Indian Economy: The Road Ahead Looks Tougher than Expected

I consider myself to be lucky to witness what we may call some years later the greatest financial crisis of all time. Before I say anything further, I must disclose that this is the first recession or bear market that I have witnessed ever since I could understand what Capital Markets are all about. And it has been one heck of a ride.

A lot of reading and common sense have helped me deal with the inexperience of going through such times. Over this period of time, I have realized how the analysts and leaders play with numbers and present economic data in a rather opportunist manner. Such has been the case for the Indian economy over the last 18 months.

For the most part of the ongoing recession, our leaders and Government were in denial mode. Such was the optimism being portrayed as if we were completely isolated from the world and there were no dependencies. In recent times, much has been made of the near zero inflation numbers (WPI) for the Indian economy; however let me assure you that the number has more to do with base effect rather than actual price declines on the street.

A state of acceptance is now more visible among Indian business circles and leaders. The RBI in its recently announced quarterly review pegged GDP growth for current fiscal at 6%, down from earlier projections of around 7.5%. I must say that rampant cost cutting and job elimination is going on. And I can say this with authority, without knowing the official numbers as I speak to a lot of recent graduates and students in final years of their studies. When placement at India's premium colleges hits a low and companies are reluctant to honor their earlier commitment, you don't need a number from an agency to get an idea of the situation.

What makes matters worse for India is its very high Fiscal Deficit, which limits the stimulus a future government can offer. Hopes are being pinned on lower commodity prices that form the bulk of Indian imports to help bring down the deficits. But how could an economic recovery and low commodity prices go hand on hand. Let us be very clear in our minds that slightest of recoveries will lead to higher commodity prices.

Also, most of us are expecting that the economic conditions may improve from second half of this year and revenue projections of our government are based on these assumptions. Though there have been large stimulus provided by the government, they don't even amount to 2% of our GDP. How can we expect to grow at a much greater pace with falling investments, low availability of capital and above all falling global demand? It is true that demand has been good in Rural India, thanks to recent pay commission hikes passed by our central government. But we must not forget that it will not be possible for any such demand to sustain if the consumption and business activity doesn't rebounds all across the nation.

Even if we were to assume that the recovery is going to come, we will be facing very high inflation both due to the base effect and also due to higher commodity prices. Given the current money supply across globe, we cannot rule out higher commodity prices should the recovery begin. And then we have the off balance sheet items to worry about. The road ahead definitely looks tougher than expected.

Disclosure: Long Nifty.

Comments

[Jasper M:]

I was just wondering about the view from the other side of the planet. Thank you.
If you find your government feels genuinely limited re stimulus by its Fiscal Deficit, you might want to be thankful - "stimulus" has a lousy track record, as we in the west are currently illustrating.
Personally, I expect India to do better than most these next few years.

Apr 28 04:48 AM

[captainjohann:]

Hi Mundra,
There is defenitely less hiring of IT professionals but then then their pay bracket was way heigher than normal before.Pilots were given pay packets due to demand and supply gap.But as the current NANO booking shows, there is demand for good products with normal cost.I as a middleclass retired man is happy that the flat panel TV is costing only 30,000, cameras, camcorders etc all costing almost 50%.House prices which was artifically jacked up is coming down due to lack of speculative money. I realy enjoy this global depression. I hope it lasts and recovery is slow for middleclass and rural labour atleast.

Apr 28 10:17 AM

[User 149220:]

Hi Saket,

I was just wondering your article is short on the Indian economy buy you are long on the NIfty.

Apr 28 10:32 AM

[Saket Mundra:]

Hello,

I have been long Nifty since March, when we hit the lows. I have been booking profits all this while, and carrying my positions with Trailing Stop Loss. I hope we all would agree, that stock market movements don't strictly follow economic activity.

Also, I wish to respond to CaptainJohann's comments. Though there has been demand in the rural segment and discounts offered on a large variety of products, the CPI (Consumer Price Index) has still not come down. Might be a good idea to visit our nearest super market or grocery store and ask about prices of vegetables, food articles. What I want to bring to your notice here is that the speculative price rise was nothing to cheer about, but it has very less to do with a common man's monthly expenditure and budget.

Demand for NANO must be seen in context with overall Auto demand. For the last three months the numbers reported by the sector have been quite overwhelming, given the environment.

