INDIA BULLS ARE GORING US, FOR NOW

Position: We are short the Indian equity market via IFN

The past weeks have been full of mixed blessing for the Indian economy: Tata’s triumphant launch of the Nano, an emblem of India’s ambitions and potential, was marred somewhat by capacity constraints that will prevent production sufficient to meet anticipated full demand until 2011, a full year later than hoped. After weather worries, the wheat harvest is now projected to be a record haul lifting concerns about consumer price pressure, but with collapsing wholesale prices the prospect of cheaper wheat provided little comfort to the more than 50% of the population that toil as small farm operators.

February export data released by the ministry of commerce today leaves little room for positive interpretation however, as collapsing global demand reverberates through the subcontinent’s manufacturing sector. Exports declined by 22% on a year-over-year basis in February as total exports fell at a greater rate of 23% narrowing the trade deficit to $4.9 billion for the month.  Excluding oil (for which India is import dependant) imports declined by 10% Y/Y.

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Since we launched our macro product early last year we have been consistently bearish on Indian equities. The divergence between our view and the India bulls has largely centered on our more negative bias on the potential for internal demand to sustain at high-single-digit growth levels. The glass half full community sees India as the major Asian economy with the least dependence on external demand while we see a massive mismatch between the vaunted drivers of the “Indian Miracle” –high tech services and intellectual property firms, and the reality of the great majority of India’s population that cannot possibly replace foreign demand for call centers and software.  Meanwhile viable products like the Nano, the model T of India poised to meet massive internal demand, have been hindered by bad governmental policies and a dependence of foreign capital (recall that Tata was forced to walk away from a nearly complete factory to produce the Nano after a regional government failed to satisfy the disgruntled farmers whose land had been appropriated for the site, setting the project back by months at massive expense).

Prime Minister Singh is in London today for the G20, and as both the leader of a rising global economic force and a talented economist his ideas will weigh heavily in the talks. At home however, with election starting before month end, the Prime Minister is scrambling to implement more stimulus measures  -rate cuts, tax cuts and infrastructure programs, which may satisfy voters even if the defense it will provide to economic growth is unclear. In the case of infrastructure projects, it is important to note that the ponderous overlapping bureaucracies of India’s state and federal governments will prevent ground from being broken for months or even years on most projects. Wholesale price levels released later this week may well register negative, but consumer inflation data has still not reflected the decline in commodity prices. In the face of all this, the any optimistic rhetoric by the ruling coalition going into the election needs to be discounted.

We are short the Indian equity market via IFN and continue to have a bearish bias despite the fact that the position has been a drag on our portfolio performance over the past month as the market rallied from January lows; the sting is softened by the long string of double and high single digit returns that we have realized shorting IFN over the past year.

Andrew Barber
Director

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