India argues, China moves ahead - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
India argues, China moves ahead A  A  A

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31 JULY 2010


The evidence speaks for itself. In 1990, India's GDP was, at $ 314b., 80% of China's GDP of $ 390b. Five years later, it was 49%, another 5 years later, it was 39%, yet another at 35% and now, in 2010, it is only 25%. Our GDP in 2010 is $ 1.3b whilst China's, at $ 5.3 trillion, has overtaken Japan to be #2 in the world.

Link this to the time wasted in making gestures in Parliament; during this week it has been shut more often than it has worked, as the opposition parties brought it to a standstill over the issue of price rise. West Bengal is often shut by its infamous 'bandhs', Maharashtra is following this dubious practise, opposition parties in J&K have stopped children from going to school for most of this month as Srinagar has ground to a halt. Another 5 years, India's GDP may well be 10% of China's. Shame on our political leaders for squabbling like spoilt children over sharing of a small pie rather than jointly working towards expanding it.

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Corruption is endemic; the latest charge by the central vigilance commission against the organising committee of the Commonwealth Games is not surprising. The cost of the games has shot up considerably and the preparedness of facilities in time for the opening of the games, just 2 months away, is dependent on divine dispensation. We are quicker to pursue investigation when it serves political ends rather than when it serves the ends of justice, especially when powerful political interests are involved.

Despite all this, the GDP is expected to grow at an envious rate of 8.5% compelling Moody's to upgrade India's sovereign currency rating. In a bid to tame inflation, RBI raised, as expected, its repo (the rate at which it lends to banks) and its reverse repo (borrows from). The former by 25 basis points, and the later by 50 basis, twice the increase expected. In this, RBI is acting prudently. It is enabled to do so by virtue of the strength of the economy. By contrast, the US is unable to raise interest rates, since economic growth is anaemic, and it is fearful of killing whatever growth there is by a hike.

Home sales in the US are low. Single family home sales in June were at a seasonally adjusted annual rate of 330,000 (or 27,500 per month), which is the lowest but one rate on record. The stock of new houses for sale represents 7.6 months at current selling rate of homes. The Economist of Jul 24 says that the recently cleared financial reform bill has not mentioned reforms of Fannie Mae and Freddie Mac, the 2 largest housing finance giants which have failed. These two own, or guarantee, more than half the $ 10.7 trillion of mortgages, and are awash in red ink! They are 'Government sponsored enterprises (GSES)' and, with an implicit guarantee from Government, can borrow at far lower rates than private mortgage lenders can, thereby stifling the growth of the latter. The Economist maintains that other countries such as Canada, Britain and Australia, have met the needs of affordable housing without GSES, and that the US should have included both of them in the financial reforms bill. But a withdrawal of Government backing to them would destroy whatever home sales are taking place and so the Government is caught in a quandrary. The US economy grew at 2.4% in Q2 ending June, after a 3.7% growth in Q1; absence of jobs curtailed consumer spending. Ironically, thanks to mortgage backed home ownership aided by Fannie Mae and Freddie Mac, home owners with negative equity (i.e. where current market prices are less than the mortgage taken effectively meaning that if they sell their houses to move where jobs are, they get nothing from the sale except an outstanding debt) are making it difficult for people to move where jobs are.

India's fiscal deficit at the end of the first quarter ended June is low, at Rs 40,200 crores, only around 10% of the budgeted deficit for the full year. This is thanks to the amount it received from sale of 3G spectrum, plus improved tax receipts. This, however, hides the fact that subsidies for petroleum products, which ought to be counted here, go on the books of publicly listed Government companies and are borne by their shareholders. ONGC, for example, showed a 24.5% drop in its net profit for Jun quarter, to Rs 3,661 crores, thanks to a forced Rs 5511 crore subsidy burden to give crude oil at lower rates to OMCs (oil marketing companies). Even after that, OMC's are bleeding! BPCL declared a loss of Rs 1718 crores for the quarter. If all these are added to the figure of Rs 40,200 crores, the true picture would not be as rosy.

A study by ET of the results of 250 companies for Q1 shows a sales growth of 23%, and an operating profit growth of 19%, thanks to increase in input costs by 29%. Other than ONGC, companies such as Ultratech (down 47%), SAIL (down 12%), HUL and Hero Honda, have shown dips in quarterly net profits.

In corporate news, Tata Motors has made an interesting barter deal with Commonwealth Games under which it would supply them with 1600 new cars for use during the games, to transport athletes, and take them back at the end of the Games, in return for advertising. The estimated cost to the company as loss on sale of used cars, has been estimated at Rs 30 crores, making it a good deal for both the company and CWG.

In other news, Fortis has wisely pulled out of the race to acquire Parkway, yielding to Malaysian sovereign wealth fund Khazanah, and pocketing a cool Rs 380 crores as profit. Armed with funds garnered from the sale of Ranbaxy, this seems to be a good strategy for the Singh brothers to adopt.

