Is India the next Greece? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is India the next Greece? 

A  A  A
In this issue:
» RBI cuts CRR rate
» Will FDI help sinking airlines sector?
» Future bleak for capital goods sector?
» QE3 will not help US out of recession
» ...and more!


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00:00
 
Since the dawn of the financial crisis in Europe, there is one name that has been talked about over and over again. It is that of Greece. The Mediterranean country has become an example of how spending beyond your means can lead to just one thing. Financial disaster. A disaster that has sunk the entire Euro zone into recession. Unfortunately unless India mends its ways, it is headed in the same direction. The country has a ballooning fiscal deficit. In the absence of policy reforms, this is all set to keep increasing. And eventually lead to India's downfall.

This is the opinion of the head of HDFC Bank, Mr Aditya Puri. He opines that India's government inaction is going to lead it on the path of a financial disaster. In his opinion all that the government is doing is playing the blame game. Each political party is blaming the other for inaction and corruption. Unfortunately this has taken away their focus on the core issue of running the country. Mr Puri feels that if each and every government official just did his job, then India is well poised to be a shining star in Asia.

And there seems to be quite a bit of logic in this statement. If we look at the other countries in the region things are not so bright. China is going through a slowdown. Korea is not doing too well either. As a result, India has a great opportunity to emerge as a star. But the government inaction and lethargy is pulling it back. In Mr Puri's opinion there are some crucial areas that the government needs to work on. These are addressing the fiscal deficit, solving the coal issue, transparent and clear policies on land acquisition, mining and environment. And improving accountability and governance in government and public sector undertakings. Once action is taken in these areas, things are expected to improve in all likelihood.

Though it is important to note that India's high domestic savings and consumption rate makes the economy far less vulnerable than Greece. Hence, investors should not be alarmed by Mr Puri's observations. However, there is no doubt that the government must act fast to respond to the economic crises. This means that they need to stop humiliating the nation by stalling parliament sessions and taking a jab at each other in the media. Instead doing their work like Mr Puri suggests would be a better idea. But are they willing to do this? We hope they do.

Do you think India is headed on the same path as Greece? Do share your comments with us or post your views on our our Facebook page / Google+ page

01:00  Chart of the day
 
The fiscal deficit of India is headed for a toss. There are several factors that are being blamed for this. Subsidies, government's populist programs, etc are just some major reasons. But another major reason is on the revenue side. We are referring to the government's disinvestment program. In light of the volatile equity markets, the government ended up postponing most of its stake sale plans. Unfortunately the government has no choice but to go ahead with its proposed stake sales and that too before March 2013. Otherwise the fiscal deficit will definitely get worse and the government will miss its target by a huge mark. As a result, it has identified 5 companies where a stake sale could be seen. These are Steel Authority of India Ltd (SAIL), Hindustan Copper Ltd, Metals and Minerals Trading Corp (MMTC), Oil India Ltd and National Aluminium Co Ltd (NALCO). The thing that the government now needs to work on is getting the pricing right. Though it has not had a great track record on this front either, however, this time due to the shortage of time, it cannot afford to make too many mistakes. If the pricing is too high, the issue will fall through. If it is too low then the government's targets may never be achieved.

Source: Livemint.com


01:30
 
How much can things change in the 45 days that fall between two monetary policy announcements? Well, a lot has transpired in this 1.5 month period. The US Fed has announced a fresh round of policy easing, popularly called as QE3. Plus the government has finally shown that it is taking reform measures seriously by announcing Foreign Direct Investment in a few sectors and raising diesel prices and reducing subsidy levels. Macro numbers in India however continue to remain poor. GDP growth is still below 6%, inflation remains high and Index of Industrial Production (IIP) growth is feeble.

