India remains highly vulnerable to this event... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India remains highly vulnerable to this event... 

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In this issue:
» Import alerts galore for Indian Pharma
» What Coal India is guilty of...
» SBI gets a downgrade from Moody's
» Is the US Fed losing credibility?
» ...and more!

Leave aside the fact that the US Fed has chosen to postpone its QE tapering program. Much before that when it had indicated that it would put an end to its bond buying program, there was widespread panic the world over. India was among the worst hit. This is because foreign funds were withdrawn and the rupee fell steeply against the US dollar. Not just this event but the 2008 global crisis also highlights how vulnerable India is to the possibility of capital outflows.

Indeed, as per an article in the Economic Times, credit rating agency Moody's has stated that India and Indonesia are the most vulnerable to capital outflows. This is because of high reliance on external funding. The fact that India is running a current account deficit has only worsened matters.

The 2008 global crisis had also seen mass exodus of foreign capital. As a result of which Indian markets took a beating. But there was a difference. Back then the Indian economy was still robust, India Inc. was growing at a healthy pace and it was only a matter of time before the markets reflected the underlying fundamentals. This time there is a sea of change. Slowdown in the economy, lack of reforms, ineffectiveness of the government, corruption and the like has undermined the faith of foreign investors in the country. So much so that certain Indian companies have also indicated that they would invest overseas to grow their businesses as the Indian climate remains unconducive for business.

When there was a surge of capital flow into the country, the government had the perfect opportunity to utilize these funds to get the reform process kicking. Ramp up in infrastructure, sorting out issues relating to labour laws and land acquisition should have been given top most priority. This would have taken growth to the next level and with investments coming in from the domestic side, the reliance on external funding would have reduced. The government instead chose to do nothing and pinned its hopes on a scenario of unending optimism and surge in capital flows. Now it is paying a heavy price for its folly. With its finances stretched, focusing on productive spending is bound to remain a challenge. But we believe that it is the only way for growth to remain higher on a sustainable basis in the longer run.

So what should investors do when a surge in capital outflows leads to battering of Indian stocks? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!

Do you think that India is the most vulnerable to the event of capital outflows? Let us know your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
As far as reputation goes, 2013 could probably be termed as the worst for the Indian pharma industry. Indeed, as the chart shows, around 19 import alerts were issued on plants of domestic pharma companies. When the US FDA issues an import alert on a particular plant, it means that drugs manufactured from that plant cannot be sold in the US unless certain corrective measures are put in place. The US generics market has always been an important and lucrative one for Indian Pharma because of the huge number of blockbuster drugs going off patent. Quite a few Indian companies had made increasing strides in the market. But given the Ranbaxy debacle and the fact that the US FDA has become stricter and more vigilant, Indian Pharma will have to get its act together. In an intensely competitive market such as the US, damage in reputation is bound to impact business in a big way.

Indian Pharma gets the most import alerts from FDA
Data Source: Business Standard

What would you call willful misrepresentation of key facts? Well, we choose to call it a scam but others could use milder expressions like misrepresentation. Whatever the terminology used, if a report by NGO, Greenpeace is to be believed then PSU firm Coal India is guilty. Greenpeace has accused the company of overstating its coal reserves by nearly 16%. It is alleged that Coal India Ltd (CIL) has used the older system of Indian Standard Procedure to calculate its coal reserves. However in 2001, the government had decided to forego this system in the favor of United Nations Framework Classification. Using the latter, the reserves stand at 18.2 bn tonnes which is 16% lower than CIL's claim of 21.75 bn tonnes.

If Greenpeace is right, then there are major implications for India. The first is of course the obvious one that a major PSU firm has committed a fraud right under the government's nose. And as usual the government has done nothing to prevent it. The bigger problem is for the investors of the company who were duped into believing the wrong numbers in all of the company's public disclosures. Unfortunately the problems don't just end with the investors. There are implications for the power sector as well. You see if the reserves are actually lower, then it means that CIL has reserves only for the next 17 years. This is bad news for the Indian power companies who have already been at the receiving end due to CIL missing its production targets in the past. As a result they have had to rely on the more expensive imported coal. If reserves do run out in 17 years, then the power companies would be forced to look for alternatives beyond CIL.

