'India has some serious problems' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

'India has some serious problems' 

A  A  A
In this issue:
» The RBI cannot cut interest rates
» India Inc shops abroad on the back of cheap loans
» Is India close to an economic crisis?
» Shutting QE would help US Dollar
» and more....

The past few weeks have not been good for India. The economic numbers were not heartening. The currency nosedived. The political picture did not look too good. And the stock markets were all over the place. As such a large chunk of FII money left our shores as well. The exodus was more pronounced in the debt market. A lot of people have said that the main reason for this is the expectation that US would taper off its QE program. And in time things will get better. Nevertheless there is one investor who continues to maintain a bearish view of India. That is none other than the legendary investor Jim Rogers.

In a recent interview carried by Financial Express, Mr Rogers has stated that India has some very serious problems. It has a deficit problem that just does not seem to be going away. Inflation has been rearing its ugly head time and again. And to add to this is the problem of the weakening currency. As such he thinks that India is probably the worst placed emerging market at the moment. Therefore in the event that foreign investors start to sell, India would be the first to get hit. And foreign investors will sell if the US shuts its money printing presses.

It is true that if the US tapers off its QE policy then there is a big chance that FIIs would pull out their money. But this is true not just for India but pretty much for all asset classes across the world. The flood of cheap money had resulted in bubbles created in nearly every asset class. Emerging markets stocks was one of them. And if the flood is stopped then these bubbles will burst.

And yes if this happens then India probably is in a bad place. The twin deficit problem has been eating our economy away. Economic growth has slowed down. A reason for this is that investments have been drying up in the high interest rate environment that was set up to control the raging inflation. Unfortunately with the Rupee taking a free fall, the Reserve Bank of India (RBI) cannot reply on the option of cutting interest rates. So does it mean that India is stuck in this rut and has no way of getting out?

Well there is one way. What India needs is for its Finance Minister and government to wake up and smell the coffee. They need to speed track reforms and remove internal bottlenecks so that the investment environment becomes more conducive. That will give the boost that the economy needs.

Do you think India is in serious trouble? Please share your comments or post them on our Facebook page / Google+ page

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01:10  Chart of the day
The wholesale inflation in India as measured by the WPI (Wholesale Price Index) seems to be easing. In May 2013, it had come down to 4.7%. This would lead many to breathe a sigh of relief that the ugly monster of inflation has been controlled. But if you go shopping for your groceries, the relief would be short lived. This is because food inflation has continued to remain high. As seen in today's chart, food inflation increased from 6.08% in April to 8.25% in May. Prices of rice, cereals, wheat and poultry have registered a double digit rise. The prices of food items have remained high even while other sources of inflation have come down in recent times. One reason for this was the severe drought that had gripped many parts of the country. Hopefully the monsoon showers would ease the prices of food in the coming months.

Source: Financial Express

Let the rain gods be generous! Amen! This seems to be prayer that the RBI governors are mouthing even as the economy remains finely balanced. In the central bank's own words, global growth at best remains 'patchy'. Hence the RBI was not able to derive much confidence from the possibility of lower interest rates fuelling growth. The only hope remains in the form of good monsoons. Since the showers have come in early, the central bank is hoping that a good crop could stem food inflation. The RBI also hoped that revisions to the minimum support prices (MSP) for crops will bring food inflation under check. Lower inflation will give it some headroom to lower borrowing rates. Plus a good crop could also bring more purchasing power in the hands of rural populace. That automatically will mean more consumption and industrial demand.

For the time being however, the RBI chose to keep its fingers crossed. The monetary policy review today did not see any changes to key rates, be it the repo rate, bank rate or cash reserve ratio. Though a non event, it clearly signaled the fact that managing growth rate is not the central bank's job alone. The government needs to do more than relying on lower commodity prices and dampening gold imports to curtail current account deficit (CAD).

India Inc's appetite for M&A activity seems to be back with a bang. This has primarily been due to two reasons. First has been the availability of foreign loans at cheap rates. Indeed, rates overseas have been quite low because of loose monetary policies followed by governments of the developed world. As a result, the cost of funding for foreign banks such as Citigroup, Standard Chartered and Deutsche Bank has been low. And so they have been able to lend at cheaper rates as compared to Indian banks.

