - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India, a big outperformer 

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In this issue:
» Indian bureaucracy the least efficient
» Outsourcing story is here to stay
» High interest costs are troubling most nations
» Indian market cap breaches the US$ 1 trillion mark yet again
» ...and more!

India has always been a land full of surprises for the outside world. And if Stephen Roach, Chairman of Morgan Stanley Asia is to be believed, India may throw up yet another surprise. In a recent interview, Mr. Roach opined that India could actually outperform not only the world, but also the entire Asian region by a big margin.

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He expressed how he suddenly finds himself very optimistic about Indian, even more than China. His reasoning for the same is that amongst all the micro and macro strengths that India has, what was missing so far was political impetus to reforms. The recent elections have now changed that too. He feels that the Congress, free of coalition politics, will now be much more active in pushing reforms on a number of fronts and that will make all the difference. "Wouldn't it be ironic that when the world has completely embraced the Chinese miracle, the real surprise in Asia could be India" said Mr. Roach.

Although the Indian stock markets are having the world in their stride, the same cannot be said about its bureaucracy. Sadly, the Indian bureaucracy has been voted as the least efficient among the 12 Asian economies that were surveyed by a Hong Kong based consultancy. "They are a power centre in their own right at both the national and state levels, and are extremely resistant to reform that affects them or the way they go about their duties," said the report, which involved inputs from more than 1,200 expats working in these countries. And India was not the only sufferer. Even China saw its ranking slip two places to 9th.

The results may not have come as a surprise to those residing in India as most would have had a firsthand experience of the slothful ways of the Indian bureaucracy. To our misfortune, the amount of economic output lost due the bureaucratic delays cannot be readily calculated and hence, cannot be dealt with effectively. But if some studies are to be believed, improvement on this front alone could easily add a couple of percentage points to India's GDP growth.

However, the task is far from easy. For one, the size itself is huge and second, years of getting used to a certain type of work ethic will make shrugging it off a very difficult proposition, especially when there are some pretty strong vested interests at work.

Just like all of us, when the expenses of our government exceed its income, it has to borrow from the market to fill up the gap. And this also means that it has to pay up the interest costs on those borrowings. In normal times, governments that run small deficits pay out only a small proportion of their income on interest. But these are no normal times and hence, with the heavy duty borrowings that most governments have resorted to, it is being estimated that the interest expenses on these borrowings are likely to punch a big hole in their finances. And if interest rates rise, then the problem becomes even more severe as is happening with the US currently.

The New York Times says that even a single percentage point increase in interest rates could cost the US Government an additional US$ 50 bn annually over a few years. The same saga is being repeated elsewhere. In fact, S&P, the ratings agency has threatened to lower England's ratings to negative from stable, its first such step since 1978, as it finds the country in a difficult position vis-a-vis its servicing of debt. The problem is so severe that some believe that countries like US are in a long term structural decline as it will take years for the government to reduce its interest expenses and this means that it will have less money to spend on other needs like social welfare and education.

Ever since it became clear that the US will have to resort to massive money printing to kickstart growth, more and more nations have been thinking of phasing out the dollar as a medium of transaction. Now, even Malaysia has joined the ranks. "We can consider whether we can use local currencies to facilitate trade financing between our two countries," the Malaysian Prime Minister was believed to have quoted on the sidelines of a four day visit to the dragon nation.

In view of its growing economic clout, China has been strongly advocating the idea of replacing dollar as the global currency with a basket of currencies thus making it less dependant on the fate of any one economy. However, the task could be easier said than done. China's currency is years away from being liberalized enough to be used as a reserve currency and apart from China, no other nation seems to have the wherewithal to challenge the US under current circumstances.

What a roller coaster ride the past one and half year has been for the Indian stockmarkets. The beginning of last year saw the stockmarkets plunge and the rupee depreciate steeply as the global financial turmoil took its toll. But the recent rally in stocks and the strengthening of the rupee has led the Indian stockmarkets to cross the market capitalization of US$ 1 trillion for the first time since the collapse of Lehman Brothers.

