India: The bear case

BusinessWeek is out with a great article on the grim prospects for Indian equities and the economy over the next year.

To summarize:

• 10% of India's GDP would be spent on fuel subsidies, fertilizer subsidies and stupid farmer loan-waiver programs. That's a recipe for inflation.
• There's been ZERO reforms over the past four years (!!).
• There's a risk that global investors who had set up base in India might leave.
• Communists in the ruling coalition are against globalization and industrialization.
• Elections will handicap the administration from acting decisively.
• Growth is hitting systemic choke points.

Chetan Parikh sums it up nicely: "We will lose years".

I kind of disagree that things were different six months back. Most of these signs were still there; only the perception has changed.

I'd commented in November 2007 that the the Indian market was going through a speculative blow off. Technically it was a classic top. Breadth had declined, and the majority of the advance in equities had been led by a few names. Markets churned around 20,000 on the index, broke through a few times, failed, and rolled over.

I'd also written about the emerging markets hoopla back in September 2007. Here's what I wrote about India (you can check the article for my view on the Chinese bubble) :

Emerging markets: one doesn't see the point of investing in emerging markets, with their high PEs. We need risk premium dammit!

Today, you can invest in the US(and Europe) with their reasonable PE ratios. There needs to be a risk adjustment in valuations, regardless of their "growth fundamentals". Let’s not forget, the Communist Party of India is still in alliance at the center. The possibility of them screwing things up is just very very high. This is very similar to how multinationals got banned from India in the 1970s, relegating India to the ‘Hindu rate of growth’. The recent posturing on the nuclear deal is a good example of their potential nuisance. India needs nuclear power if they have to maintain their growth rates. If CPI succeeds, the growth prospects of an infrastructure constrained, energy constrained, and corruption constrained India would surely need to be revised down.

The risks in India are under appreciated. A repricing of risk in the Indian subcontinent is due.

Also, in a little known and often overlooked event, IMF downgraded the historical growth contributions of both India and China by as much as 40% back in January 2008.

To conclude, while I really liked the article, I disagree with the assertion that things have changed in six months. The signs have been there all along for every one to see. If anything, this could be an indicator that all the negative domestic news has finally been priced into the market.

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