Sudip Bandyopadhyay’s Blog

The expectation from the Union Budget for the current year is significantly considering the following :

1)    The Government is now firmly in saddle for close to a year and has 4 more years to go before the next general elections.

2)    Finance Ministry and the government, in general, did get adequate time to ponder over the economic and structural issues.

3)    The recently revealed GDP numbers indicate that economic growth is back on track.

4)    Post world economic crisis, India is in a unique position to move ahead at a rapid pace by removing the residual structural bottle-necks.

With the above backdrop in mind, we expect the following from the Budget :

1)    Calibrated and well thought measures for controlling inflation without affecting growth and the roadmap for gradual withdrawal of the stimulus package spread over the next 12 to 18 months period.

2)    Introduction of effective short term and long term measures to facilitate significant additional infrastructural investment by both domestic and foreign investors.

3)    Schemes for mobilization of domestic savings through appropriate PSUs for deployment in infrastructure.

4)    Concrete steps for taking agricultural growth to its next level, thereby providing necessary impetus for double digit GDP growth.

5)    Roadmap for completing the structural reform process through enactment / amendment of pension and insurance regulations.

6)    Roadmap for carrying out necessary reforms in the Labor Laws, Commodity Market Regulations (FCRA) etc.

7)    Clear roadmap for introduction of GST.

Indian capital markets are becoming more and more integrated with the international financial markets in an increasingly globalised economy.  We can’t take an ostrich like stand and wish away the global trends.  The International markets are 24×7 and India being a part of one global economy needs to realise the same quickly.

50% to 60% of total daily Indian equity exchange turnover comprises of trading in Nifty.  Singapore Exchange (SGX) also trades in Nifty and trading at Singapore starts much before the Indian capital markets open.  Foreign investors having access to SGX , take advantage of this early start and position themselves accordingly much before the Indian markets open.  Apart from this disadvantage for the domestic investors, the Indian capital markets lose this Nifty turnover which happens at SGX.  We need to harmonise the trading timings and remove this apparent handicap for the domestic investors.

International linkage and consequent price movements create both opportunity as well as risk which need to be managed on a 24×7 basis.  Indian markets close at 3.30 pm local time when the European markets are at full swing and US markets are yet to open.  The entire development in US and significant development during the day in Europe are not captured by the Indian markets.  These get factored in when Singapore markets open for trading.  Thus very frequently we find Indian markets opening with a significant gap which create huge risk management complication for domestic market participants.  Increasing trade timing both at the beginning and towards the end will enable Indian players to better manage their risk and not get caught unaware.

Domestic infrastructures in terms of banking systems are well equipped to handle incremental trading hours particularly an early start. There is no apparent fund transfer bottle-neck for starting early trading.  The infrastructure is already in place.  Its only a question of getting used to operating in global environment.  Sooner we do the same the better it is.

India is poised for exponential growth during the next 5 years.  This growth is expected to be significantly higher than the European and US economies.  Consequent upon this, India will continue to attract more and more investments from abroad.  Proportionately more domestic savings will also get channelised to the capital market both directly and indirectly.

Return of the foreign investors was the most significant development in Indian capital market in 2009.  Post the significant withdrawal of funds by FIIs in 2008, they poured money in Indian markets once again in 2009.  Realisation that India is amongst the very few market in the world which offers significant growth opportunities in the near future, has made the FIIs re-look at India.   Relative positioning of India amongst other global markets as an investment destination has significantly improved.

For an investor with medium and long term outlook, the investment idea for 2010 will definitely be equity.  In this space the investor should buy fundamentally strong companies which are aligned with domestic economic development.

2009 has been year of significant turmoil in the international and domestic markets.  Indian Stock Market  Markets going down to 7000 – 8000 level (BSE index) and coming back from there to 16000 – 17000 level (BSE index) during the year has highlighted the need for patience and value investing.  Price of acquisition has become the topic of discussion.  This trait is very clearly visible during the recent IPOs where the investors refused to participate in over priced / fully priced issuances.

While studying the companies, investors started to look at cost efficiencies which is again a significant change from the earlier perspective. Indian Markets will continue to enjoy significant liquidity during the year 2010. Propelled by increasing domestic demand and incremental infrastructure spend will take the growth of GDP to double digits.  The Indian corporates focussed on meeting domestic demand, will prosper and will get re-rated. All these will lead to significant improvement in the capital market index levels.  The Indian capital market will cross the previous peak and scale newer heights.

I still remember an incident which took place a few years back when my next door neighbor’s son needed a large sum of money for admission to an engineering college.

He had only a few hours to complete the formalities within the deadline. They made a few phone calls to his uncle in London and within 15 minutes they collected the money from the neighborhood Western Union outlet after the uncle remitted money from Britain to our small town in the outskirts of Kolkata.

Another shocking and quite different incident took place recently. My driver in Mumbai wanted to urgently send money to his wife in his native village in Bihar for some immediate need. The poor guy was running from pillar to post trying to figure out how to ensure that the funds reached his wife within 24 hours. Unfortunately, he cannot use money transfer agents as they cannot be used for domestic remittance.

Since his illiterate wife doesn’t have a bank account and the village where his family stays, in any case, doesn’t have a bank branch within 10 kilometers, he had no other option but to ask his family to borrow money from his village money lender at an exorbitant interest rate for a week. Ultimately, he remitted money through a postal money order and he is hoping that his money reaches his wife within seven days.

Financial inclusion is one of the main planks of India’s drive to wipe out poverty – equal to the efforts put in to build physical infrastructure. Government experts define the policy as the “delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups.” Officials estimate that more than half of Indian rural households - about 46 million homes – do not have access to credit.

“Inclusive growth demands providing financial services to this un-banked population.””

