Environment ministry needs to take some important lessons from the Japan crisis

Japan is on the verge of a massive nuclear crisis. And very obviously, the question is being raised about India's nuclear power plans. The limelight is currently focused on the Jaitapur Nuclear Power Project (JNPP). But the government seems to be wearing blinders. Union Environment Minister Jairam Ramesh is usually known for his strong stance on many environmental issues. However, as far as nuclear power is concerned, he seems too relaxed about it.

Let's look at some facts about the Jaitapur project. The plant, with a massive power generating capacity of 10,000 MW, is expected to be commissioned by 2020. It is located near the coastal area of the Arabian Sea in Maharashtra. According to the earthquake hazard zoning of India, it comes under Zone III - a moderate risk zone - on the scale of I to V. However, the Geological Survey of India revealed that the site and the surrounding area experienced 91 tremors between 1985 and 2005, ranging from 2.9 to 6.3 on the Richter scale and the area falls in Zone IV. Whatever the number be, the danger still remains.

Regarding the Jaitapur project, Mr Ramesh has stated that the seismicity aspects have been taken care of. Is seismic zone III or IV not a concern? And how about the tsunami aspects? To that, he seemed unsure if a tsunami probability was factored into the clearance process.

We agree that nuclear power is critical to an energy starved nation like ours.

Will Gold outperform Sensex?

The reality is that all the money that the central bankers in China, US and Europe are pumping into their economy is not filtering into the ‘real economy’ i.e. consumers. This is because in a recessionary economy consumers cannot borrow. They have nothing to borrow against as they lose jobs and both their wages and value of their assets go down. Hence, the excess money is either lying with banks or funding speculative trades. Thus, as per Mr. Bonner, the resulting inflation is thanks to the modus operandi of speculators and Chinese central bankers, not consumer price inflation.

How long will this illusionary inflation sustain? Whether this will continue to stimulate Gold prices in the days ahead? Only time will tell.

the International Monetary Fund (IMF) has approved the sale of one-eighth of its gold reserves as China, India and Russia have indicated interest in such purchases as a way of reducing their position in dollar-denominated securities. It may be noted that the IMF is the third largest official holder of gold in the world with 3,217 metric tons after the United States and Germany. While most of this will be sold directly to the respective central banks, any sale in the open market can also pressurise gold prices in the near term.

As per CNN, the list of the best-performing Fortune 500 stocks, post Lehman collapse, is one of the most ironical ones investors have seen in recent times. This is because, they are the Goliaths of the yesteryears that succumbed to the subprime meltdown and sent shock waves through the financial system. Yes, we are talking about US government owned mortgage financers Freddie Mac and Fannie Mae. One can also view this in terms of the lessons in valuation that the Lehman collapse taught investors who were riding on a flight of fancy. As today’s chart shows, while companies like Freddie Mac and Fannie Mae have managed to recoup some of their lost valuations, the likes of Citigroup seem to have found no takers.

n our domestic markets, while the stocks of companies like Torrent Power, Godrej Consumer, Hero Honda and IDFC have been the biggest gainers over the past years, companies like Glenmark have been less appealing. The difference lay in the companies’ future potential and investors’ perception of the same.

n a scenario where deepening recession has compelled global pharma companies such as Eli Lilly, Pfizer, and Merck amongst others to cut costs including slashing jobs by thousands, Indian pharma seems to be following the opposite path. Indian pharma companies have been on a hiring spree with the top 10 domestic drug companies recruiting 200-250 professionals annually over recent years, a number which has now gone up almost 5 times. And why not? Currently, the growth of the global pharma market has considerably slowed down with US expected to witness a decline in 2009 and Europe expected to see a mere 2-3% growth. In contrast, the domestic pharma market is expected to grow at over 16% between 2007-11.

The factors that will contribute to the growth of Indian pharma will be increased spending on healthcare, increasing penetration of health insurance, changing disease profiles and positive regulatory changes. What is more, global pharma companies themselves have realized the potential of growth in the emerging markets and are gradually veering into generics by partnering with many domestic pharma companies. No wonder then that Indian pharma companies are continuing to hire.

Most central banks around the world responded to the global financial crisis with stimulus packages. Given the severity of the crisis, it was perhaps the right thing to do. But now the question is how long the packages should be continued. Since stimulus packages create an environment of easy money, if they are continued too long they might end up creating huge bubbles. Hence it is important that stimulus packages are wound up at the right time.

