Indian economy is facing a rising danger - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Indian economy is facing a rising danger 

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In this issue:
» Hotel occupancies in Asia are improving
» Emerging markets have better growth prospects
» SEBI cracks down on promoters
» Govt. caps stake sale proceeds this year to Rs 400 bn
» ...and more!!


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00:00
 
Rise in capital inflows in India and the consequent buoyancy in the stockmarkets has led to a lot of euphoria among investors. The logic being that as long as the US and Europe continue to struggle, money will find its way to Indian shores. There is a grain of truth in this. But to assume that this scenario will continue forever could be dangerous going forward.

For these capital inflows, while displaying a surface of increased optimism, reveal murky waters underneath. There are several issues. For starters, a surge of foreign portfolio investment into India has helped push both the stock market and the rupee to pre-crisis levels. If you look at the statistics, FT has reported that Since January, India's equity and bond markets have attracted a record US$33.8 bn in foreign funds as the country's economy grew robustly. In comparison, foreign direct investment, which is long term in nature and is required in greater amounts by India to sustain growth, fell by 35% YoY. This is a worrying sign.

The other big problem is the overheating in the stockmarkets as well. Too much money being poured in by the FIIs raises the danger of them pulling money out in large numbers as well. The continued recession in the US and Europe is not helping matters. And to top it all, a string of IPOs being announced by PSUs is only seeing more and more money coming India's way. As a result, valuations of many stocks have run ahead of fundamentals and picking up good quality stocks at reasonable prices has become cumbersome.

Those in favour of these inflows argue that these inflows would be absorbed given India's widening current account deficit. But over-reliance on them is unsustainable and will surely spell bad news for the Indian economy going forward. So far, India has not been very pro-active in stemming the flow of foreign money. The Finance Minister opines that it is not time yet to press the panic button. But India cannot afford to be complacent and will have to start considering some measures before the increased liquidity spirals into a bubble.

Do you think the FM is getting complacent? Share with us, or post your comments on our Facebook page.

01:24  Chart of the day
 
2009 was not a particularly good year for the hotel sector around the world. As the credit crisis deepened, economies across the world were adversely impacted. Little wonder then that as business slackened and consumers tightened their purse strings, hotels saw their occupancy rates plummet. 2010 has however, been a different story with recovery taking place. As a result, hotel occupancies have also perked up in the period January-September 2010 especially in the Asian countries. And today's chart of the day shows, that occupancy rates in China have raced way ahead of its peers.

Data Source: The Economist

02:01
 
Have you wondered why after accounting for half of the world's GDP, emerging market stocks get only a fraction of allocation reserved for their developed counterparts? Well, in earlier years we could have put this down to risks inherent in the emerging markets. However, post the financial crisis, the global investment community needs to have a serious rethink. It is not the emerging markets that are risky anymore. Infact, it is their developed counterparts as they seem saddled with too much debt. In contrast, emerging markets have very little debt and also have much better prospects for growth. In view of this, an article in FT has argued that it is time the entire asset allocation process is given the thought it deserves. In other words, allocation to emerging markets has to go up substantially. We for one find no fault with this line of thinking. But the question that remains is will this change happen anytime soon. Certainly not for an industry that is so used to getting caught in the herd mentality. However, a slow structural change is indeed par for the course. And this could mean still higher FIIs for India in the times to come.

02:41
 
Some good news for minority investors. Promoters who use the shareholding to their advantage and accumulate wealth at the cost of the minority shareholders will no longer be allowed to do so. The practice of promoters allotting warrants to themselves has been a rampant practice during bull runs. While the pretext is to pump cash into the company, often the promoters make a killing out of the deal. This is when the conversion price is a steep discount to the market price. However, if the markets crash prior to the conversion of warrants, the promoters get away easily. Only the 25% advance payment made by them during the allotment of warrants is forfeited.

With the SEBI's crackdown on the promoters who indulge in such unacceptable practices, things are set to work in the minority shareholders' favour. The regulatory body has disallowed companies to issue fresh warrants to promoters for a year after they have failed to exercise the earlier ones. Promoters will also not be issued warrants if they have sold shares in the previous six months. In the wake of these, the minority shareholders' interest may no longer be compromised.

03:14
 
The Indian government has decided not to raise more than Rs 400 bn through stake sales in the public sector companies. This is the amount that was budgeted for the current fiscal year. For this reason, there are possibilities that the planned stake sale for oil major ONGC may not happen this year. The government has stated that the follow on offers for Indian Oil and SAIL scheduled for later this year, would help meet its budget requirement for the year. Therefore, further stake sales may be put off for later. The Indian government has already raised Rs. 170 bn through the stake sale in Coal India. It has also received huge amount of funds through the 3G and BWA auctions held earlier during the year.

03:39
 
The government managed to divest stakes in six companies so far this year. It has learned to keep first time investors happy by pricing its IPOs and FPOs reasonably. But, will these PSUs continue to maintain shareholder interest in the long run?

PSUs may soon be learning the ropes from the best in the business. They will be incorporating best case practices in investor relations from companies like Infosys, Wipro and Airtel. SCOPE, the representative body for central public sector companies will help them through this process. The Coal India IPO attracted large overseas institutional interest. Good corporate governance and strong investor relations however, will be a key to it rewarding shareholders in the long term.

