This party seems unimpressed by Govt's reforms

Oct 9, 2012

In this issue:
» Should you bet on collapse of the dollar?
» Problems galore for UMPPs
» In the aftermath of the Nifty flash crash
» Will BRICs turn the tide for the global economy?
» ...and more!

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After receiving brickbats galore for paralysis on the reforms front and the political stalemate at the centre, the current government has now gone on an overdrive and introduced reform after reform. Not surprisingly, the Opposition parties are not amused. But the government has decided that it needs to go all out in reviving sentiments in the country rather than languishing in a rut. Accordingly, markets have soared and the rupee has gained. So things seem to be taking a turn for the better.

Or are they? The International Monetary Fund (IMF) has not painted a particularly bright for the Indian economy. It has sharply lowered its forecasts for India and expects it to grow 4.9% this year, down from a forecast in July of 6.1%. Further, it has pencilled in 6% growth next year, compared to an earlier 6.5% projection. The rationale for these gloomy forecasts has been attributed to red tape, weakening business sentiment, a rising current account deficit and rupee depreciation. Clearly, the spate of reforms announced by the government has not changed the institution's perception of the economy.

In which case, should these estimates be taken with a pinch of salt? It all boils down to how the government implements the reforms it has recently announced. There is no doubt that India does face headwinds in the form of a bloated fiscal deficit and high inflation. As long as these persist, growth will be impacted. In that sense, the near term outlook does seem a little weak and possibly the IMF may not be way off mark.

But it is the longer term picture that ultimately matters. The government has got its act right by going ahead with the reforms process. But the biggest challenge that it first faces is convincing the Opposition the need for these and ensure that the same get passed in Parliament. The process does not stop there. Assuming that this first hurdle is crossed, the government then has to consider the key aspects of implementing these reforms. This is not something that will happen overnight. But it will certainly test the mettle of the current government. And only if these objectives are achieved, can India consider the prospect of high growth on a sustained basis in the future.

Do you think that after the Govt. introducing reforms, the IMF's outlook for India is too bleak? Let us know yourcomments or post them on our Facebook page / Google+ page

 Chart of the day
The slowdown in the global economy has certainly had an impact on the poor, middle class and possibly the rich. But what about those who are categorized as ultra high net worth individuals? These are those people with a net worth of atleast US$ 30 m. Today's chart of the days shows that in the US, there has not only been an increase in the number of these people but also a rise in their combined wealth. This is despite the fact that the US economy has been in a slump for quite some time now. The scenario for the BRIC countries is not surprising. The slowdown in India, for instance, has taken its toll on the super rich. Not only has the number of these people dipped, but combined wealth has taken a beating as well.

*Net worth of atleast US$ 30 m
#Year to July 31
Data Source: The Economist

Basic economics suggest that when supply of a commodity increases faster than its demand, the price comes down. And this is applicable to currencies as well we believe. Thus, when the US Fed announced its third quantitative easing program, there were talks about how the US dollar could undergo a sharp depreciation against other currencies. But implicit in this assumption was the fact that the supply of other currencies would more or less remain constant. Is this really the case? We don't think so. Money printing is going on practically everywhere. And thus to conclude that US dollar will fall on the basis of quantitative easing may not be the right assumption to make. Besides, with the US economy doing better than other developed regions and also the reluctance of other countries to let their currencies appreciate much would place a floor under the dollar we believe.

In view of this, betting on an imminent collapse of the dollar may not be the right thing to do. What can be betted upon and with a fair degree of certainty is the fact that all currencies, including dollar, would continue to fall against precious metals like gold till they sort out their problems. Thus, a small exposure to gold is a must have in one's portfolio we believe.

