Will India ever escape this trap? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will India ever escape this trap? 

A  A  A
In this issue:
» Japan has the highest government debt
» Is the UID program facing hurdles
» No move to restrict capital outflows
» Gold prices are set to drop
» ...and more!

The Indian government, in its recent Union Budgets, had a very optimistic view on the economy. There were two things that it stressed on. One was its stance that the GDP growth would remain at around 8% or more going forward. The second was that fiscal deficit as a percentage of GDP would come down going forward.

The recent economic scenario, however, suggests that the Indian government was maybe a tad too optimistic on both those counts. Let us examine the GDP aspect first. Because of inflation staying at persistently high levels, the Reserve Bank of India (RBI) has undertaken a series of 12 rate hikes in the last 18 months. While this has slowed growth of India Inc. and the economy, inflation has not yet come to the levels that the central bank is comfortable with. Thus, there are concerns that the strong pace of growth that India enjoyed before the global crisis and the recovery period, may not hold up at least in the medium term. There is also the added possibility of exports being hampered by worsening scenario in the West and reduction in capital inflows. Plus, the recent tumble in the rupee adds to an already heavy oil import bill and is a new source of upward pressure on prices.

But where the government appears to be all the more off the mark is the reduction in fiscal deficit. Indeed, New Delhi's aim to cut the fiscal deficit to 4.6% of GDP for the financial year 2011-12, set in the run-up to elections in five states, was based on a growth target that looks a bit difficult now. The budget target for more than US$ 8 bn in state company share sales may be hard to adhere to. Because of the increased volatility on the stock markets, investors do not seem to be in the mood to buy and state companies themselves are putting share sales on hold. Higher prices of fuel have acted as a double whammy for the government. Prices of petrol have been freed and the recent price hikes are expected to put more pressure on growth. At the same time, because other fuels such as diesel are still subsidised, higher oil prices will only increase the subsidy bill of the government and make its fiscal reduction targets more implausible.

This brings us to the age old ill that afflicts the country, namely poor infrastructure. Indeed, if the government focuses on not missing its infrastructure targets all the time and puts some reforms into place, a lot of the current issues that it is dealing with will not occur time and again. The problem is that the central bank, receiving no help whatsoever from the government, is fighting a lonely battle with the monetary policy as its only weapon. That will not help India achieve its dream growth target of 9% plus on a sustained basis in the long term.

Do you think that India will be able to grow above 9% consistently in the coming years given the issues that it has to deal with? Share with us or post your comments on our Facebook page

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01:26  Chart of the day
Debt crisis in Europe sparked fresh fears across the globe that recession in the developed world will continue for some time to come. US debt has also significantly bloated and the impasse at the government caused S&P's to downgrade its credit rating for the first time in history. But today's chart of the day shows that although the focus has been directed on the crisis in Europe and the US, it is Japan that leads the pack with the highest government debt as a percentage of GDP.

*2011 forecast
Data Source: The Economist

The Unique Identification Numbers program (UID) was touted as a potential game changer for India. With former Infosys Chief Nandan Nilekani at the helm, everything did move forward as per the script. However, as the program enters its most important phase, differences have started making their presence felt. As per a leading daily, these differences are giving out an impression that UIDAI, the authority in charge of implementing the program is under attack from various quarters. And the opposition is coming in all shapes and sizes. While some ministries have issues with the spiraling budget of the program, others have questioned the efficacy of the same. Still others are of the opinion that it does not take into consideration the ground realities and is going forward in a hasty manner. Nilekani though looks a lot less perturbed. With a project of this magnitude and importance, differences are bound to happen as per him. He has asserted that he is in this for the long run and will certainly not quit mid way. Over the next few months, as the project readies itself for some real life testing, it will be clear who will have the last laugh.

Some facts first. The Foreign institutional investors (FIIs), who are the first to develop cold feet every time global economy shows signs of instability, have sold more than US$ 2.2 bn worth of shares in India since August. The benchmark BSE index has lost 22% since the start of this year. The rupee has lost 11% against the US dollar in the last 3 months and hit a 28-month low of Rs 49.5 per dollar. For an import dependent economy like India, depreciation of the rupee against the dollar is certainly bad news. Especially at a time when inflation has weighed heavy on growth prospects. Manufacturers and investors are therefore hoping for central bank to intervene in the currency markets. But so far the RBI has shown no signs of it. Also as per the Ministry of Finance, there are no plans of restricting capital outflows. It believes any such measure may hamper attempts to bring in more foreign capital. While utilizing India's limited forex reserves to intervene in currency markets may not be a solution, India needs to address its inflation problem. Removing supply side bottlenecks is prime amongst them.

The governments of several developed economies are submerged deep in debt with massive fiscal imbalances. With few tools left at their disposal to undo their past sins, many of these governments are now resorting to fiscal austerity, which means they are either reducing their spending or raising tax rates or both. Though observing fiscal prudence is not a bad thing, this may not be a good time to do so according to renowned economist Nouriel Roubini. He argues that at a time when private spending is falling, increasing fiscal austerity could spell economic doom, which eventually could lead to war. According to him, this same mistake was committed during the Great Depression of the 1930s. The policy mistakes back then led to a financial disaster that ultimately culminated into World War II. So are we headed towards World War III? That is anybody's guess. However, the fact that a prolonged economic crisis unfailingly lays the foundation for political and social instability cannot be ignored.