The time for wrapping up stimulus packages has not arrived, if one were to go by the views of India’s finance minister, Mr. Pranab Mukherjee. As per the Wall Street Journal, he says “At this point of time, I cannot accept the ‘dear money policy’ or credit curbing because that will have an adverse impact on overall growth”. It may be noted that the RBI is now worried about inflation. In fact, as the RBI Governor, Dr. D Subbarao, since inflation has come upon us sooner than we had expected, India will be among the first to wrap up its stimulus package. However, as per Mr. Mukherjee, we will have to wait for some time. We hope he gets the timing right.

The armed forces have come to the rescue of Indian IT Industry ! Well, you read that right. With Indian IT firms having shifted their focus to the domestic markets to wiggle their way out of the global recession, some large government projects for the defence sector have brought them some cheer. A business daily has reported that India is likely to see ‘a significant game changer’ as the one of the country’s largest IT contract to the tune of Rs 100 bn (US$ 2 bn) is likely to be up for grabs soon.

This project will be a mix of hardware and software, which will create a nationwide 43,000 km long alternate communications network for the armed forces (Air Force, Army and Navy). The reason the latter is vacating a part of its radio frequencies is for the usage of commercial telephony (3G and 2G). Software biggies such as TCS, Wipro, HCL, Infosys, Tech Mahindra are just some of the players who are likely to bid for this project. Being a project of such scale, it is likely to be given to multiple vendors. In addition, the successful bidder will also be able earn Rs 50 bn over a period of ten years as part of the contract for managing and maintaining this network.

For a power deficient country like India, power finance is the place to be. Who better to explain the challenges therein than Mr. Satnam Singh, chairman of the country’s largest power financing institution, Power Finance Corporation (PFC). In an interview to a leading business daily, Mr Singh has outlined the potential for the power finance sector and the risks associated. What interested us most is that despite the Power Minister expecting to deliver only 65,000 MW capacity addition by the end of the 11th plan period (instead of 78,750 MW), as per Mr. Singh, the power finance sector is facing a funding shortage of well over Rs 4,000 bn to meet capacity addition. Further some of the Ultra Mega Power Projects (UMPPs) floated this year have already run into difficulties. And given the fuel and equipment constraints that the power sector still faces, do we say any more?

We're not out of the woods yet

We had earlier cited that Warren Buffett is of the opinion that the US economy is past the critical point in its efforts to recover from the recession. But not everyone believes so. Professor Nouriel Roubini, who was among the first to gauge the true extent of the global financial meltdown says, "The financial system is severely damaged, and it's not just the banks. It's going to be death by a thousand cuts." He adds that more than 1,000 financial institutions could go under when the crisis is finally over and housing prices should fall by another 12 % in the next year. This is in sharp contrast to Buffett’s view that the worst is over for the residential real estate sector.

Interestingly, another financial stalwart, Bill Gross of Pimco believes that tracking the housing sector is not of much use anyway, as it cannot lead the US out of the recession. In fact, Bill Gross believes that Americans should not expect a robust bull market. He says, "It’s time to recognize that things have changed and that they will continue to change for the next - yes, the next 10 years and maybe even the next 20 years."

So, what is the takeaway for the individual investors in all of this? Firstly, that it is futile to look for a consensus on which way the broader economy is going to go and when. Secondly, thankfully genuinely long term investors need not lose sleep over the issue. As Warren Buffett said on the topic earlier this week, "I'm not buying them (stocks) based on whether we're coming out of the recession in three months or six months or a year. I'm buying them because I think we're getting good value over time. And I think it is a mistake for investors to focus on business forecasts instead of looking at the intrinsic value of the business." We believe that this also applies to investors here in India.

It is now well known that even as the developed economies were gripped by the global financial meltdown, China and India stood strong. And that is reflected in the foreign direct invest (FDI) flows to the region. Today’s chart shows the FDI inflow into India in 2008 and compares it with the developed economies as well as other emerging markets. While China is now the 3rd largest FDI recipient country in the world, after the United States and France; India ranked at the 13th place is fast catching up. In fact, China and India are ranked numbers one and three, respectively, as the most preferred FDI locations in United Nations Conference on Trade and Development’s (UNCTAD) World Investment Prospects Survey 2009-2011.

