|»5 Minute Wrap Up by Equitymaster|
On This Day - 12 NOVEMBER 2013
Why India is not a 'must invest in' country...
In this issue:
Indra Nooyi, CEO of Pepsico, also offered her views on the ease of doing business in the country. According to her, India is a 'must-deal with' country rather than 'must invest' in country. The latter means that GDP is growing and the climate is conducive to conduct business. Whereas the 'must deal with' terminology implies that foreign investors wanting to invest in the country will have to deal with issues on the infrastructure and regulatory front. Thus, would it make sense for a foreign investor to pour funds into the country if risks outweigh returns?
So what makes doing business so difficult in India? The problems are quite well known. Poor infrastructure, uncertainty surrounding tax policies, land acquisition hurdles....the list is endless. Infact, quite a few honchos of India Inc. have publicly stated their intention of investing overseas given the lack of reforms in the country.
The problems that India faces currently are no different than in the past. But the country's aspirations over the years have changed as has the perception of the outside world towards it. The 9% plus GDP growth for 3 consecutive years before the crisis made the world sit up and take notice of India. It became a land of countless opportunities. Even after the crisis struck, the economy bounced back in the subsequent couple of years. As a result, the government too harbored ambitions of the economy growing at a consistent rate of 8%. And foreign investors followed in droves, looking to capitalise on an opportunity at a time when the developed countries were down in the dumps. Thus, these years were the perfect time for the government to begin its reforms process. Instead it remained complacent and chose to sit back on the wrong notion that the buoyancy would continue forever. Now it has to pay a heavy price.
Not much can be expected before the elections next year. But once that is over, the new government will have to seriously get its act together and restore the faith of investors in the Indian economy.
As a matter of fact, the entire auto industry continues to face stiff challenges. The weak economic conditions, piling inventories and consistent losses are the main problems faced by the auto sector. Even the festive season failed to bring any cheer. Domestic passenger car sales declined by 3.9% in October this year compared to the same month of 2012. However, two-wheeler sales grew by 18% YoY in October 2013. The auto sector has witnessed de-growth of nearly 5% during the first half of 2013-14 and the recent repo rate hike may prove to be a dampener for potential customers. The industry continues to look forward to an immediate support in terms of a stimulus package to perk it up as well as bring back the growth momentum for the economy in general and the automotive sector in particular.
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But as things stand today, policymakers don't seem to be in any mood to correct this situation anytime soon. A lot of complacency has crept into their behaviour as per Erian. What more, even financial markets seem to be behaving as if the era of cheap liquidity will last forever. And this has encouraged much greater risk taking. Consequently, El-Erian has now advised central banks to move ahead with caution. As far as our view is concerned, we believe that the damage has already been done. And any effort at a significant pull back by the central banks will only end up in disaster according to us.
The Chinese economy is now going through a paradigm shift. It is shifting from an investment-driven economy to a consumption-driven economy. But this transition is not going to be without upheavals. The growth has already slowed down from double-digit levels to about 7.5%. Shifting towards consumption requires developing the service sector. But this will result in slower economic growth. And this, in turn, could further intensify the growing social unrest in China. It's going to be a tightrope walk for Chinese policymakers.
Currently, this money is finding way in financial markets leading to asset bubbles or stock markets. No wonder, markets are getting disconnected with the underlying economic fundamentals. But sooner or later the liquidity is going to dry up just making things worse for the global economy.
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