One of the universal laws of nature is that 'what goes up must come down' due to the force of gravity. But does this rule apply to asset classes as well? Gold has been on a rally for the past ten years. So, is it due for a correction now, after a decade of growth? This yellow metal has been falling of late on account of a flight to liquidity. With the Euro zone in a mess and Greece default fears, investors are scrambling to buy dollars, liquidating other positions. Even though gold is fairly liquid as an asset, people prefer holding onto cash. Legendary investor, Marc Faber believes that the gold prices could drop to as low as US$ 1,100 from over US$ 1,600 currently. If prices continue to fall, it may be a good chance to pick up this valuable asset on dips.

Acquisitions by global pharma companies in the domestic pharma industry have flourished significantly in recent times. With the former's R&D pipelines diminishing and blockbuster drugs set to lose patents, these companies are looking to plug in the gap by turning towards generics. And India appears to be an attractive destination to shop given the multitude of generic players present in the country. However, it seems that the government is wary of the increased M&A activity witnessed in the sector. It is mooting to scrutinize all the pharma deals through an anti-trust body.

The government is circumspect that amidst sluggish growth in the West, foreign companies are trying to capture the market for low price generic drugs in India. And this could effectively result in higher drug prices for the rural consumers in the longer run. That said, imposing restrictions on such deals could be protectionist and would scare away foreign investments in the sector. Further, MNCs are not capitalising on the Indian market only through acquisitions. They have also entered into alliances with various Indian companies to jointly sell drugs in both India and abroad. The government already controls the prices of many drugs in India making it one of the lowest priced pharma markets in the world. Because of which the argument that MNCs may increase prices significantly does not carry much weight.

In the meanwhile, the Indian stock markets built on their opening gains and continued to trade strong. At the time of writing, the benchmark BSE Sensex was up by 370 points (2.3%). Led by Realty and Consumer Durable stocks, all sectoral indices were trading firm. Asian stock markets too were witnessing a lot of buying interest. South Korea (up by 5%) and Indonesia (up by 4%) were the biggest gainers.

04:56  Today's investing mantra
"There seems to be an unwritten rule on Wall Street: If you don't understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product." - Peter Lynch
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9 Responses to "Will India ever escape this trap?"

Adi Daruwalla

Sep 28, 2011

Nandan Nilkani's capabaility is not at stake. The resources to be used are at stake.
There is Ad HOC employment of scrutinizers and officers at the UIDAI centers in the states and zones. (Bhai bhai attitude prevails)
60 families are accomodated daily at every center (No more)
Center staff not familiar with what Pin codes to process. (Data mismatch in what the computer has and what is the reality in terms of Postal Piin codes.)
After processing cards dont come for 3 months and more.
No replies via eamil from citizen help desk centers, no one answers the 1 800 numbers provided.
Huge queues from 0700am in the morning just to process and get forms.
No senior citizen guidance and help for senior citizens.
Senior citizens shuffled from one centre to the other as ambiguity about Pin codes to be processed or not.
Administarive and implementation glitches, lack of training center staff and as usual Indian government ka project hai, sab kuch ho jayega. Bharat mata ki jai



Sep 28, 2011

we are not serious about deficit.in the coming years, we may face trouble like PIGS and downgrades before that.



Sep 28, 2011

the real enemy is CORRUPTION and Bureaucracy.FM n Montek etc.sing of growth ONLY.(n blunder like 32/26rs.daily)
PM is defunct.no political seriousness on real issues.
and this Growth mania is also hype.Let the Growth be 6.5% for next 2 /3 yrs.it may reduce problems.
further,RBI Guv is too wrongly blamed.He may rise rates further righly, but not allowed by...
Remember prudence of ex Guv YV Reddy?no one gives credit to that real man.. and what rates hikes he gave in 2007 recollect and publish it in 5 min.wrapup.....it saved us greatly...



Sep 28, 2011

Nilekani should resign and go back to infosys.UID project will be a great failure.having enjoyed power at the rank of a minister he has also become like great MMS.



Sep 28, 2011

With the Governance being what it is annual growth of 9% can not be achieved.


Sunil Doshi

Sep 27, 2011

I find Yr Analysis today Regarding FII Investment, misplaced.You are comparing FII Sale Since Aug 2011 with Fall of Sensex in Year 2011 with fall in Rupee in last 3 months.

Total FII Net Sale Since 1/1/2011 till date is not more than Rs 2,500 crores.Sensex had gone up from 18,000 to 21000 in Sept-Dec 2010 due to QE2(i.e.,FII Strong Purchase).Rupee's depriciation is all about Dollar's Strength(due to TINA for Global Currency or safe heaven).Hence, RBI is very correct in NO-intervention in Forex Mkt., as of now.

With Regards,


Laxman Suvarna

Sep 27, 2011

With the current policy stasis and the laughable Planning Commission estimate for BPL eligibility, India definitely needs second rung of economic thinkers to steer the country in the right path to achieve the long term growth goal of 9%. The present government lacks credibility (they are too pre-occupied to cover up the various scams) and they will continue to take the country on a downhill path.


abhay Dixit

Sep 27, 2011

Would politicians allow UIDAI project of such size pass without getting their dues? A successful completion on time within budget will expose them badly. So they will try all tricks.


anupam garg

Sep 27, 2011

As per the mantra, i really don't understand the valuation of gold, even the product is incomprehensible as it is not really used for many purposes

gold has the potential to become an interesting case study...a couple of months hav changed thw whole direction of its movement, wonder what the next couple of months hold in its chart

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