Building good quality roads are an essential part of infrastructure development but in India it is not that simple. This is because the fragmented and often confusing rural land ownership environment in India’s hinterland has posed a significant challenge. As a result there are many projects which are not finding bidders and some others are yet to be completed. However, Indian Minister of Transport and Highways Mr. Kamal Nath does not seem to be unduly worried. The government wants to acquire land for a big roads development project and Mr. Nath contends that this is not a contentious issue since it has the right to use land for road development. As reported in the Wall Street Journal, the government is looking to build around 7,000 kilometers of roads a year for the next five years, costing them US$ 85 bn, of which US$ 45 bn is supposed to come from the private sector. On these, it is looking at a return of 15% to 16%. While the focus on infrastructure development is certainly a positive, obviously execution is going to be a big challenge.

Primary articles, especially food items have pushed the inflation rate into the positive territory this week. After staying negative for 13 weeks, the inflation index was recorded at 0.12% despite a high base rate of 12.4% during the same period last year. Demand for primary articles especially food items coupled with weak monsoons have pushed up the prices. Moreover, speculative activity in perishable items like fruits, vegetables and milk has added further pressure on the prices. Although, we have received good rainfall in the recent days, which have reduced the shortfall, shortage in items like paddy and sugar will continue. Further, water reserves are still inadequate. This is expected to result in the shortfall of water for irrigation of the winter crops. In spite of the government’s recent steps including import of raw sugar and crack down on hoarders, we expect higher prices to rule during the coming months.

Memories of the Lehman collapse are fresh in the minds of most people who have lost money due to the credit crisis. Moreover, many of them are even more grief stricken now than they must have been when the whole debacle actually happened. That’s because even though one year has gone by, many of the lax regulations that didn’t put a check on the problem have still not been reformed. But things have are now beginning to gather momentum. Yesterday, the US market regulator, the SEC, proposed new rules designed to prevent conflicts of interest and provide more transparency for Wall Street's infamous credit rating industry.

This industry, dominated by three large players (Standard & Poor's, Moody's Investors Service and Fitch Ratings), has been widely criticised for its role in the causing the financial crisis. This is because they were the ones that were being relied upon and paid to give advice to people about the safety of securities. And even though that is the entire essence of their job, they completely failed at warning people about the toxic nature of the subprime mortgage securities. In fact, their recklessly awarding these securities an ‘investment grade’ rating is what contributed to such a large mass of people actually buying them without even giving them a closer look, thus directly contributing to the spread of the crisis. It comes as a big relief that with the proposal of the new rules, the SEC intends to come down hard on these companies. Let’s hope that this helps prevent creating another such problem in the future.

Walk into any McDonald’s in Mumbai and you should be mentally prepared to wait in a queue before placing an order. Once that is done, finding a place to enjoy the meal at the restaurant is another task. This is especially the case on weekends. Considering that these restaurant chains are so busy, can you ever imagine it running into losses? Well, a leading business daily has reported the McDonald’s in India has accumulated losses to the tune of around Rs 4 bn. It may be noted that this figure is not yet verified. As per the company spokesperson, "There is nothing extraordinary about accumulating losses when you are starting in a country with a great potential and growing fast." It is true that McDonald’s is a relatively new company in India. It’s been around for only thirteen years. We believe, it will be interesting to note how it fares in the days ahead as it will indicate what other franchises can expect out of India.

after starting the trade on a negative note, the Sensex largely languished in the red during the day. At the time of writing, the Sensex was down 50 points. The Indian markets seemed to be moving in tandem with other Asian markets, most of which also displayed weakness and closed in the negative. Europe, however, is trading in the positive currently.

The time bomb of public debt
Source: World Investment Report, 2009, UNCTAD

The recession is over

In my recent post Are we nearing the end of global recession, we had discussed how the club of rich industrialised nations, Organisation for Economic Co-operation and Development (OECD) says that the global recession is coming to an end faster than thought a few months ago and may in fact already be over.

The US central bank now has joined in the chorus. The US Federal Reserve has come out with a survey that confirms that the US economy has turned around a corner based on reports from regional banks. This survey precedes the monetary policy meeting, to be held in two weeks. If indeed the US Fed accepts at the meeting that the recession is over; then it is likely to increase interest rates, currently pegged at zero.

