Will this Greenspan critic bailout India from crisis? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this Greenspan critic bailout India from crisis? 

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In this issue:
» Where are the ultra HNIs investing?
» Asia's richest man investing billions in Dutch energy project
» Eased ECB norms for India Inc.
» Engineering heavyweights abandon infra projects!
» ...and more!

The year was 2005. The US economy was in a state of inebriation, driven by derivative profits, huge bonuses and booming realty markets. At an annual gathering of the world's top economists at Jackson Hole, US Fed chief Alan Greenspan was being showered with praises. In attendance were Ben Bernanke, Tim Geithner and Larry Summers. But the then chief economist of IMF, Raghuram Rajan, did not exactly stick to the protocol. Instead he delivered a paper to the central bankers of the world pointing out precisely at the financial tsunami in the making. The paper particularly focused on the misguided incentive structures in Wall Street. Ones which incentivized huge short term profits and cash bonuses, but had no room for penalties on later losses. Rajan even warned the bankers about potentially bankrupting their own firms or causing a crash in the financial system. It was no surprise that the trio of Bernanke, Geithner and Summers brushed off Rajan's views as being too naive.

While Dr Rajan stood vindicated when the subprime crisis hit the US, his views are yet to find enough acceptance in the US Fed. As he now dons the mantle of steering India's central bank, it remains to be seen if he continues with the independent streak. The US Fed has yet not been able to rid itself of the money printing obsession. The RBI, on the other hand, has kept monetary policies on a tight leash.

So as the RBI governor, Raghuram Rajan's mandate is not just in terms of keeping the Indian economy free of cheap money. He has several critical crises to deal, starting with healing the rupee. Once done with that, current account deficit, inflation, GDP growth and several other problems are in the pipeline. So while his crisis prediction skills are proven, the crisis resolving skills need to be on display. Hopefully, having better knowledge of how deep rooted the crisis in the West is, will aid Dr Rajan in keeping India suitably resilient.

But it goes without saying that choosing an able RBI governor does not absolve the government of its own responsibilities. Given its track record of pressurizing the RBI to frame policies as per the Finance Minister's fancies, the government could be left with a wasted opportunity. Instead, facilitating monetary policies with adequate fiscal initiatives and reforms can go a long way in bailing out the economy from the current crisis.

Do you think being well aware of the financial mess in the Western economies will help Raghuram Rajan do a better job of being RBI governor? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
As interest rates head upwards, sectors like realty and automobile are the worst hit. There is also the speculation as to whether a steep rise in rates can burst the realty bubble. As per leading home financer HDFC Ltd, while the bubble may be in high value properties, average properties continue to remain reasonably affordable for the average borrower. As seen in the chart, the rise in average value of property financed by HDFC has gone by more than 4 times since 2003. At the same time, the annual income of the average home loan borrowers has also been commensurate. This coupled with fiscal incentives has kept properties, at least in Tier 2 and tie 3 cities, within the reach of buyers. So while interest rates can deal a blow to several realty players and heavily leveraged borrowers, it is unlikely to hurt the market as a whole.

Source: HDFC

When a slowdown starts pinching hard, one would expect people from lower rungs of society to cut back on their discretionary spending and start saving more. However, the same seems to be true for even ultra high net worth individuals (UHNIs) in India. At least that's what a survey by one of India's leading wealth management firm indicates. The report opines that non-discretionary spending amongst UHNIs continues to rise. But caution has crept into discretionary purchases. Strangely, investments into savings and wealth creation have also come down. What has gone up though is investment into one's own business. Perhaps there is hope that consumer confidence will improve in the future. Therefore the UHNIs want to be ready when the tide turns.

What has not come as surprising is the fact that real estate has emerged as the most favoured investment option. As a matter of fact, even debt and fixed income has received higher allocation in recent times. Sadly, equities are not that high on the list. And this has to do with the current environment we believe. The volatility in recent times seems to be scaring even the most seasoned investors away. Therefore it's not surprising that equities are not finding favour with UHNIs. Nevertheless, equities will still be one of the best performing asset classes for the long term we believe. Consequently, UHNIs would do well to allocate more money to equities too especially during the current times when sentiments are poor and prices low. Of course even fundamentally strong stocks could suffer some correction from current levels. But all things considered, it will be well worth the effort from a long term perspective.

