The growth drivers in India that everyone is ignoring - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The growth drivers in India that everyone is ignoring 

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In this issue:
» Austerity measure to save India Rs 10 bn
» Govt. hurting hotel business?
» As Japan stops saving, a crisis looms
» Is US dangling on the brink of recession?
» ...and more!

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India's economic growth fell to 5.3% which is a nine year low. The number sent shockwaves through the investor community which was expecting lower growth. But no one expected it to be so bad. Things have not really been looking too good for India. International ratings agencies have downgraded the country's sovereign rating. There are rumors that India would have to exit the BRICs club as it would be unable to get back to the stellar growth rates it had become used to. The government has naturally been blamed. But despite all this gloom, there is one man who still continues to be optimistic about India's future. And that is none other than Mr KV Kamath, the Chairman of Infosys and ICICI Bank.

Mr Kamath has stated that though India has seen headwinds in the recent past, there are several indicators that things would get better soon. He opines that there are several indicators that indicate towards this better growth that most people have ignored. For instance corporate revenue growth is still intact. This shows that there is demand in the country. Therefore the consumption driven story still holds. True that profitability has not kept pace with the revenues. The biggest reason for this is higher commodity prices, fuel costs, interest and exchange rates. The first two elements of this have seen prices cooling off. It is only a matter of time that the other two would see a trend reversal as well. Once this happens, corporate profitability would be back on track. This in turn would boost investments and drive the country's economic growth.

However he has stated that the government built obstacles has hurt the growth of some sectors particularly for infrastructure. And this is where the problem lies. Though the government appears to have woken up to this problem, it needs to start working on the solutions as well. Once it does the long term growth for the country would be back on track. But when this would happen is something that only time will tell.

Do you think India would get back to the high levels of economic growth that we had seen in the past? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:05  Chart of the day
A slew of policy issues and government inaction has hurt infrastructure projects in the country. Problems related to land acquisition, getting environmental clearances have led to several projects being shelved or stalled. Unfortunately for the past few quarters, the number of stalled projects has just been going up. The Prime Minister in his speech with key economic ministries has cited the need to push infrastructure investment in the economy. Unfortunately till the roadblocks and hurdles are removed, the number of stalled and/or shelved projects will just keep going up. No matter what the Prime Minister or anyone else has to say about it.

Source: The Mint

Over the last few years, the world of finance has been abuzz with the term 'austerity'. In economic parlance, austerity means a policy of deficit-cutting by cutting down on government expenditure. Years of reckless spending and mounting debt burdens have forced several developed economies to resort to austerity measures.

While India hitherto seemed resilient to all the global economic chaos, its vulnerabilities have been exposed in recent times. The country is facing problems of high fiscal deficit and high current account deficit. In response to these challenges, Finance Minister Pranab Mukherjee recently announced some austerity measures. What are these measures? For one, foreign travels of ministers and bureaucrats will be cut down. It will be allowed only when absolutely necessary and in the interest of the nation. That too, in economy class! Second, there will be restrictions on meetings at five-star hotels. There are some other measures as well such as ban on purchase of new vehicles by government departments (except defence) and ban on creation of new positions. Such measures are estimated to help the government save money in the range of Rs 8 to 10 bn. Not too big an amount to make any substantial improvement in government finances. Though welcome, are these really austerity measures? To us, they mean that the government was having a merry ride all this while at the expense of tax payers.

And while we are on the topic of the Indian government's austerity measures, what will be the impact of a ban on holding department meetings and conferences in five-star hotels? Indeed, this move by the government is already having a negative impact on the hotel industry. The hospitality industry is already under pressure due to the economic slowdown. Even as hotels face pricing pressure, costs are on their way up. Gross operating profits for hotels in FY12 were down 12-15% from a year ago. This was largely because of inflation and an increase in labour costs. Corporates are also not spending as much on conferences and meetings as they did earlier. There is a reduction in corporate travel as well. This is across both Indian and multinational companies. Thus the economic slowdown coupled with government's austerity measure will ensure that the sector remains under stress for few quarters to come.

A drop in savings rate is not just a worry for India. Our current account deficit certainly makes the trend worrisome. But the situation is not very different in an economy like Japan. Even when the current account figure is in surplus. Current account balance can be expressed as the difference between gross national saving and investments. This is by consumers, businesses and the government. Ideally, in an economy, consumers followed by businesses should be the biggest savers. But Japan's ageing population is not allowing this trend. Meanwhile the government persists with its deficit. Its gross saving is negative and gross investment is positive. That leaves the corporate sector to make up for the shortfall. Japan's corporate sector has been making up for the consumers' saving shortfall for long. Its capex have fallen while export earnings have grown. Businesses, therefore, have seamlessly replaced consumers in financing chronic government deficits. However, with exports falling, this trend is unlikely to last long. Thus fall in savings and high government deficits could sink the ship of quite a few economies. It is time for policy makers act more decisively.

Hundreds of billions of dollars have been spent. But to no avail as experts feel that the US economy still seems to be dangling on the verge of a recession. One such expert is the legendary investor Wilbur Ross. The maverick investor is of the view that the world's largest economy is poised to slide into a recession. As per him, an anaemic job growth, weak industrial production figures and leveraged consumers are combining to paint a grim picture of the US economy going forward. He even took a jibe at the present administration arguing that the Government doesn't seem to be doing enough to stem the decline.