We continue to be of the opinion that investors should not get too optimistic. Several noted investors including Wilbur Ross and David Dreman have also sounded a note of caution. In fact, Warren Buffett has recently warned that we will have to deal with the side effect of the enormous dosages of monetary medicine that continue to be administered.

Although it is close to two decades since India began on its path to liberalization, doing business in India continues to be a difficult task. Today's chart of the day shows India's rank among 184 nations in the ease of doing business. The 'Doing business 2010' study conducted by the International Finance Corporation ranks countries on 10 parameters. India performs relatively well on 'getting credit' and dismally on 'enforcing a contract', where it gets the lowest ranking among all the nations studied! Not surprisingly, India comes in at the 133rd place, on an overall basis.

India does have company from the other BRIC nations, but that's hardly any consolation. The countries where doing business is the easiest happen to be among the most prosperous. That's certainly food for thought for our policy makers and the administrative machinery.

For those of you who've missed buying into Gold before it began its recent rally, a widely anticipated upcoming correction could present a very good opportunity. Yes, that's right. Gold prices are expected to take a breather for some time as one of the major supporters of its surge from US$ 900 per ounce to US$ 1,000 shows signs of weakening. As per the Wall Street Journal, firms like Barrick and AngloGold Ashanti, which are amongst the largest producers of the yellow metal have decided to go slow on their plans of gold hedging elimination.

Gold hedging is a process whereby producers sell their future production in advance because of the belief that gold prices may decline in the future. However, currently the dynamics are such that gold prices are expected to witness a sustained long term rally. Hence, these companies have decided to eliminate their hedges and profit from the price rise. Hedging elimination on the other hand, required these companies to purchase gold from the market and this along with a move away from the dollar was causing the gold price rise in recent months. But with these companies now going slow on eliminating their hedging, the gold rally is expected to slow down for a while, presenting long term investors with a good opportunity to buy into the metal.

Looks like Indian telecom major Bharti Airtel has sweetened its bid for the South African based MTN as the two companies appear to have reached a US$ 24 bn prelimanry accord to buy each other's shares, which is the first step in a planned merger. Interestingly, Bharti's founder Sunil Mittal has denied that such a pact has been reached and has reiterated that talks between the two are still going on. Already the deadline has been extended twice since July 31 and what seems to have stalled the process are some administration issues and trying to work towards an arrangement which is acceptable to all parties concerned. Should this cross-border deal finally go through, it will create a mobile-phone carrier with annual sales of US$ 20 bn and 200 m wireless subscribers. In our view, while there will be short term pressures, the long term advantages of entering a wider market and gaining synergy benefits are expected to be meaningful for Bharti, especially when growth in the Indian market slows down.

Optimism has returned with the late surge in rains. The rainfall deficit which was 25% at the end of August has shrunk to 20% this week and if the Meteorology department is to be believed this will shrink further to 15% to 18% by the end of September. However, we should hold back the celebrations for now. As on September 3, the total water storage in country's major reservoirs was 29 % below normal and 25 % below the 10 year average. Unless, the water stock improves perceptibly in the next couple of weeks, availability of water for hydro power production as well as for irrigating crops in the ensuing rabi season will be a concern.

NSE has now reduced its transaction charges by about 10% in the cash and futures segment for market intermediaries. In effect, this move will especially help retail brokers and investors by reducing the overall cost of trading. Although it may now become cheaper to trade, long term investors must by no means get encouraged to do so. We believe, trading is a loser's game. Just ask the ones who have learnt it the hard way. By the time they realise that they are back to where they started from, their brokers are already busy laughing all the way to the bank!

Bankers are a humble lot these days. In a statement strongly condemning the outsized discretionary compensation received by bankers before the financial crisis, the Chairman of Goldman Sachs Mr. Lloyd Blankfein has said "No one should get compensated with reference to only his or her own P&L". A very important statement indeed coming from a banker of repute. It may be recalled that the multi-year guaranteed employment contracts signed by bankers received much criticism last year after several large banks paid bonuses despite anchoring to bailout funds. The payment of bonuses to individual bankers are typically based on how much money they earn for the bank, which critics claim encourages them to try to maximize returns by taking bigger risks. This also leads them to lose sight of the risk taking ability of the institution.