Signals of an economic revival across the globe and high expectations from a stable government at the centre have increased the attractiveness of equities in India. This has been been further reinforced by the frenzied activity of the FIIs who have poured in a mind boggling Rs 313 bn into Indian equities in the past three months. And the notable fact is that the damage that was done by persistent selling in six months has been made good recently in half that time.

The Union Budget will act as an important catalyst in determining the movement of the stockmarket, but the way things are now, there are strong hopes that the indices will only scale higher.

Global downturn has rubbed many businesses the wrong way. But outsourcing is an area which seems to be getting benefitted as companies attempt to cut cost and improve operational efficiency. India, for some years now, has been on the better side of the equation with a huge pool of fairly priced well-educated English speaking youth. In contrast, the developed nations in the West are plagued by sky-rocketing infrastructure and health-care costs of an ageing population.

Though the political pressures build up to keep the jobs at home, it makes better business sense to trim costs through outsourcing jobs to countries like India. This is the reason why global companies continue to invest in India, even if curbing costs back home. Hewlett-Packard (HP) hinted at plans of establishing "HP Software University" in eight Indian cities to train in software testing. Honeywell International plans to invest US$ 50 m in an R&D facility to be set up in Bangalore. There's many more to come.

New business is coming from all verticals and geographies. As the demand is upgrading to sophisticated, high-end services, supply side is also learning newer skills. This is a good sign for the Indian IT and Outsourcing industry which is all set to breach US$ 50 bn revenue in a couple of years.

Mixed trend was witnessed today amongst Asian indices. Sensex, the Indian benchmark managed to remain in the positive camp as it ended higher by nearly 1%. Most of the European indices are also trading in the positive currently.

04:45  Today's investing mantra
"A disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets." - Warren Buffett
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8 Responses to "India, a big outperformer"

S.L. Narasimha Rao

Jun 7, 2009

I say that the Indian bureaucrats are the most efficient in passing the buck, making you go round in circles, making rules for not working and preserving the status quo of the medieval times.

The GDP will be doubled from the current level if they work like those in USA.


Zainab Lotiya

Jun 5, 2009

My self zainab lotiya, I am regular reader of your Five min wrapup. It is very systematicaly precise & gr8 part is: it is in easy language. But I have some douts which are as below:
1. How i could rely on your data's.

Some Suggestion :
1. Give me some details regarding what should investor do?. where to invest in this volatile market Meanse that you to start Five min tips for investments.


Balan Bhaskaran

Jun 5, 2009

Absolutely meaningful report capturing various aspects of Indian Business and Economy. Lots to read in between the lines for those who are investing money in the share market.

A lot of information is captured and presented in a single write up. Readers are spared the need to scan 4 or 5 News papers!!

Keep going and good luck.


Pooja Tandon

Jun 5, 2009

Dear Sir,

I Pooja Tandon recently start trading. I want to know which are the good share which i should buy and good return on that . Please specify the company name.

Really good reports which u send to me.

With Regards,
Pooja Tandon


k r ramakrishnan

Jun 4, 2009

Your wrap up is lenghthy and not informative regarding investment guideline. Henceforth please stop forwarding the message to my mail id.



Jun 4, 2009

An excellent writeup with deep insights.Summary is very convincing.I think you should to collect/compile the the estimates of deficit finances that may be presented by the FM in his budget in respect of previous year. You may try to analyse The President' inaugral address which contains several hints of the likely initiatives by the New Govt.


pravin janrao

Jun 4, 2009

i am the regural reader of your five min wrapup it contain good news on the mark understandable to anyone
keep going !


capt. s. chagla

Jun 4, 2009

agree totally-lazy-upper class,ministars 99.999999%,police
85%,'babus' 100% a legacy by the british,"secular" is a joke!,basic jawans excellant but in delhi army/navy crap;
airforce 20%bad,large companies/builders 100% corrupt but
only via there clerks,INDIA must have two politician's Just U.S.A.;Next India is a 'soft country'...see Israilis!
politician's into the pature after 68years.

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