Is India deliberately avoiding reforms? (Dec 1, 2011) |
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In this issue:
» The latest step by central banks is not a lasting solution
» Marc Faber is bearish on China
» Tata Motors edges past Infosys and Reliance in R&D spending
» Brokerages may be wrong about the health of Indian banking
» ...and more!
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When asked to dispense advice about how to succeed in life, Warren Buffett is often found encouraging students to use all of their horsepower. Many people have 400 horsepower engines but end up using only 100 horsepower out of it. Thus, as per him, a person who has only 200 horsepower engine but gets the full output out of it is certainly a lot better off. While serving as an extremely useful advice on self development, this philosophy will not find itself out of place in the discussion of development prospects of a whole nation.
And this is exactly the concern that Jim O Neill, a Goldman Sachs old hand and the inventor of the term BRIC, has with respect to India. Neill is surprised that a country with such massive inherent growth advantages, a favourable demographic being one of them, is not able to pull up its socks in matters of agricultural productivity, education, technology, and reforms. In fact, he even went to the extent of saying that reforms like FDI is something that India is deliberately looking to avoid.
Those who've been observing the Indian economy for quite some time now may not find O'Neill's statements objectionable. True, we have managed to pull ourselves out of the rut known as the Hindu rate of growth. But in a country where hundreds of millions of people go to bed without eating two square meals a day, a lot still needs to be done. The chance though that big bang reforms will take place is not very encouraging. As long as there will be policymakers for whom winning the next elections round the corner assumes more importance than the long term interests of the nation, harbouring a great deal of hope about reforms may prove to be futile.
All is not lost though. India's biggest strength is its vibrant democracy and its federal institutions. And it is the existence of these bodies which ensures that voices of discontent and discrimination are not smothered but are debated upon. Thus, while the country would be giving out an impression of deliberately avoiding reforms, they will happen eventually and take us to an even higher growth path.
Do you think we are deliberately avoiding reforms? Share your Share your views with us or you can also comment on our Facebook page / Google+ page.
The downward spiral for India's GDP growth continues. As per reports, India's GDP growth came in at 6.9% during the second quarter of FY12. As today's chart of the day shows, this is the lowest level in quite some quarters, two years to be precise. What more, growth in key industries have hit their lows of the past six years. Indeed, as the finance minister observed, hard days lie ahead for the Indian economy.
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| Source: tradingeconomics.com |
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After hogging the limelight for launching the world's cheapest car (Nano) as well as acquiring two luxury brands (Jaguar and Land Rover), Tata Motors has once again made the headlines. This time it is for being the top-ranked company for research and development (R&D) in India as per a list compiled by the European Commission. Tata Motors reached this position by racing past heavyweights such as Infosys and Reliance Industries. The fact that the strength of Jaguar Land Rover (JLR) relies a lot on technology and R&D could be one of the reasons why Tata Motors bagged the top rank.
Incidentally, healthy performance by JLR during the fiscal so far has bolstered the fortunes of Tata Motors, whose passenger vehicles are otherwise facing a lot of pressure in the domestic market. Also, given that the company has lost a bit of market share in India in the passenger vehicles space, it is evaluating making new product launches going forward and improving its dealer network so that this segment can put up a strong show in the years ahead.
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If there is any sector that is likely to take the maximum hit of India's GDP growth coming to a 2 year low, it is banking. This sector, being a reflection of how the economic variables manoeuvre through global uncertainties, could bear the biggest brunt. Credit growth tapering off due to lower demand from retail and corporate customers is just one aspect of the slowdown. Rising risk of NPAs, pressure on margins and capital constraints could acutely hit the business of some of the less efficient banks. The ones in private sector are at least expected to shield themselves with higher fee incomes. But the ones that are dependent on the government for raising capital for lending may find growth elusive.
Having said that, we are not completely in agreement with the print media and brokerages that are betting big on several PSU banks going bankrupt. Without denying the near term risks to the sector's fortunes, we believe that there are several seasoned players in the sector that are likely to emerge unhurt through the economic downturn. Investing in them at bargain prices could be a very fruitful decision over the longer term.
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Coming back to India's GDP growth performance, what does corporate India have to say about this? According to Chandrajit Banerjee the director-general of the Confederation of Indian Industry (CII), India Inc is very concerned about the current growth path. High borrowing costs and a contraction in investments are likely to take its toll going forward as well. Plus, policy makers aren't taking enough strides to address these issues. Logjams in the Parliament and a lack of strong policy action are the biggest hurdles for India. Rather than running ahead, India seems to be stepping over its own feet too often.
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Recently, the central banks of some developed countries like the US, Canada, Japan, Switzerland, Britain and the European Central Bank (ECB) have agreed to lower the cost of existing dollar swap lines by 50 basis points. Sounds Greek? Well, we don't want to confuse you more by getting into the nitty-gritty of the matter. The important point here is that this will make it easier and cheaper for the troubled European banks to make dollar loans. So far, they were finding it expensive to do this and had little choice but to sell euros. This in turn hammered the value of the euro and also restricted credit in Europe. And now, this new development will make dollars easily accessible to European banks. The central banks seem to think that this measure will prevent a credit crunch from striking the global economy.
But will this solve the European debt crisis? Not at all. The problem with central banks across the globe is that they have been trying in vain to solve a problem of excess leverage by more leverage. But homoeopathy doesn't work in the world of economics. By infusing more liquidity into the system, one can only expect to delay and worsen a looming crisis and fuel inflation. There is not going to be any real solution for the Eurozone economies without some painful touch reforms. And that calls for a lot of political will which seems to be totally lacking.
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In 2008, when the world was sinking into recession, the emerging economies helped pull them out of it. The Chinese dragon roared and soared above all others. But the big question is that can the nation repeat its past performance? Legendary investor Marc Faber does not think so. In his opinion, the Chinese bubble has reached the end of its life cycle. And it would burst soon. The bubble defined by the excessive growth as well as the artificially low interest rates in the country, is nearing its end. Runaway property prices and inflation have forced the dragon nation to increase interest rates. This has led to slower growth in manufacturing. To add to this, there is a slowdown in the demand for commodities from the developed European nations. This would lead to further decline in demand and subsequently in manufacturing from China. As a result, the country would witness a downward spiral in growth. It would be up to the government to define how sharp the spiral would be. If they print more money, like their developed counterparts, the spiral may be slower. If not, then China would tumble down.
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Meanwhile, in line with global indices, the Indian stock markets too experienced a strong buying momentum today with the Sensex trading higher by around 460 points at the time of writing. Heavyweights like ICICI Bank and Reliance were seen driving a good portion of the gains. Most Asian indices closed strong today and Europe too is trading in the positive currently.
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Today's investing mantra |
"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing." - Warren Buffett
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Naxita Merchant
Dec 10, 2011If you call giving 51% FDI is growth than better we remain backward. And focus more on providing food education and health basic facility to the mass.
As far as politicans of this era are concern they have never though of country's growth with the face of human, otherwise why india corp. that sounds more like east india company who has ruled(looted) india and indians for 100 years.
we are happy with out FDI and Politicians of today.