India's nuke disappointments and more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India's nuke disappointments and more... 

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In this issue:
» What's worrying Indian markets?
» Bank of England raises inflation alarm
» Nuke disappointments for India
» It's raining cement in Moscow
» ...and more!

00:00 India maange more!
Crude oil, that is. Saudi Arabia has called for a meeting of the major oil producing and consuming nations in Jeddah on June 22. It remains to be seen if the Indian oil minister will attend the meet. But he has urged his Saudi counterpart none the same to coax the other producers to raise output. The Indian petroleum ministry believes that it will reduce volatility and stabilise oil markets. In the long run, that will promote economic growth of the consuming nations, especially India and China, and benefit all involved parties. It may be noted that the Saudi government has recently decided to raise output of oil by half a million barrels per day.

  • Read more - What makes the Saudis nervous?

    Given the importance of crude oil in the Indian growth story (It is Asia's third-largest oil consumer, importing around 70% of its requirements), we wonder why more isn't done to handle the crisis? Public transport needs to be strengthened and encouraged. Efficiency measures like promoting radial tires for heavy vehicles would also help save fuel. Eventually though, India has to take policy measures like a market price mechanism for petroleum products and simplification of the accounting of prices, duties and subsidies.

    00:47 In the meanwhile...
    Indian stocks closed in the red today with the benchmark index - the BSE-Sensex - declining by almost 2%. This is unlike other Asian markets, which closed in the positive earlier today - China was up 5% while Hong Kong closed with 1% gains. European markets are currently trading in the red. This seemingly followed heightened concerns on the performance of the banking sector, following Goldman Sachs' yesterday warning that US banks would need to raise US$ 65 bn to shore up balance sheets. The investment bank has also warned that the global credit crisis will not peak until 2009. Riding these concerns and uncertainties (as also on the back of decline in the US dollar) gold prices have edged up by almost US$ 3.5 per ounce in today's trade. The yellow metal currently trades at US$ 885.7 per ounce.

    01:15 What's worrying the Indian markets?
    There's no stopping the spectre of rising inflation as it continues to cast its spell on Indian stock markets. Rising prices of fuel and food and a sharp depreciation in the currency has led to enhanced fears regarding inflation touching even higher levels. And even then, it is important to note, the inflation (measured by wholesale and consumer price indices) figures outlined by the RBI and other statistical organisations remain understated, for facts like the rising crude prices that have not been passed on to the consumers by way of higher prices for petrol, diesel and kerosene.

  • Also read - What's keeping policymakers worried?

    In this scenario, stocks from the oil and gas and rate sensitive sectors have been particularly hit. Pressure on stocks of companies that require high levels of capital investment is also showing no signs of abating. And then there is the fear of the economy slowing down on the back of high interest rates that have curbed money demand, both for consumption and investment. Without trying to sound overtly unnerved about these issues that dog sentiments, we believe that the pain is here to stay for the short to medium term.

    01:55 UK says time's up, US will wait
    The US central bank, Federal Reserve, has hinted that it might take a longer look at inflationary pressures before deciding on an interest rate hike. On the other hand, as reported by the International Herald Tribune, inflation in Britain has accelerated to its ten year high (to 3.3%), further tying the hands of policymakers who are already grappling with a slowing economy.

    In fact, the situation in Britain, as in the US, is turning into a sort of a stagflation (rising inflation in a situation of slowdown in growth). The Bank of England has further warned that inflation could rise above 4% levels in the second half of 2008, largely on the back of higher energy costs. This would really limit options it has to cut interest rates in order to spur economic growth. The Indian central bank, the RBI, has already taken a lead when it recently raised short term lending rates for banks (the repo rate) by 0.25% to 8%.

  • Also read - RBI mincing no words

    02:30 They call it 'China plus one'
    Multinationals having manufacturing presence in China, and worried about soaring costs (wages, for instance, are rising 25% annually in dollar terms) and other upcoming issues in the dragon nation are looking out for diversifying operations in other emerging markets like Vietnam. As reported by the International Herald Tribune, these companies' 'long list of worries include rapidly rising labor costs, shortages of workers and energy, a strengthening currency, dwindling tax breaks for foreign investors and the possibility of civil unrest'.

