Will markets slip on Greece? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Will markets slip on Greece? A  A  A

3 MAY 2010

Global stockmarkets fell on Wednesday, after Greece and Spain were downgraded by S&P, the former to junk status. Investors were then reassured by the US Fed's commitment to maintain an easy money policy stance, and bounced back the next two days. The BSE-Sensex ended the week at 17558, down 36 and the NSE-Nifty ended at 5278, down 26.

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Greece, like many other nations, including India, has piled on huge debts. The country's debt is expected to peak at 120% of GDP Previously, when other countries ran into a debt trap, one of the main options was to devalue the currency, but since Greece is a part of the European Union, that option is foreclosed. So it has to cut back Government expenditure sharply. Its lenders would insist on that. Latvia, for example, cut Government salaries by 30-40%, and also cut back other expenditure. Will Greece be able to do it? Will our Government be able to have the political courage to do that without a severe backlash? Why is it that nations do not learn from the mistakes of others and mend their ways?

Politicians, of any country, seem to believe that they are in a separate orbit in which the rules are different. Consider the moral void in the way in which the UPA Government took support from Mayawati and Laloo Prasad Yadav, in the cut motion brought by the opposition, dropping, as a quid pro quo, the CBI investigations against them for holding disproportionate assets. Corruption at higher levels percolates downwards; witness the revelation that the arms used by the Maoists to kill our soldiers were bought from corrupt CRPF officials. One would have expected a Government led by Manmohan Singh to have a higher standard of morality, even if by only a fraction.

We in India would also have to pare down national debt before we end up like Greece or Latvia. Increased tax collections from a booming economy, and proceeds from disinvesting in public sector companies ought to be largely used to repay debt. Yet, our politicians vie with each other to introduce new spending schemes in which the bulk of the money is misspent.

The US has coped better than Europe in this crisis. This is because it has a more flexible economy with a hire and fire policy. But, given that it has a social security net, the hire and fire policy does not cause as much grief as it would, say, in India. It does allow a quicker bounce back. Europe is less flexible, and the brunt of the pain, borne in the US by laid off workers, is taken in Europe by its banks.

The US revealed a GDP growth of 3.6% in the March quarter, following a 5.6% growth in the December quarter. This is encouraging. However, as an article in Barron's warns this may be reduced once the tax credits, granted by the Government during the slowdown, are withdrawn.

The Indian story continues to be encouraging; industrial production growth in March is expected to be a healthy 15%. The spend on infrastructure projects, particularly on roads, will provide the impetus for continuing growth. As mentioned in the previous column, Jaypee Infratech plans to set up 5 new townships alongside the Noida-Agra 6 lane expressway it is constructing. Tata Realty, in which private equity firm Actis has taken a 35% stake, plans to spend $ 2b on roads over the next 5 years.

One of the exciting new projects is the Delhi Mumbai Industrial Corridor (DMIC) project. Conceived as a dedicated freight corridor between 6 states, it now envisages the setting up of smart cities. Four Japanese firms have joined in as financial and technology partners. The first phase of the project is expected to cost Rs 55,225 crores.

That the India story is considered attractive is seen from the success of the London IPO of Essar Energy, which succeeded in raising 1.27 b. British pounds sterling, albeit at a lower price of pounds 4.2 instead of the range of 4.5-5.5 pounds they had initially expected.

In contrast, Greek bond yields have gone up to 11%, indicating difficulty for the country to raise debt.

The Government has stated that both HDFC Bank and ICICI Bank are foreign banks; foreign investors hold over 70% in each. This could stymie their branch expansion as also their insurance businesses, unless a solution is found.

So, whilst the India story continues strong, and we can have a continuing cycle of domestically spurred economic growth, it is the abysmally poor public governance and the rampant corruption that is the cause of worry. The US is investigating criminal offenses by Goldman Sach's executives; one would find it hard to imagine such investigations being concluded here. Yes, they are launched, for sure, but later used as bargaining chips by those in power. Public memory being short, the investigations are not concluded; does anyone recall the scams of Hasan Ali Khan or Telgi? If public governance improves, given the unfolding nature of the India story, there would be no stopping the Dalal Street bull.

