A disaster in waiting

Jul 16, 2009

In this issue:
» Mobius on things that could cause the next big crisis
» Ex-Governor of RBI bowls a googly
» Indian pharma firms in the firing line
» China grows at a record pace
» ...and more!!
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We may not have recovered fully from the crisis that hit us last year but there are some people out there who are a step ahead and are already seeking reasons that could cause the next big crisis. Mark Mobius, the widely respected guru of emerging markets believes that derivatives and the stimulus money could well spark the next financial crisis. Speaking to Bloomberg, Mobius has opined that political pressure from investment banks and all the people that make money in derivatives will prevent adequate regulation from coming into effect thus letting it flourish unchecked.

It should be noted that the enormous write-offs of the magnitude of US$ 1.5 trillion that the world's biggest banks had to take last year was due to the excessive use of derivatives, most of it unregulated. Although governments are trying their best to introduce more regulation, banks seem to lobbying hard against any change that would prevent them from taking the risks they took some time ago.

Mobius also noted that a 'very bad' crisis may emerge within a few years as stimulus money to the tune of US$ 2 trillion globally would add to more liquidity and hence, financial volatility. The emerging markets guru has also predicted a number of short, dramatic corrections in stock markets in the short term, saying that corrections of the order of 15 to 20% are nothing when there is uncertainty all around.

 Chart of the day
The financial crisis, which was sparked off by the US subprime mortgage market, has really taken a toll on the global economic growth. As this chart suggests, economies around the world have gone into a tailspin, with the advanced nations taking a real big knock. Average GDP growth for this class of nations is expected to dip by around 3.7% during 2009, as projected by the IMF. Compared to this, emerging nations are expected to see growth fall down to 1.6% level, from almost 6% in 2008.

Data source: IMF's World Economic Outlook, 2009

Bimal Jalan, the former RBI Governor seemed to have bowled a big googly when he put the government in a spot of embarrassment while talking about the issue of delay in completion of power projects. Mr. Jalan, who is also the member of Rajya Sabha must have indeed raised some heckles when he pointed out that a system that is able to complete a massive exercise like the elections on time is unable to meet the deadline on a power project.

He further added that the government perhaps needs to create a delivery mechanism that was at arm's length to ministries, the almost spotless working of the Election Commission being a case in point. He wondered why we can't make one minister accountable for one project rather than involving large number of ministries in every project.

Jalan did not stop here. He also made a mention of the recent report of the Planning Commission, which found out that for every one rupee that reaches a BPL (Below Poverty Line) household, the government spends Rs 3.35 on the logistics, leading to colossal wastage of tax payers' money.

Indeed, as we believe and as he himself put it, "We need to make some fundamental reforms in the way we run our ministries."

Anyways, the government has finally conceded to the fact that there will be slippages in India's power generation capacity addition target for the 11th five year plan. In a recent interview, power minister Sushil Kumar Shinde has said that India will probably miss its target of adding about 78,000 MW power generation capacity by March 2012, and might end up adding only about 65,000 MW instead, even though 80,000 MW is currently supposed to be under construction.

This is far from surprising as India has had consistent track record of not meeting its power capacity addition targets in all its past five year 'plans'. In fact, it may seem ironical, but we are of the opinion that even 65,000 MW of new power capacity may not see the light of day before the targeted deadline.

Every year, a theme has been emerging in the Indian pharma sector with one company setting the trend and others flowing suit. While these themes were construed a plus, the last year unfortunately, was witness to a theme which had problems written all over it. Yes, we are talking of the issues that the domestic pharma companies are facing with the regulators in the US and Europe.

While the saga began with Ranbaxy, subsequently it was Sun Pharma who irked the US FDA. What is more, Wockhardt, Lupin, Matrix ,and Unichem have now courted trouble with regulatory authorities in Europe. What has caused these authorities to be so stringent all of a sudden? Reports of many deaths caused by the poor quality of drugs manufactured by two leading Chinese companies have kept the authorities on a vigil and unfortunately this blemish has spread to India as well.

Having said that, the onus of the blame cannot be laid on the regulatory authorities alone which means that Indian companies are themselves to blame for not sticking to quality standards. And they will have to resolve these issues quickly if they want to salvage their image and shore up their profitability.