Fearing an onslaught of higher commodity prices post the liquidity measures enacted by the Fed and the European Central Bank (ECB), the central bank has decided to keep rates unchanged. However, in order to boost liquidity, the RBI reduced the cash reserve ratio (CRR) by 0.25% to 4.5%. This will help inject Rs 170 bn into the system. This may please the SBI Chairman, who had a famous tussle over this ratio a few weeks earlier. A rate cut at this stage may have stoked inflation. As expected, the central bank has once again taken a conservative stance. The Reserve Bank of India (RBI) caution coupled with the government's new found resolve may just help macro numbers going forward.

02:10
 
One look at the Indian stock market and you will know how relieved investors are with the government's baby steps in ushering reforms. Even ones like FDI in aviation, which is unlikely to bring in economic benefits for a very long time to come. For one, aviation turbine duel (ATF) in India is expensive. This means there is no cost advantage for even a well-funded global airline which might want to operate in the domestic sector. That apart, most Indian airline companies, particularly the listed ones, are in a bad shape financially. To top that, the sector faces numerous structural challenges. Not that every foreign airline is a welcome suitor. But ones that can compete effectively in Indian market have very few choices amongst incumbent players. So it will be quite a while before the FDI policy in aviation endows the sector with any riches. Meanwhile the ailments of the sector are yet to find some cure.

02:40
 
The capital goods sector was amongst the most favored sectors by investors during the pre-2008 boom days. India's high growth phase coupled with strong investments in the infrastructure space drove the earnings and order books of companies (and stocks prices as well) forming part of this sector. It wouldn't be wrong to say that the investments in power - the key focus of the five-year plans - had a significant role to play in the fortunes of the sector.

The situation now, as you would know, is quite the opposite. And it is expected to remain like this for some time in the future! The key concerns include slowing investments (and therefore orders), excess capacities (in certain areas), unhealthy balance sheets, and the unwillingness of financial institutions to fund power projects. Regarding the latter, comparisons are being made to what the situation was way back in FY06. As reported by the Business Standard, project loan sanctions in the last quarter of FY12 stood at a figure of Rs 255 bn. This is the lowest level since FY06. Adding to the already long list of issues is the CAG's questioning of the coal block allocations - thereby putting all the related projects on hold.

03:40
 
Will the US Fed's latest attempt to drive the US economy higher work? Certainly not if Robert Wiedemer, the best-selling author of 'Aftershock' is to be believed. Talking to Moneynews.com, Wiedemer has argued that a recession seems unavoidable even though QE3 has been unleashed. This is because he believes that monetary policies can only set conditions that encourage investing and growth.

The real onus of job creation lies with the fiscal policy and what the other economies around the world are doing. And things are not looking good on both these fronts. The US, as we all know, is fast approaching a fiscal cliff. This is a condition where tax cuts will expire at the same time the Government will implement automatic spending cuts. Thus, this could well send the country sliding into recession if corrective measures are not taken. Besides, manufacturing, one of the key drivers of the US economy, would also slow down due to problems in Europe. In light of these factors, all that QE3 will end up doing is inflate stock prices without any marked improvement in the overall economic scenario.

04:30
 
In the meanwhile, after opening the day in the green, the Indian equity markets continued to trade above the dotted line. At the time of writing, Sensex was up by 85 points (0.5%). Among the stocks leading the gains were Jindal Steel and ICICI Bank. Other major Asian stock markets have closed the day on a mixed note with Japan and Singapore closing in the green while markets in China and Korea closed in the red.

04:55  Today's investment mantra
"If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." - Philip Fisher
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9 Responses to "Is India the next Greece?"

sharad sharda

Sep 19, 2012

Not a single political party is concerned about the well being of our country and in turn countrymen. They see only their political interest and most of them have become a tool for regional imbalances too. What Mr. Puri has suggested, if followed in letter and spirit, India will undoubtedly become an economic super-power in the continent.