But I still agree that price moderation shall really help and its a good sign. Nevertheless price moderation at the cost of jobs and growth is something I am seriously doubtful and cautious of.

Apr 29 01:14 AM

[ART DAVE:]

I THINK THE AUTHOR OF THESE ARTICLE ALONG WITH MOST OF EXPERTS HAVE TOTALLY FAULTY ANALYSIS.
INDIAN ECONOMY IS A TRULY AN UNIQUE SITUATION IN INVESTMENT WORLD. WHENVER, THIS GOLBAL BUBBLE THAT STARTED WITH HIGHLY SUBSIDIZED (THROUGH TAX BREAK FOR 50 YEARS FOLLOWED BY FNMA GURANTEES BY US GOVT ON FINANCING) WITH US HOUSING WILL BUST ALONG WITH BUBBLE RECKLESS SPENDING OF US CONSUMER, THERE WILL BE A NEW WORLD LEADER THAT WILL EMERGE. MUCH THE SAME WAY USA EMERGED AS A LEADER AFTER WORLD WAR 2. PARRLALLEL WITH USA POST WORLD WAR 2 AND INDIA TODAY IS DRAMATIC. POST WORLD WAR 2, BRITAN AND WESTERN EUROPE WAS IN A HUGE DEBT MUCH THE SAME WAY US AND WESTERN EUROPE IS TODAY. USA AT THE TIME WAS THE LOW COST PRODUCER WITH ROE AND ROC (RETURN ON EQUITY AND RETURN OF CAPITAL) WAS THE HIGHEST IN EVERY INDUSTRY MUCH THE SAME WAY INDIA IS TODAY. USA POST WW2 HAD LOWEST DEBT COMPARE TO PEARS. BELIEVE IT OR NOT, INDIA HAS MUCH LOWER DEBT COMPARE TO USA AND WEST EUROPE. AND MOST OF THE DEBT IS INTERNAL AS OPPOSE TO CURRENT USA IS EXTERNA. SAME SCENERIO EXISITED IN FAVOR OF USA POST WW2. USA POST WW2 HAD THE MOST EDUCATED WORK FORCE (SPECIALLY ALL GERMAN AND RUSSIAN SCIENTIST MOVED TO USA). THE SAME EXISIT FOR INDIA.
CHINA ON THE HAND LOT OF US DOLLARS AS RESERVE. THEY WILL SOON FIND OUT THAT IF THEY SELL OR USE LOT OF THESE DOLLARS, DOLLARS WILL DECLINE SUBSTANTIALLY. SO, EXACTLY AFTER THIS DECLINE WE ALL BE SURPRISED HOW MANY DOLLARS THEY HAVE. AND OFFCORSE, FLOW OF CAPITAL WHICH THIS AUTHORS TALKS ABOUT, THAT THERE WILL NOT BE QUESITONS WHEN CAPITAL WHEN ALLOWED TO FLOW FREELY, WILL ALWAYS FLOW TO MOST EFFICIENT ECONOMY-I.E. THE ECONOMY WITH HIGHEST ROE AND ROC. WHICH INDIAN COMPANIES HAVE ONE OF THE HIGHEST ROE AND ROC.
USA HAS ALWAY MAINTAINED HIGHEST LIVING STARNDARDS BECAUSE CAPITAL WAS EFFICIENTLY DEPLOYED AND IT WAS EVIDANT WITH ROE/ROC. NOW INDIA HAS THAT ADVANTAGE. EVERY MAJOR INDUSTRY, INDIAN COMPANY IS LEADER IN ROE/ROC. OIL, REFINING OR E&P, METALS, MINING, ALTERNATE ENERGY WIND GENRATION, AIRLINES, AUTO, AUTO PARTS AND EVEN SUCH AS AUTOANCIALRY, IT; YOU WILL FIND ARE THE LOWEST COST PRODUCERS AND GIVING BETTER ROE/ROC.

