Chindia beats Eurorica

26 DECEMBER 2009

The contrast couldn't have been starker. The developed economies are growing anemically, spurred by massive monetary and fiscal stimuli, without which economic growth may even have been negative. US GDP growth is expected at 2.2% in Q4, lower than the 2.8% growth in Q3. Japan is mired in deflation and its aging population combined with inward looking economic policies are doing nothing to get it out of it. Its public debt is at a frightening 227% of GDP and with GDP growth sclerotic, one wonders how this would be repaid. The Eurozone is moving at a pace similar to that of a tortoise with gout.

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China, on the other hand, has revised its growth forecast upward to 9.8%, and India to between 7.5 and 8% in 2009-10 and higher in 2010. Eurorica is trying to pressure Chindia to accept carbon emission targets that would slow the latters' growth and also provide a market for the green technologies they are seeking a market for.

In order to bail their economies out of the mess created by their financial institutions, Governments have borrowed heavily to provide the monetary stimulus needed. A large part of this is in short term debt, which needs to be rolled over. The US needs to roll over $ 2.5 trillion in the next 12 months, plus the shortfall (estimated at $ 1 trillion) that would accrue over the next 12 months. Since its current account deficit has halved to 4% of GDP, even as its fiscal deficit has soared to 10% of GDP, there are not enough $ and not enough investors, to fund it.

Several Governments are looking at amnesty schemes to bring in funds held secretly by their citizens abroad. The US, being large enough, has bullied the Swiss Government into disclosing over 4000 names of its citizens holding bank accounts. The Italians, not being big enough, have offered an amnesty scheme, forgiving all for a penalty of a mere 5% of amount brought in (the fiscal equivalent of the light rap on the knuckles given in India to a Haryana cop for molesting a child who later committed suicide! A shame on our system).

The Italian amnesty scheme was highly successful, bringing in $80b Euros, about a sixth of estimated horde. It would not be surprising if Pranab Mukherjee followed suit and, in the coming budget, declared an amnesty scheme to bring in the hundreds of billions held abroad. Perhaps it would be structured in such a way that the holder would have two options, to either pay a higher upfront tax, no questions asked, or to invest in a 3 year infrastructure bond, low yielding, with no tax payment. That would be a way to bridge the shortfall in the estimated $500 b. spend required on infrastructure by 2012.

But for India to achieve its full potential our politicians need to get their act together, something for which evidence is sorely lacking. They cannot shield wrongdoers from due punishment, such as the errant police officer or a corrupt former Chief Minister, or any other. They cannot continue playing silly divide and rule games, carving up the country into ever smaller bits thus decrying the vision of federalism that the founding fathers of our constitution had envisaged long before Europe realised the benefits of a common market. They cannot continue to amass wealth through corrupt means, unmindful of the human, environmental and societal consequences of their criminal greed, and to hide that wealth behind the fiction of agricultural income which is tax exempt. It is tax exempt not for poor farmers, over 95% of whom are subsistence farmers never needing tax breaks, but only for corrupt politicians. They cannot delay use of available technologies till such time as they meet their own needs, as is happening in telecom.

The introduction of 3G telecom has been delayed to an extent where it has become, possibly, infructuous. Auction of spectrum is to take place mid Jan 2010, but with spectrum allocation taking place only in August. However, the next generation of telephony, 4G, is slated to be ready for commercialisation in Jan 2011, so it is a moot point if operators would bid for 3G for a possible benefit of a few months.

They cannot blame others for their own negligence and follies, as the Karnataka politicians are doing, blaming the likes of NR Narayan Murthy for perceived faulty design of the new airport (widely accepted by users as being of international standards). The ludicrity of their position is brought out by their wish to ban companies like L&T, Siemens Project Ventures etc. for having the temerity to sell their stakes, at a profit, even whilst giving 'shoddy work'. Pray, why would the buyer allow them a profit on their stake sale, if, indeed, the work was shoddy?

The Indian story continues to look good. Advance tax collections are up 44% in Q3 and the core sector grew at 5.3% in November. Corporate profits in Q4 will be positively surprising (not only in India but also in the US, where huge cost cutting has taken place).

