For all the comparisons between India and China that do the rounds, this one goes hands down to China without as much as a fight. Today's chart of the day shows just how far India is when it comes to attracting foreign long-term capital investments from the rest of the world when compared to its aggressive neighbour. Foreign direct investments (FDI) are those investments that foreigners make in a country to build a business in that country. In entails investments in physical assets such a plant, machinery and buildings for that purpose.
What's most striking about this comparison is that the quantum of FDI flowing into India in the year 2008 (US$ 35 bn) was breached by China way back in 1995! While the Indian government has in the last few years been taking steps to attract foreign long term capital, it has clearly not been enough when seen from this perspective.
If the data on factory output is anything to go by, looks like China has put the ill effects of the global financial crisis behind it. As reported in a leading business daily,Chinese factory output surged to a 19 month high in October. Having said that, there was a dip in the pace of investment and loan growth and exports have yet to take off in a significant manner as the US and Europe are still reeling from recession.
Despite this, the Chinese economy is expected to log in a decent 8% growth in GDP in 2009. While domestic demand seems to be improving, it is the excess liquidity that is also playing a role in bolstering growth. Famed economist Andy Xie was certain that the Chinese bubble was set to pop.
More importantly, there are concerns that global investors are confusing the Chinese 'stimulated' growth with sustainable growth. It is well known that a large part of the growth in China's economy over the past decade came from exporting and lending to the US. Now with the latter in a deep recession, the former is suffering from overcapacity. Hence, even if China does manage to grow its economy by 8% this year, it remains to be seen whether the same will be sustainable in the next two years.
While the RBI continues to remain worried about the excess liquidity stoking inflation, the government seems to be in no mood to pay attention. The government has ruled out any curbs on capital inflows even though the inflows in the initial months of the current fiscal have far exceeded the expected levels. India saw foreign investments inflows to the tune of US$ 27.5 bn in the first six months of this fiscal. At the current pace, inflows could cross the US$ 61.6 bn for FY08, when the country undertook tough measures including imposing restrictions on participatory notes (PN) and external commercial borrowings. While the government may still be concerned about capital inflows as is evident in the fact that it has no immediate plans to raise the cap on FII investments in corporate bonds from the current US$ 15 bn, the lure of forex inflow seems to be getting hard to contain.
India scores over its developed peers on many points and one such advantage that the country has is the lowest number of old age dependents. As today's chart of the day shows, the percentage of old aged population (65 years and above) as a percentage of working population (15-64 years) in India is lowest as compared to Japan, UK and US and even its BRICS peers. For the developed world, rising aged population means that there is that much more pressure on governments to provide healthcare, pensions and other such benefits. A lower ratio in India means that the scope for contributing to the country's growth is higher. What is more, in the healthcare field, the rising aged in the developed world means more focus on low cost medicines to keep healthcare costs under control and this provides immense opportunity to India pharma players.
The Indian stock markets have rallied at a scorching pace this year. What is more, investors seem to be getting jittery at this meteoric rise. Otherwise what would explain the fact that in October 2009, investors booked profits worth Rs 66 bn in equity mutual funds, the highest ever for any month? At the same time, Rs 44 bn was poured into these funds resulting in a net outflow of Rs 21 bn, which also happens to be a monthly record. No doubt that the markets this year have gone too high too fast and investors, who don’t want to repeat the mistakes last year when markets touched 21,000 levels, are looking to take some profits off the table.
Mutual fund houses also agree that lack of push from the financial advisors and mutual fund agents, who now have to claim their commissions directly from investors, has had an impact on business. However, overall the general perception is that investors are taking informed decisions, and this indeed is an encouraging sign.
Today’s chart of the day perhaps presents the greatest paradox of our times. What do you think is a good gauge of a country’s economic strength? Its currency or its stock markets? If you answered both then perhaps the chart laid out below will leave you scratching your head. Since the lows of March 2009, while the US stock market benchmark, the Dow Jones, has risen by a significant 56%, the purchasing power of the US dollar vis-à-vis gold has come down by 15%. What more, it has also moved down by a similar margin against a basket of currencies. Thus, either the stock market rally is false or the dollar’s decline. Fortunately, we do have some objective criterions viz. the earnings trend of US companies and the US balance sheet to make some reliable assessment. And the criterions do point towards the fact that the US dollar is indeed under pressure. Thus, a conclusion that directly follows from this one is that the US stock market rally of the past six months may not be true after all. Hope the US stock market investors are listening.
The Indian government last week announced its intentions to go aggressive on listing of unlisted profitable public sector undertakings (PSUs). And the markets cheered, as seen from the near 5% jump in the BSE-PSU index. This suggests that markets have liked this move though we find no reason for the same. After all, the government will just be divesting a small part of its overall stake and will still be maintaining a strong control on all these companies even after the stake sale. Secondly, almost the entire money raised through the PSU IPOs will go into the government's coffers and nothing will flow into the companies going for listing.
Another thing, and this is the most important, is that you need to be very careful of the pricing of these PSU IPOs. Seeing the high valuations that were asked recently for the IPOs of NHPC and Oil India, the government might be looking to again rake in the moolah by going for aggressive pricing for these new IPOs.
If this happens to be the case, then you can comfortably give the forthcoming PSUs IPO a pass. Having said that, the underlying fact is that it is important to evaluate every IPO on its merit rather than follow any thumb rule.