With the rupee sliding steadily against the dollar, the government seems to be exploring all possible to avenues to reverse this trend. The latest in this regards is that it is set to relax norms for external commercial borrowings. The idea is to enable debt laden companies to access funds from abroad. And also to encourage capital inflows which ease some pressure of the rupee. Quite a few restrictions on raising capital are also likely to be done away with. For starters, Indian arms of MNCs could be allowed to raise funds from parents through working capital. As of now only the civil aviation sector and public sector oil companies are allowed to do so. Indian companies will also be allowed to repay rupee loans from ECB proceeds. This move at present is restricted to certain sectors. Limit for 3 year ECBs has also been raised substantially. Moreover, the amount through automatic route has also been doubled. Whether these moves achieve the desired results though remains to be seen. The problem for companies with foreign debt on their books is that the volatility in the currency and the subsequent restatement of gains or losses would have quite an impact on profitability going forward.

Garbage and trash. These are common words associated with our everyday life. Trash is present pretty much everywhere. So wouldn't it be exciting if you could make money from this trash? This seems to be the mindset of Asia's richest man, Li Ka-Shing. He is pouring money into companies that convert trash to energy. The latest on his list of acquisitions is the Dutch waste treatment company, AVR. He has reportedly chalked out a plan of US$ 1.26 bn to buy out the company's stake from its private equity investors. Trash/waste management is increasingly coming into focus as more and more countries are seeking ways to dispose their growing wastes.

Around the world, waste to energy is a sector that is growing at a fast pace. This brings us to the case of India where waste and trash is growing every minute. Perhaps some great industrial mind here would also look at investing in converting this waste to energy. It would certainly help India's energy situation where demand exceeds supply. And would also help make our country a cleaner place as well.

There are two things that drive property prices. One is demand and second in artificial scarcity. While there is very little that can be done about demand, however artificial scarcity created by builders is something that is hurting buyers the most. It may be noted that most builders are holding on to their inventories despite slowing sales thereby creating artificial scarcity in the market. While slowing sales impacts their cash flows until now they were able to arrange for external liquidity through banks. However, most of them are facing difficulty in making repayments as cash flows from their existing projects have dried due to sky rocketing prices. Further, they are also facing difficulties in getting fresh loans since banks have tightened their screws in lending to the realty sector. Also, restructuring of bank loans has been ruled out by RBI. Thus, the temporary relief option is also no longer available.

As a result, the only option in the hands of builders is to reduce prices. If not, they may default on their bank loans. As such, most real estate developers are in a precarious situation now. Under the greed to acquire land banks most of them have leveraged their balance sheets. And in such an environment where sales are not taking place due to rising prices servicing interest costs has become a matter of grave concern. With no external form of liquidity available to them we feel reducing property prices is the only option in their hands now.

A decade ago, grand plans were made to make India's financial capital Mumbai into Shanghai. They were drawn with an aim to globalize Mumbai and thereby beginning the process of restructuring urban India. Fast forward to today... the city continues to be stuck in a rut.

The many projects that were announced overtime were aimed to make life better in the city. But with completion of these projects taking way longer than anticipated, cost overruns have only worsened the situation. What makes matters worse is that the country's top engineering and construction companies have abandoned or deferred some of the mega infra projects! The reasons cited for the same are lack of government support and cost overruns. And they do not seem willing to take on more projects. At least till the time they do not receive support from authorities. Delays in receiving environmental clearances and right of way as well as relocation of religious structures are some of the key issues being faced by companies.

Taking cues from the weakness across global markets, the key indices in Indian equity markets continued to tread in the negative territory today. The BSE Sensex was trading lower by around 71 points at the time of writing. Key indices in Asia, except Indonesia, closed lower today while markets in Europe have also opened lower.