Two thirds of the country’s population doesn’t have a bank account and this situation is not expected to change dramatically in the near future. Inclusive growth demands providing financial services to this un-banked population.

The attempt by the government is now rightly moving towards using alternate non-banking channels to route financial services into the interiors of the country. As a part of this process it would be only appropriate if the domestic remittance market is opened to recognized money transfer agents who already are authorized to receive inward remittance from abroad.

In fact, it is quite paradoxical that a person sitting in India can receive remittance from anywhere else in the world but not from other locations in India. So a person in London can remit money to a person sitting in a remote village in Bihar by using the services of Reserve Bank of India-approved, private money transfer players, while a person sitting in Mumbai cannot do the same. The only option open to him is to use the postal department’s money order service and borrow in the meantime if necessary.

The problems in India’s rural sector are well documented and the lack of remittance services is but one of the many inequities that plague this part of the country and keep its inhabitants outside of mainstream finance

Consider some of the others.

About 72% of the country’s 1.14 billion people live in rural areas, yet agriculture produces only about 21% of gross domestic product, according to the World Bank. That leaves the majority of the population living off a small chunk of the economic pie. While the government has claimed it can end poverty by 2040, at present, more than 250 million Indians live on less than $1 a day.

Small and marginal farmers, with two hectares (five acres) of land or less, comprise three quarters of the nation’s farming households but own less than one quarter of its farmland. In the poorest states, such as Bihar, small and marginal farmers comprise about 96% of those working the land, according to industry experts.

A lack of transport and other infrastructure forces these farmers to sell their produce to village “aggregators,” the middlemen, at less than market value. With a better knowledge of prices than many of their poorly educated clientele, the middlemen dupe farmers into steep discounts. They also double up as money lenders, providing farmers with credit for seeds and equipment, often at crippling interest rates.

This is where micro-finance and non-bank financial companies can play a huge role so that financial inclusion reaches the remotest levels of the country and India can truly progress.

**** This article was originally published in The Wall Street Journal. http://online.wsj.com/article/SB125549894649484331.html

In the Hindi blockbuster movie Gajini, the lead actor suffers from a disastrous aliment “Short-term Memory Loss”.  The current market euphoria across the world reminds me of a similar mental state for investors across asset classes who are unable to grasp the toughest lessons of last year’s global economic crisis.  The crisis was predominantly about unsustainability  of macro imbalances – imbalances within and between the nations as well as flaws in policies, regulatory structures & risk management practices that allowed these imbalances to take the world to the brink. Many of these structural issues haven’t been adequately addressed yet. The macro  imbalances continue .In the midst of a very lukewarm recovery in few economic indicators, the recent rally in almost all asset classes is baffling.The current market upswing is being driven by huge surge in liquidity, consequent upon biggest ever simultaneous liquidity injection by the governments across the world. The danger of the current euphoria is apparent with a very clear writing on the wall regarding forthcoming acceleration in inflation numbers across the globe.  This is driving the gold prices which are hitting record highs.  Even oil& other commodity prices are  showing steady rise &  the unprecedented  liquidity is keeping the equity markets  buoyant.

Confused investors are seeking answers and searching for  appropriate asset classes for investment .  They are clinging on to gold.  With looming inflation in the horizon I don’t see any fault in this logic of buying or holding on to gold except the fact that the appreciation in gold may not be significant  in the near term considering the fact that it is already at record high.  But for long-term purposes gold will continue to remain an attractive investment avenue. Jim Rogers the renowned commodity bull recently mentioned ” I can’t say what will happen to Gold tommorow..but if you ask me whether Gold will go up in the long term…I would say yes .”

Oil as an investment avenue is a bit complicated and at present avoidable for the general investors. Inside every Oil bull beats the heart of a brooding pessimist.Crisis , turbulence & disasters enable Oil prices to shoot up.  Apart from demand/supply dynamics, geopolitical issues play a significant role in determining the price of oil. Geopolitical tensions around the world are currently showing signs of cooling down with more mature US policy response to the various issues. While the economies  of China, India and few other developing countries are on their recovery path , the same is not true for the European and US economies.  Subdued global economic activity depresses demand for oil and consequently  its prices.  Popular belief that holding  oil as investment can act as a hedge against forthcoming increasing inflation will not hold true  unless & until economic activity around the world significantly picks up.

Thus, in spite of nervousness around the world regarding sharp rise in prices of Equity Shares over the last six months, investing in stocks will continue to remain attractive.This is specially true in case of India.  During the boom of 2007, the rate differential  between the GDP growth of US,Western Europe and India was around 3-4 per cent, as India was growing at around 8 per cent, whereas these economies were growing at around 4-5 per cent. Conservatively India is expected to grow at around 6 -7 per cent during the next few years, whereas US and Western Europe will either show de-growth or grow marginally.  Thus the GDP rate differential  has only moved up to 6 per cent, making India more attractive as an investment destination.  India will continue to attract significant long-term FII fund inflows ensuring that there is ample liquidity in the market. Domestic savings will also continue to get channelised indirectly through the Mutual Funds & Insurance companies. The trick would be to identify the right sector and right company in these sectors.  With the economy growing at 6 – 7 per cent, and expected inflation of around 4-5 per cent, the nominal growth will be 10-11 per cent.  In such a scenario, the performing Indian companies will definitely provide a CAGR of around 15 per cent over the next 5 years.

It is also very important to remember the cardinal principle of investment…don’t try to time the market..be in the market for a time. Today’s stock market levels are much closer to the 2007-08 peak than the bottom of 2008-09 & in the short term market movements will be volatile & choppy. The world economic scenario is still not very rosy & liquidity levels may fluctuate wildly based on entry or exit of FIIs. However the medium to long term projection for Indian eqity markets are very encouraging & Investors with similar time horizon should definitely look at equity investments for building their wealth.