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THIRUMURTHY.R

Sep 18, 2012

We should remember that Spain, Portugal and Italy closely follow Greece in macroeconomic crises. India is far better than these countries right now. This may be short lived but to say India is the next Greece is stretching it a bit.
I am still hopeful that the crises of the Eurozone will be tackled in a robust manner. Strong pointers in this direction are the proposed control and oversight of Banks and proposed fiscal consolidation norms across the Eurozone. These will kick in sooner than we think.
When Eurozone stabilises, India will be a frontrunner in real growth acceleration.
The US too is addressing the problem of employment generation through QEs. This too is good news. Dollar being the reserve currency, the value of the dollar relative to other currencies may not fall too fast, despite the fact that any significant reduction of fiscal deficit by US government will take eight to ten years. This relatively stable value of the Dollar, coupled with increased US employment generation and slow but steady fiscal consolidation will help India because India's traditional exports to US will not be displaced by job growth in the US. The consumption oriented growth trajectory of the US will continue to give market access to India in an equitable manner. That is, if India too gives access to US trade, the natural and organic two way growth potential will be a win-win game for both the countries. It would be stupid to conclude that the Indian market would be swamped by US trade. There are so many other players, local and foreign, in the market for this to happen. The Indian entrepreneur too is second to none in the world. Anyone setting shop in India will be doing a costly mistake if he does not know how to utilise local resources and local entrepreneurship.
The bold policy initiative by India in permitting foreign direct investment in multi-brand retail and in the aviation sector will certainly attract US investments, among others. This will be a durable long term growth component for India. Enough study of the history of foreign investments world over has been done for India to avoid the pitfalls in FDI and roll out a win-win model of trade with the larger economies. Barring outright stupid decisions, it is highly unlikely that Indian economy will not benefit through FDIs in the areas mentioned above.
This makes India a very unlikely candidate to follow Greece.
India's look east policy too will gather momentum. The odds are in favour of India playing a more active role in ASEAN. Trade with the ASEAN countries is bound to pick up.
SAARC too is picking up in volume of business traded. There is no going back on this.
China recognises India as a partner in growth. The Chinese have always invested in shrewd, hard-nosed economics and trade, untramelled by their ideology. This will continue to auger well for the world at large and for India in particular. There are practical reasons to believe that the dollar reserves of China will be increasingly used for equitable economic growth of the rest of the world. India is well poised to capitalise on this. Hawkish and militaristic Chinese view of the world is likely to change sooner than later. This is because humanity is on the cusp of a kind of togetherness we have never before witnessed thanks to the marvels of technology. Common denominators of collective existence and multiculturalism across the world may perhaps compel China to open up and become a vibrant part of the making of the global human being.
India and China will grow together as economic powerhouses in Asia.
Rating agencies have to follow their rating Dharma. They cannot be asked to factor in bullish or bearish moods of the market. They have to analyse large volume of data by applying accepted econometric and other methods. Therefore there is no point in crying foul when they lower the ratings. India's ratings by these agencies, though important, are by no means a ready reckoner for what the country's potential for growth is, which is truly huge by any standard. How soon this potential translates into real growth depends on India's resolve to get its act together.
Multiparty democracy as it is in India may appear to be a drag on economic development. But then, those in a tearing hurry to improve economic development have been known to be insensitive to the human and physical environment they operate in, to the long term detriment of that development itself. Maybe, the dynamics of a democratic polity is a necessary self-corrective component of the whole process of growth and development. That said, politicians in India are badly in need of a makeover of mindset. Corruption and cronyism is definitely out. That chapter of politics is in the hospice on just morphine. The sooner the political elite consisting of the politician, the bureaucrat and, the businessman see this reality the better for them. A New India has arisen. If the political elite continue to pooh-pooh this reality New India will dump them in the dustbins of history unceremoniously.

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S.S.Ranganathan

Sep 18, 2012

I agree that there is a real danger of India becoming the next
Greece.I hope it does not happen because,if it does there will be total anarchy and lawlessness.It is up to the people
to become really vocal and warn the cental and state Goverments that they will have to face the wrath of the electorate if they do not take steps to prevent our country from suffering the same fate as Greece.