04:50  Today's investing mantra
"Identifying bubbles is fairly easy. You don't know how big they will get and you don't know when they will pop. You don't know when midnight will hit, but when it does, it turns carriages to pumpkins and mice. What markets will do is pretty easy. When they will do it is more difficult. Some people want to stick around for the last dance, and they thought that a bigger fool would be just around the corner tomorrow." - Warren Buffett
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16 Responses to "Will this Greenspan critic bailout India from crisis?"


Aug 11, 2013

In fact the mantra for remedying the ills of Indian economy are simple, but alas un-populistic measures. If the government is not to divert billions of dollars worth of freebies, for the sake of vote bank, like the NREGA, or FS bill, and such ones, these billions can be used to fund the infrastructure growth that would provide the food and employment to same set of people, but by using this money for real development of India. All freebies are like opium, which are cutting into the productivity of Indians, and the new projects will never come up for deficiency of funds. With new projects coming, economy will boom, rupee will appreciate and GDP go up. This is the way China did it, and so did all near and far east countries, who despite being smaller economies than India are overshadowing India in growth and per capita income. But alas again, whether it be BJP or Congress led governments, no government will be ready to become un-popular by withdrawing such schemes, and therefore we Indians are doomed to live with the problems, no matter whether Raman is brought in as RBI Governor or God himself is brought in !!Alas, alas !!!


Amit Sengupta

Aug 10, 2013

Not quite. We don't know how well he understands the present pilitical class. He has to stand his ground inspite of all push and pull from this class. If he has the skills to do so, India will stand to gain. Otherwise ???- question marks all the way.
A big plus is his age- he has time on his side. We are tired watching the bickering of these old guys every day.



Aug 10, 2013

Raghuram Rajan will do well not to emulate the bad policies of the US which are not suitable for a frugal populace of India. Dr Rajan is capable of helping India's economy to recover and the country to be back on growth track, But he should be left alone to do his job and the government of India should not interfere with his plans,



Aug 10, 2013




Aug 9, 2013

We have full faith in Dr.Raghuram Rajan, but not in the Government of the day. They are doing things in their self interest and not in the interest of Nation. Voters can never be satisfied.



Aug 8, 2013

Yes One more bright young RBI Governor can contribute positive, practical solutions to turnaround the Indian economy, but alas there are two engines one in front and one in the back both goung at full throttle in opposite direction.Wait Wait and Wait...

Like (1)

Dinesh Arya

Aug 8, 2013

Notwithstanding all the intelligence and knowledge, governance in India is not a rule but exception and what Rajan would be able to achieve would depend largely on how much political will our present representatives of public have.

Going by the track record of the present government and "vote" and "save chair" being the compelling key factors, Raghuram Rajan's efforts to bailout India from crisis, I am afraid would be severely hit by the road blocks created in his path by his political masters. Such thinking becomes more relevant when one keeps in mind the fact that the present crisis is self created mainly due to policy paralysis.

Of course it is true that when going gets tough, tough gets going... so Raghuram Rajan has his task cut out.

Like (2)

Narasimhan Sundapalayam

Aug 8, 2013

I fully endorse the views of Jogesh to the effect that the thick skinned politicians- facing the Elections, would never ever allow Raghuram Rajan the facility.

Contrarily, they would sit on any intelligent move he may suggest to take and cooly step into oblivion at the bustings.

Like (1)

c v krishnakumar

Aug 8, 2013

There is a world of difference from being a scholar and a practitioner. We have many scholars like our PM and Mr Montek Singh. Let us hope that Mr Rajan is a hands-on type and not a mere academic. The only way to reduce CAD and strengthen the INR is by boosting exports and reducing unnecessary imports. There are no shortcuts and more than the RBI it is for the GOI to act. And our government does everything but govern. The India story was despite the government and it can go forward if the Indian entrepreneur is allowed to operate freely. Let us wish Mr Rajan all the best as he takes on the hot seat at a difficult time. His test would come when the Know-all FM tries to dictate policy for him!!

Like (1)

v nrao

Aug 8, 2013

It is a selection of sycophant of rangarajan/chidambarm nothing more can be possible from this man One more Aluvalia to feed on govt largesse after saving lot of mney from IMF/World bank.Acdamics does not help and politicians will not allow to take a prudent decesion

Like (1)
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