    However, as reported, the kinds of jobs that are being shifted from China to elsewhere in Asia tend to the low-skill, low-wage kinds. This is considering that China is deliberately focusing on ramping up its presence in the high-skill, high-wage industries like precision machining and computer component manufacturing.

    A similar sort of movement has also been seen in India of late, where multinationals are shifting service jobs (especially in the technology and back office outsourcing spaces) to other low cost regions like the Philippines and Indonesia. This is again considering rising wages of 15% to 20% in the Indian IT space, rising rentals as also a shortage of talent. Indian IT companies, in the meanwhile, concentrate on moving up the value chain by providing high-end jobs like package implementation, IT consulting systems integration and software products to their clients overseas.

    03:12 What could impact India's manufacturing dreams?
    Have you heard of this 'terrorism' of a different kind? It's called 'Naxalism', a phenomenon that is impacting the rise of India's manufacturing set-up. People who follow Naxalism, called the Naxalites are insurgents who seek the violent overthrow of the state and who despise India's landowning and business classes. As reported in the latest issue of Business Week, Naxalism is a big threat to India's economic power, even 'more damaging to Indian companies, foreign investors, and the state than pollution, crumbling infrastructure, or political gridlock'. The attacks on Essar Steel's factory in Chhattisgarh in April and earlier attacks on Tata Motors' small car plant in Singur (West Bengal) are examples of this rising insurgency.

  • Also read - What's holding India back?

    The report further states that 'just when India needs to ramp up its industrial machine to lock in growth - and just when foreign companies are joining the party - the Naxalites are clashing with the mining and steel companies essential to India's long term success. What is more, the Business Week report talks about the threat that Naxalism can have on establishments (of retailing, outsourcing and finance) in Indian cities. A non-uniform progress that India has seen ever since Independence in 1947 has been the genesis of the Naxalite movement (which started way back in 1967). If the cause of unequal distribution of wealth between the haves and the have-nots is addressed, we believe the problem will also get reduced to the minimum.

    03:53 Nuke disappointments for India
    Political uncertainty over the nuclear deal with the US continues to loom large over investor sentiment, as a meeting between the government and its communist allies to break a deadlock over the deal has been postponed. The communists have opposed the deal that could meet some of the country's energy needs, saying it compromises India's sovereignty and security and have threatened to withdraw vital support from the ruling coalition.

    At a time when there is an imminent need to plug in to alternate sources for India's gaping shortage of energy resources, the political parties' unwillingness to arrive at a consensus threatens the sustainability of the economy's growth pace. It also shows signs of political instability at the brink of elections. Having said that, nuclear energy resources have their own set of problems and may not be the only source of energy that India needs to tap in the future.

    04:25 It's raining 'cement' in Moscow
    In a move to seed clouds* to prevent rain from spoiling a holiday, air force planes dropped a 25 kg sack of cement on a suburban Moscow home last week, making a hole about 80-100 cm on the roof of a house! As reported by Reuters, 'ahead of major public holidays, the Russian Air Force often dispatches up to 12 cargo planes carrying loads of silver iodide, liquid nitrogen and cement powder to seed clouds above Moscow and empty the skies of moisture'. The fact that cement failed to turn to powder has left the country's weather specialists flummoxed, who have indicated that this was the first such incidence they have seen in 20 years!

    Probably this can be a way out for people in Mumbai from the rains that wreak havoc year after year on the city's infrastructure and many a lives. Is the state municipal commissioner listening?

    * As defined by Wikipedia - "Cloud seeding, a form of weather modification, is the attempt to change the amount or type of precipitation that falls from clouds, by dispersing substances into the air that serve as cloud condensation."

    04:54 Today's investing mantra
    "The four most dangerous words in investing are - 'This time it's different'." - Sir John Templeton
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