Should we be worrying about the Euro crisis? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should we be worrying about the Euro crisis? 

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In this issue:
» Healthcare expenditure highest in the US
» What the mutual fund industry is pitching for
» Lower rains accentuate power shortage
» US' Act on outsourcing, a dampener for Indian IT?
» ...and more!

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The crisis in the Eurozone has hardly come to an end. And from the looks of it, it could be a long time before the region gets back on track. In the meanwhile, what does a prolonged crisis there mean for a country like India?

On the face of it, the general response would be that India's growth is dependent on its domestic economy. Thus, although there will be some impact felt from the Euro crisis, it will not be much. Which is why the government has received flak for blaming India's economic woes on the European crisis. There is some truth to that. Infact, a lot of problems that India is facing currently are homegrown. Rising fiscal deficit, not much headway on the reforms front and inability of the government to bring inflation under control have only added to the country's woes. And led to the disappointing 5.3% growth in GDP for the March 2012 quarter.

Having said that, it would be unwise to undermine the impact of the crisis. The larger impact will be felt on the exchange rate. Even though the US is also beset with many problems, a worsening crisis in Europe would still cause the dollar to appreciate. This in turn could put downward pressure on the rupee. What makes it worse is that India's fundamentals on the forex front are on shaky grounds. So an appreciating dollar for whatever reasons is bound to lead to a fall in the rupee. On the trade front too, India would get impacted, although the country has done well to diversify exports to other regions besides the developed world. FDI investments could also take a hit. As conditions in the developed world deteriorate, investments may be less forthcoming if companies are strapped for cash and have slashed growth targets.

Interestingly, there is a stark difference with regards to the impact of the global crisis now and what it was in 2008-09. The difference lies in the state of economic conditions back home. At the height of the global financial crisis in 2008-09, although India felt its impact, the country was able to weather the storm because finances were in a better shape and inflation was not a threat. Infact, there was headroom for the Reserve Bank of India (RBI) to lower interest rates to spur growth and domestic demand was robust too. The current scenario is entirely different. Inflation is high and so the central bank is reluctant to cut rates. In the meanwhile, growth has slowed down and demand has also toned down. Thus, in such times, although the Euro crisis is not the sole factor causing India's problems, it could nevertheless add on to it.

Do you think that the current Eurozone crisis could have a major impact on the growth prospects of the Indian economy? Share with us or post your comments on our Facebook page / Google+ page.

01:26  Chart of the day
High healthcare expenditure in the developed countries is a goldmine for Indian pharma companies. Given that most of these countries are saddled with rising deficits, many of them are keen to bring the overall cost of healthcare down. And one way to do this is allowing the launch of generic versions of patented drugs. Today's chart of the day shows that US had the highest healthcare expenditure as a percentage of GDP in 2010. And with many branded drugs scheduled to see patents expire, the US generics market is expected to grow at a faster rate than the overall pharma industry in the US. And given that Indian pharma companies are well entrenched in this market, most of them are looking to capitalise on this opportunity.

*in 2009
Data Source: The Economist

It is ironical that the very steps that were taken in the best interest of investors are now proving to be the proverbial thorns in the flesh. We are talking about the concept of entry loads in mutual funds. You would remember that the erstwhile Chairman of Securities and Exchange Board of India (SEBI), Mr Bhave had completely done away with the concept of entry loads. He had rightly argued that this fees charged to investors was being subjected to gross misuse. It turns out that the distributors are now holding this very banning as the key reason behind the poor mobilisation by the MF industry in the past couple of years. This is not all. The industry is also pitching for a proposal that will shift the burden of service tax on the buyers and to also raise administrative fees and other expenses. These are worrying developments we believe and the ones that seem to focus on only increasing the AUMs of the industry and not on the long term interests of investors. We just hope that better sense prevails amongst policymakers. And they arrive at their decisions only after looking at all the sides of the equation.

Call it the 'dark ages'. At the risk of sounding cynical, we truly think that times have never been so bad for India's power supply as they are now. Despite a lot of hope and loads of investment planning, nothing seems to be going right for the sector, at least in the short term. Leave aside land acquisition, environmental clearance and payment delays from electricity boards (SEBs). Even the most basic resource - fuel supply - has been hard to come by. Acute shortage of coal supplies is something that has gripped the power sector in the past year. The choice of imported coal from overseas mines too has turned sour. That has left power producers to scout for alternative fuels. After thermal (coal based) power generation, hyro power is the largest source of electricity for India. Other renewable resources like solar, wind and nuclear power account for a miniscule proportion. But with the rainfall playing truant, is seems that India's hopes for making up for the coal shortage through hydro power is also drying up. In the event of low hydro power generation, the demand supply gap will only widen. That means power companies' capacity addition plans could remain in the backburner for now.

