MNCs also looking to cash in on India's golden decade - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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MNCs also looking to cash in on India's golden decade 

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In this issue:
» FDI in India leaves a lot to be desired
» Modi looks to subsidize more food
» Commodities index falls to a fresh five year low
» Bond bubble to end badly
» ...and more!


00:00
 
Global CEOs seem to have a love hate relationship with India. For many, doing business in India is a difficult proposition on account of various bureaucratic delays, regulatory hurdles and retrospective laws. Little wonder then that India has been ranked 134 in the ease of doing business rankings among 189 countries. What more, comparisons are continuously being made to China whose infrastructure has grown by leaps and bounds while India's continues to creak.

And yet, despite these issues, most acknowledge that there exists tremendous growth potential in the country. And while top honchos have been lamenting about the problems of investing in India, they are not completely abandoning their plans either. Indeed, India continues to remain an attractive destination for many global corporations and multinationals.

The last three years particularly frustrated both Indian CEOs and MNCs alike primarily on account of lack of initiative by the erstwhile UPA government in moving things along. But the new Modi government promises to be different. Although early signs yet, it has become increasingly clear that the Modi government intends to make infrastructure growth one of its top priorities. And while this is not something that will happen overnight, we believe that the environment for bringing about this development remains favourable over the next many years than never before.

And while cynics would find much to criticize about India as compared to China, there are many areas where India is eons ahead of the dragon nation. As per a report by CLSA, India has a much better developed financial system that encourages the private sector. This is in stark contrast to Chinese banks which are largely state owned and the subject of much debate on account of poor transparency.

While regulatory hurdles continue to pose challenges for companies, not all regulatory bodies have been necessarily bad. Indeed, the RBI and SEBI in particular are to be commended for strengthening India's financial system and protecting the interest of shareholders respectively.

India also continues to be a strong destination to ride the consumption theme. Unlike China, the Indian economy is not dependent upon exports to fuel its growth. Large part of the demand remains domestic driven. Thus, India's domestic driven consumption story still has the potential to reap huge dividends even when the developed world has slowed down. In that sense, India will be able to adjust faster than its Chinese counterpart.

All of these are indicators that India is at the cusp of some major changes that will unleash huge growth potential in the coming decade. And this will not only see Indian companies benefit tremendously but will see considerable interest from MNCs as well. Indeed, MNCs are also finding signs of a golden decade presently in India. That is why they will continue to invest in the India story even if the current environment remains challenging.

We at Equitymaster also believe that investors stand to profit immensely from India's golden decade. To know more about this, we urge you to click here.

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02:01  Chart of the day
 
According to Mr. S. P. Kothari, Professor at the MIT Sloan School of Management, the concern of loss of management control is of much less importance compared to sacrifice of economic growth. And for India to clock higher growth rates, reservations about caps in foreign direct investments should be shed. Comparable nations such as China and Mexico have garnered net FDI inflows totaling to US$ 2 trillion and US$ 247 bn in the past decade. India attracted about US$ 229 bn during this period. But when compared on a per capita basis, the country would be nowhere comparable. As per Mr Kothari, for FDI to make a meaningful impact to India's GDP - say boosting growth by as much as 4%, the country would need to attract US$ 200 bn of FDI, which is about 8x the percentage of GDP India currently attracts in FDI. This has essentially been the key difference between India and China in the past few decades as the latter attracted huge sums of money which aided in sustaining growth levels at higher rates. As such, we believe this approach would not be wrong considering that India requires a lot of funding, especially in the manufacturing and infrastructure space.

FDI in India leaves a lot to be desired


03:02
 
The food bill was tabled by UPA right before the elections. While some said it was a gimmick to garner votes, some said it was a wise political move. Also, being accommodative in nature, it would be difficult for the incumbent government to overturn the decision.

However, what the Modi government has done after coming to power has put many in awe. It has increased the quota of subsidized food grains by 40%. This may increase government's food subsidy bill. And burden the exchequer which is already reeling under huge fiscal gap.

One may wonder how accommodating more subsidy burden will be possible on this front. Perhaps, the Modi government is backing on reducing the pilferage and wastages that happen due to poor storage facilities. This can help increase the food quota. In the past, we have seen food grains rotting at FCI and destitutes dying of hunger. If the new administration is able to change that and thus increase the quota, it would truly be the onset of achhe din.

03:46
 
Here is one global macro trend that you should not ignore. Commodity prices have been on a decline. In fact, you would be surprised to know that commodity prices have fallen to the lowest levels since the global financial crisis. The Total Return Bloomberg Commodities Index has fallen to a fresh five-year low yesterday. It must be noted that this widely-followed index reflects the price of 20 commodities including crude oil, soyabeans, nickel and gold.

What are the major reasons for the decline in commodity prices? One reason is the strengthening of the US dollar. Two, there has been an increase in supply in key commodity markets. And lastly, the faltering economic growth in China is another major reason because the dragon nation has been the biggest consumer of commodities. While these may be bad omen for commodity investors, the declining trend in commodity prices could be a blessing in disguise for India since we rely heavily reliant on imports of commodities such as gold and crude oil.

04:13
 
Earning 15%-16% per annum consistently on a long term basis is in itself a very difficult task. Therefore you have to really give it to the guy who managed to return a whopping 26% year after year over a period as long as 20 years! This is exactly what hedge fund legend Julian Robertson achieved between 1980 and 2000. And therefore when he speaks, it makes sense to listen. So, what's worrying Robertson these days? It is the bubble in bonds if a leading financial portal is to be believed. Robertson is of the view that bonds are at ridiculous levels and the bubble is likely to end in a very bad way.

Alarmingly, he is not alone. He is joined by another stellar investor Howard Marks who's put out a similar warning. Marks has warned that people who are participating in the enthusiasm by taking on more risk in their portfolios will also have to participate in the correction. Truth be told, people who've bet against the US bonds after the financial crisis have actually lost out big time. Simply because their predictions that there will be high inflation has actually not materialised. This does not mean that inflation will not rise at all. As a matter of fact, the longer the euphoria lasts, there will that much bigger price to pay. Therefore, it may not be a bad idea to take some money off the table and wait for the storm to pass.

04:45
 
Indian stock markets continued to slip deeper in the red in the post noon trading session. At the time of writing, the BSE-Sensex was trading down by 180 points (0.7%). Majority of the sectoral indices were trading in the red led by realty and engineering stocks. IT and pharma were among the few stocks trading positive. Most of the Asian markets were trading weak with Japan and Taiwan being the major losers. European markets have also opened the day in the red.

04:56  Today's investing mantra
"Pessimism is the most common cause of low prices. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." - Warren Buffett
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