Ultra Mega Power Projects. 16 of these were envisioned with capacities of 4,000 MW each. Together, these ambitious power generation projects were supposed to rid India of her chronic power shortage problem. The UMPP, as they are commonly known, were meant to bring electricity to every citizen of India by 2012. With the end of 2012 barely 3 months away, not a single power UMPP project is running on full steam. The very first of the lot, Tata Power's Mundra UMPP has also got off to a bumpy start with just 800 MW of capacity in May 2012. Reliant on imported coal from China, the project has been under severe stress. One, Indonesian taxation laws have made imports expensive from Tata Power's captive mines there. Two, electricity distributors who have entered into long term agreements with Tata Power refused to hike tariffs. As a result, the project itself is on the brink of becoming unviable. Meanwhile high debt burden of the UMPP is stressing Tata Power's books. The woes of the other UMPPs are far more complex.

New norms for power projects propose that they will be owned by power distribution utilities. The qualified bidders (power generators) will be mere contractors. They will build the project and collect fee through tariffs for 30 years. The distribution utilities would own the land, denying power firms the option to mortgage land to raise funds. The build operate transfer model is common to roadway projects. But unlike the National Highways Authority of India (NHAI), power distribution utilities are cash starved, nearly bankrupt entities. Banks therefore are most unwilling to take an exposure to the new UMPP projects. Such a crisis in a heavily debt reliant sector like power could mean pushing India's future into darkness.

On a hot October morning, investors were greeted by a horrific sight. The NSE-Nifty crashed by over 19% forcing a 15 minute shut down. Later the news came out that this was due to erroneous orders placed by a leading brokerage firm. The incident brought to light the shortcomings of using software based trading. Even a small mistake can result in huge losses. To avoid such a thing from happening again is important. As a result, Indian stock exchanges have requested the market regulator to narrow the range it allows some stocks to trade in. Currently, the limit for most of the large stocks is around 20%. Exchanges have proposed to narrow this to 9% for the heavyweights in the index. Lowering the limits would prevent flash crashes like the one seen last week. But the problem with lowering limits is that it restricts free trading of shares. As a result, regulators and exchanges need to work out a workable solution to the problem. Setting the right limit is necessary. Otherwise such flash crashes may occur again.

While the developed economies faced problems on several economic fronts, the growth baton had been handed over to the emerging economies. And whenever we talk about emerging economies, the countries that are generally referred to are the BRICS. Brazil, Russia, India, China and South Africa (BRICS). An article in the Financial Times gives an interesting perspective on these economies.

So, what's going on in these promising economies? Will they lead the global economy out of the ongoing crisis? The answer is not as affirmative as it used to be three years ago. The reasons are many. And different for each of the BRICS countries. For one, it is clear that these economies are not quite decoupled from the West. The weakness in the US and the European Union has certainly dented their growth prospects. But a more serious problem plaguing all of these economies is that of incurably rampant corruption. It is evident that this problem is taking a toll on their respective economies. While China is the world's second largest economy and also the fastest growing among BRICS, the country's future is full of uncertainties. It is important to note that China is the largest trading partner for India, Brazil and South Africa. So, the impending slowing in the dragon nation will certainly affect these economies. All in all, the BRICS really need strong political and economic reforms to reclaim their high growth prospects.

In the meanwhile, the Indian equity markets traded firm with the benchmark index, the BSE-Sensex trading higher by about 100 points or 0.5%. Midcap and smallcap stocks also were in favour with the representative indices - the BSE-Midcap and BSE-Small cap indices trading higher by about 0.5% each at the time of writing. Barring stocks from the auto and telecom spaces, buying activity was seen across the board with healthcare and capital goods stocks leading the pack of gainers.

 Today's Investing Mantra
"It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities." - Charles Munger

Click here to read our series on 'Lessons from Charlie Munger'

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1 Responses to "This party seems unimpressed by Govt's reforms"


Oct 9, 2012

I am keeping my fingers crossed.Proposed reforms are not likely to heighten the impression of the institution.The greatest foe of India is inflation.We have not yet forgot happenings in Argentina,Brazil, and Zimbabway.How long the took to reduce inflation and that too has not yet hidden their hydra heads still now.while computing an image of a country IMF will consider a large number of discerning factors.Therefore only announcement of reforms will not lead India to recovery.There may even be a collapse in the Govt.once these proposals are placed in the Parliament in its winter sassion.

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