India's biggest advantage under threat - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India's biggest advantage under threat 

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In this issue:
» A new wave of financial crisis could hit the US
» Now, a police station for power theft in India
» China's manufacturing edge over India
» US insiders are selling shares
» ...and more!!


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00:00
 
When it comes to manufacturing, size does matter. And this is the mantra that the Chinese policymakers have adopted to such devastating effect that they have left competitors like India far behind. A recent study by the ADB (Asian Development Bank) and analyzed by LiveMint, has revealed that -micro enterprises that employ less than five people account for 61% of manufacturing employment in India as compared to just 8% in China.

Now, combine this tiny piece of statistic with another one which says that on an average, labour productivity in micro-enterprises is just one third of that existing in small enterprises (establishments that employ less than 50 people) and it becomes clear why India lags China in manufacturing. Not only this, there is enormous wage differential between micro and small and large enterprises, thus giving rise to huge inequality.

Clearly, if India has to become a force to reckon with in manufacturing and foster an environment of more equitable income distribution, constraints that prevent larger enterprises from taking shape like restrictive labour laws, red tapism and many others will have to be removed on a priority basis. Otherwise, the huge demographic advantage that we have is in danger of grave under utilisation.

00:49  Chart of the day
Companies pay the cost of their misdoings, and so do their shareholders. Who else can vouch for the fact than the investors in US financial stocks, who have had a pretty rough ride over the past two years. As today's chart shows, investors in financial behemoths like Citigroup, AIG and Bank of America saw their investments disappear in these companies during the period September 2007 till about the beginning of 2009. While these stocks have recovered, the current value is far below what it was in September 2007. For instance, Citi's stock price is currently just around 10% of its September 2007 levels!

Source: Yahoo finance, CMIE Prowess

As compared to these American financial companies, investors in Indian financial stocks have had a much better time during the same period. While investors in ICICI Bank had to pay for the bank's aggressiveness, those in more conservative companies like HDFC Bank and SBI have nearly recouped most of their losses. Doesn't this tell you something?

01:37
 
India's 11th five-year plan came up for a mid-term appraisal and the preview of the same was presented by the planning commission yesterday. It observed that after growing at a scorching rate of more than 9% in FY07 and FY08, the economy slowed down to 6.7% in FY09 and is likely to slow down further to 6.3% in the current fiscal (FY10). In fact, if one were to take a worst case scenario, the growth could even come down to below 6% for the first time in quite a few years and stand at 5.5%. However, even the plan panel conceded that any projection of the growth in the current fiscal would be vulnerable to a revision as there aren't enough data points to rely upon and a real picture will emerge a little later in the year.

With economic growth expected to be 8% in FY11 and 9% in FY12, it looks like we will end the 11th plan with an average annual growth of 7.8%, a far cry from the target of 9%. In fact, until India does something to move huge swathe of her population out of agriculture and into other fields like manufacturing and services, our stated objective of 9% growth will continue to be at the mercy of rain gods.

02:20
 
This could well turn out to be the second wave of destruction that could once again put the US financial system in trouble and the economic recovery at some serious risk. As per The New York Times, the US commercial real estate market is not in the best of health currently, with the economic downturn posing refinancing problem for borrowers what with their property values suffering massive erosion and bad underwriting standards of the boom time ready to blow up in the face . It is estimated that US banks are holding a total of US$ 1,300 bn in commercial mortgages and US$ 536 bn in construction and development loans. Hence, if loans start turning non-performing at an alarming rate, write offs will have to made, eroding banks' capital, thus not only forcing them to cut back on lending in other areas but perhaps also raise new capital.

02:55
 
After police personnel posted especially to guard politicians, India is now going to have its first police station exclusively to guard electricity. Yes, you read right - electricity. At least three sub-inspectors and a dozen constables would comprise this station, which is slated to come up in Agra where power theft is the cause for almost half of the electricity consumed. But power theft is not the only major problem that is facing the country. The cost of power sold by a number of power generating companies, especially during periods of high demand, has been extremely high, thus leading to huge jump in prices. Seems like as much as India needs power, it is being deprived of the same!

03:22
 
When it comes to investing, the problem is not the lack of opinion. It is in choosing from the variety of and often conflicting opinions. Take the entire issue of economic recovery. While investment banks like Goldman Sachs and Morgan Stanley are extremely bullish about the recovery coming through, hedge fund gurus think otherwise. As per Bloomberg, three hedge funds that deploy around US$ 15 bn in macro economic calls think that the US government spending is only a band aid solution and doesn't address the root causes of the crisis, bad assets. Hence, the so called recovery is not sustainable.

So, who's right? The answer perhaps lies in the manner in which both the above mentioned entities make money. The hedge funds have to get the trend right in order to make their money, which means that they would be indifferent to both a rise as well as a fall in the markets. But for investment banks, it is a rising market that will help them more as they can sell more of their stock, raise more capital and of course, advise on more deals. Hence, it might pay to be on the side of the hedge funds at least for now.

04:05
 
Here's another reason why you should be perhaps on the side of hedge funds. As per an article in Moneynews, officers and directors of publicly traded companies in the US sold twice as much stock in their own companies as they bought in the last six months of FY09. We had earlier reported about insiders in several Indian companies selling their shares. These included not just the large investors but also the promoters and top management. This is certainly a cause of genuine worry as companies that have been rerated on having reported higher profitability in recent quarters due to better cost management may not be in a position to sustain the same. Investors therefore need to read more carefully between the lines and hold back their optimism.

04:38
 
In the meanwhile, it has turned out to be a pretty volatile session for the Indian markets as the benchmark indices were seen circling around the breakeven point at the time of writing. Infact, when the readings last came in, the BSE benchmark Sensex was trading virtually flat. Majority of the Asian indices closed in the red today while Europe has also opened amidst weakness at most places.

04:54  Today's investing mantra
"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?" - Warren Buffett
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5 Responses to "India's biggest advantage under threat"

Syed Askari Hasan

Sep 5, 2009

It is a good decision to have a police station for electricity theft.It would be even better if the personnel had technical background.

Like 

angad

Sep 2, 2009

being a regular reader of your mail,i personally feel all these informations provided by u are very much vital n very much useful to me as i m a day trader, these informations keep me in touch of all the activities related to the economy n impact of it on share market.....along with this if u can suggest some stocks for short term n long term, everyday this will make u'r effort even more interesting..thnx

Like 

Vishal

Sep 2, 2009

While I agree and understand the point being made in comparison of HDFC Bank and ICICI Bank - I think it would have been very difficult to know about this in 2007 that bad day are coming for this bank. Those were times where aggression, growth was most favoured. Its only in hidsight that you come to know of drawbacks of such things. That was a euphoric phase - any(or majority) investment made during that time/phase is in LOSS. This bear market brought even best of best companies to such levels that would have been impossible to think in 2007 like Thermax, Voltas, Voltamp, Blue Star, ABB, Tata Steel etc..

Like 

Energy Investor

Sep 2, 2009

Your comment on the price of electricity in India being high during peak demand is interesting. In a typical international market scenario - higher cost electricity (oil-fired or gas-fired peaking units) is needed during very high demand hence cost of production is higher than coal generators.

Like 

rp77

Sep 2, 2009

On another thought, ICICI Bank generated much higher returns than its Indian peers when purchased during the trough... a matter of making right calls

Like 
  
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