David Fuller and Eoin Treacy's Comment of the Day
Category - India

    Rajan Defends Inflation Fight, Says India Should Stay Course

    This article by Sandrine Rastello and Unni Krishnan for Bloomberg may be of interest to subscribers. Here is a section:

    “We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor. What is happening today is truly revolutionary – we are abandoning the ways of the past that benefited the few at the expense of the many."

    “Indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply." 

    “If a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation. He cannot have it both ways, want lower inflation as well as lower policy rates."

    “At the same time, the RBI does not focus on inflation to the exclusion of growth."

    “The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle."

    “Decades of studying macroeconomic policy tells me to be very wary of economists who say you can have it all if only you try something out of the box. Argentina, Brazil, and Venezuela tried unorthodox policies with depressingly orthodox consequences."

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    Mobius Bets on India's Small-Cap Stocks to Tap Growing Economy

    This article by Santunu Chakroborty for Bloomberg may be of interest to subscribers. Here is a section:

    Mark Mobius is betting on shares of smaller Indian companies to profit from expansion in the world’s fastest-growing major economy.

    “If you factor in the reforms that are taking place and the impact they can have on company earnings, it tells us that India is on the cusp of an interesting opportunity,” Mobius, executive chairman of Templeton Emerging Markets Group, said in an interview to Bloomberg Quint in Mumbai. The money manager has $2 billion in Indian stocks, of which more than $600 million is invested in shares of small companies, he said.

    The S&P BSE SmallCap gauge of 762 small companies has fallen 5.4 percent this year, compared with the 2.8 percent advance in the S&P BSE Sensex, as some of the worst-performing stocks on the benchmark index last year rebounded in 2016. The smaller companies are likely to climb after trailing the rally in the biggest shares as benefits from Prime Minister Narendra Modi’s growth-boosting measures take hold, Mobius said.

     

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    Mapping the World's Prices 2016

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    world. Zurich leads the way, followed by Sydney, London, Milan, Stockholm, Copenhagen, NYC, San Francisco, Amsterdam and Madrid. Tokyo is amongst the most expensive cities on most measures but surprisingly cheap hotel rooms (more akin to EM prices) help push it below many others. Our cheap date index sees Zurich, Copenhagen, Tokyo, Stockholm and Amsterdam as the most expensive cities to woo a partner. One might choose to settle down at a younger age in these countries or risk expensive courtships. London has dropped 2 places this year and out of the top 5. At the other end of the scale, cities in Malaysia, India and South Africa are the cheapest for a weekend away and around a third of the cost of the most expensive places. For those wanting a real cheap ‘cheap date’, India, Indonesia, the Philippines and South Africa are the places to go. Indeed in all of these places you can have at least 4 dates for the price of one in Zurich but please don’t tell the other 3 people! 

    Don’t lose your phone while away in Brazil, India, Sweden, Denmark or Italy as a new iPhone is most expensive there. The US remains the place to buy a new one, followed by HK and Japan. Interestingly there are signs that perhaps Uber is making its mark on the world as taxi prices in many places are falling sharply. Indeed in San Francisco (where Silicon Valley resides), taxi prices have fallen more than anywhere in the DM world over the last 12 months (-30%). 

    Bad habits cost you most in Melbourne, Singapore, Auckland, NYC and London as our ‘sin index’ of cigarettes and beers suggests. Singapore and Copenhagen really don't want you to own new cars as prices are nearly 4 times and 2 times the cost of NYC here. Buying a new car in India is half the price of NYC if you can find a way of driving it home. In addition to the aforementioned items this report also looks at the cost of various goods and services across the world. The index page provides the full list.

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    Why structural reforms are EM's last stand

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section on India: 

    Despite its impressive growth record over the past decade and a half, India’s structural deficiencies are well known, holding back its potential. Infrastructure is poor, goods market efficiency suffers from excessive regulation, labor market is inflexible, little is spent on health and education, and both the economy and financial markets have been hampered by heavy handed state intervention.

