Is there an alchemist in the house?

By Priya Nigam

East is East, and West is West, and never the twain shall meet. Well, that’s what Rudyard Kipling said. Unfortunately, the “slowdown” monster emanating from the West seems to be digging its fangs into the Indian economy. It wasn’t too long ago when all we seemed to be talking about was the Indian stock market boom and the bright prospects of Asia's third-largest economy. Now, the stock market and the economy are unable to keep pace with expectations. And there is talk of a sharp slowdown in the Indian economy in the coming year.

Moody's Economy.com said India's industrial production (IIP) rose only 5.3% in January. This not only represents a slowdown from the year-ago levels of 11.6%, but also a downturn from December’s 7.7% growth. Moreover, the growth recorded in January 2008 was lower than expected. Compared to December, industrial output was down 1.5%. Following aggressive monetary tightening (nine interest rate hikes since 2004), borrowing costs are now close to the highest they have been in a decade. This has dampened the domestic demand for goods that are sensitive to interest rates. And with inflation on the upswing, the central bank may not loosen its monetary policy in a hurry.

Moreover, the global slowdown has impacted India’s manufacturing production, which forms the lion’s share of the industrial output. With exports suffering, manufacturing production has taken a hit. The US, which is barely managing to keep its head above the water, is one of India’s most important trade partners. With the US economy sliding fast and the rupee having surged against the dollar, things are not really going in favour of exports.

In fact, India’s GDP growth has moderated to 8.4% in the October to December quarter, from 8.9% in the July to September quarter.

Indian investors did not digest the news too well and the Sensex plummeted nearly 5% in afternoon trading on Thursday, led by heavyweights Reliance Industries and ICICI Bank. The broader NSE index plunged 5.4%.

Needless to mention, these developments don’t go in favour of the Congress-led coalition government, with the general elections due next year.

“Softening in industrial production - if it continues at this pace - would pose a serious problem to the Indian growth outlook down the year,” said HSBC economist Robert Prior-Wandesforde. The government forecasts a slowdown in economic growth to 8.8% in the current fiscal year, from 9.6% last year. This would be the first deceleration in three years. Also, GDP growth could slow further next year. Even with these expectations, India would likely remain the world's second fastest growing economy after China.

So, what’s the elixir of life for the Indian economy? Infrastructure, vocational training and sound government policies are areas that definitely need to be addressed. Whatever the recipe for success is, I hope India can whip it up!

Suggested reading:

• India ahead of China in Bertelsmann survey
• Don’t panic when the stakes are down

What's next for Stock Market?

By Vipin Agnihotri

No doubt, Bombay Stock Exchange (BSE) Sensex is making valiant attempts to decisively cross the 14,697 peak it reached on February 8 but has not been able to ever since.

In theory, the NSE Nifty, which is not a free-float index such as the Sensex, has managed to cross its previous peak. “Two large IPOs, DLF and ICICI Bank, will divert part of the funds that could otherwise have gone into the secondary market,” pointed out Rangita Chatterjee, stock market expert.

Last week, the Sensex failed to get its chin above the 14,697 bar and dropped back to end the week at 14,003, down 506 points. The biggest contributors were Reliance Industries (with 98 of those 506 points), Larsen & Toubro (47) and ITC (44). Investors are wondering which way the breakout will happen.

As far as money flow into the stock market is concerned, it has come into the notice of The India Street that Life Insurance Corporation of India is planning to invest Rs 115,000 crore in equity and corporate debt.

In addition, pension funds will be allowed to invest partly in equity. Furthermore, private sector mutual funds will get access to surplus PSU funds. “The Reserve Bank of India is releasing $5 billion of its over $200 billion forex kitty for investment in infrastructure. As India’s economy grows and the equity cult spreads, more money will keep pouring into the stock market,” pointed out N Yadav, business journalist based at India.

But experts believe that there are reasons to being cautious in the short term. First and foremost, public governance is abysmal, and getting worse as elections approach. Quite a number of times it is downright foolish as in the quest to squeeze tax resources with not a thought on how poorly those already raised are being utilized.

In my opinion, the fringe benefit tax on sweat equity is one example. Another one is the levy of a 12.3 per cent service tax on sale of tickets for international flights out of India. The result: ticketing business has gone to other countries.

“The most valuable state-owned company is ONGC, which has been headless ever since the Government refused an extension to its former chairman who made the firm hugely profitable,” pointed out Ramesh G, CEO of India research.

It is worthwhile remembering that the man nominated by an internal committee, RS Sharma, was refused the post by the Prime Minister’s Office and now, funnily, has been re-nominated! Similarly, State Bank of India, which has an unbelievable uninterrupted dividend history of over 150 years, is valued at $17 billion, less than private sector ICICI Bank and far lower than ICBC of China, which is valued at over $230 billion.

To see how the private sector extracts value, it is of utmost importance that one observes the $1 billion valuation sought to be extracted by Reliance Communication by hiving off its tower business into a separate entity.

The present stock of 110,000 towers is expected by the telecom regulator to grow to 350,000 by 2010. Reliance Communication’s valuation has shot up.

On the other hand, that of public sector Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation are languishing, because of the burden of subsidy forced upon them. Its not that these managements cannot extract value but, sadly, they are not allowed to. All in all, it’s better, therefore, to await a better opportunity to invest.