Second, many Indian corporates are looking to expand abroad. The Indian economy in FY13 slowed down to the lowest level in a decade. Large part of this has been due to the ineffectiveness of the government in implementing key reforms. Problems relating to securing land, environmental clearances, regulatory approvals for mining projects, various other supply bottlenecks have thwarted growth for years earlier and continue to do so even now. Doing business in India continues to remain a challenge. That is why quite a few Indian companies have stated their intention of expanding abroad. Thus, as long as the differential in interest rates back home and abroad exists, one may continue to see a flurry of M&A activity. But how long this trend will sustain remains to be seen.

What is one of the hottest political topics being debated in India right now? Apparently, it is about who will be the next Prime Minister candidate. As always, the personal agendas of politicians appear to be at the forefront. But is this the most critical issue facing India right now? As an article in Livemint very aptly highlights, Indian politics seems to be totally disconnected from the economic reality.

For one, the Indian policymakers seem to have undermined the extent of the impending economic crisis in the country. We cannot excuse ourselves by shifting the blame entirely on the crisis in the global economy. What India is currently bracing is not just a temporary blip. It rather seems to be a far deeper structural crisis to which there is no quick solution. In simple words, the economy grew at the rapid pace in the previous decade. But India lacked the social and economic infrastructure to sustain the high growth rate.

There is still a serious dearth of crucial physical infrastructure. As far as employment is concerned we have a very ironical situation. On one hand, there is a severe shortage of jobs. One million people are entering the workforce every month. Against this, only 2 lakh people are absorbed in an entire year. On the other hand, there is a shortage of skilled manpower. The idea of 'demographic dividend' appears to be a grand delusion.

The worst is the policy mechanism. Policymakers have failed to bring in timely reforms to keep India on the path of development. Issues such as rising income inequality, poor education, and lack of drinking water in many areas are some very pressing concerns. But apparently, political ambitions seem to be the priority for this country's so-called leaders. Other issues, however important, may have to wait patiently in the queue.

Sometimes we wonder whether currency movements do indeed have any logic to them. Take the current situation for instance. There's a talk that the US dollar is weakening against the Yen because the US Fed plans of cutting back its quantitative easing. Now, isn't that illogical? Quantitative easing simply means printing more money. And if there's a slowdown in the rate of printing, the underlying currency should strengthen and not weaken, isn't it? However, there are no signs yet of the dollar becoming stronger. Or maybe the Yen has been hammered so badly that it is now coming back to favour. And as a result of the same, dollar is weakening and not strengthening as it should be.

So while we expect dollar to strengthen, it really does not mean that it has got the best fundamentals out there. In fact, it is as much in trouble as other currencies and hence, over the long term, should see its value erode considerably. If not against other currencies, then certainly against gold we believe. And this the reason why we keep harping about the virtues of gold and the importance of having some part of one's investments in the yellow metal.

In the meanwhile after opening the day on a negative note, Indian equity markets are now witnessing buying interest. At the time of writing, the Sensex was up by about 83 points (0.4%). Barring China and Korea, the other major Asian markets have closed the day on a positive note with Japan and Hong Kong leading the pack of gainers in the region.

04:55  Today's investing mantra
"No wise pilot, no matter how great his talent and experience, fails to use his checklist." - Charlie Munger

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    3 Responses to "'India has some serious problems'"

    Gandhi Pankaj

    Jun 17, 2013

    Being election year,how govt.can push reform?



    Jun 17, 2013

    It is a crude and unpalatable truth that the Economy of India is in a very bad and critical stage. The CAD is unmanageable. Inspite of Rupee weakening neither the export is picking up nor the unsatiable comsumption of gold is reduced. It is an unanswered question as to where the funds allocated for development of infrastructure projects go. Just imagine as to what will happen if the umpteen scam money is confisticated and brought into the system. May be India will then shine. Inspite of that seeking reduction of interest rate in inflation situation is totally unheard of in the Principles of Economics. It is purely for the purpose of vote bank. It is mere cooking up that the inflation has come down by citing some useless WPI. People living in the ivory tower should come down and see the plight of BPL (below poverty line). As long as sthe common man or even for that matter the graduates and post graduates do not know about these things and apply their brain India will slowly and steadily slide towaads Nadir. May GOd help India the most ancient country in the world.

    Like (1)


    Jun 17, 2013

    Deeply worried about what is happening to our country. There seems to be no control on imports and no desire to build a business reputation internationally. Then, there is the issue of the fiscal deficit- who is concerned about that?

    A complete litany of problems. When will we see some sunshine?

    Like (1)
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