Developed world's folly could be India's fortune - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Developed world's folly could be India's fortune 

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In this issue:
» Indian IT and the Dubai debt crisis
» BSE Sensex v/s the Dow Jones Industrial Average
» More developers withdraw their SEZ plans
» Indian steel production to get a fillip from government
» ...and more!!

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It's not over yet. Not by any stretch of imagination. The shockwaves from Dubai proved this in ample measure. The once sprawling emirate kingdom is now finding it difficult to repay its debt obligations. And investors are busy analyzing which one would be the next country to follow suit. Not that there aren't enough contenders. Infact, the list is bigger than any other time in history. As per LiveMint, OECD has already warned that the world's 30 leading industrialized economies will see their outstanding public debt to grow to 100% of their GDP in 2010, a near doubling from the percentage 20 years ago.

Now imagine what would happen if creditors refuse to lend to the governments anymore? While the governments could still resort to a lot of methods, sadly, none of them promise a swift and a strong recovery in the near to medium term. In other words, get used to anemic and subpar growth in economies with a significant amount of outstanding debt vis-a-vis the GDP. Does India fall into this category? We don't' think so. The country's debt is not as high as some of its developed counterparts and secondly, its GDP growth rate is also significantly higher, an indication of good interest servicing ability. What's more, foreign investors disappointed with returns from developed economies, could turn to India in a big way. As our founder Ajit Dayal puts it wonderfully in a recent article, "The Dubai bankruptcy will make the rabbits search for patches of grass where they can eat their carrots in peace. India will be one such patch of grass where they will continue to chew away." If you haven't guessed it by now, the rabbit is indeed the investor who has been frightened by the recent incident.

01:17  Chart of the day
Stock markets in India appear to move in tandem with what is fondly termed 'global cues'. The US, most suppose, has the most influencing effect on Indian markets. Most times, it appears that if the US markets have closed in the red, the Indian markets are also slated to open on a negative note. However, as today's chart suggests, over the long term the movements of the Indian markets have nothing to do with what their US counterparts are doing. The chart compares the performance of the US's Dow Jones Industrial Average with India's BSE Sensex since the year 2000. The Indian markets have far outperformed by any measure. A perfect reflection of India's higher GDP growth and the higher profitability of India's corporate sector as a whole. Of course, the difference could narrow down a bit if currency effects are also considered.

Source: Statistical Outline of India 2008-09

Even as the financial world braces itself for more bad news, there continues to remain some oasis of hope. India seems to be one of them. Economic bodies the world over seem to concur on the view that India will surpass the 6% growth rate projected earlier for FY10. This will make the country's GDP growth one of the highest in the world. The upward revision of earlier forecasts is despite India suffering one of the worst droughts in 17 years. The impact of the drought is expected to be in terms of pulling down agricultural GDP by 2.5% (in worst case). Most forecasters have attributed the cause of higher forecast to increased government spending and speedy industrial recovery. Having said that, poor bank credit offtake and fiscal deficit problems continue to worry them. Unless these concerns are addressed, the volatility in economic projections is likely to linger.

The ills afflicting the development of SEZs in India are another indicator of the plight that developers are facing in wake of the economic slowdown. And this could turn out to be a thorn in India's attempts to create world class infrastructure. As reported in a leading business daily, 3 developers have expressed their inability to go ahead with their SEZ projects citing poor market conditions. What is more, the number of such notified projects, which developers are seeking to withdraw, has now gone up to 12. And these are projects that had received the final go-ahead to start development. Those who have not yet withdrawn are asking for extensions as they are waiting for market conditions to improve. The heydays of 2006 and 2007 had seen a slew of SEZ projects being announced and it is clear that the global economic meltdown has hit many of them. However, the silver lining in the cloud seems to be that new proposals for setting up SEZs have not entirely dried up. But it seems more likely that activity on the SEZ front is likely to be subdued at best in the medium term.

It appears that the Indian IT industry may emerge more or less unscathed from the Dubai debt crisis. Indian IT majors derive marginal revenues from the region. Their exposure to the problem area, therefore, is limited. Moreover, many IT majors already saw the crisis coming there and took appropriate measures beforehand. It's good to know that this financial crisis hasn't rubbed the Indian IT industry the wrong way.

Potential shortage of steel has the government worried. It is believed that due to high steel prices, the country may become a dumping ground for the rest of the world's excess capacity. To meet this steel shortage, the government is reportedly planning a scheme similar to the ultra mega power project (UMPP) scheme in the power sector. Under this scheme, the government will get clearances for the project and assure raw material linkages. Bids will then be invited and the successful company will be handed over the project. In India, the biggest hurdles in setting up greenfield projects are getting approvals and acquiring land. We believe such a step is a positive one and will help get new projects online on a big scale much faster.

Meanwhile, after trading firm for first half of the day, the Indian markets have managed to hold on to their gains. Fears of the Dubai crisis seem to be receding as the BSE-Sensex nears the 17,000 mark once again, and was trading higher by around 280 points at the time of writing. The metal and IT spaces were seen to be attracting the maximum buying activity, with most other sectoral indices also in the positive. While most Asian stocks closed higher today, European stocks have opened on a negative note.

04:52  Today's investing mantra
"The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer" - Warren Buffett
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13 Responses to "Developed world's folly could be India's fortune"

m.k shah

Dec 2, 2009

best thinking



Dec 1, 2009

Good information.Thanks.


mahinder sobti

Dec 1, 2009

Your adevice to those who control the Indian economy could be more precise & direct.



Dec 1, 2009

really good information



Dec 1, 2009

The prevailing situation has been splendidly analysed. Everything points to the fact that, true to the title given to the write-up, the "Developed world's folly could be India's fortune".



Nov 30, 2009

It is quite informative in convincing way , thanks .


Dr. KC Nautiyal

Nov 30, 2009

Superb analysis.



Nov 30, 2009

It throws light for next day's strategy to be adopted while trading cautiously.How nice it would have been if you provide tips to buy and sell stocks for intra-day trading with atleast 90% out come of the result.


Colonel DS Hoonjan

Nov 30, 2009

A very useful input to decision making. Thanks


dr syed tareeb

Nov 30, 2009

now days i won`t finding it informative to read, please tell stocks for which we have to concentrate.
thank you

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