In corporate news of interest, RIL has announced a huge gas find, being evaluated, in its D3 field. This would be a windfall after the judgement in the gas dispute is given, if it succeeds in getting the higher price for it. The Government has given 'maharatna' status to 3 companies, viz. ONGC, SAIL and NTPC, giving them greater freedom to enable them to become global giants. them a label like maharatna or navratna needs to be followed up with enabling policies and attitudes. Not by policies that have destroyed navratnas like BPCL and HPCL by burdening them with a subsidy burden that ought to go in the Budget. The Government is now thinking of giving them cash, instead of bonds, to compensate them, which would be great for the companies (the bonds are often illiquid or entail a loss on monetisation). The cash for this is expected to come from the higher tax expected from significantly improved Q4 corporate performance and from the expected Rs 35,000 crore proceeds from disinvestment.

The BSE-Sensex added 640 points last week to end at 17360 and the NSE-Nifty gained 210 to end at 5178. FII inflows during calendar 2009 have far exceeded outflows in earlier years, after the financial crisis. The pool of domestic household savings going into equity is increasing; traditionally most of it has gone into fixed income instruments like bank deposits or bonds.

So, on the one hand there is a looming crisis in the developed world, especially the US with its huge debt which would compel it to print more money. It needs to raise interest rates to encourage more saving to repay the debt, but can't do so because unemployment is still high at 10%. The US is caught in a chakravayuha of its own making. On the other hand China and India are growing at a healthy pace, so funds should logically flow to these countries. This would happen over time, but not smoothly; there would be hiccups in the market. There is steam left in this rally, but watch out for signals that warn of imminent rises in interest rates. And lighten when you get such signals.

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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12 Responses to "Chindia beats Eurorica"

c v s saikumar

Dec 27, 2009

I want to know about the Indian share Market in 2010 and in which way the gold prices move.


srinivasu chennapragada

Dec 27, 2009

good article.
dear all,
i would be happy if any of the readers comment on mutual fund agents loosing their commissions.
thanks in advance.


Shekhar Vaidya

Dec 27, 2009

Amnesty scheme is certainly an option before the government to boost economy. However, it would result in further enhancement of domestic money supply and would give a further fillip to already high inflation. I doubt whether the government will consider this option at present.
Everybody seems to agree that valuations are already on the higher side and the only reason the market may sustain the present momentum is the abundant money chasing few good stocks. However, with many new IPOs and FPOs scheduled to hit the market in the next quarter, I doubt if there is still steam left in the market. I think the right strategy would be to keep selling on every high. Look at other asset classes (not real estate in Mumbai, which is already high) or in the worst case, just hold cash. When the market is richly valued, even smallest event can upset it. Another war somewhere or God forbid but another terror strike and we could suddenly see selling bouts. And as Vibhav has observed, the losers would be small investors who dont like the idea of losing money and hence dont get out quickly unlike the 'professional investors' who take losses as part of life and move out quickly.



Dec 27, 2009

Having worked on airport projects overseas,I can say that the Bangalore International Airport can best qualify to be a "THIRD WORLD CLASS" airport and not a "WORLD CLASS"airport.
I have visited the project site during construction and the Project Manager of BIAL tried his best to defend some of the obvious cost cutting measures that had been done but agreed to some of shortcomings -like the insufficient width of the staircase next to the escalator.
The problem is that this is a PPP project where the GOI,AAI and the GOK are all shareholders in the company.
Any escalation in the share price of BIAL directly benefits these parties as well.It is not that only
the private players are benefitting from the increase.
What was clearly lacking was the presence of an independent and competent body to scrutinize the designs.Ideally,this should have been done by AAI but in this case,since AAI is also a shareholder,there is an obvious conflict of interest.So,the net result is that that they cut corners everywhere and spent the barest minimum.So,we've ended up with a THIRD CLASS airport.
Mention also must be made of the interference by the Civil aviation minister of the day in certain aspects which is another story...