    Our analyses show that not only is India in a mediocre cohort with respect to its structural strength, it has in fact slipped in recent years. While education attainment has improved marginally and the economy has undergone a few bouts of liberalization measures, there have been setbacks in areas such as goods market efficiency, labor and financial markets, along with no discernible improvement in institutional quality. India scores particularly poorly on infrastructure.

    It is too early to tell if the new government that came to power in mid-2014 will be able to improve India’s structural scores expeditiously. Efforts to maintain fiscal discipline, raise the efficiency of cash transfer to the poor, reduce wasteful subsidies, tackle corruption, improve health indicators, pass the much-belated Goods and Services Tax legislation, widen the scope of privatization, liberalize the labor market, break down goods market cartels, pass business friendly laws, etc are welcome, but clearly the to-do list is arduously long

    Furthermore, the structural scores would rise only when such measures are pushed through successfully, many of which would likely receive pushback from vested interests and face numerous other implementation risks, especially related to the political calendar. We appreciate the goal of the government to improve India’s ranking in the cost of doing business surveys, but would need to see a broader range reform initiatives in order to anticipate decisive improvement in structural rankings. 

     

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    Email of the day on India

    I noted the Nifty & Sensex indices did a weekly reversal early March, which you mentioned in your Comment of the Day. At that time you were looking for a move above the moving average to confirm upside potential, which if I am correct has happened now. How do you now interpret the prospects for the Indian market?

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    Rajan Builds Record Reserves to Strengthen Asia's Worst Currency

    This article by Kartik Goyal for Bloomberg may be of interest to subscribers. Here is a section: 

    Rajan is boosting reserves to counter any volatility in outflows amid slowing growth in China and prospects that the Federal Reserve will consider raising U.S. interest rates. The rupee, down 0.4 percent this year in Asia’s worst performance, slumped to a record in August 2013 as indications the U.S. would curtail monetary stimulus spurred investors to pull back from emerging markets.

    “With flows coming back into the market, the RBI has been there and buying at every dip,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Speculators who see that the RBI has the firepower will not try to depreciate or take advantage of the situation, compared to earlier times when reserves were low and India saw outflows.”

     

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    India loses its lustre

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section: 

    Investors have grown disillusioned with India. Deteriorating corporate profitability, a depreciating currency and concerns that momentum on reform was slower than had been expected have contributed to a reversal of investors’ previous optimism on investment prospects. After foreign investors brought in more than USD60bn over an 18-month period from late 2013 to early 2015, flows have reversed since May last year.
     
    While these concerns are valid, sentiment may now have turned too negative. In the near-term, we see little reason to expect a significant decline in the trend growth rate of about 7% on real GDP even though fiscal and monetary policies are unlikely to provide much more support to growth from here. Unless inflation rises sharply and unexpectedly, consumption is likely to remain strong enough to support this rate of growth and we think it is reasonable to expect the improvement in investment conditions to yield an increase in investment growth. For that reason, we see growth rising modestly over the next few years. 

    Will this be “Chinese-style” double-digit growth? Probably not. India faces some constraints on growth that China didn’t, and not (just) because it is a democracy. Its banking system is unlikely to be able to grow fast enough, the government itself is not in a position to provide the investment needed and the global backdrop is less supportive with slower growth and a rising protectionist tide than China faced. 

    But India’s demographic profile lends a certain inevitability to growth being sustained at a high rate for a prolonged period as long as the government does not stand in the way. Since the government is committed to doing the opposite, to facilitating private investment by opening up the economy and improving the business climate, we remain fundamentally optimistic on India’s medium- and long-term prospects.

