Why the doomster predictions on Indian economy are wrong... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why the doomster predictions on Indian economy are wrong... 

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In this issue:
» Is Bernanke lying about QE3?
» Will scrapping old private cars help the auto sector?
» Mounting bad loans in China
» Infosys' encouraging second quarter results
» ...and more!

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00:00  Chart of the day
 
No, this is not yet another account of how India's GDP growth is set to breach the 9% mark sooner or later. Nor is this another thumbs up to the economy's demographic virtues. High inflation, tight liquidity and fiscal deficits too remain finely etched on our minds when we speak on the Indian economy. However, there is one upside to the economy's resilience that is being ignored by most experts. The potential to export value added products to other growing economies.

Yes, unlike China, India has always been perceived as an import dependent country. Well, that may remain true for several years to come. But the fact that needs to be noted is that India's export to GDP ratio is rapidly closing in on China's. There too there is a differentiation. Unlike earlier, India's exports are no longer restricted to gems and textiles. Engineering and petrochemicals that comprised barely 14% of exported goods a decade back, today account for a lion's share (42%). Also as seen in today's chart, data from Economist and World Bank shows India's latest export to GDP ratio close on the heels of China's. In fact, China's cheap and low quality goods may soon find fewer takers in its biggest export destinations in the US and Europe. On the contrary, India is not just exporting value added products but also has very little concentration to the barely growing developed nations. The share of goods exported to sluggish US and Europe has dropped from a half to a third in the past decade.

Data source: Economist, World Bank

Coming to India's trade deficit (excess of imports over exports), economists opine that a reasonable deficit is a healthy sign. Certainly better than following China's footstep of building giant surpluses! More so since the funds are recycled as loans to weak Western governments. Thus whether or not the exchange rates support a flourishing export route from India, the future is certainly more crisis resilient here than in China. If that assures you of the Indian economy's encouraging long term prospects, it should certainly influence your investment decisions. For the doomsayers on the Indian economy, sooner or later they are set to be proven wrong.

01:15
 
The Indian auto industry is facing some headwinds in the form of rising input costs, fuel prices and interest rates in recent times. All of which has dampened demand for vehicles as well. Increasing vehicle pollution is also an issue that it needs to address. And so the auto industry body Society of Indian Automobile Manufacturers (SIAM) has made a suggestion to the government that all private cars made before 1996 should be scrapped. This would boost demand for new vehicles and push sales of environment conscious vehicles. SIAM opines that a regular scrappage policy should be put in place for private and commercial vehicles as well as for two wheelers like it in the West. This would ensure that there is a regular churn and burn-out of old vehicles, while adding new and more efficient ones at the same time. SIAM has suggested a cut-off point of 10 years for commercial vehicles, while for private vehicles a cut-off point of 15 years or above could be considered. At present, with no such policy in place, the average age of vehicles on the road is quite high. That said, introducing such a policy without incentives for new purchases, in the form of lower excise and sales tax as well direct cash benefits for those who scrap their old vehicles, may not go down well with consumers.

Do you agree with the suggestion to pass a law for scrapping old private and commercial vehicles as in the West? Let us know your comments or post them on our Facebook page.

01:50
 
Famed commodities investor Jim Rogers is back with his brickbats aimed at Ben Bernanke. According to him, the US Fed is already into another mode of quantitative easing. How exactly? Well, he explains that in August this year the central banker had said that the interest rates would be kept at a low level until 2013. Now, how do you keep interest rates low? You go into the market and force them down. He has openly said that Mr Bernanke is in the market and is lying about it. He elaborates further that the M2 numbers, which are an indicator of money circulation in the economy, have shot up since the first week of August and have been steadily on the surge. It seems that the European Central Bank is also set to go on a quantitative easing (QE) spree in its attempt to salvage the euro. All this hints towards high global inflation in the coming times.

