June 2009
Equity markets in India has been going through a period of uncertainty over the past month. FIIs, who have been the prime driver of the strong move over the past 3 months, have been selling over the past 2 weeks. There is a serious global debate on as to whether to continue the stimulus programs, or start acting towards bring it to an end. It is a foregone conclusion that at some stage the stimulus programs need to be brought to an end, and all corresponding borrowings paid back. The debate is on the timing of this process. Since we are dealing with unprecedented events, there is no history that could give the economists and decision makers clues as to how to act. As and when the reversal does happen, it will be associated with a serious dry up of liquidity.
In India, the focus is on the ambitious plans of the new government. The budget on the 6th of July is a keenly awaited event. Large scale plans for investment in roads, power, other infrastructure, rural programs, divestment, freeing oil price subsidy, etc are being mapped out. The ambitious Unique Identification Number project, that would improve the efficiency of several of the government programs, has been initiated. The key bottleneck to implementing all these should be availability of funding for the same. One can have spectacular plans to spend money, but remember that availability of money is limited.
Indian government tax collections to GDP has been constant at about 14% for over 2 decades now. Government’s borrowing to GDP has gone up from about 52% in 1980 to about 86% currently, through a consistently high fiscal deficit. Fiscal deficit in the current year is expected to reach an all time high. It is going to be nearly impossible for the government to achieve all its infrastructure development goals, without improving the tax collections. Would the coming budget bite the bullet is a question. Most likely, the government is likely to focus on higher private sector participation, reduction of subsidies, divestment, etc to manage their goals in an environment where the risk of higher taxes leading to economic slowdown is still present. Despite talks of the world coming out of the recession, and the sharp uptrend in equity markets, underlying performance of companies continues to struggle. Newspapers headlines are full of companies announcing sharp fall in profits, and in a few cases large losses. What is not obvious are several companies that continues to deliver reasonably good performances. Many of these companies have taken the hard choices of walking the right path of sustainable growth, in times when there was great temptation to walk the near sighted path.
I have attached the annual letter by Mr Deepak Parikh, the Chairman of HDFC. It is an interesting reading for all investors and especially for those looking to invest in properties. It is a company that has chosen to walk the path of sustainable growth, taken the difficult choices over years and has done exceptionally over 30 years, transcending several economic cycles. Few more companies with the business integrity of companies like this would make a vast difference in India achieving its potential. It is our endeavor to identify such companies and invest in them when prices are cheap. We believe such a strategy should protect and grow ones portfolio in a satisfactory manner over time.