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subhash

Sep 18, 2012

this comment is without any basis, seems rubbish

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swapan

Sep 17, 2012

i agree with puri`s observation.perhaps he has (intentionally)side tracked the issue of mammoth corruption because of his position.india will soon meet greece`s fate and in course soon meet doomsday.only almighty`s help will be able to set it right.alas! by that time lot of waters will have flown through the ganga.indian should be made well informed of`occupy wall street`movement which one day shatter edifice of india`s governance.

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fernswin

Sep 17, 2012

Mr. Puri has his head on his shoulders.The news in todays papers is anything but heartening.Mamta Banerjee is not fit to be a leader of the party. She messed the rail Budject and set back the Rlys. of funds badly needed by them. The other block head is Jayalalitha.To say that all trhese people oppose FDI in malls, is like having blinkers. Are malls not existin? Have any kirana shops closed? Are people not aware that these shops give them A/Cs and they can order on the phone? They also give them home delivery. Are these jokers not aware of all this?They arebent on holding the Country to ransom, so that thsy can get elected soon, and people Like Sushma Swaraj, Arun Jaitley are all hankering to occupy the Chairs vaccated by the incompetent men, and the silent P.M., who was an economist par excellence, but has forgotten all economics after occupying the Chair, by playing footsy with the idiots surrounding him. How long will we have to suffer uncertainty,and fear of what the morrow will hold?Unless the silent P.M. for once opens his mouth, and endorses what his Finance Minister proposes, we are doomed to poverty.Ferns

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harry

Sep 17, 2012

I sincerely recommend that you do a little more research before giving such quotes. It undermines your credibility. Also the media really really needs to have some restraint before publishing such trash.

Like 

VIJAY MULLAJI

Sep 17, 2012

THE POSSIBILITY OF INDIA BECOMING NEXT GREECE IN THE LONG RUN CAN NOT BE RULED OUT ALTOGETHER. THE FISCAL DEFICIT
IS GETTING OUT OF CONTROL AND INFLATION HAS ALREADY CROSSED DANGER MARK. WE CAN NOT SURVIVE MERELY ON THE STRENGTH OF OUR HIGH RATE OF SAVINGS AND DOMESTIC CONSUMPTION. THE LEAKAGES IN GOVERNMENT EXPENDITURE IS A CAUSE FOR CONCERN

Like (1)

PM MENON

Sep 17, 2012

YES SIR. NO DOUBT ON THAT IF WE HAVE ANOTHER QUARTER OF THE DISGRACE THAT THIS SO CALLED DEMOCRACY IS... EVERY PARTY WITHOUT EXCEPTION HAS ONLY ONE AGENDA- NO NO & NO. LIKE IN GOVT ORGS JUST DONT DO ANYTYHING. THAT ENSURES IN A MYOPIC INDIAN WAY THAT YOU DID NOT MAKE ANY MISTAKES.!!!!! IF YOU DONT MAKE MISTAKES (KNOWN TO PUBLIC) THEN YOU WILL GET PROMOTED. TO HEAD A GOVT ORG: BE A RES CATEGORY IF POSSIBLE, STAY ALIVE AND DONT EVER DO ANYTHING!! SIMPLE MANTRA.
POSSIBLE DIFFERENCE FROM GREECE IS THAT THERE WILL BE NO GERMANY OR FRANCE ETC HOLDING A CARPET UNDER THE CRUMBLING FLOOR. THE DROP WILL BE SHARP AND STEEP.ADD A FEW NATURAL CALAMITIES ( OR MAN MADE ONES LIKE UNCLEARED GARBAGE AND BLOCKED DRAINS AND WHAM! YOU HAVE IT. THE VULTURES ARE ALREADY HOVERING. ITS POSSIBLY A MATTER OF TIME. NO MORE WILL?? ITS WHEN!!!

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