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    Delhi JAL Board website

    Thanks to a subscriber for highlighting this site which illustrates how much progress Delhi has made in water infrastructure, what is planned this year and what the long-term objectives are. Here is a section:

    (The work of laying sewerage facility in 162 U/A colonies is in progress. Out of total 9500 km appx. sewer to be laid, action for laying 407 km appx. is being taken up in current Financial Year) 

    Yamuna Action Plan: Under YAP-I, two S.T.Ps of 2.2 MGD each were constructed at the mouth of Delhi Gate and Dr Sen Nursing Home drains at total cost of Rs. 11.52 crore in 1996.  Under  YAP-II,  5 projects  i.e. 12 MGD new STP at Keshopur, rehabilitation of 20 & 40 mgd STP at Keshopure, 30 mgd STP at Okhla, Laying of peripheral sewer line at Wazirabad Road for U/A Gp. of colonies, Rehabilitation of Bela Road Trunk sewer and Rehabilitation of Ring Road Trunk sewer were  completed.  Under YAP-III it is proposed to undertake rehabilitation of sewerage system ( Kondali & Rithala catchment),  Rising mains (Kondali & Rithala catchment), Tertiary treatment Plants (  Kondali, Rithala  and Okhla catchment)  and Waste Water Treatment Plants(  Kondali, Rithala  and Okhla catchment) 

    Use of treated effluent: Present use of treated effluent is  142.4 MGD  from Keshopure, Okhla , Coronation Pillar, Delhi Gate, Sen Nursing Home and Rithala STP. and proposed for adding 66 MGD in near future for power plant at Bamnoli, Horticulture by DDA in Dwarka etc. The notification for sale of treated effluent  @ Rs. 7 per KL has been published.}

    Sale of dry Sludge: lot  of  dry  sludge(manure) is being produced regularly at various Sewage Treatment Plants  of  Delhi  Jal  Board  as  a  by-product  .   This  manure  being  rich  in  nutrients  i.e Nitrogen,  Phosphorous,  Potassium  and  other  valuable organic  matter  is   quite useful for agriculture as a fertilizer and a soil conditioner.  This  manure,  is  henceforth  available  Free  of  Cost to  the  intending consumers  from  DJB’s  Sewage  Treatment  Plants. 

     

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    Rajan Plays Long Game by Building Reserves Chest as Rupee Slumps

    This article by Kartik Goyal for Bloomberg may be of interest to subscribers. Here is a section:

    "There was a bit of a pause, but they are back to the policy of reserves accumulation, building up the war chest, and really being able to continue to be able to dampen the volatility in the currency market,” said Mitul Kotecha, head of Asian foreign-exchange and interest-rate strategy at Barclays Plc in Singapore. “Rajan’s comments indicate the RBI is likely to steer the currency on a fairly steady depreciation path along the lines of keeping a fairly stable real-effective exchange rate.”

    The rupee is Asia’s worst performer after South Korea’s won in the past three months as overseas funds pulled a net $3 billion from Indian stocks, and foreign holdings of local debt fell by $1.5 billion amid a global wave of risk aversion and slowing growth at home. The Indian currency fell 0.5 percent to 68.3825 a dollar on Tuesday. It sank to an unprecedented 68.8250 in August 2013.

    “Our intent is not to depreciate the rupee in a steady way or anything of that sort,” Rajan said in a speech in the southern state of Kerala. “Our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening.”

     

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    India Has Designs on Toy Manufacturing

    This article by Raymond Zhong for the Wall Street Journal may be of interest to subscribers. Here are two sections: 

    In the world’s second-most-populous country, manufacturing wages today are less than half China’s, after adjusting for productivity: $5.36 an hour compared with $14.60, according to Boston Consulting Group. Labor will be abundant and wage-growth stable, some factory owners reckon, for more than a decade.

    Whether that is enough to offset other shortcomings that have stymied India’s rise as an export power—including roads and ports that badly need upgrading, power cuts and cumbersome bureaucracy—remains to be seen.

    And 

    John Leung, chairman of GFT Group Ltd., a manufacturer of Transformers, “Star Wars” and other toys for Hasbro that is based in China’s Guangdong province, said he plans to start producing soon from a rented factory in Chennai.

    Eight years ago, GFT shifted much of its production from China to Vietnam, where today the company’s workers earn around $215 a month, less than Chinese counterparts’ salaries. But Vietnam is quickly becoming saturated with factories, Mr. Leung said.

    “In the next eight to 10 years, Vietnam will be finished,” he said. He said Hasbro, based in Pawtucket, R.I., had urged him to set up shop in India.

     

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