25 Jun 2012

Is the growth story intact?

Policy paralysis is the main obstacle to further economic growth in India. But India is still the second fastest growing major economy in the world and a return to 9%+ economic growth is not out of the question.

A seminar titled "India: Is the growth story intact?" was held at the Greenwood Theatre in London on 19 June 2012. The panel of speakers consisted of: Lord Desai, Jitesh Gadhia, Senior Managing Director - Blackstone, Mark Lewis , Co-Chair India Group - BLP, Ian McEvatt , Chairman - Himalayan Fund NV and Steven O'Hanlon, Chief Investment Officer - Fixed Income, ACPI.

  • The India economic growth story is impaired - not intact anymore, but not dead either. Politics and policy paralysis are the main causes. India is known for taking three steps forward and two steps back. You should not write off India in the middle of the two steps back. India is still the second fastest growing major economy in the world.
  • The drivers to achieving India's economic potential include: a mature democracy, an established institutional framework, demographics, entrepreneurial spirit, a growing educated middle class and a judicial system which, although it is very slow,has also passed judgements in favour of foreign investors.
  • The risks to achieving India's economic potential include: politics, corruption, lack of consensus among coalition partners for reforms, poor infrastructure, inadequate education and skilling, lack of a developed bond market to help finance infrastructure growth. The recent proposals on retrospective tax and the "Vodafone case" have damaged foreign investor sentiment and limited their appetite for what was once a very attractive investment destination.
  • The outlook for markets in next twelve months: positive for equity and bond markets. Private equity investments into India are viewed on more than a twelve month horizon and the appetite remains for selective investments.
  • The stock market is far more open to foreign investors than Foreign Direct Investments which are subject to sector caps. Politics severely limits the opening up of key sectors. Bureaucracy and red tape need to be reduced substantially to make India a more attractive destination.
  • Politics, scandals and poor governance were mentioned throughout the seminar by the panellists. There was a need to de-link politics from economic decisions. In reality this is impossible, and limits India's economic potential.
  • Overall, the impairment in India's economic growth was seen as being short-term. But, many "speed bumps" lie on the journey ahead to returning to 9%+ growth. Politics, corruption, excessive bureaucracy, poor infrastructure and inadequate education and skilling are among challenges that limit India from realising its economic potential. The size of the market is compelling, especially at a time of weakness in developed markets.

22 Jun 2012

Indian political parties: unpopular and badly managed

Indian politics is suffering a comparable policy freeze to Europe and the United States. The central bank is unable to take up the slack.

The monsoon made good progress this week, with rainfall improving to 75% of the long-term average. Reservoir levels are behind last year’s record level but still ahead of the ten-year average. Some crop sowing is already ahead of last year. Any improvement will be well-received at the RBI, the central bank, where inflation concerns are at the top of the agenda. With many Indians spending up to half of their disposable income on food, an abundant harvest is crucial in reducing price pressure.

The slow start to the monsoon season was one reason for the RBI to hold interest rates unchanged at its June mid-term review last week. Another reason was its disappointment that the bank’s previous interest rate cuts failed to encourage the government to move on fiscal consolidation. The RBI states that high interest rates are less a factor in slowing investment than the absence of government policy action and reform.

This brings us to the central issue in the Indian economy: Indian politics is suffering a comparable policy freeze to Europe and the United States. Both national parties, Congress and BJP, are unpopular and badly organized. Regional parties are attracting increasing support, raising the prospect of a disparate coalition emerging from the next national elections in 2014.

A new political impetus is required and the election of a new President next month may provide just that. Polls suggest the current Finance Minister, Pranab Mukherjee, of the Congress Party, will win. This would present the Prime Minister, Manmohan Singh, with an opportunity to re-shuffle his cabinet, perhaps taking back the Finance portfolio himself in a late attempt to restore his reputation for reform.

Himalayan Fund's full Weekly Market Commentary is available on the website.


