India: The Bear Case

BusinessWeek is out with a great article on the grim prospects for Indian equities and the economy over the next year.

To summarize:

• 10% of India's GDP would be spent on fuel subsidies, fertilizer subsidies and stupid farmer loan-waiver programs. That's a recipe for inflation.
• There's been ZERO reforms over the past four years (!!).
• There's a risk that global investors who had set up base in India might leave.
• Communists in the ruling coalition are against globalization and industrialization.
• Elections will handicap the administration from acting decisively.
• Growth is hitting systemic choke points.

Chetan Parikh sums it up nicely: "We will lose years".

I kind of disagree that things were different six months back. Most of these signs were still there; only the perception has changed.

I commented back in November 2007 that the the Indian market was going through a speculative blow off. Technically, it was a classic top. Breadth had declined, and the majority of the advance in equities had been led by a few names. Markets churned around 20,000 on the index, broke through a few times, failed, and rolled over.

I'd also written about the emerging markets hoopla back in September 2007. Here's what I wrote about India (you can check the article for my view on the Chinese bubble) :

Emerging markets: one doesn't see the point of investing in emerging markets, with their high PEs. We need risk premium dammit!

Today, you can invest in the US(and Europe) with their reasonable PE ratios. There needs to be a risk adjustment in valuations, regardless of their "growth fundamentals". Let’s not forget, the Communist Party of India is still in alliance at the center. The possibility of them screwing things up is just very very high. This is very similar to how multinationals got banned from India in the 1970s, relegating India to the ‘Hindu rate of growth’.

The recent posturing on the nuclear deal is a good example of their potential nuisance. India needs nuclear power if they have to maintain their growth rates. If CPI succeeds, the growth prospects of an infrastructure constrained, energy constrained, and corruption constrained India would surely need to be revised down.

The risks in India are under appreciated. A repricing of risk in the Indian subcontinent is due.

Also, in a little known and often overlooked event, IMF downgraded the historical growth contributions of both India and China by as much as 40% back in January 2008.

To conclude, while I really liked the article, I disagree with the assertion that things have changed in six months. The signs have been there all along for every one to see. If anything, this could be an indicator that all the negative domestic news has finally been priced into the market.

Disclosure: None

Comments

[FreddieBoy]

I agree - India is no China. Massive Indian Government will choke off growth. This is one nation where "democracy" is a hindurance !!

[hownow]

Well it was evident to some clearly.

indiaplay.blogspot.com...

[andyn]

India has always had a meandering path...its not as straight as China's. The key to note for investors is not to look at the govt (they will disappoint) but to look at the Indian companies making money hand over fist like Reliance, Tata, ICICI, HDFC and the other unknown firms who have good earnings power. The long term story is intact - inspite of short term bumps - and an ETF such as EPI should bear it out even though it had a rough start in this market.

[Brahm]

India has problems; however, the extreme gloomy case being made is not justified now as new elections are in the cards soon. This case should have been made a year or two ago when it was clear that the Left of center government was just interested in staying in power, instead of continuing the reform process which had been instituted by the previous and other Governments in the nineties. The Communists have an undue influence on the Government, and Sonia Gandhi, the airy leader of the Congress, actually calls the shots for the Government. The nominal Prime Minisiter , though earnest and a good economist, has little clout in his own cabinet, and acts and behaves as though he is outside the Government. However, it will pass, since the Government will coast itself out of the present set-up while in the interim relying on the accomplishments and momentum generated by the previous Government.

I agree there has been several lousy missteps by this Government, more out of commission than omission. The non-energy subsidies actually perpetuate huge corruption on the part of the bureaucracy and political establishments. More than the energy subsidies, the failures and non-performance in the Agicultural sector have been more deplorably damaging to the economy while being highly inflation generating also. This is for a country that has sixty or more percent of its population dependant on it! The Reserve Bank of India had been used in an extremely political manner, and its actions inadequate and late for controlling inflation. The Government's failure to initiate meaningful and adequate programs for infrastructure development has not been lacking. In short, there has been a short in Government processes of majot proportions.

OIndians will talk again about the lost years. However, it is unlikely that the present set-up or cast of characters will prevail again afte the elections due in a few months. So, it will pass, and India come b ack again!

However,

[Hits]

The argument in this article misses some of the fundamental points about the Indian economy.

Indian economy will face some headwinds for 6-12 months. But after that substantially increased repatriations from higher Indian migration to the boom economies of MiddleEast will kick in. There is consensus in India for reform and a new Federal Govt in 2009 will certainly make the right economic noise.

India was an exciting place 6 months back because the people have hope in their future and are NOW willing to work hard for their future. This fundamental argument for growth continues.

Add to your positions for the next 6-12 months and see the rewards after that.

[paultaut]

After a dismal 8.8% rise in GDP in the first quarter, The Indian Government announced that they were setting their sights on a growth rate of 12% and once there wanted to keep it there for years.

The US grew up with low oil prices and wants to go back and live in the Past.

