Is India's growth story in danger? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is India's growth story in danger? 

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In this issue:
» Near term outlook for Indian banking sector not so rosy
» Bribing scam. Will this lead to a crash in property prices?
» Centre criticizes ridiculous air fares in the peak season
» Impact of fertilizer subsidy on fiscal deficit
» ...and more!!


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00:00
 
'Rotten to the crore?', screams a headline on one of the world's most widely read financial magazines, The Economist. Indeed, India's scams are now grabbing international headlines as well. The content of the article though is nothing new. Besides presenting an excellent synopsis of the outbreak of recent scams in India, it does precious little. Of course, it harps upon the reducing moral standards in India. But truth be told, this 'holier than thou' attitude doesn't quite cut it with us. Especially at a time when morality has plumbed to new depths in the West.

India's malaise though, is too dangerous to be underestimated. If not stopped in its tracks, this problem of widespread corruption presents perhaps the biggest danger to the India growth story. Fortunately for us, we don't think the hurdle is too difficult to overcome. We derive this rather bold looking comfort from two facts. First, the presence of a reasonably well functioning democracy in India and also the presence of a well functioning trade and capital markets. Turn back the pages of history and one will come to know what we are trying to say. No other system has done more to lift billions of people out of poverty and improve their standard of living manifold than a democratic government and a capitalistic market place. Hence, India certainly is on the right path as far as these two systems are concerned.

Where we seem to have gone wrong is that increasingly, we have started mixing the two. And that is a dangerous combination to have. You see, democracy functions on the basis of the common interest whereas capitalism strives on personal interest. Hence, it is not at all advisable when politicians start getting closer to businesses. Because this amounts to them giving precedence to their own personal interests rather than that of the people they represent. Hence, the sooner they start distancing themselves from businesses and instead, start thinking about the common interest of its people, the better it will be for India. We believe that Indian society does have enough checks and balances to ensure that things are controlled before they get too out of hand. It is upon us, the citizens of the country to ensure that their sanctity is preserved.

Do you think the India growth story is at serious risk from the outbreak of these scams? Share your views.

01:25  Chart of the day
 
Prices of gold and oil have moved in tandem in recent times. Commodity prices across the board have been going up since the announcement of QE2 by the US. However, recently, the relation between gold and oil seems to have broken away as they part in directions. Fears surrounding Euro zone and clashes in the Korean peninsula have caused investors to renew their interest in gold. However, oil prices appear to be cooling down as investors are now seeking safer investment opportunities. Today's chart of the day highlights the relationship of oil and gold prices in the recent past.

Data source: CNNfn, Kitco

01:48
 
As scams preoccupy news space across media, investor appetite for Indian stocks already seems to be on the decline. At such time, the scrutiny over the quality of assets in the banking sector could not be more ill timed. Thanks to greedy overtures by some banking officials, the sector is being held to ransom by investors. The RBI has never been comfortable with the sector's high exposure to real estate assets. And the latest development could ruin lending prospects to the same even further. Not to mention the thinning spreads that sector is having to contend with. Thus the time is ripe for investors to be on the lookout for some good bargains in the sector. The near term prospects for the banking sector are certainly not rosy. But it may be very opportune to buy some fundamentally strong banking companies during times of such crisis.

02:28
 
After an unprecedented rise in property rates, is a pricing relief for a genuine home buyer just around the corner? Well we think so. Post the housing loan scandal finance minister Pranab Mukherjee has directed state owned banks to go in for a critical appraisal for loans above a certain threshold limit. As banks would now be more cautious in sanctioning loans to the developers the move is likely to suck out the liquidity from the sector. This may force the builders to cut prices in order to improve their cash position. Until now the builders were holding on to the prices as they were able to manage their working capital cycle through either pre-sales or bank loans. With pre-sales dying down due to high prices and banks being reluctant to lend in light of the recent ruckus we believe price correction is just around the corner. Again with borrowing rates likely to become expensive as banks would now be reluctant to lend it could prove to be a double whammy for the developers. In such a scenario releasing inventory at lower prices could be the best possible alternative and a blessing in disguise for genuine home buyers.

