Is India a Benchmark Bet on the Global Economy?

“Despite significant hurdles, GDP growth for 2009 will exceed 7%,” India’s chief economic planner Montek Ahluwalia has been repeating in recent media interviews. And, with the Sensex rising above 17,000 points yesterday on steady buying, few analysts are prepared to make a short call on the Indian stock market.

Fewer still are bothering to look closer at the “significant hurdles” which plague the Indian economy. Though the Indian government claims that, with ample food in storage, there is no threat of widespread hunger, the weakest monsoon season since 1972 has wreaked havoc on millions of farmers, many of whom have already defaulted on loans to banks and private money lenders. During the height of last year’s downturn, more than 10 million workers in the “unorganized” sector, India’s largest labour pool, either lost their jobs or were forced to accept drastic reductions in wages and working hours. And, with the prices of basic foodstuffs like lentils, sugar and vegetables at historic peaks, it is not difficult to visualize the fate of the 500 million-plus Indians living below the poverty line.

Yet, corporate profits are expected to rise and government spending will inevitability boost core industrial segments. On the one hand, levels of impoverishment clearly suggest that the Indian Shining story has failed to touch the lives of a majority of Indians and, in fact, the already-disturbing rich-poor gap continues to widen. On the other hand, as evidenced by valuations attributed to recent listings, investor sentiment is gearing up for another 15-20% surge in stocks before Christmas. “We see the Sensex at 20,000, as a first target,” a Mumbai stockbroker declared over the weekend. “We are not worried about drought, unemployment or food inflation.”

In other words, the “significant hurdles” Mr. Ahluwalia mentioned belong to another India altogether, an India which lives in the villages and the urban shanty towns. The India asset managers and business leaders speak about is confined to the 200-million-strong middle class, the super rich and those loaded with cash which has escaped the scrutiny of tax authorities. But is this “disconnect” sustainable? Specifically, is the Indian stock market capable of breaching one resistance point after another in an environment where the deep-rooted structural problems within the national economy still need to be addressed?

The answers must shape a strategy to trade India-specific ETFs or ETNs (EPI, ICN, INP and PIN). In this writer’s view, any surge in Indian equities from this juncture must bring with it attractive short opportunities, for three good reasons.

Firstly, widespread economic hardship is imposing severe constraints on the consumer demand matrix. Secondly, the optimism generated amongst local and international investors by a stimulus-loaded GDP is no substitute for comprehensive and realistic asset valuations; the painful lessons of heavily-leveraged balance sheets have been easily forgotten. Thirdly, a Maoist movement, rooted in marginalized tribals and landless peasants, now holds sway in 180 districts across 10 states, accounting for almost 42% of India’s geographical area. Armed confrontations between paramilitary forces and communist guerrillas will dominate the headlines in forthcoming months; New Delhi rates the Maoists as the biggest threat to national security, ahead of the terrorism promoted by Islamic militants.

Too often in the past, fund managers in the West have applied flawed valuation methodologies to India by ignoring the political, social and economic risks the “other” India brings to the asset equation. “The disconnect between deprivation and abundance works to a degree but, at the end of the day, nothing works if the disgruntled are prepared to pick up the gun and fight for social justice,” an opposition politician in the Maoist-infested state of Andhra Pradesh conceded at a news conference last week.

An informal survey revealed that the overwhelming majority of Mumbai brokers are convinced that global growth through 2010 will create the foundations for another impressive bull run. But the lack of clarity on what global growth means in this era of unprecedented deficits was striking indeed.

Comments

[Mad Hedge F...:]

ytv India has been one of my stellar picks this year, the “I” in BRIC, rocketing 112% from the March lows (click here for my initial report ). Although it appears overheated for the short term, I believe it has much further to run over the long haul. You want to buy countries that have yet to build infrastructure and a middle class, and China has already done that. India’s per capita GDP came in at a sparse $1,016 last year, compared to $6,100 for the Middle Kingdom. China’s economy today is about on the same level that Japan experienced during the late fifties, while India is still in the late twenties, with large parts effectively mired in the 16th century. India’s recent election of a more pro-business government was the trigger for improved growth, which is expected to exceed 6% for the rest of the year. India’s economy is entirely domestic, and is so far outside the world economic system that the global financial crisis was barely felt there. While we were melting down with a minus 6% GDP rate, India continued to bask in a plus 5.8% growth rate. No subprime debt, toxic portfolios, foreclosure crisis, government bailouts, or AIG, GM, or Chrysler. With 1.2 billion consumers, some 70% of GDP there accounted for by consumer spending, so retail figures large in the country’s future. Even Harley Davidson (HOG) has big expansion plans in the world’s largest user of motorcycles. For those of the ETF persuasion, look at Wisdom tree’s earnings based offering (EPI) or the one from PowerShares (PIN). Better start checking your share prices in rupees.

Oct 01 10:28 AM

[LCACM:]

India probably cannot be a benchmark for the Global Economy as its socio-economic makeup is markedly different from Europe, Africa or Middle-East. In India joint families and extended families are the norm, resulting in a family having several bread winners who pool their resources.. A job loss by one or two family members probably requires belt tightening but is not economically devastating as in the West where a family depends on one or two breadwinners. As a result the loss of consumer confidence due to the financial Meltdown is fairly low in rural India, compared to other economies. Also as the Indian laws do not allow companies to hire and fire to satisfy their whims, the job situation is not so dire. This has had the positive impact of improving consumer confidence and the resulting consumer demand. It is interesting that countries that follow a mixed economic model (India,China) are performing better than countries following either a purely socialistic or purely capitalistic ideology.

Oct 01 10:31 AM

[Tony Petroski:]

Rakesh Saxena: A sobering assessment:

"New Delhi rates the Maoists as the biggest threat to national security, ahead of the terrorism promoted by Islamic militants."

Maoists? Can't someone tell them that we're all Keynesians now? I guess history moves on.

Oct 01 07:54 PM

[AAS191:]

"Thirdly, a Maoist movement, rooted in marginalized tribals and landless peasants, now holds sway in 180 districts across 10 states, accounting for almost 42% of India’s geographical area."

You have designed this statement to be intentionally misleading in support of the thesis of your article. Just because the Maoists may be operating in 180 districts in 10 states that REPRESENT 42% of India's area, doesn't mean that the Maoists hold 42% of India's territory. While the Maoist insurgency is certainly a threat to India's stability, particularly in the central region, the Maoists are hardly knocking on the doors to Delhi, Bangalore or Bombay.

Oct 02 09:15 AM

[Uttam:]

"Thirdly, a Maoist movement, rooted in marginalized tribals and landless peasants, now holds sway in 180 districts across 10 states, accounting for almost 42% of India’s geographical area."

This article rates among the top 5 stupidest articles I have read in recent times. Don't want to waste any more time on this one. Enough.

Oct 03 02:43 PM

[punk_ash:]

I am visiting India. I feel that living in US is cheaper than living in India. There is too much inflation. There is so much demand for the real estate that the bubble may not burst for decades.

If every one in India gets to the standard of life as the west, Earth will start shining like the Sun with all the heat produced from the fossil fuels.

One thing just keeps working for India is the population and the pyramid as in more young people than the old, other than that, the whole environment is just bad.

Oct 03 03:37 PM

[No Free Cake:]

Welcome back Rakesh. It's been awhile since you've written here. Always look forward to your material.

Oct 03 11:22 PM

[rakj124674:]

India is yet to grow its infrastructure to the levels where China is today. So lot of growth is pending.

Oct 04 02:48 AM