An opportunity India should not have missed... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

An opportunity India should not have missed... 

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In this issue:
» OPEC is worried about the global economy
» Indian govt. plans to increase coal production
» Fed's QE to rise to US$ 1 trillion a month
» China's debt to get out of control
» ...and more!

For all the harping on how well emerging economies have done in the past several years, they may have actually missed out on a crucial opportunity. One that would have made them major forces to reckon with in the global arena.

The 1997 Asian financial crisis was a turning point for many emerging countries. Having burnt their fingers badly, most of them set about to put things in order. They reduced their dependency on foreign currency debt, cleaned up their public finances and built huge forex reserves. As reported in the Financial Times, these were first generation reforms that lent stability to their respective economies ensuring that they were better prepared should another crisis strike.

But implementing reforms should not be looked upon as a one time event. There has to be constant efforts by governments to identify key problem areas and find effective long term solutions to address them. This is where emerging market economies probably failed.

In the years before the 2008 global crisis, emerging countries were growing at a scorching pace. Because growth in the developed world was relatively subdued, a lot of foreign money began to find its way into emerging markets. Even post the crisis, when quantitative easing became the new recipe for the developed world, emerging markets became the preferred destinations for this excess money to be parked. This was the perfect opportunity for the emerging market governments to implement some more big ticket reforms that would further cement the faith of serious investors in these markets. But that did not happen. Most governments chose to put their feet up and relax. There emerged a misconception that this kind of buoyancy would continue forever.

The importance of this missed opportunity has especially become more glaring today. Countries such as India and China have seen their economies slow down. India particularly has also to deal with the problem of a sliding rupee and deteriorating current account balance. Its public finances are also strained. The irony is that when key reforms have become crucial to pull itself out of the slump, it does not have the means to do so. This has been the case with other emerging countries as well such as Brazil.

It would be too early to write off the growth story of emerging economies. Time will tell how the situation ultimately pans out. But there is no denying that reforms are important. And because of complacency in the past, implementation of these reforms will be a more difficult now than it would have been in their heydays.

Do you think that emerging countries have slowed down today because of their failure to continue implementing reforms? Let us know your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
IMF's GDP forecast for 2013 and 2014 is a mixed bag. While growth in 2013 for most of the countries is nothing much to write about, the scenario in 2014 is not very compelling either. Countries such as China, Japan and Brazil are expected to record lower GDP growth in 2014 as compared to 2013. Others are expected to do better. India in particular is estimated to grow by 5.1% in 2014 as against 3.8% in 2013. This year has been a challenging one for the country as economic activity has remained sluggish, rupee has weakened and consumption has dwindled. But the monsoons have been good. And while growth of 5% is nowhere to what it was before the global crisis, considering various challenges, it is certainly an improvement.

IMF's GDP forecast for 2013 and 2014
Source: The Economist

Can the Indian economy's near term future be predicted without an analysis of its monsoons? Certainly not we believe. Not taking monsoons into consideration will be a total waste of effort. Simply because more than 60% of its population is dependent on agriculture. By the same token, OPEC has every reason to be worried about a weak global economic outlook. The organisation, which supplies about 40% of world's oil, has asked to its member to remain on its guard over the next few months. The reason being there are a few concerns over global economic growth going into the year 2014.

And these concerns are not without reason we reckon. Europe is still mired in its labour issues while emerging markets like China and India's growth challenges are already on display. Besides, there is a possibility that US monetary stimulus could also be eased. As a consequence, there are enough factors that could prove to be a drag on oil prices. Certainly not a happy scenario for OPEC members where a huge chunk of the economy depends on oil exports. This is however good news for India as it could aid in bringing down further its precarious current account deficit problem.

A couple of days back we wrote about how India is having to waste precious foreign exchange on a resource it has in surplus. The problem of coal supplies for India's thermal power plants is not new. But with Coal India doing little to justify its monopoly status in controlling coal fields, the supply constraints have got magnified. The government has tried everything. It allocated captive coal blocks to power generators. It also allocated coal blocks to large manufacturing facilities wanting its captive power supply. However, the license to mine coal from most of these blocks remained mired in corruption and red tape. The result being that despite the availability of coal, India kept importing more than 100 million tonnes of coal year after year. The policy makers seemed to have finally smelled the coffee. Alarmed by the economic impact of fuel shortages, the government plans to mine an additional 240 m tonnes per annum (mtpa) of coal from 26 new fields in the 13th 5 year plan (2017- 2022) . However, it seems even this target may not be met. For the government has overlooked the fact that it takes a minimum of around six years for the coal to be mined from the date of allocating a field. Thus, India's coal sufficiency remains a distant dream. And those hoping to find electricity in every Indian household will need to wait much longer.

The US government averted a potential default by raising the debt ceiling. This means that the quantitative easing (QE) program will continue at least for the time being. But the US Fed had stated (earlier) that it will roll back the QE over a period of time. So what will actually happen? Marc Faber is of the opinion that the QE program will never really end. He has stated that the Fed will eventually raise the program to US$ 1 trillion a month!

It is currently at US$ 85 bn a month. He feels that this is necessary as the US has basically put itself in a box like situation. The economy cannot grow without the QE funds. Unfortunately the economy has not really displayed any spectacular growth with the QE funds either. The reason for this is that the funds have helped only a selected section of people and not the economy at large. We have stated several times that the US is in a catch 22 like situation. The cheap funds have become akin to a drug. And the withdrawal from it would be even more painful than the addiction itself.

Debt is a doubled-edged sword. On the positive side, it can accelerate growth and development. But if not controlled well, it can lead to severe financial crises. And history is proof. Almost all financial crises have their roots in excessive debt.

This is what worries people about China. The rapid pace at which it has grown its economy is indeed commendable. But now, it is sitting on a massive debt pile. And there is no quick fix solution for such a debt problem.

An article in CNN Money validates our concerns. In the aftermath of the 2008 financial crisis, Chinese policymakers eased credit and doled out several stimuli. And now, the dragon economy is finding it tough to curb the fast mushrooming corporate and government debt.

Take the local government debt for instance. As per certain estimates, local debt stood at close to 20 trillion yuan at the end of last year. That's nearly one-third the size of China's GDP.

What is even more worrying is that this figure has almost doubled in just 3 years. The latest set of numbers from a nationwide government debt audit is expected shortly. We wouldn't be too surprised if we witness a major financial crisis in China anytime soon.

In the meanwhile, Indian stock markets continued to trade below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by 42 points (0.2%). The sectoral indices were trading mixed with stocks in the consumer durables and oil and gas leading the losses. However, stocks in the power and capital goods were leading the gains. The major Asian stock markets were trading mixed with stock markets in China and Indonesia witnessing maximum losses. However, the stock markets in Singapore and South Korea were trading firm. The major European markets opened the day on a mixed note.

04:56  Today's investing mantra
"If a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result." - Charlie Munger
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3 Responses to "An opportunity India should not have missed..."


Oct 23, 2013

I agree that it is an opportunity India should never have missed,and our fully to blame for this shocking negligence.


ajay k gupta

Oct 23, 2013

Our leaders are busy in looking what else they can domor how to cover up?


Palanisamy Senthilkumar

Oct 22, 2013

Premium writeup is an excellent idea and within two days I believe I received my money's worth. Kudos for the equitymaster research team. Thank you very much.

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