03:08
 
The Indian airline industry was badly hampered by the global financial crisis. Especially since travel reduced and caused most companies to plunge deep into the red. But the scenario now seems to have changed. With passenger demand rising, airlines are leaving no stone unturned in raising airfares. In fact, in recent months, the rise in airfares has been so steep (up around 50%) that ministry of civil aviation is considering price bands for airlines. The civil aviation minister, Praful Patel, has claimed that the huge increase in airfares in recent times has been inappropriate and arbitrary. He further went on to say that airfares on every sector or route should have a lower and higher limit. This in turn must be notified in advance on the websites of airlines. Also, the price band will have to be fixed in consultation with the civil aviation industry. This might spell good news for harrowed travelers. But whether airline companies toe the line remains to be seen. Especially since these companies are already saddled with the burden of higher taxes on aviation fuel.

03:39
 
The fertilizer ministry has sought an additional Rs 300 bn to meet the rising subsidy bill, bringing the government's finances under stress. The ministry has projected a revised demand of Rs 822 bn as against the budgeted Rs 528 bn, citing hardening international prices of key inputs and imported fertilizers. The petroleum ministry could also seek extra funds to compensate oil companies for higher losses incurred in selling fuel at below cost.

The Ministry of Finance had raked in more than Rs 1,000 bn from the auction of 3G and broadband airwaves against a budgeted Rs 350 bn, but most of the extra funds have already been absorbed by the higher subsidy burden. The government has already committed an additional expenditure of more than Rs 750 bn in the current fiscal through two supplementary demands for grants. However, the Finance Minister does not think it will have much impact on fiscal deficit as all additional expenditures relates to developmental outlay.

04:11
 
Troubles for the Euro zone appear to be far from over. Ireland's recent acceptance of bailout funds from the IMF and European Union seems to have controlled the situation as of now. However, it does not appear to be a long term solution. As per Morgan Stanley's global economist, the contagion effect is imminent in Europe. Countries are so deeply buried in debt related problems that sooner or later they would end up screaming the need for a bailout. This would lead to a contagion effect as one country after the other starts to go down like a game of dominoes. Whether they rely on the European Union to bail them out or not, they will definitely need funds in the days to come.

04:32
 
In the meanwhile, the Indian markets were trading in the red, but much higher than the day's lows as buying activity picked up during the post noon session. The BSE-Sensex was trading 44 points lower at the time of writing. Stocks from the banking and IT spaces were in favour at the time, while those from the realty and consumer durables were amongst the top losers. As for rest of Asia, markets were trading weak with China, Hong Kong and Japan trading lower by about 0.5% to 1%.

04:50  Today's investing mantra
"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." - John Templeton
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44 Responses to "Is India's growth story in danger?"

Siddhartha

Aug 15, 2011

Most of the communities in the entire Indian sub-continent(such as Bengali) succumbed in ‘Culture of Poverty'(Oscar Lewis), irrespective of class or economic strata, lives in pavement or apartment. Nobody is at all feel regret ed or ashamed of the deep-rooted corruption, decaying general quality of life, worst Politico-administrative system, weak mother language, continuous absorption of common social space (mental as well as physical, both). We are becoming fathers & mothers only by self-procreation, mindlessly & blindfold(supported by some lame excuses). Simply depriving their(the children) fundamental rights of a decent, caring society, fearless & dignified living. Do not ever look for any other positive alternative behaviour(values) to perform human way of parenthood, i.e. deliberately co-parenting children those are born out of ignorance, extreme poverty, need to strike hard at fundamental point. It seems that all of us are being driven only by the very animal instinct. If the Bengali people ever be able to bring that genuine freedom (from vicious cycle of ‘poverty’) in their own life/attitude, involve themselves in ‘Production of (social) Space’ (Henri Lefebvre), initiate a movement by heart, decent & dedicated Politics will definitely come up. – Siddhartha Bandyopadhyay, 16/4, Girish Banerjee Lane, Howrah-711101.

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B S GANESH BANGALORE

Apr 8, 2011

The greatest crime our former politicians have committed to the country is to make political posts as salary posts instead of only remuneration of nominal amount of Rs 1000 or so during their peiod only like committees members of co-operative banks/ societies. When they are prescribed any qualification and are not selected by any competitive public service commisssion with prescribed qualification, experience etc and selected by the head of the party based on winnabilty ?. B S GANESJH BANGALORE

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fmgheesta 20.11.2010

Nov 29, 2010

The rot is so deep, and the audacity so brazen, that unless time bound capital punishment by public hanging is introduced for proven corrupt politicians, bureaucrats, and public servants within a year of their arrest, together with simultaneous confiscation of all properties and blacklisting of their immediate families from state benefits, public life and employment is enforced without fear or favor, nothing can cleanse this murky system which is driving our nation to self-destruction, and anarchy.