04:02
 
The US may be busy pointing fingers at China for manipulating its currency. But now fingers have begun to be pointed at the US itself. At a recent G20 meet, an official from Germany's finance ministry opined that the US' extended push towards easier monetary policy may amount to 'manipulation of the dollar'. The German official felt that excessive and permanent money creation could easily end up being an indirect way to manipulate the dollar's exchange rate. The US central bank completed purchases to the tune of US$ 1.7 trillion of debt in March this year to support the recovery. As per some estimates, the central bank may buy about US$ 100 bn in government debt a month going forward. This amounts to US$ 1.2 trillion over the next year. Thus, Germany is right in pointing out that this could lead to the devaluation of the US's own currency. Something that every country seems desperate for these days.

04:41
 
After moving around the dotted line for most of the morning session, the Indian markets dipped into the red as selling activity intensified post noon. Led by selling activity in heavyweights from the metal, banking and healthcare spaces, the BSE-Sensex was trading lower by about 0.5% at the time of writing. Asian markets were down today led by China and Japan, which ended lower by about 0.3% each.

04:54  Today's investing mantra
"The intelligent investor is likely to need considerable will power to keep from following the crowd." - Benjamin Graham
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14 Responses to "Indian economy is facing a rising danger"

jnm

Oct 29, 2010

FM is either totally wrong or is protecting the interests of those corrupt Indians who have stashed abroad Rs. 300 lac crores; and who rotate their money thru p note / FII route. May God help India that is Bharat

Like 

ramaraom3

Oct 28, 2010

i am sure the fm has something up his sleeve. he must be closely watching.
i feel at some stage the fdi and investment in bourses/bonds must be linked. also more avenues for profitable hassle free investments must be openedup.

Like 

swaminathan

Oct 28, 2010

Massive short term flows is a problem by itself. The fact that we also run a current account deficit consistently makes the problem worse but we are trying to bask in the glory of both. The proper course is to let the current account deficit correct itself through currency movements but we do not seem to want this. Let us remember that this particular aspect of our economy is common with US, big current account deficit financed by inflows from foreigners. Only that, in the case of US, the numbers and even the percentages are bigger. But, our current account deficit as a % of GDP has started to increase because our invisibles (software exports and expat remittances among others) are not growing at the same rate as our imports.

Like 

K Pradeep Kumar

Oct 27, 2010

Yes. The Finance Minister has become complacent. No doubt about it.

Like 

Murali Krishnan K

Oct 26, 2010

In my opinion, the PANIC BUTTON should have been pressed long before. Had it been introduced, the last market crash could have been averted

Like 

sunilkumar tejwani

Oct 26, 2010

neither the finance minstry nor the RBI has taken any step in the direction, it seems that both are rejoicing the euphoric rise in the markets. So far, the steps taken by RBI are only symbolic, didin't have desired effect. & to top it all government at the centre is busy offloading stake in various PSUS' at higher prices, for which it needs a buoyant stock market to enable it to garner funds for its wasteful puproses.The CWG (Common wealth Games) is the latest example.
The funds raised thru stake sale in PSUS' goes into the coffers of the governemnt, not in to PSUS having no effect on thier balance sheets. It is a sad commentary on the governance, that tonnes of food grain is rotting & 1/3 population goes sleeping hungry. Classic case of Nero fiddling when Rome was burining. No one at the helm is really converned about unabated rise is the stock markets, FED on a currency printing spree & our finance minister's ostritch like attitude will keep fuelling the rally, until the cookie crumbles.

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Praveen Bhargava

Oct 26, 2010

India had started showing its shine to the rest of the world from 1991 onwords by opening the doors to come and invest in India and vica-verse.Now we had travelled a long way of 20 years by opening our economy to the whole world.Since then so much economic activities had taken place in our country as well as in so many other parts of the world by our industrialists and investors that it is not possible to remember or count them.
This is the reason that in a short span of 20 years or so India is being counted as a 2nd largest emerging economy in the world after China.
We have gained grounds of progress due to our increasing production being set off by own increasing consumption and also increased exports.This wheel of progress is gaining more success due to the skilled labour and big industrialists of India not only in India but in so many other parts of the world.
In very recent times India has faced bravely the world wide recession on its own footing and emerged as a successful example for the world to face such a severe recession with increasing growth in our GDP.This all happened due to the fundamentally strong economy.
Investors of USA,Europe and other countries shows their strong faith in Indian Economy and have invested billions of Dollors in Indian Stock markets as well as other areas of economic activities.In the near future say 5 to 10 years it is very much certain that their faith will not be tilt and India's economy will grow with the 8.5%growth and whole world will see that in the year 2020 India will emerge as a new economic power.
Seeing the recent economic growth of India for the last 10 years or so in almost all the fields count a few-Automobile,Electronics,Steel,cement,Telecom,Infrastructure,Medicine,Power Etc.,it is very much certain that there is no danger what so ever to the INDIAN ECONOMY in the near future.

Like 

v.k.arora

Oct 26, 2010

Due to unabated foreign inflows the stock markets are entering into a bubble zone and the inflation is getting out of control.The FM and RBI are not taking the matter seriously and the steps already taken by RBI are not proving effective. In this whole process the common man is suffering due to vety high prices of food items .

Like 

vasant vora

Oct 26, 2010

para02-01 gives the answer to para00-00

Like 

Om Prakash Sharma

Oct 26, 2010

Yes all Govts have been and will be cmplacent as they get pleasure seeing the market rising so that they can mesmerize the people to vote for them. After they lose nothing in this process.They have their money coming through PE Notes.( their money being stashed awy in Swiss bank.)

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