May 02 07:56 PM

[ART DAVE:]

REGARDING STIMULUS PACKAGE: OFF COUSRSE IT IS BETTER FOR GOVERNMENT TO HAVE LOT OF RESERVE CASH AND LOWER DEFICIT TO HAVE EXCESS MONEY TO LOWER TAXES WITH. HOWVER, INDIAN ECONONY STARTED OPENING UP AT LEAST 10-15 YEARS AFTER CHINA. INDIA HAS SIGNIFICANT RESERVE COMPARED TO IT HAD 10 YEARS AGO BUT NOT NEARLY AS MUCH AS CHINA DOES.
HOWEVER, INDIA HAS AN ADVANTAGE IN THAT THEY CAN STIMULATE ECONOMY MUCH MORE EFFECTIVLY SINCE ITS CORPORATE STRUCTURE IS VERY COST EFFECTIVE. FOR INSTANCE, RBI HAS ISSUED 100 BILLION USD BOND FOR INFRASTRUCURE. MOST OF THESE INFRASTRUCUTRE BONDS WILL BE AVAILABLE THROUGH PROJECT THAT ARE BOT METHODS, WHERE PRIVATE ENTERPIRSE WILL DECIDE, BUILD AND OPERATE THOSE INFASTRUCTURE ASSETTS.
CHINA AND EVEN USA, DOES NOT HAVE THESE TYPE OF ORGANIZATION. BULK OF THE STIMULATION WILL BE WASTED IN GOVERNMENT BURACRACY AND BRIDGES TO NO WHERE. THE COST OF GOVERNMENT PROJECTS IN USA ARE MUCH HIGHER THAN THE SAME PROJECTS DONE IN PRIVATE SECORE AND WASTEFUL AND VERY TINY % OF ACTUAL SPENDING WILL END UP STIMULATING THE ECONOMY.
THIS IS WHERE MY PREVIOUS ARGUMENT COMES IN HANDY. CHINA AND USA ECONOMY IS SO WASTEFUL (DUE TO LOW ROE/ROC) SUCH THAT VERY SMALL PART OF STIMULS WILL RESULT IN ECONOMIC BENIFIT AND RESULTING INFLATION WILL BE MUCH HIGHER THAN THE BENIFIT.
THUS, REVIVING ECONMY REQUIRES GOOD ECONOMIC BASE (EFFFICIENT ECONOMY -ROE AND ROC TO BE OVER 20%). THE STIULUS WILL ONLY BE EFFECTIVE IF IT IS SPENT IN A SYSTEM WHICH GENERATES MORE GDP COMPARE TO INFALTION. EVERY TIME GDP IS GENERATED IN INDIA, DOWN STREAM GDP IS MUCH HIGHER. SUCH AS WHEN POWER PLANT IS GENERATED WITH 1 BILLION DOLLAR WILL GENERATE MUCH MORE GDP DOWN STREAM THAN 1 BILLION OF RETAIL SALES ARE GENERATED. BECAUSE US ECONOMY SATURATED, DOWN STREAM GENRATION IS NOT POSSIBLE UNLESS US IS THE LOW COST PRODUCER. WITH CHINA, DOWN STREAM DEMANDS ARE NOT SUSTANABLE AS IT IS IN INDIA SINCE CHINA HAS BUILD ITS ECONOMY ONLY ON EXPORT MODEL. IT IS NOT EASY TO GENERATE INTERNAL DEMAND THAT CAN BE SUSTAINABLE. TO GENEARATE INTERNAL DEMAND, CHINA WILL HAVE TO DEVELOPE AND EDUCATE THEIR RURAL AREAS, PROVIDE THEM WITH SKILLS AND INFRASTRUCTURE THAT WILL CREATE MARKETABLE SKILLS AND THAT CAN SUSTAIN DEMANDS. EVEN THOUGH, THEY HAVE DEVELOPE FEW URBANS ARES, 80-90% OF CHINA ARE MUCH FURTHER BEHIND THAN INDIA IN THAT RESPECT. ALTHOUGH, THEY HAVE STARTED IN RECENT TIMES, IT WILL TAKE THE 10-12 YEARS BEFORE SIGNIFICANT RESULT CAN COME. EVEN S KOREA, SINGAPORE, TAIWAN TOOK 5-7 YEARS BUT THEY WERE MUCH SMALLER COUNTRY AND CHINA WILL TAKE MUCH MORE TIME

May 02 08:27 PM

[Saket Mundra:]

Dear Art,

I would suggest all to please read Reserve Bank of India's Quarterly and Yearly survey released in April. I hope following points answer your questions

1) I am talking about next year or so and you are talking about Long term (10 Years or so).

2) I am talking about current economic numbers, and you are suggesting about Demographics and anticipated growth.