The unemployment numbers worldwide have been dismal during the economic downturn with the western economies worst impacted. However, if the latest survey conducted by a leading business channel is to be believed, India Inc. kept hiring despite the global slowdown. According to the findings from a sample of 375 listed companies, three out of every five companies added employees. The major recruiters were the IT majors like TCS, Infosys and Wipro each of which recruited over 10,000 people during the last fiscal. India's biggest bank, SBI, outnumbered the IT giants by recruiting 26,691 employees during the same period. This hiring feat of India Inc. can be attributed to robust domestic demand and early signs of revival of global business during the latter half of FY09.

Over the next 3 Yrs, stock markets will return...

If you are expecting to achieve super normal returns from the stock markets over the next three years or so, it's perhaps time to temper that optimism a bit. As the chart below shows, at the current dividend yields of the Nifty, the benchmark may give the investors an average return of 12% CAGR in the next three years. Investors have been able to make their best returns with a portfolio that exactly mirrors Nifty stocks when the index has traded at a yield of between 2.6% and 3% between 2000 and 2006. Even dividend yields between 2.2% and 2.6% have given very attractive returns over a three year period. The worst returns have come when the benchmark has traded at a yield between 0.8 and 1.14%, returning in the negative.

Interestingly, at its peak in Jan 2008, the index traded at a yield of 0.8%, an indication that the markets were overvalued. And on 9 March 2009, when the index touched its recent lows, the dividend yield showed a reading of 2.2%, which meant more than 30% average returns per year over a three year period! You may have just learnt one of the most important charts in making far more reliable estimates about future market returns. We say far more reliable because unlike earnings and book value, dividends don't lend themselves to large scale abuse.

The last time a slowdown happened in the Indian real estate industry, it took the industry as much as five years to recover from the blow. But if a story in Mint is to be believed, the current slowdown is perhaps already breathing its last few breaths. In other words, there are telltale signs that real estate prices in select pockets are inching upwards. None more so than in the affordable housing space. Despite the big real estate players shifting their priority towards affordable housing in the aftermath of the crisis, demand may comfortably outstrip supply over the next few years, thus putting upward pressure on prices. In fact, some developers are already saying that prices may bounce back to the peak levels of 2007.

Although there seems to be huge demand for affordable housing, it remains to be seen whether the developers are being realistic or are deliberately creating stories of scarcity to lure people into buying homes. If our founder Ajit Dayal is to be believed, it is more a case of the latter as he is of the opinion that real estate projects under construction are probably 5x what the actual demand will be at the price points being currently quoted. It does not take more than a few seconds to realize whose vested interests are at stake and hence, who is more prone to fabricating a lie.
POs in India had taken a considerable beating last year when the global financial crisis deepened and stock markets plunged. However, despite signs of recovery being evident of late and global indices including India rallying, the response to IPOs has at best remained tepid. Investors, having burnt their fingers badly when the meltdown happened, are now vary of these IPOs being priced steeply and many are not looking to invest for listing gains and very rightly so.

Infact, as reported in a leading business daily, three of the four IPOs listed in August this year are trading below their offer price including Adani Power and the recent NHPC. What also seems to have impacted IPOs is a ban on derivatives trading on IPO stocks for the first six months. IPOs were the in-thing before the crisis unfolded when money (some of it borrowed) was poured into these public issues even when the underlying companies did not have sales or assets to speak of or if the revenue potential was some distance away. Not anymore!

We are back to lazy banking, if you wish to put it that way. Lazy banking implies banks doing their primary job of lending money at an unusually slow pace. As per the RBI's latest bulletin, the banking system has about Rs 3,000 bn of surplus funds parked partly with the RBI and partly with mutual funds. While it goes without saying that these are not the ideal destinations for these funds (due to their relatively poor yields), the banks have few options. Despite an economic revival, credit offtake remains feeble and has grown barely 15% YoY so far in FY10. As against this, deposit growth was healthy at 21% YoY during the same period. While you may be wondering if banks are making a killing in the bond markets - that is not exactly the case.

The surplus liquidity is not flowing towards government bonds as well because banks are reluctant to take mark-to-market positions owing to worries over rising bond yields (or falling prices). The reason why banks have chosen to park excessive liquidity in overnight instruments is because they view the liquidity situation as temporary and are anticipating a hike in CRR, SLR to suck out liquidity as inflation rears its head. While this has been overdue for sometime, the RBI's monetary tightening is also expected to work well in terms of pricing and margins for the banking sector.

