Is India a bubble waiting to burst? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is India a bubble waiting to burst? 

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In this issue:
» India's labour reforms need a change
» Policy paralysis, the sole reason for India Inc's woes?
» Global economy in worst shape since 2009
» India stares at the possibility of a drought
» ...and more!

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When noted Morgan Stanley economist Andy Xie labeled India a 'black swan' we had to sit up and take notice. But to the basics first. What is a black swan This concept was first introduced by Nassim Nicholas Taleb. It is essentially a metaphor for rare and random events that are a surprise to the observer, have a major impact, but subsequently are rationalized with the benefit of hindsight.

Put this in India's context. It goes without saying the economy has slowed down in the past one year. But the stupendous rate at which India has grown in the years prior would leave no doubt in many minds that the country will not meet the fate that has befallen its developed peers. But Andy Xie thinks different. He believes India is a bubble waiting to burst. The prime reason he cites is that a lot of hot money has flowed into the country and has created a bubble. The problem is also that the money has not been used to build infrastructure, which can sustain the economy. He also believes that one should not be deceived by the high returns and capital in the nation because they will vanish without strong support from the industrial sector.

Indeed, if the bubble in India bursts, the shock will be immense and so will the impact. Though on hindsight, none of the factors that propel this crisis will be surprising. Indeed, lack of adequate infrastructure has been plaguing India for a long time now. And we all know that its current problems are on account of a bloated deficit and lack of reforms.

It all depends on how the government chooses to tackle these problems. Growth is yet not an issue because the country is still doing better than its developed peers. But if the government swings into action and takes important measures to bring debt down and ramp up infrastructure, not only will a crisis not take place, but the possibility of an 8% GDP growth on a sustained basis could be well within reach.

Do you think that India's growth is a bubble waiting to burst? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:26  Chart of the day
With the rupee falling so rapidly, exporters in India would largely stand to benefit in the form of higher earnings. And to some extent, higher volume of exports would also help ease some of the pressure off the government deficit. However, today's chart of the day shows that compared to other countries, India's exports in value terms in 2011 were quite lower. There is an upside to this as well. India is an economy driven by domestic consumption. One of the reasons why that made it resilient to the 2008 global crisis was that unlike China which was heavily dependent on exports, India could bank on consumption back home.

Data Source: The Economist

'We are facing this situation due to the conditions in the western world'. How often have you heard this lament from policymakers of emerging markets? All the time, isn't it? Even India's policymakers cannot be absolved of such blame. However, if The Economist is to be believed, external factors explain only a small portion of the volatility in GDP growth of emerging nations. As per the magazine, curbing domestic credit and keeping currencies flexible can prove to be of big help in tiding over the crisis.

India certainly cannot be faulted for the latter. Its currency isn't as rigid as say like China. But it could certainly do its economy a world of good if it keeps debt under control. Its fiscal deficit condition is nothing to write home about, causing inflation and slowing down growth due to crowding out of private investments. Thus, unless it brings the deficit under control, the long term sustainable growth isn't 8%-9% as we have come to expect. It is more in the region of 6%-7% we believe. And this seems to be true for all the BRIC nations.

When it comes to unemployment, states in India are more diverse than their cultural lineage. The likes of Bihar, West Bengal, Tripura and Kerala have unemployment rates that are nearly triple the national average of 3.8%. Haryana, Himachal Pradesh and Gujarat on the other hand have covered themselves in glory when it comes to job creation. However, the latest instance of labour unrest in Manesar shows that all is not well. Not even in states that claim steep employment numbers. A change in the country's labour law is therefore paramount.

A recent survey of job trends across states has challenged the conventional wisdom. That pro-worker policies protect jobs and ensure higher employment has been proven to be false assumptions. None of the communism inclined states like Kerala or West Bengal have achieved much in job creation. On the other hand, the more reformist states like Gujarat have sprinted ahead. However, labour reforms cannot just suit the need of workers. They must meet the requirements of companies and investors as well. The overall ease of doing business needs to be conducive for entrepreneurs and investors.