Globally, Greece is at the frontline of countries with sovereign debt problem and the EU and IMF are working hard to avoid a catastrophy that can easily cascade to other countries. Remember the contagion during the South East Asian crisis, which spread from SE Asia to Russia and then to Argentina? Walking a tightrope is always fraught with danger, but when its also greased, the dangers are manifold. Caution is advisable.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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11 Responses to "Will markets slip on Greece?"
May 8, 2010
May 7, 2010
Its is true that the politics of number games makes it a compulsion to accomodate even the ugliest corruption like that of Mayawatis and Lalus and common man in India is paying price of it th. non availability of Power , Water etc. But more disappointing is that the person like Dr. Manmohan Singh also become hungry of Power and submit to the coorupt politicinas ( see case of Raja , the Terlecom Minisater ) . Is it a less corruption of morality ??. Simialrly the Courts of this country also , taking shelter of technicality of Evidence let off the Powerful people under the pretaxt of flimsy justifications . Whert is the hopw for hopeless India ??? The institutional framework is uttrely corrupt and there thrive the breed of corrupt politicians . Like 
May 6, 2010
Mr. Arun

There is every good reasong to invest in gold. I would not discourage the Indian populace from investing in gold which is the age old tradition in India.

In fact the Western world is now waking up to the fact that gold is an important investnebt.

Forget what Buffet said about gold. You too are contradicting yourself. Buffet has lost his edge and we should not quote him nor emulate at our convenience.
May 6, 2010
@LAKSHMAN PARDHANANI - Actually people at equitymaster are very confused. They will talk about Warren Buffet yet give daily stock commentaries. They will talk about government's unproductive expenditure yet ask private investors to put their money in unproductive assets like Gold. Investing in Gold wastes our precious Forex and as once Buffet said "we buy gold then lock it and spend huge money to keep it safe". Gold is utterly unproductive. Any economically conscious man will work to rid the Indian people of their obsession for Gold. They will be oozing confidence on one hand and ask us to invest in Indian stocks and tell us how Indian stock market has nowhere to go but up and how Sensex can touch 30000 but go on to contradict themselves but talking about imminent crash and publishing views of people like Bill Bonner who reel in depression and can't see anything good in the World. Now tell me readers, do we get anything substantial from reading equitymaster or is it just another noise that needs to be shut off? Like 
May 6, 2010
Is Warren Buffett paying you anything for spreading his popularity in India? Why are you so repulsively patronising? Stop patronising a person and give sound financial advice. Like 
H C Gupta
May 4, 2010
It is not correct to ask the different type of membership. The service 'Value pro' should be available to at least new members, who have joined your group recently. Hoe you can expect that a new member who has not tasted any fruits so far will go on giving money to you on the name of different programmes/ services.
H c Gupta
May 4, 2010
when our honourable PM is bent upon selling the country to US ,what do you expect.what you see is corruption and everybody is guilty of it including you and I .because it is impossible to live without some tip.i read that the boat in which Kasab and the others traveled were let off by our coast guard for a paltry sum of 400 rs!
Mayavathi has shown the way for corruption without any legal problems.all you have to do is get it as present from your followers openly.real brilliance!!
May 3, 2010
I would advise you and all at Equitymaster to desist from emulating America, Warren Buffet and all things United States. All that glitters is not gold.
Buffet is an equal or a bigger wolf in sheep's clothing than others and behind his mild manners he is a man who does not want the responsibility of managing his own money.

As for the social security net in America, it will go bankrupt fast and is an able competitor to Bernie Madoff's rip off scheme.

So Mr Mulraj you would do well to stick to most matters India and recommend and explore avenues for India to thrive and prosper relying more and more on its middle class and internal demands and consumption as also exports of tangible products.

The United States' standing as a beacon for the world has diminished and may never come back.
May 3, 2010
agreed that the corrupt politicians , lack of governance, and accountability are impeding the indian growth. but what is the solution and when will it correct the situation?
with more and more subsidies and freebees, productivity is affected.even manmohansingh is losing his credibility
May 3, 2010
Dear Mr. Mulraj,
Since starting to subscribe to your letter I have given unreserved support to your views about the governance in India,as they confirm the views I have formed about India, since I returned 4+ years back.
If it is indeed true that the Government have decided top go easy on Mayawati on her assets enquiry in exchange for the support she gave on the cut motion, then there is nothing left to say except that India is now a sewer, from which one will need to escape!!
Charity however begins at home. You have been telling us that a stock market crash is imminent. I believe that too, and have sold all my holdings except in Gold and a few emerging economy Debts. At the same time your office keeps on writing to me asking me to become a premium subscriber with a view to securing buying opportunities. Surely you cannot be advising people to buy when you know a crash is imminent. Or are you too doing a Goldman Sachs/UPA Government???
Equitymaster requests your view! Post a comment on "Will markets slip on Greece?". Click here!