It appears that China, which contributed one-third of the global growth (in terms of purchasing power parity) last year, will also be the harbinger of global recovery from the deep economic crisis. Beating the downturn, the country's GDP figures for the second quarter grew by an impressive 7.9%, triggering hopes that it will grow at over 8% when the developed world will still be wriggling with economic and social pains. The enormous stimulus package worth 4 trillion Yuan acted as a catalyst that not only boosted credit markets but also led to a huge surge in share prices, making China the world's second largest stock market by value.

But the cloudy days are still not bygone for the export-oriented economy as external demand, corporate profits and fiscal revenues continue to fall. Understanding that the recovery is still not firm, the Chinese government stays put with conducive fiscal and monetary policies towards its goal of creating jobs and ensuring social stability.

The government needs money to fund its 'social investments' and the banking system apparently has plenty of it. The result - the government is likely to borrow Rs 150 bn from the market every 14 days till the end of October, as per a leading business daily. It may be noted that the government is scheduled to borrow Rs 4.5 trillion from the market in FY10.

It is believed that the demand for credit from the private sector will kick in from October. When that happens, the government will be cautious in approaching the markets as it might crowd out the private sector and push up interest rates. At that point of time, the RBI will pitch in with its open market operations. When you have to raise a mountain of debt, it certainly takes a lot of juggling to ensure that you don't upset the apple cart. Once raised, we wonder how easily this debt will then be repaid!

Indian markets opened on a strong footing today but went below the dotted line subsequently and were trading marginally in the negative at the time of writing. Most Asian markets however managed to close in the positive. Optimism is also being witnessed amongst major European markets currently.

 Today's investing mantra
"We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." - Warren Buffett

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9 Responses to "A disaster in waiting"

Jal S Mahimwala

Jul 19, 2009

I must truly commend the person/s who write the 5 Minute wrap-ups. The language and turn of phrase is excellent, so unlike the bad grammar and syntax used by other on-line and print media in Bombay. Plus of course, your content too is good. Make it a point to read them regularly
Congratulations and keep up the good work.


Mathvel Daniel

Jul 18, 2009

In the pharma sector, I hope Dr. Reddy is out of the firing line.


Fred Barboza

Jul 17, 2009

Excellent presentation.


raj Kumar

Jul 16, 2009

Hats-off to Mr. Jalan. We need such parliamentarians who are prepared to a spade a spade. Unless the existing system corrects itself to achieve the goals, we can only dream. If a Minister cannot perform he needs to be sacked and this applies to concerned beurocrats also. Our well-meaning P.M. must ensure this to achieve country's goals.
Raj Kumar



Jul 16, 2009

The basic and good human behavior of living within their means and less plunder of natural resources needs to be reestablished in this world and the GDP measure needs to support it, not be in opposition to it.



Jul 16, 2009

We have a Thumb ,showing our identity, which is built in a cumulative way through periodical savings, which alone comes handy in times of any disaster.33% savings average India has only helped it to lessen the adverse effects of recession.When Global dip % was 3.7% it was only 1.6% in India.It is rightly said Beggars have no choice,Wealth/Power flows from high level to low ie why developing nations had to accept 40% reduction of present levels of carbon emissions, though the fact is that many manufacturing facilities imported into developing countries by G-5 countries are more to circumvent the evil effects of carbon emissions.In short both the Judge and the Judged are the same culprit.Due to recession there has been 50% reduction of NAV of all our investments, making equity investments a nightmare, though after 18months of perseverance, though 75% has been recouped, but loss by 23% over 18 months , a feeling passes in our minds whether equity is at all a good optin or not.,but words of Warren Buffet, and CAGR index is good, and Iam a pensioner with no long term commitment except keeping afloat, I could continue with my SIP plans.



Jul 16, 2009

Excellent. It proves th quote--Brevity is the soul of wit



Jul 16, 2009




Jul 16, 2009

we need more people like jalan to find out inefficiencies in implementation. most of the time it is c0ruption which delays the procedures. idbi declaring significant npas gives an indication of future shocks in indian banking industry which is always bailed out for common man but rich people who do not pay large loans go scot free and apply with new names and new company . it is duty of the govt to declare the list of large defaulters and how much capitalization was done by parliament to wave it off the sum is around 180000 crores as per some financial sources .

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