We couldn't help but agree with Mr Ross, especially on his last point. One of the major reasons the US is suffering is because of the frequent Government intervention as per us. By not letting the forces of free market do the clean up act, it has only made matters worse. The result being that a lot of zombie firms and financial institutions that should have been dead in the first place are still surviving and using up important resources of the economy. We believe a true recovery will only come when bad investments are liquidated and unfortunately, there seems to be no sign of the same on the horizon yet.

Will he announce QE3? Or won't he? This was the question foremost in the minds of most global investors before the US Fed Ben Bernanke's testimony yesterday. For the time being, the Fed chief has decided to 'wait and watch' and has put QE3 on the backburner. Especially since the Fed is of the view that the US economy was picking up at a 'moderate' pace. We are not sure if that is really the case. With massive debt and high unemployment, the sustainability of a recovery seems doubtful. However, we believe that introducing third round of quantitative easing is not really going to help matters either. The Fed introduced 2 rounds of quantitative easing (QE) after the financial crisis. While there was some sort of growth reported as a result of these measures, it proved to be more of a short term nature. Some basic and big issues continue to haunt the US. So a third round also would probably not have achieved much either other than signal the downfall of the dollar going forward.

In the meanwhile, after opening the day in the red, the Indian equity markets continued to trade in the negative zone. At the time of writing, Sensex today was down by 86 points (0.5%). Stocks in the information technology and banking space are witnessing maximum losses. Among the stocks leading the losses were Infosys Ltd and Oil and Natural Gas Corporation Ltd. The other major Asian stock markets have closed the day on a negative note as well with Japan and Taiwan leading the losses in the region.

04:50  Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch
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6 Responses to "The growth drivers in India that everyone is ignoring"

Prasanta Mazumder

Jun 9, 2012

It is one thing to be optimistic, however it is something different to act like a prophet and know-all. I have seen that Mr. Kamath many time act like a prophet. And it is dangerous to follow or believe some one like that. I distinctly remember in late 2007 once rupee appreciated to 39 to dollar, he prophetically declared that going forward he expects the rupee to appreciate on the average one per year, i.e., in 10 year you can see rupee reaching may be in the range of 29! And only after few days he declared that, rupee start depreciating and now it reached 56. Now, such a highly educated business doyen completely misunderstood the sub-prime crisis, housing boom, artificial control of interest rate by FED and all the macro-economic issues. So, moral of the story is that no one can predict future. All they do pretend and guess, many times they are correct just, probabilistically correct and shout "I said so!" and they keep quiet otherwise. So, don't get sway by them, take your cover and do appropriate investing.

Like (2)

Kuldeep Nayar

Jun 9, 2012

Whatever Mr. Kamath (for whom I have a lot of respect) or EquityMaster (Ditto) may opine, India's consumption story will remain volatile and sluggish. Why? Because unless politicians become statesmen and not degenerate into warlords, nothing positive will be sustained. Too many things need to be fixed and this cannot happen if politicians remain fixated on their own privileges, cultivating cultural, caste, religious divisions for their short term goals.

Like (2)


Jun 9, 2012

Re: Gov't budget and subsequent actions: The government has destabilized the investing environment vide: retroactive tax measures and partially withdrawing or delaying some negative tax measures for 1 year ?! FDI and NRI investors want a somewhat predictable cost analysis for their investment decisions. Changing the cost environment RETROACTIVELY is one of the worst no-confidence builders, who wants to invest in a robust economy if the playing field rules are to be changed retro ? Then Pranab's delaying for 1 yr implementation of certain tax measures just pulls the plug for any confidence we had for investment. TRYING TO TAX ONE'S WAY TO SOLVENCY IS A SURE FIRE WAY TO DECREASE THE FDI INDIA SO DESPERATELY REQUIRES FOR INFRASTRUCTURE DEVELOPMENT

Like (2)


Jun 8, 2012

Government of any country is the single most important factor for the country's economy, and in that matter, the strength we had in 1991 has gone a 180 degree negative turn currently. Not a single project can we hear which goes without a problem or a scam and meddling by ministries/ministers - CWG, 2G, Coal block auctions, NREGA, Highway projects, oil/gas blocks, illegal mining and now we hear that a central minister is meddling with a wonderful project like the UID for his selfish gains. Parliament's reluctance to pass efficient laws against corruption and black money is a clear indication that they don't want India's good, but their own. Government in India has clearly lost people's confidence and whatever they do from here could just be a bonus, yet not enough to restore India's pride.
Good governance could have easily stamped out ill effects of a global slowdown significantly. But we are not that lucky!

Like (2)


Jun 8, 2012

Mr. Kundapoor Kamath is in LaLa Land. His belief is as much a hoax as the Prime Minister publicly proclaiming of converting Bombay into Shanghai. Mr. Kamath should focus on improving InfoSys now. Running ICICI is different from making Macro Projections on a declining economy bereft with corruption and cronyism. Everything in India is rigged from industry to sports.

Like (2)

Kishan Sharma

Jun 8, 2012

India will come back on track of high growth only after the present anti-industry govt is voted out and a new, development-friendly govt takes over.

Like (2)
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