Policy Paralysis! These days, any reference to the Indian economy seems to be incomplete without this term. For starters, the term refers mainly to government inaction on reforms and initiatives that are vital for the health of the Indian economy. On one hand, policymakers shift the blame on the sorry state of the global economy, especially the crisis in the Eurozone. Of course, in part, India's growth has been affected by the slowdown in the global economy. But the other reason is the government's failure to initiate some tough reforms. For instance, the high fiscal and current account deficits are nothing but the government's own doings. There is no foreign hand involved here. Ditto could be said about the corporates. To what extent would it be appropriate for them to blame the government? If all their future prospects are dependent purely on the government action, then they are certainly bad businesses. Investors should certainly steer away from stocks that are too heavily dependent on government policies.

During the dark days of 2008-2009, companies were on the brink of bankruptcy. But this time around, entire countries are on the edge of disaster. Six of the 17 nations that use the Euro are in recession. The American economy is still struggling. And the developing world countries - China, India and Brazil - are in no position to pull the world safely back to shore. Growth is very evidently slowing in the emerging markets. In consequence, the International Monetary Fund has reduced its forecast for world growth this year to 3.5%, the slowest since a 0.6% drop in 2009. All in all, the global economy is in the worst shape since the dark days of 2009. This is one of the negative fall outs of globalization. No nation is fully decoupled and there is literally nowhere to hide.

Although monsoon rains have now covered all of the country, India is still staring at the possibility of a drought in some regions with rains 22% below a 50-year average so far. It is most likely that the government will have to announce a drought within a fortnight. The center and the states are now gearing up for contingency plans. The lower rainfall could result in output of summer-sown crops such as oilseeds, sugar and pulses to fall. As a result the government is making available enough seeds for all crops, including coarse cereals and pulse. The government will increase the availability of electricity and diesel to the grain-bowl northern region. This will help farmers draw ground water so that the yield of rice is not affected. It will also increase the subsidy for the supply of pulses through the government's welfare program to poor families to meet any shortage. If these measures are not properly implemented, the drought could further hurt India's already slowing economic growth.

In the meanwhile, the Indian equity markets shed initial gains and were trading weak. At the time of writing, BSE Sensex was down by 10 points (0.1%). FMCG stocks along with consumer durables and oil & gas stocks managed to stay in the green. All other sectoral indices were trading weak. Asian stock markets displayed mixed sentiments.

04:56  Today's investing mantra
"Many investors seem to have forgotten the hard reality. There are frequent periods when the stock markets don't do much." - Jim Rogers
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12 Responses to "Is India a bubble waiting to burst?"

Tikam Patni

Jul 25, 2012

Absolutely not. India cannot go burst no matter what? Why?? Two reasons:
1) In India more than 80 % are poor. They live on a day to day basis. They have no scope to go burst.
2) The remaining live on number two.
That is why, any negative global event will not effect India.



Jul 25, 2012

We have moved out the inefficient and deplorable FM into Raisina Hill - that one positive to take home; the other one, the Head of Congress, who controls the entire policy making in the country needs to be moved out by the people and that can only happen in 2014 - that is a huge negative.. Until such time, the PM and his bureaucrats will continue to follow the policy of playing safe and facilitate deterioration.. India is not a poor country, its riches are being swindled by the current crop of politicians, perhaps over 100-fold times than when the British ruled us... And this loot if channelized into infrastructure, good governance and industry, will send all the western nations into a spin.. But no one wants it and there lies the tragedy of this nation..


Like (3)


Jul 24, 2012

Do you think India's growth story is a bubble waiting to burst? Fantastic question and all wise answers or comments by bloggers. But, I just wanted to give an idiotic answer to this question.

And my answer is, It is not just India but the whole world growth story is a bubble waiting to burst as long as we continue to chant a country's growth and more growth the nature gets destroyed and more destroyed.

The sea level has risen more than 300ft in the last 10000yrs, The global warming has resulted in the SUN to become vulnerable to erupt solar flare and also cause break down of huge ice blocks to join sea water in antarctic nations every now and then, The coral reefs are drastically decreasing in every part of the oceans and so there are many other nature destruction stories as well and last but not least, Growth and Development since 1950 that is when the world economists and politicians became greedy and charlatans coupled with undisciplined printing of paper currency and corruption will not be a sustainable growth for the next 25 yrs atleast.

