Is India a global power?
28 NOVEMBER 2009
Net investment, in Rs crores
At the Washington summit of Prime Minister Manmohan Singh and President Obama, the latter described India as a global power. Yes, India is one of the 4 BRIC countries and yes, it has made great strides in its economy and yes, it holds the promise to become a dominant economic power. That promise, however, can be translated into reality with good governance, both public and corporate, and that is not something very much in evidence.
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Thanks largely to globalisation, it is the four BRIC countries (Brazil, Russia, India and China) that have emerged as potential economic giants. As the Economist of Nov 5 points out these 4 powers were, interestingly, statist power, where Governments were dominant and free markets less open. The fall of the Berlin Wall encouraged, in the absence of a viable option, their shift to free market economics. The rest, as they say, was history.
Of the four it was China that has led the economic race and has become the contender for a gradual shift in global power, such as had occurred post World War II, when the US took over the reins from a war devastated UK. This process would take decades, were it to happen, since China does not (yet) have democratic freedom, which was the hope of globalisation.
The current global stock market rallies in the BRIC countries are driven both by better economic fundamentals (the developed world is growing at 1%) as well as the surge in global liquidity as a means to avert a financial collapse. The stock of financial savings in the developed world is 3 times its GDP and this is largely institutionalised. Prior to institutionalisation of savings, in the 60s (when mutual funds came into prominence) individuals held some 75% of equity and institutions (like banks) 25%; the ratio is now more than reversed. Institutional investors look mainly to maximising profits, and move wherever expected returns are higher. This positions India well. But there are some ifs.
One if is the capacity of the global money flow to be able to absorb it. A few countries have, in fear of creating bubbles, restricted foreign inflows. Brazil has constrained its companies from borrowing and has imposed a tax on FII inflows. India, specifically RBI, is also contemplating such move, which may be sensible. However, the Government is keener to let the markets rise, as there is a pipeline of public sector company stock which they wish to sell. This stock could well absorb more foreign inflows.
The bigger if is in the quality of governance and of planning. The political class is Teflon coated and is never ever brought to task. Madhu Koda, former CM of Jharkhand who is being investigated for amassing Rs 2000 crores in 5 years (even as his father remains a subsistence farmer) is but the latest of many examples where no action is taken. Nor has action been taken against political leaders found by the Liberhan commission to have been involved in the destruction of a mosque; that the report also took 17 years to prepare is another indication of poor governance and accountability. According to a report, some $40 b. are paid in bribes in the 4 BRIC countries! Is it any wonder that the Indian Government is not asking Swiss banks for information, as the US has done?
Such poor governance, of course, impacts economic performance. Let us see its impact on the 30 sensex scrips.
Finance companies (ICICI Bank, HDFC, SBI and HDFC Bank) account for 23.2% of weightage of the sensex. Around 80% of banking sector assets are with public sector banks and Government policy is to hold a majority stake in them. The banks are prudently managed, but, not being subject to pressures of corporate democracy, are slow and steady, and have a far lower P/E multiple than warranted by performance. The Government would not put at risk the safety of India's financial system by reducing its stake below majority in all but, say 3 of the largest banks, but that is a politically tough decision no party would ever take the risk of.
Much of India's household savings is channelized through banks, earning a return lower than the rate of inflation thereby eroding wealth. Just consider the figures for FII and Domestic Mutual Fund investment to date in 2009:
Ownership of corporate holding by FIIs is increasing as Indian mutual funds and investors prefer a safer debt route, despite returns negative to inflation.
In the current year, loan growth is below expectations and the RBI has tightened provisioning norms for non performing assets; hence the scope for this sector leading the next rally is constrained.
The next sector in terms of sensex weightage is the Oil & Gas, with a weight of 17.8% (these weights are free float weightages; thus companies like ONGC or Wipro which have a low float of stock for the public, carry a lower weightage). RIL and ONGC are the constituents. RIL's stock performance would depend significantly on the ongoing dispute with RNRL over supply of gas. Judging, however, by its move to acquire a controlling stake in Lyondell Basel, reportedly for upto $ 12 b., it seems to be sending a signal of confidence. RIL and other private sector companies such as Essar and Royal Dutch Shell have also asked the Government to raise petrol/diesel prices (by upto Rs 3.85 and 3.71/litre, respectively) or else allow them the benefit of subsidy as is being allowed to PSUs IOC, HPCL and BPCL. The latter suggestion is a non starter, given the already out of control fiscal deficit; hence petro product prices are likely to be raised, in phases. As they should be; the subsidy is completely insane not least for the environmental problems it is causing. ONGC's results would also improve thanks to higher crude oil prices and the removal of its subsidy burden for petrol and diesel.
The next sector is IT, with a current weightage of 13.7% in the sensex, comprising Infosys, TCS and Wipro, all well managed companies. Their P/Es reflect better corporate governance. These companies are hoping for a $ 1b. pie from banks as the US economy recovers. However, these companies hit all time highs last week and closed at 5-6% below their highs.
Thus, on fundamentals, these three sectors, accounting for nearly 55% of weightage, seem to be fairly valued; they could move up if more FII money is pumped in after fresh allocations in January.
Cement prices are slated to go up by Rs 5-10/bag because of shortage of wagons, another example of poor planning.
Last week the BSE-Sensex initially rose but dropped after Dubai asked for a freeze on its $80b debt. It ended the week at 16632, down 389 points. The NSE-Nifty ended at 4941, down 110. Should global investors become more worried about Dubai, and its impact on other countries (about a third of India's inward remittances come from the Middle East and Dubai was a significant contributor because of its construction boom, now ended), the sensex could fall to test the recent low of 15,500.
So, is India a global power, capable of sustained economic growth based upon sensible economic policies, and able to thereby attract more of the huge pool of financial assets? Will our political leaders show that they are capable of, and willing to, proceed against those guilty of crimes, never mind who they are or were? Will we be able, then, to become the economic superpower that we are capable of becoming? You tell me.
J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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