The dynamics of the Indian auto industry have changed drastically in recent times. The overall slowdown has impacted car sales which have been growing at low single digits in the past few months. Apart from the slowing economy, other aspects such as the volatile fuel price (and their fluctuations) and the uncertainty surrounding the same, additional taxes and the weakening currencies have made Indian auto companies rework their strategies. Adding to that has been the strong preference of cars run on diesel (as against petrol earlier).

In fact, such is the demand for diesel vehicles that delivery periods of certain diesel models have touched their peaks. Further, with all this happening, competition has also risen substantially across segments. A good amount of foreign players have entered the Indian markets (over the past decade) in anticipation of grabbing a share of India's booming auto pie. And given the norm of new launches propping up sales, auto makers have a slew of launches lined up for this year as well. All said and done, it will be interesting to see who comes out on the top during such bleak times.

Life for the Indian IT industry has not really been a smooth ride in recent months. Changes in legislations in US like hike in visa charges, etc have hurt the general sentiments. The bigger concern is the slowdown in business due to a slowdown in the industry's biggest client countries. The IT majors have already been revising their growth rates to lower levels. Now to add to all this is US' renewed interest in their 'Bring Jobs Home' Act. The Act aims at providing incentives to companies that cut down on outsourcing and instead bring that part of business back to US. This Act is not really new. US has been voicing anti-outsourcing campaigns since they were hit by the crisis. It is easier to call someone else the big bad wolf rather than look inwards.

Nevertheless, though this Act, if it were to be passed, would lead to some loss of business from US. However, the loss would not be as spectacular as one may think. Companies outside cannot do away with the cost advantage that outsourcing provides. As a result, they are sure to put up a fight against such laws. At the same time, Indian companies too have expanded their footprint beyond the shores of US to mitigate the risks. And lets not forget the Indian IT companies themselves hire locally in US. So if US decides to shut down their businesses then there would be a loss of employment on that front.

In the meanwhile, the Indian equity markets have been trading in the positive today. At the time of writing, BSE Sensex was up by 53 points (0.3%). Barring, FMCG and IT stocks, the sectoral indices were trading firm. Asian stock markets displayed positive investor sentiments and Europe too opened in the green.

04:56  Today's investing mantra
"Investing is simple but it's not easy. Because emotions get in people's way or greed and that sort of thing. They get all excited about stocks when they've gone up recently, and they get depressed when they've gone down." - Warren Buffett

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    2 Responses to "Should we be worrying about the Euro crisis?"


    Jul 4, 2012

    I think you have given a COMPLEMENT to Pranab da by talking SO LESS about the damage he has done to the country... He has been the most ineffective FM that India has ever had in its history, BY FAR. He has been unable to cut back the huge fiscal deficit, has driven away foreign investments from the country by proposing 'unfriendly' Tax laws, has not been able to bring back the sizable black money's parked in safe havens abroad, has been a failure in curtailing inflation, a disaster in terms of promoting growth and giving a philip to the industry/stock markets... How can a man responsible for the current state of the economy, be allowed to go scot-free? He has to be made accountable to the people of this country and made answerable to the public.. Instead, he has been rewarded with the highest honor - a cushy job, with umpteen perks and no responsibility... He does not have the stature of an Abdul Kalam or a Radhakrishan or a Rajendra Prasad.. His only claim to fame being that of a 'trouble shooter' for UPA and Congress, does not make him a deserving candidate to the highest post in India.. It WILL BE a sad day for India, when a politician like him, will be ELEVATED to the highest POSITION.


    George Elava

    Jul 3, 2012

    Indian products & Indian rupee has still to be gain popularity in the Global Market. Indian products although it is superior in quality has been distinguished as inferior and so also Indian rupee. So in the current global economic turmoil Indian rupee is suffering much more than it deserving only because globally Indian products are inferior at least in the mindset of market. So no need to worry but Indians globally should understand this phenomenon.

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