The rating downgrade is a sword hanging loosely over India over past several months. Not just the sovereign rating but the rating for Indian banks too has been under the scanner. Global rating agencies like Moody's and S&P have issued warnings based on the consistent deterioration in India's economic standing. The depreciation of dollar was supposed to call for the inevitable downgrade of India to 'junk status'. However, the Fed's decision to keep money flowing and subsequent rise in the rupee has deferred that casualty for the time being. Indian PSU banks, though, have not been as lucky. For India's largest bank, State Bank of India (SBI), rise in NPAs have become a common feature every quarter. The lack of capital support from the cash strapped government has become yet another area of concern. And whether the worst is behind it is anybody's guess. Moody's has therefore downgraded SBI's unsecured debt to the lowest investment grade. We cannot deny the fact that SBI's fundamentals do cut a sorry picture. But given Moody's track record in rating we will not be surprised if less deserving companies get a better rating than SBI. Investors can therefore take such rating updates with a pinch of salt.

The most powerful central bank in the world, the US Federal Reserve has received a lot of brick bats for its ultra-easing monetary policy. The quantitative easing program, which is nothing but a sophisticated term for reckless money printing, has fuelled asset bubbles across the globe. And it seems the US Fed is going to have a tough time to end this money printing binge. The recent Fed move to defer the tapering of the QE was an indicator of how vulnerable the US economy is. If it is taken off the QE dope, it may just collapse.

In fact, even within the US Fed there are officials who are against the QE. Richard Fisher, a top Fed official, is one of them. As per him, the QE is ineffective in reviving the economy. Moreover, it may lead to high inflation in the future. He even urged the Fed to start the tapering September onwards. But as we all know, it didn't happen. And this has certainly hurt the central bank's credibility.

Now, this is going to come as music to the ears of the ruling party in India. Finding itself cornered on almost every major economic issue currently, the revolution slowly brewing in rural India is the last big hope left we reckon. And if Bloomberg is to believed, things are looking better than ever on this front. At last count, the Government had at least 12 programs aimed at India's villages. And this ran the whole gamut, right from state-sponsored jobs, housing plans and road building to mid-day meals for school children. Little wonder, these handouts have increased prosperity in rural India and has improved the quality of life a significant deal.

What has left us worried though is the burden these schemes have put on the country's finances. It has ballooned its debt and has left very little money to be utilised for spending on infrastructure and improving supply bottlenecks, the real long term drivers of the economy. Therefore, the boost to rural economy might give the Congress a great shot at coming back to power. However, it's going to extract a great economic cost as per us. What is more, their re-election might only end up emboldening them more, leading to even more handouts for the poor. And this would lead to even bigger pain to the economy in the long term we believe.

In the meanwhile, the Indian equity markets witnessed a volatile day with the markets hovering sharply around the dotted line. At the time of writing the BSE-Sensex was trading higher by about 87 points. Barring stocks from the information technology, metal and realty spaces, gains were seen across the board. Mid and smallcap stocks were trading higher with the BSE Mid Cap and BSE Small Cap indices up by about 0.1 to 0.2%. Markets in Asia were trading weak overall while gains were seen in Europe.

04:55  Today's investing mantra
"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it."- Peter Lynch
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4 Responses to "India remains highly vulnerable to this event..."