As per Bloomberg, there appeared unanimity among finance officials of the G20 nations on a plan that would alter bonus structures of banks and force lenders to hold more capital to make them more crisis proof. "We have broad agreement on a very strong set of principles and objectives for building a more stable global financial system. We need to move now to put that framework in place," this is how Tim Geithner, the US Treasury Secretary chose to put it across.

While the developed nations, most of all the US have indeed shown the right intentions, the question remains that how many of the new rules and regulations will find their way into the rule book for US banks. The US banking industry in recent years has become a very powerful entity and there have been widespread allegations that they do manage to pull a lot of strings in Washington. Whether they succeed in scuttling this latest attempt that seeks to curb their animal spirits and aims to bring their compensation structure in line with other industries, remains to be seen. If they don't then that would indeed mark the beginning of a new era of the global financial system.


A late surge in monsoons seems to have rekindled hopes that the growth in India's GDP this fiscal may not be that bad after all. As per a leading daily, the rainfall in the country over the past week has been 4% more than normal with even regions like Haryana, Punjab and Delhi that till the start of September had witnessed very scanty rainfall witnessing some sort of improvement. And with the spurt likely to continue over the next week or so, there could be notable improvement in the crop production in the country and also the income of rural India.

It should be noted that a couple of weeks back, with weak monsoons as the backdrop, India's planning commission had projected a worst case scenario GDP growth of 5.5% for the current fiscal. A far cry from the 6.7% growth that we managed to achieve for the year ended March 09. Now, with monsoon deficit expected to come down, the number will most likely be revised upwards in the region of 6%-6.5%.
Recently, Nouriel Roubini predicted that the world economy faces "a rising risk of a double-dip W-shaped recession. A double dip recession means growth rates start to improve and but then peter out again. Now he has modified his prediction, admitting that a U-shaped recovery is possible. It will take about 3 years for the leading economies to get back on track.

However, he warns that if "we don't get the exit strategy right we could end up with a relapse in growth ...a double-dip recession," It may be noted that of late several credible voices have cautioned that investors are getting too optimistic and drawing cheerful conclusion from negative data. Given that Nouriel Roubini was among the very few who predicted the scale of the global financial meltdown, it makes sense to listen when he talks about the broader economy.

If one were to go by Bloomberg report, investors seem to have developed a preference for bonds and a consequent aversion to equities despite what the rising trend of markets the world over suggests. According to the report, investors withdrew a net of US$ 4.95 bn from equity funds, and added US$ 5.06 bn to bond funds in the week ending September 2. Concerns about high valuations of stocks despite continued macro economic uncertainty is what seems to have triggered this shift. Some of this concern is surely justified considering that certain stocks in the Indian markets too have become dangerously expensive, breaking even their January 2008 highs recently.

Meanwhile, led by international as well as domestic cues, Indian markets were trading strongly in the positive at the time of writing this, with stocks from the auto and metals pack leading the list of gainers. While stocks across Asia have ended strongly today, Europe is also witnessing significant buying interest currently.

Are We Nearing The End of Global Recession?

Investment banks believed a recovery is coming through, while several large hedge funds didn't. Now, the club of rich industrialised nations, Organisation for Economic Co-operation and Development (OECD) has joined the debate. And it agrees with the investment banks. OECD says that the global recession is coming to an end faster than thought a few months ago and may in fact already be over. It believes the turnaround started in the emerging economies, especially China and india. However, OECD cautions that the pickup in economic activity continues to be dependent on government stimulus packages. Also, despite the improvement now in sight, OECD expects a contraction in GDPs of the major industrialised nations for 2009 as a whole due to the poor first half.

In my, the optimism is not warranted at this stage. There are still genuine worries over unemployment data and housing prices. As Wilbur Ross, the investor famous for acquiring and turning around failed companies, recently said, "People are so desperate to hear positive news that they are drawing cheerful conclusions from negative data".

Staying on the issue, quite a few titans of the investing world have already given their verdict. 'We are not out of the woods yet, certainly not in the US', that's the mantra they are chanting these days. In fact, author and fund manager David Dreman has recently warned that the huge dose of liquidity that has been injected into the world economy will resurface in the future as inflation.

Is this the reason the precious metals gold and silver are back in vogue these days? After about a breather of few months, gold has started flirting with US$ 1,000 per ounce mark again Rs.11,720/-per pavan in kerala . In fact, it is just a few dollars away from revisiting its 2009 highs. Silver has been equally buoyant, it recently touched its highest level in weeks. Thus, with the global economic uncertainty threatening to raise its ugly head again; it would pay to move some of your money into the relative safety of these precious metals.

Our FACE!!

It is often said that the India growth story is driven by its consuming class(middle class). Today's chart of the day shows that consumption is indeed the bedrock of the Indian economy, accounting for 57% of its GDP. Compare that with China, where private domestic consumption forms only 37% of its GDP. In fact, India fares well when compared to the major economies in the Asia Pacific region. The reason is not hard to find. Most of these economies are export led and are dependent on the constant demand of goods from the Western nations. In the case of China for example, exports contribute to 37% of the GDP as against 13% in the case of India. Little wonder that India has shown a great deal of resilience to global economic crises time and again.

The hide and seek that the monsoons continue to play with the fortunes of rural India and corporates alike has taken a new turn, but this time, thankfully for the better,even we got a sexy rain on ONAM days. As per reports, the monsoon rains in India have been near normal for the three consecutive weeks since about the 12th of last month. In fact, the rainfall in the country is said to be almost 4% above normal during this period. Nonetheless, the total seasonal rainfall across India for the full June-September season is still forecast to be 20% below normal despite the recent downpour due to the rains playing truant during the initial part of the season. Interestingly, these rains might just have helped in bringing down the total deficit for this year from 25% to 23%. Also, this last minute comeback is expected to help the case of the depleted reservoirs and affected crops in the country, though its exact impact will be known only later in the year.

Sugar prices have already soared to Rs 35 a kg since last September due to a global shortage. Indications are that they are likely to go up further. And rising sugar prices are not the only problem. Already, the prospect of rising inflation looms large given that deficient rains have wreaked havoc on crop production in the country. Inflation (WPI) for the week ended August 22 moved up to -0.21% from -0.95% recorded in the week before. There are concerns that inflation will once again breach RBI's estimate of 5% by the end of this fiscal. What is more, the CPI, in which food gets a higher weightage, surged to 11.89% in July. The government contends that there are sufficient food stocks which would enable the country to tide over the drought. But, as usual, execution is the key and the government will really have to pull up its socks soon on releasing these buffer stocks and keep inflation in check lest the situation gets out of control.

Subtle aftershocks of the economic meltdown coupled with drought-like settings and inflationary threat do not particularly make the perfect setting for the growth of banking sector. However the 1% YoY(Year on Year) growth that the Indian banking sector has managed in its credit disbursals in the first five months of FY10 is certainly disappointing; if not alarming. Although the first quarter is typically a muted one for the banking sector in terms of deposit accumulation and credit offtake, this year the performance has been particularly sloppy, for understandable reasons. Given that historically the credit growth in India has been on an average 2 times the GDP growth, we do not envisage the sector to clock credit growth in excess of 12% - 15% this fiscal.

The Planning Commission deputy chairman recently underlined the urgent need for divestment to bridge the resource gap of Rs 1.6 trillion in the Eleventh Five-Year Plan. The gravity of the situation is clear from the fact that the government is not divesting any new company but is instead selling its stake in companies already listed on the stock exchanges through FPOs. The FPO or follow on public offer is when a company listed on the exchange comes up with a secondary sale of shares offer. For the government, the advantage of an FPO is that they don't have to go take approvals from the parliament and the line ministry before making an offer as this results in a large lead time. For example, Coal India is expected to take at least 6 months before it can file the prospectus for an IPO with SEBI. The reason is that it will have to take approval from its board of directors, the administrative ministry, the disinvestment department, the Cabinet and only then can it file its prospectus. Even the government gets entangled in its own red tape.

In the meanwhile, the BSE-Sensex was up around 300 points on week end.. While losses persisted in the IT index, other indices managed to trade in the green led by metal, auto and capital goods sectors. On the global front, while key Asian indices closed mixed, European indices are trading firm currently.

Source: Livemint , Business Line, Global Insight, McKinsey ,Economic times etc