Jim Rogers hates India. Should you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Jim Rogers hates India. Should you? 

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In this issue:
» Troubles galore for high debt companies
» India's onion crisis
» Asset quality to hurt PSU banks
» Are emerging markets losing their sheen
» and more....

We recently had the opportunity to talk to one of the greatest pundits in the investing world. This was none other than Jim Rogers himself. He is the gentleman whose maiden fund generated 4,200% in just 10 years while the benchmark S&P Index returned a paltry 47%. Therefore we thought that it would be a good idea to get his thoughts on the world in general and India in particular. Unfortunately his views on India are not good.

In his opinion "there is nothing good in India". And he has solid reasons to support this statement. He feels that the country has high debt to GDP which is set to worsen. It has an economy that has slowed down and getting worse. This is thanks to our politicians who are putting in place more controls and regulations rather than opening up the economy. From a foreign investor's perspective there is simply no attraction in India. The Indian Rupee is not convertible. The stock markets are difficult to invest in as there are all sorts of problems and regulations. The commodity markets are not attractive either as there are numerous permissions that foreign investors need to get before investing in the same. So he asks what is good about investing in India?

We could not agree more with Mr Rogers on his view on India. Over the years the government and politicians of our country have favored populist measures. These measures have done nothing but add to our country's debt. Though the figures are not as alarming as what they are for the countries in debt crisis, nevertheless the debt is still high. And by concentrating more on the populist measures they have neglected those areas that would boost growth and investment in the country. Result - the current situation that we see in the country.

Unfortunately to turnaround the investment scenario, the government is trying to woo foreign investors and their dollars. But with the way things are, would any foreign investor be interested in investing in the country?

This brings us to the question as to what happens to the domestic investors. With things being so bad, should domestic investors completely stay away from the Indian markets? Here again Mr Rogers comes to the rescue. As per him investors should only invest in things that they know. This means they should stick to their circle of competence. Rather than getting hurt by stock tips, and advises. No matter what the asset class, doing your homework is crucial. And in these tough times it has become even more important. It is the only way to not just grow your wealth but to protect it in the first place.

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01:15  Chart of the day
Indian companies have grown considerably since the 1990s. Yet they appear to have come full circle to the debt problems they were facing then. India Inc is heavily depended on external financing, including bank borrowings, to fund growth and working capital. India Inc borrowed at a faster pace than the rate at which it managed to raise shareholder funds. The chart shows the most indebted companies as per the most recent available data (refers to FY 12 where annual reports for FY13 are not available).

And now with a slowing economy and liquidity squeeze by RBI to arrest Rupee depreciation, India Inc is in deep trouble. But in order to reduce debt, India Inc has limited options. They can either go in for cost cutting measures or raise fresh equity capital. The problems in raising fresh equity capital have been compounded by a decline in valuations and depressed market conditions. Companies could also sell assets in order to raise cash. But most promoters are not willing to take a haircut on their investments. Hence India Inc is in a tight spot. Some hard decisions will have to be taken to service debt.

Source: Equitymaster database

Persistently high inflation has been one of the biggest challenges for India. As per Businessweek, India has the highest consumer inflation among the BRIC countries. Consumer prices in India rose 9.9% year-on-year during the twelve month period ended June 2013. On the other hand, consumer prices rose 6.7% in Brazil, 6.9% in Russia and 2.7% in China.

One of the major drivers of India's inflation problem is increasing food prices. It must be noted that food prices account for over half of the consumer index. And there doesn't seem to be any reprieve on this front. Onion prices have been zooming. Recently, India's commerce ministry reported that onion prices had zoomed up 114% since June 2012.

Why do onion prices matter so much in India? The main reason is onion is a staple food item for a majority of the Indian population. India is the world's second largest producer of onions after China. The annual per capita consumption of onions stood at 18 pounds (lb) in 2009. This was just slightly lower than 20 pounds per year in the US. Given its importance in the Indian diet, onion prices have far-reaching political consequences. On certain occasions in the past, they have driven governments out of power. With the general elections barely a year away, onion prices must certainly be giving tears to the UPA.

They account for more than 60% of the Indian banking sector's assets. So despite the yo-yo nature of earnings of Indian PSU banks, investors find hard to ignore them. The cyclicality of the banking sector no doubt needs to be factored in while investing in the stocks. But rapid deterioration in asset quality has become a recurring phenomenon in the PSU entities during times of economic stress. The 11 state-owned banks that have declared their earnings so far have seen their total gross NPAs jump 46.8% YoY. The number is on a high base as the last 4 quarters too have seen slippage of loans from restructured assets to NPAs. What is a pity is that even banks like Punjab National Bank that sported one of the highest NIMs and best asset qualities until 2008 have become avoidable. The government's determination to use the PSU banks for 'social lending' rather than economic interests is the reason for their plight. Both NIMs and NPAs have the toll of the government's vested political interest in waiving loans and restricting bad ones. Not to mention that taxpayer money is wasted in recapitalizing banks that write off bad assets with their reserves.

There was a time when emerging markets were the apple of the investors' eye. Especially after the global financial crisis, countries such as India, China and the like were looked upon as those which would rebalance global growth. But the reality now seems to have altered. No doubt they are still growing faster than the rich world. But overall growth nevertheless has slowed down. Some of them, such as India for instance, are battling with high inflation, weakening rupee and rising deficit. As a result, foreign investors are pulling out money. The Fed's statement that QE could be withdrawn has suddenly made the US markets more attractive. And that has been the other reason for outflow of money especially from the bond markets. But does this paint the right picture? Today, emerging markets are being accorded valuations which are lower than that of the developed world. This is despite the fact that since the crisis, emerging markets have grown at quite a fast pace while the rich world has stagnated. Also, despite the problems that the emerging region is facing, it is still expected to outpace the growth recorded by the developed world going forward. There are no clear signs yet that any meaningful economic recovery is taking place in the developed world. That is why it would not be prudent to write off emerging markets entirely.