Namit Verma

Sep 26, 2013

The Fed never promised a taper. It was always commentators like yourself who have been misleading your readers and putting words in the Fed Chairman's mouth; and you got some propoganda support from officials like Raghuram Rajan and Manmohan Singh who are junior members of Senator Rockfeller's propoganda machine. For the last 4 months amost every financial consultant has been lying to his clients and readers about the Fed Chairman's future guidance emanating from (i) the 22 May 2013 hearings before the Joint Economic Committee of the US Congress (full text of the Fed Chairman's submission is available at the Federal Reserve site: search federalreserve newsevents testimony bernanke20130522a pdf since this present site does not allow links to be posted) and (ii) the 19 June post FOMC Press Conference of the Fed Chairman (full text available at federalreserve mediacenter files FOMCpresconf20130619 pdf, once again search required since this present site does not allow links to be posted). Bernanke never promised a taper, he did not even suggest it was possible, he always made it repeatedly and explicitly clear that the QE Taper JUST WAS NOT ON. It was vested interests like Barclays, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Bank of America-Merrill Lynch, Nomura who led the bogus propoganda and semi-literate consultants who wittingly/unwittingly whipped up global paranoia about it. Read the statements of the Fed Chairman for yourself (official website addresses given above) and figure out who was lying. Raghuram Rajan, P Chidambaram and Manmohan Singh just facilitated a repeat of the Harshad Mehta-Citibank stock scam of 1992 and the Ketan Parekh-Credit Suisse Scam of 2001. They cleaned out over a trillion dollars worth from the Indian markets over the last 4 months -- June to September 2013 -- and nobody's the wiser! And the market has been kept depressed with regular statements from Raghuram Rajan to ensure that the new FDI FII shopping of recently increased 49% and 74% quotas can be done at firesale rates. Also recall how these foreign investment limits were raised surreptitiously during the last minute week-long extension granted to the last session of parliament! Your aspersions about the "recent Fed move to defer the tapering of the QE" is nonsensical, where is the question of deferring that which has not been slated or agreed upon in the first place? It is not the Fed's credibility at stake.... rather that of pesky consultants who pester clients with bogus inaccurate and shoddy research .... or maybe deliberately set out to mislead and rob them.


syed salahuddin

Sep 25, 2013

If look at the way the economy is being steered, A substantial number of policy makers would be absent and a few do not understand the intricacies of the economy and a few always take an opportunity to oppose even for good points walkout are a regular scene. criticism is only a way to get mileage keeping the next election.volley of lies and counter lies is the game plan. what the very insignificant always on putting the facts and economic conditions are defeated by the majority, assumption well this is not being watched by the foreign investors.Reliance on foreign funds when much is mismanaged within is a way of Indian economy


Umesh Sharma

Sep 24, 2013

India does not have to be dependent on foreign funds flow if we are prudent.If we stop import of not necessary items like cellphones gold etc.We can control outgo of foreign currency substantially.If we improve our own production of crude etc.the imports can be further reduced.If we take up alternative sources of energy like wind and solar power and harness them we can manage our energy requirements without much dependence on imports.For this we need patriotic feelings and vision.Above all a our leaders should not have a yen to make a small cut from all transactions which is ostensible stashed abroad in coded accounts.If we can manage this Indian Rupees will become as strong as any other currency


Ganesh Sastri

Sep 24, 2013

For the last five years, India has been having two major problems: 1. MASSIVE INFLATION. 2. MASSIVE TRADE DEFICITS.

Inflation has exceeded 15% CAGR during last five years. Major cause: GOI living BEYOND means and resorting to massive borrowing and note printing. Why criticise FED alone? The country has also been living BEYOND means. In 1991 Trade Deficit was $6B and India had to pledge gold. During last five years Trade Deficit has been over $ 600B and in the most recent year nearly $ 250B. Why blame import of gold when so many other articles contributed to the deficit? Electronics will soon become the single biggest import item. India does not stop with importing crude oil in a big way. Vegetable oil, apples, fruits of various kinds, foodstuffs are also imported in a big way. Again this kind of living BEYOND means is UNSUSTAINABLE. We the people of India are responsible for this. The massive inflation and massive trade deficit are the sole cause for the INR's fall in value. Why blame FED for doing something in its own perceived interest? We have to blame ourselves and stop giving lame excuses. Chinese currency was not affected like INR? It is exporting more than what it is importing. When will be in that situation? When will we stop depending on REFUNDABLE INFLOWS for maintaining our life style? Why NOT go after NON REFUNDABLE INFLOWS? Export more goods, services, get more tourists etc.

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