JSW Steel has done a good deal by selling a 15% stake, for $ 1 b., to Japanese steel major JFW. Not only will the infusion help reduce a high debt:equity ratio, more importantly, it will provide technology for high end special steel used for automobile manufacture.

Last week the sensex fell 262 points, to end at 17868 and the Nifty declined 81 to end at 5367. As in the previous week, foreign investors were net buyers throughout, and domestic institutions were net sellers throughout.

The largest fund house in the world, Blackrock, has an AUM (assets under management) of $ 3.3 t. This is nearly 3 times India's GDP. Given the poor economic growth of developed economies, and the far healthier ones of emerging markets, there is a growing need for FIIs to allocate more to emerging markets like ours. It is in our interest to absorb as much as we can, to build up shoddy infrastructure. But for that we must behave like adults, not like spoilt brats as we see the Parliamentarians do on national TV! When will our politicians start thinking of India's seat in the comity of nations, rather than their seat in Parliament?

The next stops on the BSE express on the downside are 17,500, then 16,500 and, if that is breached, 16,000. The sensex is unlikely to crash as it does not fall under the purview of the Railways. But a fall to 16,000 - 16,500 would present buying opportunities.

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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13 Responses to "India argues, China moves ahead"
Moorthy
Aug 9, 2010
I agree little bit with Srikanth, but Loksatta cannot do any thing, they just talk. I had given funds 2 years back assuming it can do. Now even in the location where JP (Loksatta president elected) all the basic amenities are in very bad condition (water, roads, transport, you name any thing). I am not trying to point here personally as I was the fan of Loksatta, but one small party cannot do any thing and as a fact they cannot clean in their local system. Only revolution from people will do and that day is not too far... Like 
Srikanth
Aug 7, 2010
Hi Mulraj,
Every educated Indian knows that it is our politics that is pulling us back into the dark ages. We know it when we speak to any autowala or a shopkeeper or a friend or a relative. We all know it well.But many of us don't want to take the initiative, get into politics and fix it. Good news is there is a visionary leader who already got Indian politics to clean it of the scumm it got over the period. He is Dr.Jayaprakash Narayan of Lok Satta. Please visit www(dot)loksatta(dot)org for more details.
Thanks,
Srikanth
Like 
Ujjwal
Aug 6, 2010
I think as pointed out by others, India's GDP should be 1.2t not 1.2b...
I saw a plot of China and India GDP since 1960 from WB data. Till 1990, both had almost the same GDP and after 1990 there is big fork formation...It would be interesting to know why India could not go full steam...Corrupt politicians is one reason but is it the only one...
Like 
ROY
Aug 4, 2010
"MERA BHARAT MAHAAN". WE HAVE A PRIMEMINISTER WITH DOCTORATE DEGREE IN ECONOMICS, GOOD FOR NOTHING; PARLIAMENT IS FULL OF CRIMINALS AND GOONDAS; A-Z GOVERNMENT OFFICES ARE ENGULFED IN CORRUPTION; PUNISHMENT IS NOT SEVERE; OFFICIALS WHO ARE GETTING SUSPENSION ENJOY THEIR LIFE WITH FAMILY; HOW THIS COUNTRY IS GOING TO DEVELOP? Like 
Bhutra R R
Aug 2, 2010
We are deep neck in cooruption. We only see one side,wht ever our leaning is there we defend that.However each party is same.remidy is only common men has to be active.However our self interest dose not allow us to unite.GOD help us. Like 
J Mulraj
Aug 1, 2010
Readers, thank you for pointing out the errors in b. and trillion. my mistake. Blackrock has an AUM of $ 3.3 trillion . my apologies
Like 
Thresiamma
Jul 31, 2010
Dear Sir,
Ther is an old story. If you throw a cat upwards it will land on its four legs. If you give a chance to our politicians and officers, they know how to make the system complicated and generate money in any way. Regarding CWG, it is also a programme to generate money for them. Why you are making hue and cry. Oppertunities wait for them. If this is not there another will come. Millions are here to toil for them.
regards
Thresiamma
Like 
Ashwini Kumar Otta
Jul 31, 2010
This article is typical of a zero-intellect, thoughtless piece. While there is no disputing the higher growth rate of China, the simple question is what is the point of this article. Does this article suggest one party, no freedom-for-expression political system more effective than a deomcratic political system? Like 
P.V.Ranganathan
Jul 31, 2010
Blackrock's AUM is $3.3b or $3.3t? Like 
Kapil Chadha
Jul 31, 2010
Attn.Editor,

Articles are informative and interesting to read. However if we can take care of our "billions" and "trillions" it would add to the quality of the "writing".
EXAMPLE..I quote from the article:
"Our GDP in 2010 is $ 1.3b (should be trillion) whilst China's, at $ 5.3 trillion, has overtaken Japan to be #2 in the world."
ALSO:
"The largest fund house in the world, Blackrock, has an AUM (assets under management) of $ 3.3 b (should be trillion).

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