»5 Minute Wrap Up by Equitymaster

On This Day - 12 NOVEMBER 2013
Why India is not a 'must invest in' country...

In this issue:
» Economic conditions in India are difficult
» Central bankers don the role of policymaking
» Can China shift to a consumption driven model?
» Jim Rogers offers his views on the US Fed
» ...and more!

Just a few days back, India was ranked quite low on the Ease of Doing Business index released by the World Bank. As reported in the Business Standard, its overall rank in Ease of Doing Business dropped from 131st position in 2013 to 134th in 2014. India also fared the worst when compared to its BRIC peers. Indeed, it was placed at 179th position, while Russia was at 88th, Brazil at 123rd and China at 158th.

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.

Do you agree with Indra Nooyi's views that India is a 'must deal with' country rather than a 'must invest in' one? Let us know your comments or post them on our Facebook page / Google+ page

 Chart of the day
That the Indian economy is facing severe slowdown is there for everyone to see. And this fact is echoed by none other than the MD of Tata Motors. According to him, the economic conditions in India are very difficult. He should know. The commercial vehicles segment of the auto space, where Tata Motors is the market leader, closely tracks GDP growth. And the volume growth of this segment has been continuously declining for the past several quarters now.

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.

Auto volumes have been poor in FY14 so far

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No prizes for guessing who's become more powerful than policymakers in the aftermath of financial crisis. It is the central bankers indeed. However, as Mohamed-El-Erian, the CEO at bond giant PIMCO notes, the bankers didn't quite ask for these powers in the first place. Rightly so. You see, there is democracy in most of the developed nations. And hence, the major responsibility for policymaking should indeed lie with the elected representatives. However El-Erian believes that there was just no other option than to give central bank powers. Simply because anything else would have meant a far worse outcome for the society.

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 has several records to its credit. For two decades the dragon economy grew at a blistering pace of over 10%. No other developing economy has grown at such a high pace for such an extended period. China differs from other economies in several ways. It has followed an investment-driven economic model. The country's investments have accounted for about half of its gross domestic product (GDP). Household consumption, on the other hand, is merely one-third of GDP. In a normal economy, things are a bit different. For instance, it is practically impossible for an economy to productively invest over one-third of its GDP for a long time. And secondly, consumption generally accounts for two-thirds of a country's normal GDP.

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.

These are the times of extreme volatility and confusion. And thanks to Fed's wishy washy policies and unclear stance on tapering, the chaos is likely to continue. Among the many voices criticizing Fed's policies, one of the strongest comes from the legendary investor Jim Rogers. And is definitely worth listening to. Mr Rogers sees a disaster in the making as more and more money is being printed. The latter will only lead to destruction in the currency value and hence wealth.

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.

In the meanwhile, the Indian markets continued to trade weak during the post noon trading session. At the time of writing, the BSE-Sensex was down by about 90 points. While selling was seen across the board, stocks from the FMCG and pharmaceutical spaces managed to buck the trend. Midcaps and smallcaps were not spared either as both the BSE Mid Cap and BSE Small Cap indices were trading marginally lower. Stock markets in other parts of Asia ended the day on a mixed note with Japan and China up by about 2% and 1% respectively, while Hong Kong was down by 1%.

 Today's investing mantra
"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks" - Warren Buffett

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