It's obvious that RBI's measures to rein in liquidity, has not gone down well with the Government. What more, even the corporate sector seems to be crying foul. Little wonder when industry leaders meet the PM later today, this will be the topmost item on the agenda. Well, the link is quite obvious for everyone to see. By curtailing liquidity, the RBI forces interest rates to go up. And this hurts investments, especially at a time when the economy is facing one of its worst slumps in a decade. Thus, India Inc does not seem to favour RBI's recent maneuvers.

We are of the view that RBI should be left alone when it comes to deciding monetary policy. If it feels that liquidity needs to be curtailed in order to reduce inflation and also bring rupee under control, so be it. After all, this is in the economy's best long term interest and no corporate can argue against that. We believe that things like liquidity and weak rupee are not really the cause but the effect of an ill managed economy. Thus, any suggestion by the corporate sector will have to be directed towards the Government's management of the economy. And this should be the topmost item on their agenda rather than train their guns at RBI which can do only so much.

In the meanwhile after opening the day on a negative note Indian equity markets continued to languish. At the time of writing, the Sensex was down by about 105 points (0.5%). The other Asian markets closed the day in the red as well with markets in Japan and China leading the losses in the region.

04:55  Today's investing mantra
"We're emphasizing the knowable by predicting how certain people and companies will swim against the current. We're not predicting the fluctuation in the current."- Charlie Munger
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11 Responses to "Jim Rogers hates India. Should you?"

Dr Anil k Kothari

Aug 3, 2013

It is not borrowing but the utilization of borrowings, We borrow to distribute freebies like free food, free mobiles, free sarees, free tv, and subsidize the products. No country can survive if they borrow or uses taxpayers money for non developmental programmes. Jim rogers is right their is policy paralysis, but instead of opening the floodgates for foreign capital we should encourage competitiveness for indian industries so we can export more.



Jul 31, 2013

Jim Rogers has studied India well. Instead of admitting our mistakes and correcting them, we are doing more mistakes.This is its result.



Jul 30, 2013

lots of economist spread lots of lies.we are wooried about out flow of dollers due to us policy of reduction in qe3 of usa.if rs is not convertible as rogers say how this is possible???
facts is lots of things not possible but common indian but all game for fii and corporates!!!!!
increasing fdi limits in all markets (selling indian markets) to feed todays demand for oil!!!!!!!!!!
what about my brothers sent abroad for doing labour and their sent back dollers???
all bullsheet policies.but keep me happy i can drive car ,but no jobs!!!!!!no job but go and play satta!!!!!!!
now no money also!!!having spent reserves of family spent!!!!!!!



Jul 30, 2013

Jim Rogers is right. Instead of finding fault with him our politicians (Desh Drohis)of all hue & cry are the criminals. They want FDI, see what happened with Arcelor Mittal , Posco. Vedanta also in perennial trouble,Jet Etihad deal still hanging on fire.Coal gate & poor gas output from KG Basin damaged power sector, not to talk about land acquisition. What is left good nobody knows when even SC judgements are suspect


Lakshminarayanan K

Jul 30, 2013

If the ruling govt. is permitted to perform, they get the votes in the next elections. So, the opposition always puts a spoke in the wheel of the govt. As a result, the govt. turns populist and empties the exchequer. Unless good sense prevails and consensus is built amongst political parties nothing in this country is likely to move. Alternatively, if a mass leader, be it Rahul Gandhi or Narendra Modi win the next elections, let it be with a muscling majority, so that they have their way. What India needs today is a Benevolent Autocrat.



Jul 30, 2013

Most of what Jim Rogers said is correct. But let's not forget that after all he is an investor with his own agenda--so not necessary that his advice is aligned with the country's interests. This has nothing to do with being patroitic, but if India is not a great place
to invest why are foreign investors flocking to India and clamoring for greater Foreign investment? there's something amiss here, I feel. regds


Anil Kumar

Jul 29, 2013

What else to expect if we elect illiterate goons to parliament?

The young and educated have to get out and vote for sensible people. That's the solution IMHO.



Jul 29, 2013

Fools security bill will solve all the problems of India. Be cause money will grow on trees and DBT will help to reduce the CAD. Only left out is empty tumbler for the common people for begging.

Like (1)


Jul 29, 2013

I find nothing great about his comments.A poor country with fractured political party system is bound to suffer like this.We are to blame our political parties for the demogogical approach---any thing and everything is done for vote catching/ considerations of county's economics just do not matter.He can suggest nothing.Democracy as it exists today just cannot work any more--we should pray for a tall towering leader who can rewrite the ground rules.Till then any num. of Rogers can do nothing.YOU DONOT KNOW OUR ECONOMY WELL,YET TRY TO SELL ALL SORT OF FANCY STATEMENTS.

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Jul 29, 2013

The present government has lost it ways and means to take decisive actions. Their main focus is to win next year election by hook or crook. You cannot treat electorate as fools in this internet age. Half-hearted measures taken be-lately is not panacea for fixing cancerous conditions of our economy and deficit situation as a quick fix.
Congress has been there long enough the young blood have a chance to mend the ills built up for so long. However sticking power by any means adds to the country`s problems. Absolute power corrupts absolutely and present Government has proved the same.

Bye bye Congress! Welcome Modi/BJP! At least Modi has track record and charisma and conviction to lead from the front and take difficult decisions without fear or favour. That is what India lacks presently.

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