18 Jun 2012

Inflation risk triggers surprise RBI decision

The Reserve Bank of India today surprised markets by holding the key repo rate stable at 8%.
With core inflation remaining just below 5%, global commodity prices subdued and the Rupee stabilizing, the RBI was widely expected to announce further monetary easing. Analists expected a cut of 25 basis points.

In the event, the RBI went against market expectations with a hold on monetary policy. The big excuses were failure of the Indian government to follow-through with fiscal consolidation, sustained inflation risk and a hopeless external situation as international governments fail to grasp the nettle of economic crisis.

Expert views on the decision can be found here.

Meanwhile, Indian politics is in a stalemate which is unliely to be broken before the Presidential election on July 19th. The elections may offer an opportunity for a cabinet re-shuffle to stimulate policy action.

Even in the face of global downturn, India can still generate 60-70% of GDP from domestic demand. That means that to maintain growth in the 5%+ range, India Inc. just needs to keep operating. Corporate earnings growth of 10-12% should be a floor for well-managed companies. Policy uncertainties are holding the private sector back, so we need to see movement in New Delhi and Prime Minister Singh has re-iterated commitment to public sector investment.

15 Jun 2012

Monsoon season

It’s the monsoon season in India. Rains are is crucial for Indian price levels. Bad rains mean bad harvests, resulting in higher prices. And since the average Indian spends up to half his disposable income on food, an abundant harvest is crucial in reducing price pressure.

The rains have started a little slowly: rainfall over the first two weeks has been weaker than hoped for and so far has concentrated in coastal areas. There is concern that an El Nino effect may interrupt rainfall volume later in the season, but for now, forecasts remain optimistic. Meanwhile, the government has announced a substantial increase in minimum support prices for key crops. This may affect inflation figures later in the year.

1 Jun 2012

Wanted: catalyst for market momentum

The Eurozone continues to undermine investor sentiment everywhere; this week it was Spain which looks like having to bail out its banks, which the zone might not be able to afford. The week started out well in India, with the Nifty creeping up in the first couple of days but ended up closing 1.6% down at 4,842 points.

The Finance Minister has instructed state-owned banks to ensure that every household has at least one savings account by the end of June, in preparation for direct transfer of benefits under the financial inclusion plan. We think Mr. Mukherjee may be polishing his marbles in the hope of being elected president in the next session of parliament.

The new National Telecoms Policy has been approved: this will do away with domestic roaming charges, introduce a new pan-India license and allow operators to share and trade spectrum; all eventually favouring the major operators, especially Bharti, still the market leader.

The week ended with weak news on the economy. GDP growth slowed in Q4 of fiscal year 2012 to 5.3%. The slowdown is not quite as bad as it appears, being partly due to a base effect caused by the revision of growth in Q4 of fiscal year 2011 from 7.8% to 9.2%. The fiscal deficit for FY12 came out at 5.7%, a bit lower than the revised forecast of 5.9%.

The rate of quarterly profits growth appears still to be slowing. The overall market valuation is at the bottom end of the historic range but we still need a catalyst for a return of market momentum. The weak GDP number may provide that now by moving the RBI to further easing with a view to reviving private investment. Their next meeting follows the next Greek election.

Himalayan Fund's full Weekly Market Commentary is available on the website.


A Different Explanation for the Rupee Decline

An Indian vastu expert has come up with an unusual explanation for the decline of the Indian rupee over the past two years: apparently it’s all to do with the new symbol of the rupee.

In the past twelve months, the rupee has declined nearly 20% against the dollar. According to vastu consultant Rajkumar Jhanjhari, the slide has been caused by the introduction of the new rupee symbol in 2010.

The rupee symbol is a combination of the Devanagari "?" (ra) and the Latin R without its vertical bar. According to its designer, the two parallel lines at the top represent the three colours of the Indian flag and depict an equality sign symbolising the nation's desire to reduce economic disparity.

However, according to Mr. Jhanjhari, the lower horizontal line of the symbol has “slit the throat” of the Indian rupee, leading to its slide. “One must ask why our growth rate is taking a beating now before rubbishing pleas for changing the symbol," Mr. Jhanjhari says.

He may be on to something.