India is swimming in a sea of red - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India is swimming in a sea of red 

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In this issue:
» Prices of gold moving steadily upwards
» Europe gets a new bailout fund, but will it help?
» Rupee sees worst quarter in 17 years
» Will the eventual recovery be a jobless recovery?
» ...and more!

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Are the death knells ringing for India? Almost every number that seems to be announced on the state of the economy lately is bleeding red. And it is only getting worse. Data released by the Reserve Bank of India (RBI) yesterday showed the current state of the Indian economy. And it is not a pretty sight. India's trade position with the rest of the world deteriorated in the March quarter to its worst level in 20 years. The current account deficit (CAD), which is the excess of imports over exports, rose to a dangerous level of 4.5% of the gross domestic product (GDP), from a benign level of 1.3% only a year earlier. For the full fiscal, the CAD stood at 4.2% of GDP, crossing projections of 4%. In FY11, the same stood at 2.7% of the gross domestic product. It has been almost 2 decades since the balance of payments crisis of 1991 where the Indian government was on a brink of default. But, even then these numbers were not so dismal.

A high CAD is a clear indication that a country is living beyond its means and can only fund its consumption with excessive external borrowings. A prime example is the US government, which continues to run a multi-billion dollar deficit till today. The scary part is that India seems to be treading a similar destructive path. India currently has the highest debt to GDP ratio of all the BRIC nations. This currently stands at 68% of GDP, compared to only 25.8% in China.

India also seems to be more vulnerable to external shocks, since its forex reserves have been drawn down and its stock of external debt has increased. Plus, growth in the country has slowed and India is facing pressures of sovereign credit rating downgrades. Now with its report on the state of affairs of the economy, the RBI has raised the red flag, confirming the rating agencies' concerns. But, can the government rise to the challenge? Or will it raise the white flag of surrender?

Do you think the government can rise to the challenge, embrace fiscal consolidation and repair India's balance of payments? Let us know your views you can also comment on our Facebook page / Google+ page.

01:23  Chart of the day
It is already the end of June, yet the monsoons in India haven't taken off smoothly. Today's chart of the day shows that the monsoon rainfall was 23% below the normal level of 170 millimeters (mm) in June. However, India Meteorological Department (IMD) officials say that this month's deficit isn't very significant as far as agriculture is concerned as the monsoon is expected to improve in July. The month of June contributes less than 20% of the overall monsoon rainfall. But, given that kharif crops (of which rice is a staple) are sown at the end of June, the below normal rainfall is a concern for farmers dependant on the rains to feed their crops. Most of the rice growing areas are rain fed, and if the current disturbing trend continues, we may be in some trouble.

Data source: Livemint
Note: Data as of 27th June 2012

The supporters for gold are cheering harder. They are of the opinion that the prices of the yellow metal are headed only in one direction. And that is northwards. They have a reason behind this optimism as well. They expect the debt crisis in the Euro zone to worsen. And the fear that the zone invokes in the investors would leave them scurrying in search for a safe haven. That safe haven is undoubtedly gold. In recent times, the slide in the gold prices has left many wondering whether the metal's bull-run was nothing but a bubble. However, the optimists still believe that gold has not yet run out of steam. The crisis in Europe as well as pickup in demand from countries like India would boost prices in times to come. To add to this, money printing from developed nations like US would also help support gold prices.

A bailout fund, by whatever name, is a bailout fund! But central bankers and governments in the West seem to have developed the uncanny knack of trying to camouflage the same. A bailout fund for the Eurozone has been a long standing demand. Despite disapprovals from global economists, a bailout deal seems to have been cracked. Albeit under a different name, one that does not carry the word 'bailout'. Struggling banks in countries like Greece, Ireland and Spain will be recapitalised with a central rescue fund. What is more, this will not add to the beleaguered economies' debt burden. All in all it is a win-win situation for the government and their banks. But for investors this is yet another indication that the debt bubble is only growing bigger. And when it bursts it can wipe out wealth from even the economies that are currently relatively healthy.

One of the most visible signs of a strong economy is a stable currency. The slide of the Rupee against the dollar is continuing unabated. The rupee posted its biggest daily gain in three years on Friday, after Indian government confirmed it will not impose retroactive taxes on foreign investors. But, this still did not prevent the Indian currency from posting its worst quarterly performance in at least 17 years. The reasons for this downfall are many. India's large current account deficit. Eurozone's escalating sovereign debt crisis. Dollar outflows from Indian stock markets (BSE-Sensex lost 25% in 2011). India's deteriorating macro-economic conditions. The country's new taxation rules and reopening of old cases. To reverse this trend, India needs to put some key strategies so that the demand for Indian Rupee increases in the forex market.