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o p banmali

Nov 28, 2010

YOUR COMMENTS ON CORRUPTION IN INDIA VERSUS WESTERN COUNTRIES MADE AN INTERESTING READING and your advice to politicians to maintain a distance between their personal interests and common public interests is required to be followed by all politicians and a mass movement is required to contain the malady. INDIAN DEMOCRACY IS SUFFERING FROM CANCEROUS CORRUPTION AND POLITICIANS HAVE BROUGHT THE ECONOMY TO THE OPERATION THEATRE. YOU HAVE SUGGESTED A SHARP EDGED INSTRUMENT TO operate immediately and save the economy from greedy politicians and crazy bureaucrats

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ROGER

Nov 28, 2010

I AM A SAD AND DISGUSTED INDIAN AND I'M CONVINCED TODAY THAT IN INDIA YOU CANNOT MAKE IT RICH BY BEING HONEST, HARD WORKING BUT GOING THE CROOKED POLITICIAN WAY PAYS DIVIDENDS, SO I BLAME THE CORRUPT INDIAN CONGRESS GOVERNMENT FOR CHANGING MY BELIEFS THAT HONESTY PAYS IT NEVER DOES NOT IN THIS INDIA.

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ROGER

Nov 28, 2010

YES IT IS IN DANGER OF LOSING ITS SHINE AND THE TRUST OF INDIAN AS WELL AS FOREIGN INVESTORS WITH ALL THE SCAMS THAT ARE PRESENTLY PREVAILING IN INDIA THIS WILL DEFINITELY EFFECT THE ECONOMY, FII WILL START WITH DRAWING THEIR MONIES FROM THE EQUITY MARKET AND LOCAL INVESTORS WILL BE APPREHENSIVE TO CHANCE INVESTING THEIR HARD EARNED MONEY INTO CORRUPT INDIA GOVERNMENT RUN COMPANIES,THE SOLUTION HANG CORRUPT OFFICIALS AND PROVE TO THE WORLD AND US INDIANS THAT THE CONGRESS GOVERNMENT MEAN BUSINESS.

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Vinay

Nov 28, 2010

India's growth story was,is and will be in danger until a shock treatment is administered to end corruption. This corruption is a typical politician + beuracrats + police + judiciary nexus and thus threatening the roots of economy.
First these vested interests frame complicated laws and procedures so that you need manipulators and middlement.
The remedy is very simple. Make simple laws and procedures thereby making compliance easy and ensuring easy access for all.

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S A Padmanabhan

Nov 27, 2010

The one glaring bad point of democracy (not denying of many good points)is the inability of any ruling government to act firmly on good issues such as equality irrespective of cast and religion, devolopmenal works and bad issues such as corruption, murders,terrorism etc.,due to vote bank politics, political compulsions and ofcourse bribery. So I think India's growth story is definitely in danger

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A. Pereira

Nov 27, 2010

Funny enough, I received a call today from a marketing executive of the leading private sector bank in the country offering me a housing loan in India. As I had changed into my own small business recently (after several years working in banks), I knew this bank would not be able to give me a loan. And rightly, the guy told me that since my business has no history and that I dont have a regular salary, I cant be given a loan. I said thank you, I fully understand, but I asked him, if he was giving me a 'housing loan' on a mortgage basis, or a business or a personal loan? How much more security did his bank want from me? My question could be the topic for next bankers summit or a board room discussion - I dont need to wait for an answer!
(However, I can be contacted on my email through EquityMaster if any bank or regulator wants to discuss this issue, free of cost)

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A. Pereira

Nov 27, 2010

While as a traveller I wont mind price bands, but as a person interested in businesses to be left to themselves to manage without political interference, I am shocked to hear how the Civil Aviation minister Praful Patel is interfering when the airliners are increasing their fare when the demand is high. Did the minister or the government give any support when these airlines suffered losses? when the fuel bill went through the roof? did it provide cheap fuel when the prices went up? So how can the government ask them to reduce their fares? In a normal market, only demand and supply should determine pricing, nothing else. Unless, the government wants to control everything in the country, like Chinese government is doing in China.

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