The India story and the global story

21 NOVEMBER 2009

The India story remains good. A large domestic market with less reliance on exports; slow but steady continuation of economic reforms; sensible monetary management; discovery of gas reserves that can improve the Government balance sheet; plans to spend massive amounts on infrastructure like roads and power; simplification of indirect taxes on a non discretionary basis and a programme to uniquely identify each citizen making them electronically connected, are some of the reasons for optimism. Foreign institutional investors, who had invested $ 17.6 b. in 2007, withdrawn $ 12 b. in 2008 after the global financial crisis, have come back with an investment of $15b. so far in 2009. With fresh allocations to be made for 2010, it is expected that the India weightage in global portfolios would rise, based on the factors above. Combine that with an increased flow of domestic household savings into equities, and you can almost smell the roses!

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The global picture is, however, yet worrisome, despite no less a figure than Warren Buffett averring that the financial crisis is over. Both the Eurozone and the US have shown economic growth in Q3. This growth, however, has come with a price tag attached to it. In the US, unemployment has hit 10.2%, going, for the first time in 26 years into double digits. The Eurozone and the US have both piled up mountains of debt in order to provide economic stimuli; such debts have to be repaid. Debt mountains do not reduce through global warming. The pumping in of money has reduced US interest rates so low that a huge carry trade is happening as US investors borrow in the US and invest in other markets (including India). With the US $ declining, and with returns on assets such as Indian equities rising (up 70% this year), such investors are raking it in! But at some point, the US $ will stop falling (Tim Geithner has stated recently that the US needs a strong currency), the US interest rates will start rising, and other markets will stop rising. Therein lies the risks of asset bubbles bursting all over again.

In order to prevent this, some Governments have started to take action. Australia, for example, has hiked interest rates. Brazil imposed a tax on capital inflows and, when companies took the ADR route to raise low cost funds, imposed a tax on ADR issues. The RBI is thinking of similar steps and may auction the rights of external commercial borrowing, a good way to use market mechanisms to exercise monetary restraint. Both Finance Minister Pranab Mukherjee, and Planning Commission Chairman, Montek Ahluwalia, have stated that the fiscal stimulus will not be withdrawn till the next fiscal.

Lets go back to the India story and see Government action in keeping the reform bandwagon rolling along. In the telecom sector the charges for changing operators, after Dec 31, have been fixed at a mere Rs 19. This is sure to lead to a lot of churn as customers, dissatisfied with service, will have no hesitation switching them, whilst retaining their number, at the low cost of Rs 19. Telcos have already started slashing roaming and other charges, and quality of service should start to improve. Hitherto customer care has been outsourced to agencies and often enough escalation of a complaint is impossible; the agencies handling customer care refuse to give contact details of officers in the service provider. This should change, and the service provider would now start to treat his paying customers with the respect they deserve. There would, ultimately, be a restructuring of the industry but till then, a dip in operating margins due to this competition for customer retention.

At the same time, the Government failed to provide clarity on issues at a prebid conference, for auction of 3G spectrum, to be held in Jan 2010. Such prebid conferences are meant for providing clarity on issues that bidders need. This suggests that Government still wishes to keep discretionary powers; such powers can only result in increased corruption. Corruption is the Achilles' heel of the India story.

It has taken the Serious Fraud Investigation Office over 10 months to move court against Ramalinga Raju for company law violations, raising questions about the seriousness of intent in pursuing such white collar crime. As an economy develops, one would tend to see more of such crimes, and the system ought to be prepared to act quickly and strongly on them.

In the RIL-RNRL gas dispute, the former's counsel has stated that if gas were to be supplied at $ 2.34/mmBtu, net cash flow to Government would be $ 3.84 b, over the supply period with RNRL, but at the price of $ 4.20 fixed by the Government, it would be $ 15.29b. The Government is thus keen to join as a party to the dispute, which has now been allowed by the Supreme Court (the Bombay High Court had allowed it to join as an intervener, not as a party). Since the arguments are to be submitted in writing and not orally, there would not be cross examination of Petroleum Ministry officials.

As in the telecom sector, which will see M&A after the introduction of MNP and the subsequent churn, so in the banking sector, we will see restructuring through M&A. Only in this sector, the restructuring would not be market driven but dictated. The smaller public sector banks, such as Dena (assets Rs 48 lac crores), Andhra (68) and Corporation (87) would become targets for acquisition by the larger ones such as PNB (249), Bank of Baroda (227), BOI (225), Canara (219) and Union (161). This is because the Government is loath to let go of majority control of its public sector banks, fearing a threat to the financial system if it did. However, one opines that such a threat would not be posed even if the Government retained majority ownership and management control of SBI plus 2 large banks, and were to let the others be diluted. Perhaps, over time, this may yet happen, if the political situation allows.

The markets were up last week, with the BSE-Sensex gaining 173 points, to end at 17021 and the NSE-Nifty gaining 53 to end at 5052. Interestingly, up until Thursday (for which figures are available) domestic mutual funds were net sellers on all days whilst FIIs were net buyers on all days except on Thursday when the sensex fell 213 points.

The $ index has climbed from a low of 74.8 on Nov 16 to 75.6 on Nov 21. This may lead to a temporary halt in the rally, perhaps after another 200-300 points.

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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4 Responses to "The India story and the global story"


Nov 24, 2009

gr8 work. can you please also write about the true impact of the delayed monsoons in northern india. Everyone says there will be less rice but then the farmers may grow other crops which take less water and the delayed mansoons may be a boon for onion and potato, grams and oil seed cultivation. so how these factors will be effecting the indian economy. And if the scene is not so dark for comodities like potato, onion, grams and oil seeds, why these commodities have risen so much. remember there is no black marketing or hoarding, because you can get tonns of them from the market.



Nov 24, 2009

A correction. the asset size of the banks mentioned should be 000 crores instead of lac crores.



Nov 22, 2009

Pretty good and usefull analysis of the current market trend and happennings. Please include some research facts on Agriculture and Commodities as it will give a good perspective of the economy, in terms of sustainability. Thanks and regards,


altaf chaugule

Nov 21, 2009

very interesting.could u keep us informed about mutual funds may be weekly / monthly?

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