Since the break out of the 2008 financial crisis, the main focus of European policymakers has been austerity measures to cut deficits. It is a different matter that they have done very little to really solve the problem of high debt. The President of the European Commission has put his finger on another burgeoning problem. Did you know that 25 million people in Europe have no jobs? By all means that's quite a big number. That's 10% of Europe's total population. So there is a strong need to focus on enabling citizens to upgrade their skills to match the needs of the labour market. Otherwise, by focusing only on deficit cutting, the eventual recovery would be a jobless recovery. We believe India needs to take some lessons while the overall growth prospects are still intact. Else, the long term ramifications of having a huge employable population without the requisite skill sets would be a liability instead of a demographic dividend.

After witnessing strong growth in the past, the real estate market has seen subdued growth in the last couple of years. And the outlook for the current year is not encouraging either. Low investor confidence, high property prices and rising interest rates are likely to act as a big dampener. Escalating input costs and issues with respect to land acquisition is another roadblock. However, out of all these factors interest rates and property prices are the biggest concerns. With inflation remaining high interest rates are unlikely to cool in the near term. However, it remains to be seen for how long the builders are able to hold on to the current prices. With demand decelerating prices are bound to correct. But when? Well, actually that depends on the liquidity situation of the builders. And that is not great at the moment as bank loans have dried up. Thus, lowering the prices is only option left with them. And that is likely to happen sooner than later.

It was a positive week for the world stock markets. Barring China and Brazil, key markets closed on a positive note. France was the highest gainer during the week, followed by India and Germany. Brazil and China were down by 2.0% and 1.6% respectively. The US stock markets were up 1.9% during the week. The rescue plans suggested by European leaders to help banks and debt ridden Governments countered the discouraging economic reports on US economy earlier during the week.

The Indian equity markets registered the second highest gains for the week across the world. The Sensex saw strong gains on account of clarity on tax avoidance rules and positive global sentiments. The Finance Ministry proposed that General Anti-Tax Avoidance Rules (GAAR) would not be applicable below a particular limit. However the complete details are still awaited on the same. To arrest the depreciation of the rupee, the Reserve Bank of India raised the limit of external commercial borrowing (ECB) to US$ 10 bn.

Source: Yahoo Finance

04:50  Today's investing mantra
"If you can't find any companies that you think are attractive, put your money in the bank until you discover some." - Peter Lynch
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9 Responses to "India is swimming in a sea of red"


Jul 2, 2012

It is obvious. We need some two more schemes to win the next elections and later, India will be kicked out of BRIC. Smaller countries like Indonatia & South Africa will over take us.

I wish Central govt will introduce an innovative scheme of 300 days paid work for all the people.(Really we don't work, we only participate). The other 65 days are for festivals, vacations.

Keep observing in another 1-2 years there will be deep divide between the states and it might widen as we go forward.
God bless India.



Jul 1, 2012

I want to mention that there is no target of lending by domestic banks to SSI as priority sector lending.



Jul 1, 2012

The impact of depreciated currency to improve trade balance has lag effect. Priorities should be financial inclusion, development of private bond market, more developed secondary market for Govt securities so that there is alignment of interest rate among different financial markets in the country.As lending to small scale industry does not fall under priority sector lending for domestic banks, SFCs,NSIC,SIDBI should play a vital role.


Big bull

Jul 1, 2012

Sensex will touch 25000 soon


rrk ramakrishnan

Jul 1, 2012

Statistics, they say, are compared to the bikini and bra worn by vuluptuous virgin lady. It reveals her entire bare body but conceals her vital parts!

Like (2)


Jul 1, 2012

Deficit financing is not bad per se. The catch is that the excess should be towards infrastructure building and generation of jobs / growth. Easier said than done. But I think the PM will now attack most of the weak points in our fiscal policies. Better days are to come.

Like (2)


Jun 30, 2012

Nothing to worry. This is God's country.The ups and downs are to ahppen, But India will stabilize and its economy will once again command the world. We have a strong agriculture,Intellectual work force and also trained and untrained labour force wich wil sustain without any external tout.Above all Our Sanatana Dharma will protect this country. Don't be carried away by scare mongerers.

Like (2)


Jun 30, 2012

I think PM Should take all the ministries under himself and continue to be a moot spectator of things happings around. It is actually a good for the economy, because doing nothing is better than screwing things up.

Like (5)


Jun 30, 2012

I hope that all investors remember what kind of rally happened in 2009. Don't get confused by statistics of monsoon. FII have turned buyers & are changing their weights on India. The mkts are cheap for them. Don't expect any problem before 2013, till then keep your bull alive and kicking. The joyride is just begining...

Like (2)
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