Will India sparkle in the long term? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will India sparkle in the long term? 

A  A  A
In this issue:
» The culprit behind higher oil prices
» PM says we are not in stagflation
» Real estate befuddles everyone
» Will we see QE-III?
» ...and more!

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India has had a gloomy 2012. Since the dawn of the year, it has seen its stock markets take the route of a roller coaster. Policy paralysis and government inefficiencies have become everyday phrases. Interest rates have been blamed for a slowdown in investments. And inflation has reared its ugly head all over again. As a result, investors and experts have started to rethink their India focused investment strategy. After all sub 8% GDP growth rates do not sound attractive to anyone. But even through this seemingly unsolvable mess there is one man who continues to believe in India. And this is the same man who correctly predicted the crisis of 2008. The man is none other than the famous economist Jim Walker.

In an interview to a leading daily, he has stated that "Indian companies and the country as a whole are an excellent long term investment." Despite the hiccups described above, he feels that as long as the Reserve Bank of India (RBI) continues to do its job, the long term strength of the country remains intact. But he has added a caveat that this is possible only when the government follows the footsteps of the RBI and does its job as well. In his opinion the recent move by the RBI to leave the interest rates unchanged would add pressure on the government. It has been forced into accepting that it cannot rely exclusively on the RBI policies to drive investment growth in the country. It has to do its job through policy reforms and give the economy a general direction for growth. Unless this happens, the dismal growth rates that we saw in recent times would become worrisome and predictable.

Therefore, he has suggested that foreign investors should look at buying Indian market ETFs (Exchange Traded Funds) in US dollars. This would help mitigate the negative impact of the falling rupee. While Mr Walker's advice is more focused on the international investors, his message can be used by the domestic investors as well. The message is clear and simple. The long term case for India remains positive. Therefore prudently select the stocks based on their fundamental strengths and hold on to them for a long term horizon. In the short term there will be hiccups. But in the long term the handsome returns would make all the short term pains worthwhile.

Do you agree with Jim Walker that India remains an attractive long term investment? Share your views or you can also comment on our Facebook page / Google+ page.

01:15  Chart of the day
'Digitization' is the keyword that has become the norm of everything. Starting from television channels to a media for advertising. Digitization is everywhere. Therefore it would not come as a surprise to see digital media becoming more and more popular as a source of advertising. As per leading media buyer, Group M, the share of digital media in advertising has been going up. This is reflected in the healthy growth rates for the industry. Some of the drivers for this growth have been the rise of social media, high speed data services as well as the ability to monitor online campaigns real time. The most important development has been the transition from 2G to 3G/4G which has helped digital agencies upload more content. The greater bandwidth that these data services provide has made this possible.

Source: LiveMint
* Forecast for calendar year 2012

Higher oil prices are weighing heavy on India's economy. As crude prices rose, Indian oil companies earlier had raised petrol price by around Rs 7 a litre. Diesel prices on account of being regulated remained unchanged. However, global crude prices appear to have cooled off a bit. Despite this, oil companies are reluctant to cut petrol prices as well. The culprit here is the rupee depreciation. For a country which imports around 70% of the oil that it consumes, the rupee assumes a lot of importance. Thus, even if global oil prices have eased off a bit, the rupee has fallen further against the dollar making imports expensive. In response to the outcry against such a steep hike in petrol prices, oil firms had undertaken a partial rollback. But whether more such cuts will take place in the coming months remains to be seen. If the rupee continues to fall, it may seem unlikely. From a longer term perspective, government efforts have to be on securing more oil assets and reduce India's dependence on imports.

Global rating agency Moody's believes that the Indian economy is facing stagflation. This is a situation where growth is slow and inflation and unemployment remain high. Interest rates are also expected to remain elevated as the central bank cannot take necessary action to spur growth without worrying about prices. However, Prime Minister Manmohan Singh begs to differ. He refuses to believe that India is facing stagflation, although he admits that there are signs of slowing growth. Well, either way India is in a spot of trouble. Sincere efforts on fiscal consolidation and managing supply side infra issues are needed. Else, sub 7% growth may not just be an aberration.