And for sure the destruction as usual will be faster like the stock market correction period than the growth or bull run period the world has seen ever since Science, Industrialization and Capitalism came into existence in the last 200-300 yrs.

My only wish is to see in my lifetime, let the nature be so kind to destroy India the last, So that we all will have a fair idea for atleast a few hours or days of how the world gets destroyed.

Like (3)

dr hari pamnani

Jul 24, 2012

the india bubble is going to burst sooner or later,it may take years or decades,but the achievements are bound to be superfluous,why?
you know whats the infrastructure of democracy?a democratic nation?
its the people,civilins.
and they are not trained.we r still PRAJA ONLY!
the human resources are all just superficial in everything.
its high time we build a long term hard planning to train for everything otherwisenot only economic bubble will burst, but also there will be great disaster in other fields,social wellbeing,law and order education and almost every field!!

Like (3)

girish shah

Jul 24, 2012

cabinet note 2 in regards to investment by fdi in property in the year 2005 has created a bubble in the property market --also the inflation is also from there and most of the problem i know for sure nemish shah of enam has been investing only in property for the better part of the 5/10 years his invetment run in thousands of crores --suppose your house value goes up from 10 lak to 1 crore in 5 years --you know what will happen

remove that cabinet note and see all the markets in india collapse and the stockmarket shoot up (as inflation will collapse)

Like (3)

Ganapathy Sastri

Jul 24, 2012

India for many many years, has been having two major problems: A. Massive Trade Deficit ( At $ 185B it much much more than the $ 6 B during the crisis year of 1991 when RBI had to PLEDGE gold). B. Massive Inflation of over 15% year after year during the recent past. While one can blame the government for inflation, the public has to be blamed for the trade deficit. The private sector is not known to promote efficiencies. There is very little talk about the need to improve efficiency at individual level and corporate level. There are very success stories of increases in efficiencies. However, at worker / employee level, expecations of big increase in wages, merely because the earth has gone round the sun once,is high and is also largely being fulfilled.
Unless we are able to reverse the trend in all these, chances of UNPLEASANT surprise are very high.

Like (2)

Kuldeep Nayar

Jul 24, 2012

"Growth is yet not an issue because the country is still doing better than its developed peers. But if the government swings into action and takes important measures to bring debt down and ramp up infrastructure, not only will a crisis not take place, but the possibility of an 8% GDP growth on a sustained basis could be well within reach."

This is a pipe dream. Let us not be ostriches with our collective heads in the sand. Corruption, economic mismanagement, and policies designed to appease caste, community, and class distinction cannot support 8% GDP growth in the long term. If you want GDP growth, make sure the infrastructure is developed at a priority and at genuine capital costs. Infra capex in India tends to be almost double of developed world. Remember Enron ... the whole project was made unviable by successive Maharastra governments.

Remember corruption and crony capitalism results in phony growth!

Like (2)


Jul 24, 2012

Where there was a bubble burst it aligned itself to certain sector as Housing Bubble in 2008 ,Dot Com Bubble in 1999 - 2000.
If India is a Bubble waiting to burst which is the sector in which heavy credit inflow has taken place ??? Urban Property perhaps yes .Govt Spendings again one sector where the Govt has spent without any results in terms of productivity .Can any body point a few other sectors ???

Like (2)

Gitesh Shah

Jul 24, 2012

In Ravi Batra's book, Crash Of the Millenium - 1992, only bubble criteria he defines is 'Income Gap between so called rich and poor. Others like hot money, float money they are all extremely subjective.

Where he has compared countries like USA, Germany, India, Japan. Specially Germany which is rich and wealthy and yet does not have much of wage gap. Germany has low asset prices as compared to GDP. India, China has high asset prices as compared to GDP. As wage gaps shrinks, economy can grow, but asset prices can collapse. P/E ratios can go down to single digits as the wage gap requird to support it could be missing. Buy GILTS!

Like (2)


Jul 24, 2012

It's the responsibility not only of government but also of the opposition who oppose all reforms just because they have to oppose.One can understand opposition to FDI in retail by the leftist,socialist parties, but why by right wing party like BJP ? Why opposition to even minor price hike in Diesel price when lots of the Diesel goes for running trucks, SUV's & cars ? Not only government, but all political parties should behave responsibly, else the bubble will burst.

Like (1)
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