Dec 26, 2009

YOUR topics is current and cover all the pertinent subjects that is looked by a small investor like me. The India story is going to stay, but my concern is the in action by the Government in areas of food commodity prices, sugar,lintels etc. The ministers should study what is being done in China. Having visited China several times, I have come to the conclusion that they keep a low key about communism and slowly following the capitalist mindset. The Indian Communists also should draw lessons from China. India will certainly outdo China and other developing countries if quicker actions are done by the government. Mr.Marc Faber is of the opinion that India and China would do better in the coming years. We needto explore for for more resources by mining minerals which is available plenty in India. There are many areas which is untouched by us so far. Our consumer demand is ever increasing and our living standards are rapidly going to new heights. We are still far behind China. They let the people work hard and make a living. The Indian communists espeically in Kerala and W Bengal killed both the states with old fashioned mind sets. Look at It sector, communists will not like smart city developement as the employees are highly educated MBA with IT qualification, who work more hours to make a decent living. They will not join the Red Trade Unions. The unions in Kerala on the other hand distribute money for the work they do not do. Each labour union members get 15000 rupees from the truckers everyday. The likes of Prakash Karat, VS Achuthanandan should look into these strange happenings in Kerala. NRI from Kerala will never come and do any ventures in Kerala because of these Labour Unions who go scot free and throw their muscles whereever they can. An American Keralite came and invested 3 crores in a venture, in less than 2 months the venture went to brankruptcy, who will invest in Kerala???



Dec 26, 2009

are you trying to befool the people by painting a rosy picture of indian economy. tell us about current ac deficit and growth without stimulus or after the stimulus will be withdrawn. what about inflation and the rapid growth of it. dont try to lure the poor people in this market. it is at its peak and now you people are making a news for others to get trapped so that you people handover your monkeys to them and after that no madari ha ha ha


Jayanth N

Dec 26, 2009

I would like to comment on inducting NRM in faulty airport design of BAIL , but these comments were first made by our own elite businessmen from Bangalore describing the BAIL as an "Industrial shed" . The report says that Sir.NRM was one of the advisers for BAIL when it was started actually main people for getting International airport , and I think it does not name them for faulty design. Regarding L&T and SEIMENS stake sale to GVK as rewarded passengers by paying higher fees for maintains. Lets not blame politicians for everything it was a PPP project and i am proud get an international airport at Bengaluru .... Thank you .....



Dec 26, 2009

On Bangalore Airport you say "Pray, why would the buyer allow them a profit on their stake sale, if, indeed, the work was shoddy?"

You would know the value of monopolistic businesses. That is why buyers would pay highly for the stake.

The promoters of Bangalore Airport wrested out a Monopolistic status for their business, Wrested Concessions and Real Estate, wrested guarantees for loans. Of course the business would be very valuable.

We wouldn't grudge them this if then they had really delivered a World Class Airport of Current standards.

They focussed then on how to leverage their Real Estate by building Hotels, selling out oligopolistic concessions from Taxi Services to Restaurants. So today at peak times there is no place to sit in the Airport.

Most of the Aircraft do not get an aerobridge on arrival. The aerobridges built are so narrow that even when an aircraft docks there, for quick discharge of passengers, the back door of the aircraft is also opened and the passengers are transported by bus to the terminal. This is the only "International Airport" that I have seen do this.

Just putting polished Granite on the floors and walls does not make an International Airport. It is the adequacy of the facilities that is required.

The terminal is built at the far end from the main approach road to the City. So every passenger pays Rs 75 extra on top of the approximate Rs 450 fare to their Oligopolistic Taxi services just to cover this distance.

If people get credit for work well done, some mud will stick when things don't go well.

Having spent just @ Rs 3500 crores on the project, they now want the State to spend another Rs 4000 crores on a High speed Link to the Airport.

The Old HAL Airport should be reopened to give them competition.


C K Shayin

Dec 26, 2009

The pool of household savings going into equities are increasing. This when the nifty P/E ration is crossing 23. Is it a good sign?


P V N Rao

Dec 26, 2009

China and India have one of the oldest civilizations. The saving habits of both the countries are unique in the sense that right from the childhood stage the parents inculcate the family values and in particular saving habits. The mother's role in the family need not be over emphasised.

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