3) ROE and ROC are a function of number of parameters including Leverage. I hope you have taken into account high leverages of some of the Indian companies.

4) Regarding Public Private Partnership - I suggest you please update your figures for construction of Roads and other Infrastructure in the last five years. Planning and allocating money is very different from execution on ground.

In the end, I would like to understand, why has the Indian Government and RBI lowering its GDP and other economic (Exports, FDI) estimates every 3 months over the last year?

Regards

Saket Mundra

On May 02 07:56 PM ART DAVE wrote:

> I THINK THE AUTHOR OF THESE ARTICLE ALONG WITH MOST OF EXPERTS HAVE
> TOTALLY FAULTY ANALYSIS.
> INDIAN ECONOMY IS A TRULY AN UNIQUE SITUATION IN INVESTMENT WORLD.
> WHENVER, THIS GOLBAL BUBBLE THAT STARTED WITH HIGHLY SUBSIDIZED
> (THROUGH TAX BREAK FOR 50 YEARS FOLLOWED BY FNMA GURANTEES BY US
> GOVT ON FINANCING) WITH US HOUSING WILL BUST ALONG WITH BUBBLE RECKLESS
> SPENDING OF US CONSUMER, THERE WILL BE A NEW WORLD LEADER THAT WILL
> EMERGE. MUCH THE SAME WAY USA EMERGED AS A LEADER AFTER WORLD WAR
> 2. PARRLALLEL WITH USA POST WORLD WAR 2 AND INDIA TODAY IS DRAMATIC.
> POST WORLD WAR 2, BRITAN AND WESTERN EUROPE WAS IN A HUGE DEBT MUCH
> THE SAME WAY US AND WESTERN EUROPE IS TODAY. USA AT THE TIME WAS
> THE LOW COST PRODUCER WITH ROE AND ROC (RETURN ON EQUITY AND RETURN
> OF CAPITAL) WAS THE HIGHEST IN EVERY INDUSTRY MUCH THE SAME WAY INDIA
> IS TODAY. USA POST WW2 HAD LOWEST DEBT COMPARE TO PEARS. BELIEVE
> IT OR NOT, INDIA HAS MUCH LOWER DEBT COMPARE TO USA AND WEST EUROPE.
> AND MOST OF THE DEBT IS INTERNAL AS OPPOSE TO CURRENT USA IS EXTERNA.
> SAME SCENERIO EXISITED IN FAVOR OF USA POST WW2. USA POST WW2 HAD
> THE MOST EDUCATED WORK FORCE (SPECIALLY ALL GERMAN AND RUSSIAN SCIENTIST
> MOVED TO USA). THE SAME EXISIT FOR INDIA.
> CHINA ON THE HAND LOT OF US DOLLARS AS RESERVE. THEY WILL SOON FIND
> OUT THAT IF THEY SELL OR USE LOT OF THESE DOLLARS, DOLLARS WILL DECLINE
> SUBSTANTIALLY. SO, EXACTLY AFTER THIS DECLINE WE ALL BE SURPRISED
> HOW MANY DOLLARS THEY HAVE. AND OFFCORSE, FLOW OF CAPITAL WHICH
> THIS AUTHORS TALKS ABOUT, THAT THERE WILL NOT BE QUESITONS WHEN CAPITAL
> WHEN ALLOWED TO FLOW FREELY, WILL ALWAYS FLOW TO MOST EFFICIENT ECONOMY-I.E.
> THE ECONOMY WITH HIGHEST ROE AND ROC. WHICH INDIAN COMPANIES HAVE
> ONE OF THE HIGHEST ROE AND ROC.
> USA HAS ALWAY MAINTAINED HIGHEST LIVING STARNDARDS BECAUSE CAPITAL
> WAS EFFICIENTLY DEPLOYED AND IT WAS EVIDANT WITH ROE/ROC. NOW INDIA
> HAS THAT ADVANTAGE. EVERY MAJOR INDUSTRY, INDIAN COMPANY IS LEADER
> IN ROE/ROC. OIL, REFINING OR E&P, METALS, MINING, ALTERNATE
> ENERGY WIND GENRATION, AIRLINES, AUTO, AUTO PARTS AND EVEN SUCH AS
> AUTOANCIALRY, IT; YOU WILL FIND ARE THE LOWEST COST PRODUCERS AND
> GIVING BETTER ROE/ROC.
>

May 03 04:43 AM