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Conclusion: We do not currently view the announcements of truly positive reforms as a probable events in the near-term and, thus, remain bearish on Indian equities, the rupee and rupee-denominated debt from an intermediate term perspective.


For those of you who may be unable to get allocated a share of the upcoming Facebook IPO, next month the Old Wall will roadshow another “juicy” deal for interested parties. That’s right, gov’t and central bank officials from India will enlist the services of investment banks such as C, GS and JPM to embark on their own version of a global dog and pony show.

The plan is to attract an incremental $75 billion of capital into the Indian economy over the next two years – a marked acceleration from the $117 billion cumulative investment into India’s debt and equity capital markets since they were opened up to the world in 1993. They are certainly working uphill here; global investors have withdrawn 447.8M and 2.1B rupees from India’s equity and debt markets, respectively, from their respective YTD peaks in foreign ownership.

Tossing Up BRIC(k)s: India’s Upcoming Roadshow - 1

Since we are all but certain that the accompanying presentation will be filled with hopeful projections surrounding India’s growth potential and outlook for both urbanization and industrialization, we thought it would be helpful to equip you with a mini-presentation designed to help you appropriately combat the pollyannaish storytelling you’re very likely to hear in these meetings.

Key “Highlights” of the world’s ninth-largest economy:

  • Real YoY GDP growth at an 11-quarter low (+6.1% in 4Q11) and below the rate of headline inflation in every quarter since 4Q10;
  • A fiscal deficit target of 5.1% of GDP in FY13 – 50bps wider than the 4.6% target that was missed in FY12 (actual figure came in at 5.9%);
  • Record sovereign borrowing needs of 5.69 trillion rupees in FY13 to crowd out a record requirement of international capital (all-time wide current account deficit of 3.6% of GDP in 2011);
  • 75% of its 1.2 billion population living on less than $2 per day;
  • A reliance on external supplies for 80% of its crude oil consumption;
  • A ranking of 95th (out of 182 countries) in Transparency International’s 2011 Corruption Perceptions Index;
  • A ranking of 56th (out of 142 countries) in the World Economic Forum’s 2011-12 Global Competitiveness Index (89th in Infrastructure);
  • A currency that has fallen nearly -17% over the LTM to a record low of 53.96 per USD in concurrence with rate cuts and ongoing QE (despite inflation consistently hovering 300-500bps above the central bank’s unofficial 4.5% target since DEC ’09);
  • An local equity market that has a dividend yield of only 1.47% that has fallen nearly -23% from an all-time high in NOV ’10; and
  • Partisan gridlock – made worse by routs of the ruling Congress Party in recent regional elections – that has delayed key economic reforms such as opening up India’s retail market to majority FDI stakes, the so-called Direct Tax Code Legislation and implementing a nationwide goods and services tax (GST). 

Net-net, if economic management were akin to basketball, Indian policymakers have truly put the “brick” in BRIC over the past ~18 months. Moreover, they have yet to introduce a credible strategy to reverse the negative course they are currently on.

That said, however, not only are the aforementioned bearish data points largely in the rear-view mirror, we’d be remiss to ignore the bullish storytelling that is likely to accompany next month’s roadshow. A such, we would view some combination of the following reform proposals as broadly bullish for Indian capital markets (from a price): 

  • An overhaul of the country’s tax code designed to widen the base and discourage tax evasion;
  • A focus on reigning in the country’s outstretched budget deficit via credible fiscal consolidation rather than hopeful expectations of revenue and/or GDP growth;
  • A shift to credible inflation-targeting out of the central bank, rather than hopeful expectations of where they’d like rates of inflation to eventually arrive at;
  • A shift away from supporting financial market liquidity at all costs towards protecting the nation’s currency from making continued all-time lows vs. the USD; and
  • A adoption of a credible system to investigate and, more importantly, punish officials convicted of corruption (currently, the average criminal case for Indian politicians lasts 15 years). 

All told, we do not currently view the announcement(s) of truly positive reforms as a probable event(s) in the near-term and our quantitative analysis of India's equity market affords us confidence in our view. Thus, we remain bearish on Indian equities, the rupee and rupee-denominated debt from an intermediate term perspective – accepting any rallies into next month's storytelling as potential short opportunities if the risk management levels remain supportive of our fundamental thesis.

Tossing Up BRIC(k)s: India’s Upcoming Roadshow - 2

Darius Dale

Senior Analyst

As an aside, we’ve been bearish on Indian equities since early NOV ’10 and the country’s L/C bond and currency markets since MAY ’11. India remains a country that can’t seem to get out of its own way from a monetary, fiscal and regulatory policy standpoint. An increasingly questionable long-term growth outlook and persistently elevated rates of inflation form a colorful backdrop for consistent “misses” relative to the country’s budget deficit, growth and inflation targets. India remains dramatically short of both capital and crude oil – having to import both in size at steep costs to the economy. As detailed in our recent work, India’s latest budget fiasco has set the country up for a repeat of our 2010-11 Nasty Trifecta thesis. 

Recent Relevant Research (email us for copies):

  • 11/9/10: India’s Two Big Problems;
  • 1/6/11: India’s Two-Factor Squeeze;
  • 1/26/11: Top Emerging Market Short Ideas – Indian Equities;
  • 2/28/11: India – Missing Where It Matters Most;
  • 5/3/11: India’s Nasty Trifecta;
  • 10/21/11: Weekly Asia Risk Monitor – Global Bankruptcy Cycle?;
  • 11/28/11: Weekly Asia Risk Monitor – The Many Faces Of King Dollar;
  • 1/20/12: Weekly Asia Risk Monitor – Stress-Testing Asian Risk;
  • 1/9/12: Awful Fundamentals – Out Updated Thoughts On India and Shorting INP Trade Update;
  • 2/17/12: Triangulating Asia – Is It Time for India To Take a Breather?;
  • 3/5/12: Triangulating Asia – Policy Ping Pong Sets Indian Equities Up For a Sustainable Breakout or Breakdown;
  • 3/30/12: India Strikes Out Again; and
  • 4/17/11: Is India Out of Bullets?