02:30
 
The global crisis has weakened the sentiment for each and every asset class. Stocks are too volatile. Commodity prices have corrected sharply. Debt has become a problem as well. So which asset class would benefit? As per Dr Marc Faber, US dollar is the only asset that will benefit from this crisis. He opines that the debt crisis in US and Europe would lead investors to invest in the US dollar denominated assets like treasuries. And this investment would boost the value of the greenback. He also opines that the European governments would need to pump money into their own economies in order to boost growth. This move would further aid the movement in the US dollar as it is still considered to be safer as compared to the Euro. Unfortunately the US is also on shaky grounds thanks to the mountains of debt that it has piled on itself. So will the safety tag continue to be attached to the US dollar? We are less optimistic than Faber on this point.

03:10
 
China has been growing at a blistering pace since the last few years. Loose monetary policies adopted by the Chinese central banks enabled unprecedented lending thereby boosting investments in infrastructure and housing. It would be worthwhile to note that since September 2008, new loans doled out by banks in China have totaled to US$3.8 trillion. This is significantly higher than the entire GDP of India! Thus, the growth was fuelled by injecting liquidity into the system.

However, after three years of credit boom, concerns have started emanating that slowing economic growth may spur a bad debt problem in China. In fact, if the legendary hedge fund manager, Jim Chanos, is to be believed the situation is about to get worse in the near future. He cites that the property market is an important gauge of where the economy is headed in China. And with China's home transactions falling with a correction in residential prices the situation looks gloomy. If prices correct further it could spell trouble for Chinese banks. While the government is making calibrated efforts like raising rates and imposing restrictions on bank lending to developers it would be interesting to see whether these steps can protect the deteriorating health of its banking system.

03:40
 
Out of the 17 member nations of Euro currency bloc, Slovakia, one of the smallest in the consortium, has given a no go for the plan to overhaul the bailout fund. The bailout is being adopted as a tool of last resort to address the stubborn debt crisis in Greece and other Eurozone nations. However, Slovakia's disapproval to the bailout comes as a pleasant surprise. It finally seems as though someone has the guts to stop foolishly supporting the misdeeds of the powerful.

Issuing fresh debt is no solution to solve a debt crisis. Going by the fate of the first bailout plan, Greece doesn't deserve a second chance, and it certainly is not worth putting the tax payers' money at stake. There is no reason why one nation should pay for the debts piled by another.

However, one also needs to look at possible domino effect if Greece's insolvency spills the crisis beyond its borders. To give money to Greece does not make sense, but there seem to be very limited options. Without the bailout, the situation can get even worse and may doom all members of the euro zone, Slovakia included. However, the success of the overhaul will hinge upon the ensuring fiscal discipline and combining it with a comprehensive strategy to fight the debt crisis.

04:20
 
An encouraging start to the second quarter result season with Infosy's good set of numbers helped the Indian indices surge into the positive territory today. At the time of writing, the BSE Sensex was trading higher by 228 points (up 1.4%). Most other Asian markets were also in the positive. However, Europe has opened on a mixed note.

Infosys today dished out a much better performance as compared to the last couple of quarters. Its net sales grew by 8.2% on a sequential (QoQ) basis while net income grew by 10.7% QoQ. Investors have been skeptical of the US related business which was expected to get an adverse hit due to the economic crisis in the region. Nevertheless, the company was able to see a growth of 10% QoQ in the business from the region. The operating margins were also favorably impacted by lower cost of sales as well as higher rupee rates. Rupee has depreciated vis-a-vis the US dollar in recent times. This boded well for companies like Infosys who earn a substantial part of their revenues in dollar denomination. However, what remains to be seen is whether this performance is one time or is sustainable.

04:50  Today's investing mantra
"Bear markets happen for a simple reason. The owners of the merchandise can't get their asking price. The shortage of buyers forces them to lower the fare, until a buyer can be coaxed into making a deal. It's a common occurrence in retail. Stores have a bear market after every Christmas rush" - John Rothchild
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38 Responses to "Why the doomster predictions on Indian economy are wrong..."

Uddhao Raoji Shende

Nov 13, 2011

Scrapping of old vehicles is in the national interest;not only commercial but all auto-vehicles which have become too old also.The act should be passed because i)it will decrease the air pollution ii)it will boost the auto-industries following the tremendous demand for new high-tech but economic vehicles emerging new market competitors.iii)this situation will generate the employment opportunities subsequently... Uddhao Shende,Nagpur.

Like 

Col R N Gokhlae

Nov 1, 2011

1. SIAMs gone nuts, Defence personels seldom drive their vehicles except in peace stations,thats after every two years. My car has done 72000 kms in 16 years.

2. The govt is collecting PUC every six months and pollution tax 3500 for 3yrs for vehs over 15 years.

3. A 3 lakh car not used will incur a standing cost of rs 20000 a year thats 1750 a month. Its better to travel by taxi and invest this amount.

Like 

Ramesh Kumar Nanjundaiya

Oct 25, 2011

YET ANOTHER VIEW - by Ramesh Kumar Nanjundaiya - as recently appeared in The Economist, London - On the present state of the Indian Economy.
One-track bind
Oct 8th 2011 4:45 GMT
What is the current state of the Indian Economy - The Indian Paradox 2011
QUOTE
India’s economic growth rate in the past decade has been nothing short of spectacular. With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world. However, the country’s manufacturing sector accounts for a dismal 17 percent of its employment opportunities, as compared to 60 percent in agriculture and 23 percent in services.[1]This summer, the World Bank’s Indian Visiting Scholars Program* invited two leading academics from Harvard University to visit India and to articulate potential pathways to sustain the country’s growth trajectory. These 2 scholars are Ricardo Hausmann, Professor of Economic Development at the John F. Kennedy School of Government and Director of Harvard’s Center of International Development and Dani Rodrik, Professor of International Political Economy at the Kennedy School. While there, they interacted with the private sector and key policymakers, including senior officials of the Department of Industrial Policy and Promotion, the Planning Commission, and the Ministry of Finance. Hausmann argues that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India.
UNQUOTE
My response
What is the current state of the Indian Economy and where is it headed – While I fully understand and appreciate Hausmann’s views that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India, his observation that rich economies produce many products whereas developing economies produce few products that are also made in rich economies calls for a discussion. It is true, that this relationship exists not only between countries, but also between cities within a country. What is therefore the secret of India’s economic growth rate in the past decade which has been nothing short of spectacular? With its GDP growth around 7 to 9 percent per year, India is the second-fastest-growing large economy in the world. Who is the driver for this. Before we answer this, one needs to revisit the American Economic Historian W.W. Rostow who in the sixties had suggested that countries passed through 5 stages of economic development as Traditional Society, Transitional Stage, Take-off, Drive to Maturity and High Mass Consumption., Would this today apply to India. Many development economists argue that Rostows's model was developed with Western cultures in mind and not applicable to developing countries as India as it is generalised and policy makers are unable to identify the various stages as they seem to overlap each other. It depends how you look at it. It is a growth model and we should examine if there is actual all round development to witness the 9% GDP growth. One of the contributors for this is the growing “Indian Middle Class”. While the reasons are varied, but one which has really propelled up the Indian economy ( I would say, in the last 6 years) is the growing buying power of people in the so called "Middle Income Group" which in the case of India, per my estimation, represents almost 300 million people. This is a huge market to cater to and is growing. This group is the one which is pushing demand locally and thus giving a boast to the economy. It is a life cycle change in the population group. This is the group which is spending on all goods and related services. Because of such a growth demand for goods/services, banks will certainly witness increase in their lending in the next couple of years. This fuels continuous economic growth (notwithstanding inflation) The rosy side is that when the economy grows, the equity markets become much more active and again adds for the economy growth with more people coming into the "Middle Income Group of People" or the people with buying power or cash to spend. Thus going back to W.W. Rostow, we are somewhere in between stage 3 and 4. But at this stage, one needs to be very careful. While India seems to be embarking on a high-growth strategy today, it must guard and overcome some global trends which include global warming, the falling relative price of manufactured goods and rising relative price of commodities, including energy; swelling discontent with globalization in advanced and some developing economies, the various ongoing “scams” which could eat upto 2% of the GDP, the growing “young population” which should not become a struggle (almost 400 million in the age group of 15 to 30 years) to cope with and the ongoing mismatch between global problems—in economics, health, climate change, and other areas—and weakly coordinated international responses. Notwithstanding the challenges, the support of the global economy remains central for the current Indian growth story or as they call it the - The India Paradox: Promoting Competitive Industries in a High-Growth Country.
RAMESH KUMAR NANJUNDAIYA

Like 

Nitai Mahatha

Oct 18, 2011

its a good news for the persons involved in manufacturing vehicles along with the persons involved in marketing,finance,distribution,insurance etc.but the back bone of the business,the consumer ,is not considerd at all.Vehicles used for public transport should not be taken at par with that of private transport.Any vehicle that fulfills the safety norms should not be scrapped off.

Like (3)

Dhar

Oct 14, 2011

SIAM then made good vehicles,packaged and sold them better.We Indians too got addicted to our vehicles.Now after 15 years SIAM says those vehicles are lousy and need to be scrapped!They want to replace those with newer(and flimsier)models.Better not to ask a hairdresser if we need a haircut.SIAM's stake in this issue is obvious.Better leave it to the users,and heavily incentivise them for replacing old cars.

Like (3)

Vikash Kandhway

Oct 13, 2011

SIAM is trying to make a make a fool out of the Indian government and the general public by pretending to put forward an idea that would reduce energy consumption and pollution. Do they have an estimate of much energy goes into producing a new vehicle and how much pollution it creates? Can they tell how well it will compare with the reduced fuel consumption and pollution on the roads. Also, it is its members who are responsible in the first place for manufacturing these so called "inefficient" pre-1997 vehicles. So, its members should me made to pay at least partially towards replacing those vehicles which SIAM is now claiming to be "inefficient".

Like (3)

Kunal Kundu

Oct 13, 2011

While I do agree with the assessment on exports, I think it is also important to note the impact of INR depreciation. While the INR has depreciated steeply recently, fact is, even when it was strong vis-a-vis dollar, India's REER did not indicate as much appreciation. In fact, the INR was still weak. I think it is important to be cautious while such drawing conclusions.

Like (3)

B M Lal

Oct 13, 2011

I feel that India being a poor country there will be opposition to scrap private cars at 10-15 years.A via media of scrapping these after 20 years should be acceptable.One time road tax should be taken for 20 years for a new car and no further extension be given thereafter

Like (3)

P. Jaiman

Oct 13, 2011

Till some times back the “EXTRA ORDINARY THINKERS” were limited to Western Countries only, those have the ability to increase problems many fold by not focusing on the root cause of the problem but some where else wherever lobbying is stronger. So congratulations to “Society of Indian Automobile Manufacturers (SIAM)”, it appears that now west has reached east, GREAT - SIAM.

SIAM you are great, you have Great idea. Who has time to think for improving the conditions of road, their widening, who has time in Government to focus on the root causes. Which factors are more dominating in the domain of this problems, the condition of the private vehicles or the government vehicles, the condition of road for which lot of taxes are collected or the vehicles running on it? Well friends now any thing can happen in our country also, let us be ready for it.

Like (3)

Dr K B Patil

Oct 13, 2011

It is a good idea to scrap 15 year old private vehicles and 10 year old commercial vehicles,with attractive incentives to those affected by this law.It is good for the individual as well as state,above all the environment.

Like (3)
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