Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Warning for India Stock Market Global Investors

Stock-Markets / India Jul 14, 2009 - 05:18 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: When India unveiled its annual budget on July 6, it immediately caused a sharp drop in the rupee, as well as a 5.8% decline in the benchmark BSE Sensex stock index that had soared 55% so far this year.


The sharp reaction wasn’t a surprise: Since it including nothing about privatization, and outlined a deficit that widens to dangerous levels, the budget was nothing but bad news for investors.

Russia, by virtue of its myriad economic travails and poor overall performance, faces an equally dour near-term outlook. Given those two laggards, is it possible that the Goldman Sachs Group Inc. (NYSE: GS) “BRIC” group of exciting emerging-market players will narrow the to the “BC” – meaning investors should focus their attentions on Brazil and China alone?

Insights on India’s Economic Travails

Investors had hoped that the thumping electoral victory for the Congress Party in May would have opened the way for further financial reform and privatization, but new Finance Minister Pranab Mukherjee is an old Congress Party warhorse left over from the days of state control. Mukherjee was previously finance minister under Indira Gandhi in 1982-84, a period of state-controlled economy and sluggish economic growth that took place well before the Indian economic liberalization began in 1991.

The new budget confirmed that investors’ hopes of the new Congress-led government are likely to be dashed. It increased the deficit further – to 6.8% of gross domestic product (GDP) – raised state spending by a startling 36%, and boosted subsidies for food and petrol by an astonishing 55%. Since the budget also increased the target for state and local government budget deficits – to 4% of GDP – an overall Indian state sector deficit in excess of 10% of GDP seems assured.

India isn’t the United States, in which such large deficits can easily be financed – or at least can be for a time. Moody’s Investors Service (NYSE: MCO) rates India’s domestic debt as a Ba2 – a “junk” rating – and the country is already running a significant balance-of-payments deficit.

India has foreign-exchange reserves of $223 billion, so one year of a $95 billion budget deficit (plus about another $60 billion at the state level) can probably be financed, but if there was an overrun – not impossible, particularly if organic economic growth does not resume – the strain on India’s foreign exchange reserves would probably become unbearable.

Most important, such large budget deficits might well lead to a substantial “crowding out” effect in the Indian domestic market, in which Indian businesses find it difficult to raise money. Unlike in the United States, the Reserve Bank of India cannot just buy government bonds to prop up the market; Indian inflation is already running at 8.7%, and any “monetization” of the government deficit by the central bank would push it well into double digits.

India-watchers have seen this move before – periodically, until reform began in 1991, and speeded up after 1998. From 1947 to 1991, whenever economic growth picked up, the government would attempt to spend all the extra money that was being generated by the tax system and the deficit would become impossible to finance.

India’s economic sluggishness in the period to 1990 – when economic growth peaked at around 3%, or 1% per capita, while other Asian countries were racing ahead – actually spawned a controversial and derogatory term, known as the “Hindu rate of growth,” which spawned even more angst when it was attributed to cultural difficulties.

With the growth of the last two decades, we now know this to be nonsense: India can perfectly well grow as rapidly as China if it wants to. The obstacle is India’s government, and that’s an impediment that’s not going to disappear anytime soon.

The Outlook for Stocks

The implications of all this for Indian stocks are dire. If India’s government runs budget deficits that burden the capital markets, and economic growth slows sharply, domestic stock prices are likely to be affected accordingly.

India’s stock market, currently trading at a Price/Earnings (P/E) ratio in excess of 20, will be devalued until it has a P/E like Turkey (8.2) or Sri Lanka (7.7). In such a situation, the rupee would also be weak (it has already dropped by 10% against the dollar in the last year) giving U.S. investors doubly painful losses, perhaps even in the range of 50% to 60% from current levels – which already are 30% below the January 2008 peak. Only major exporting companies with liquidity sufficient to fund their operations without raising new domestic capital would flourish.

The world is thus in a position in which two of its great growth engines – India and Russia – are likely to run into increasing difficulties. Fortunately a third, Brazil, has been growing much better in the last few years, with policies of high domestic interest rates and contained budget deficits that have allowed its resources sector to flourish.

And while Western economies remain mired in recession, global growth is currently excessively dependent on China, the largest emerging market of them all.

[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best – because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

The Permanent Wealth Invesor assembles high-yielding dividend stocks, profit plays on gold and specially designated "Alpha-Dog" stocks into high-income/high-return portfolios for subscribers. Hutchinson's strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash - only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.

To find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor - please just Click Here.]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules