DHIRENDRA KUMAR ON THE SAD STATE OF THE INDIAN ECONOMY

A Long and Dark Journey

Our country’s economy is being run aground, and there’s little serious effort to revive it

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A Long and Dark Journey

Here's an excerpt from his article

Let’s use a medical analogy for what is happening to our country’s economy. The global financial crisis of 2008 was like an infectious disease that spread rapidly. India was hit too, but we probably had better immunity than many others. On the other hand, India’s current economic crisis is like a cancer. Treatment is possible but it’s difficult and expensive and has a lot of harmful side effects. But the biggest problem is the doctor himself seems disinterested in the cancer. Instead, he and his assistants seem intent on fighting other incidental symptoms with treatments that will actually make the cancer worse.

However, the decline of the rupee is merely one symptom of the underlying disease. The core problems are that on one hand, the government’s expenditure is out of control and on the other, we are less and less competitive in the world. There’s a cascade of causes and effects that are interconnected in a web in which we are trapped. Excess government expenditure means huge borrowings. Government borrowing crowds out industry. Massive consumption expenditure by the government drives up inflation. Poor infrastructure and labour quality constraint supply and therefore make inflation out of control. High domestic inflation means that to remain competitive, the rupee must fall.

The relaxation of FDI limits is based on the notion that low limits are what is holding back investors. This is a fantasy. Poor infrastructure, corruption, red tape and a hostile regulatory and tax environment are the actual problems. If ownership limits were the issue then we wouldn’t have seen so many Indian business houses so interested in investing abroad.
I’m sorry for taking such a pessimistic view, but there are only a few silver linings and things will get worse before they get better.

USD INR - THE DOWNWARD SPIRAL INTENSIFIES

The Indian Rupee  has continued it slide versus the USD.
The INR is down almost 19% vs the USD since the beginning of May 2013!

Inaction and lack of reforms by the government have continued to compound problems of food inflation and currency depreciation.

At the present time, local investors are faced with volatile and mostly negative returns in both the equity markets and also the Indian Debt market, which has been severely rattled by sharply rising Government bond yields.

The only asset class that has managed to outperform and provide a hedge to local investors is GOLD.(thanks to a currency depreciation)

EXCELLENT POST FROM ZERO HEDGE:

Indian Rupee Collapses - Worst Day In 20 Years | Zero Hedge

The Indian Govenment has been steadily raising import duty on gold, in its continuing effort to rein in the current account deficit.

Watch this space. 

As valuations in the Indian Equity markets start to look attractive, remember that the country now faces a rather tricky situation of slowing growth, steady/persistant inflation, and a weak currency.

GDP growth rates of under 5% are now a distinct possibility.

While a sub 5% growth rate may appear robust to readers in the developed world----in emerging markets like India, it is extremely worrying.

Unemployment and non performing bank loans will be  serious problems over the next few years, if we are unable to get the economy back on track.

The inability of the RBI to cut interest rates (due to a rapidly depreciating currency and a rising current account deficit) will add to the woes of a struggling manufacturing sector. Stock prices of companies in the engineering / capital goods space are now trading at 8 year lows, and hopes of a recovery look bleak at the moment.

The Banking sector too has faced a drastic sell off in stock prices since May 2013. Public Sector banks will face considerable stress and even at todays discounted valuations, they still remain a high risk buy- meant only for those who are ready to weather more turmoil in the sector.

Perhaps, private sector bank stocks need to correct too, as expectations of growth are adjusted downward. Many private sector banks trade at expensive price/book ratios even after the initial sell off

Lastly, FMCG (Consumer staples), Pharmacaeuticals, and Information Technology (IT Services) remain the last pillars of strength.

Buying in these sectors should be done with extreme caution, as valuations may not leave an adequate margin of safety for the investor. 

These sectors will continue to relatively outperform the benchmark indices, as they function with nominal government price controls (FMCG) and in the case of export oriented Pharmacaeuticals and IT companies - are beneficiaries of currency depreciation.

CRUDE OIL OVERVIEW -BUSINESS LINE NEWSPAPER - July 1, 2012

The Sunday Business Line Newspaper from ''THE HINDU'', on July 1, 2012 discusses the average price of an Indian Basket of Crude Oil and compares $/barrel and INR/barrel prices.

Crude Oil imports account for just over a third of  India's imports; and thus high Crude Oil prices coupled with a weak INR have resulted in persistent inflation despite high interest rates set by the RBI.

Also, this situation has resulted in rising government Petroleum (Oil sector) subsidies as the Indian Government continues to heavily subsidize retail fuels like Diesel, Cooking Gas and Kerosene.

If the price of Crude Oil refuses to correct despite a slowing world economy, and if the Indian Rupee fails to regain lost ground vs the USD; the Indian Government will have to rethink its policy of "unsustainable" Petroleum sector subsidies and instead plan for a gradual move to market driven - prices for fuel sold by the Oil Marketing companies.

INDIAN RUPEE SLIDE CONTINUES

2012 has been another tough year for the INR.

With the ongoing policy deadlock, high energy prices, ''risk off attitude'' and unyielding inflation, the INR faces a rather challenging secong half for 2012.

Here is an article from the Economic Times 23.06.2012, that explains the plight of the INR in more detail.