If there's one asset class in India that has befuddled investors and experts alike, it is real estate we believe. There have been reams and reams of data published over how demand has slowed down in the past few quarters. But there has hardly been any sign of a corresponding softening of prices. In fact if anything, in key markets like the metros, prices have continued to inch higher. What then could be the reason behind his anomaly? A leading daily has managed to highlight quite a few of them. This ranges from not enough units available for immediate possession to a demand supply mismatch in key segments of the market and also to the builders' policy of selling non-core businesses to raise cash and cushion themselves.

Quite creative explanations indeed. But we don't think these reasons, offered mostly by builders, could stand up to any intense scrutiny. Besides, we refuse to believe that builders, whose debt time bombs are ticking away, can manage to hold prices firm for the period that they have managed to. It is clearly the funds sourced from somewhere else that are helping them stay afloat. And unless this nexus is broken, any wish of seeing affordable home prices someday will remain just that, a wish we think.

As debt crisis in Europe and dismal job market data loom large over US economy, the Fed has kept interest rates unchanged and outstretched Operation Twist. However, this by itself can hardly spur the economy and more action could be in the offing. Chances are that Fed may return to printing more money to buy bonds, fancily named QE3, to prop up the economy.

With interest rates already hitting rock bottom, fitting in QE3 with a central bank target inflation rate of 2% is going to be a big hurdle. Also, the failure of previous two rounds of QE to boost economy or employment hardly supports the idea. That said, going by the past, the short term rescue measures have always been favored over long term goals. With other components of GDP growth painting a bleak picture, the only option left is Government spending. If the weak economic cues persist, QE3 could be launched despite the costs and risks.

Is it easy to act independently notwithstanding the interest of your employer? Ask the rating agencies. The risk of losing business in the event of unpleasant ratings has enough influence on the 'independence' of ratings. But they are not alone. Our supposedly independent central bank faces the risk in almost equal measure. Being an investment banker for the government is no easy task. It means ensuring sufficient fund raising for the government at cheapest possible rates.

With liquidity management at its disposal, the Reserve Bank of India (RBI) can easily keep interest rates benign. However, cheap money stokes inflationary pressure. Hence being a good investment banker comes at the cost of sacrificing the role of a good central bank. Moreover, being under the influence of Ministry of Finance also has its own side effects. The RBI's decisions cannot be completely disconnected to political interests.

Economic research agencies have suggested relieving the RBI from government fund raising responsibility. Handing over the same to an independent agency certainly seems meaningful. At least it will ensure that the central bank's reputation of being independent and proactive remains intact.

In the meanwhile, after opening the day in the green, the Indian equity markets continued to trade in the positive zone. At the time of writing, Sensex was up by 115 points (0.7%). Barring information technology, all the other sectoral indices were trading up with stocks in the consumer durables sector witnessing maximum gains. Among the stocks leading the gains were Maruti Suzuki and Gas Authority of India Ltd. The other major Asian stock markets have closed the day on a high note with Korea and Japan leading the gains in the region.

04:55  Today's investing mantra
"Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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2 Responses to "Will India sparkle in the long term?"

girish shah

Jun 25, 2012




Jun 25, 2012

If go down the history of scams and economic growth of India, our country has withstood many economic crisis and has never had triple digit inflation like many of the South American nations who are now in the special group of BRICS. Even Russia also had such bad times after change of Communist regime. A growth of 8% plus is not something one can maintain for a long time. A growth of 5% and less has so far brought the country to this extent and that is good enough for us. We should not ape for what the west is doing and now look at their state of affairs. We should definitely learn from what those guys have done. Kudos to our RBI which atleast is functioning properly forget the government.

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