The Emerging nations have been living with ever rising prices and accept this as a way of life.

Where are the Energy related strikers located?

Food is a totally different matter and was caused soley by the idiots in Congress. A recent finding by the WTO, I believe, shows that 75% of the recent rise in food prices can be laid directly on the usage of food to produce energy. Imbalances were created which caused ripple effects throughout the AG Sector. This coupled with other natural disasters will keep AG prices high for the forseeable future.

[Ketan Desai]

The Indian stockmarket should be looked at differently from the economy. As the US and (sooner or later) European economies cool, the quest for cheap but competent services will increase. For example, in my radiology business, I am seeing a rather dramatic increase. Regarding politics, I should think that Investor Sajal, being of Indian origin, should know that India grows despite the government, not because of it.

[brijsrivastava]

India creates billionaires overnight.This phenomenon needs a complete scrutiny.The answer lies in pricing of public issues by govt.agencies and also in rampant price rigging by operators (read:promoters).

[User 222733]

Indian Inflation will be booming in the near future as we are already seeing some of it. the demand for the commodities rising with the prices rising in the world market and the Government continue to create more money to spend on subsidies and legislated imports.there is no innovation or enterprenureship in this society except some govt legislated capitalism. communists wants this country to be old india to keep their ideology Alive.

[fxtrader07]

yeah, when things go wrong, blame it on the communists. that game obviously never dies. never mind that almost all the questionable govt. actiona and inactions of the past 8-10 years had been taken by the Congress püarty and/or the BJP and their allies. And regarding nuclear power plants: As long as nobody comes up with a viable longterm solution (i.e lasting for at least(!) 2,000 years!!) for the disposal of all the highly toxic and radiating waste the building of any nuclear power plant anywhere in the world should be conmsidered a crime against humanity and a willful destruction of this planet. Nuclear poer is not cheap by any standards. It is the most expensive and most dangerous form of electricity generation out there. If the producers of nuclear energy were to pay the real costs to society (i.e. including all the costs for disposing and storing the waste for the next 50-100 centuries) then costs would be prohibitive. But as thimgs stand, thos ecrooks are allowed to earn huige profits and the problems are left to society and future generations.

[Tom B]

India's actually in a much better position than China: 1) They already have a Democracy. 2) They already all speak English 3) They have a better grasp of the concept of intellectual property (as, in SOME grasp vs none). 4) they have a more highly educated workforce on average.

[User 169031]

I don't like the very first statement of " 10% of India's GDP would be spent on fuel subsidies, fertilizer subsidies and stupid farmer loan-waiver programs. That's a recipe for inflation".

"stupid farmer loan program"- is essential since India is having atleast 2000 farmer's commiting suicide every year due to crop failure. 70% of India's population lives in villages and govt. has done very little to help the rural India. Agro sector is essential to feed 1 B people. Govt. spends all the money on technology parks but has done very little to open food procesing parks. Blaming on poor farmer is redicules for failure due to other policies. 70-80% of farmers in India have less than 1 Acre of land. People do not undersatnd teh amount of work needed in agriculture. Farmer's in India don't want to make their children as farmer as they see only misery and very little support from Indian Govt. China supports their agro business in very big wany in terms of subsidies. If India looses these farmers, who will feed India?

[User 169031]

Author claims to have a crystal ball about Indian stock market. No one has crystal ball !. No one had idea of OIL going this high and creating global inflation. Author seems to be an expert on world economy that is redicules. If author had so much clarity on India and China, he would not be working as chip designer. As a matter of fact, author will not be here. Investors with faint of heart leaves the stock market. Especially foreign investors, except some short tem hedge funds, stay in market since they know foreign markets are volatile. Claim of foreign investors leaving India is too far fetched. Author may have shorted the Indian market !

[growthvalue]

SLT is a strong Indian stock with a P/E of 9.7 and earnings growing every year. It is a copper, zinc and aluminum stock that is near 52 week lows on over reaction selling. While some stocks got ahead of themselves in the Indian market some are now being thrown out with the baby water.
SLT looks to be a remarkable value right now and I have been accumulating it with earnest.

[kbs]

Conventional wisdom - Business week is a contrary indicator.
Be Bullish on India.

[sonamon]

People still have not seen the end of 2008.India will post surprisingly positive returns which probably nobody can think of today. India is the place to be in now.

[Vikram]

The communists are out!

[Alakh NSingh]

What will Chinese do after olympics? Chinese market is going to be bearish after Olympics. The preparation for Olympics created millions of jobs and huge profts for many companies which supplied them intemdiate goods over the last so many years since they had won the bid for Olympics. The economy as a whole has built a lot of excess capacity during the years. Once the Olymics are over, the economy would be in dol-drums. All these would mean that the excess capcity would remain untilized and the profits suppliers would go down and stocks would perform badly in the same manner that had happened in Japan during the nineties and during this century. India does not have such an eventuality because its growth is balanced.
Alakh