Tag: economist

Reliance Industries – Too big for India

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NEW DELHI, INDIA - NOVEMBER 08: Indian Industr...

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Over the following four and a half decades Ambani took plenty more chances, making bets on vast projects and using brawn and guile to deal with officials and politicians. Today RIL is a conglomerate active in energy, refining and petrochemicals, with a market value of $55 billion, or a tenth of the worth of India’s stockmarket.

At the most recent AGM in June some attendees grouched about the stock price and low dividends; today, with the shares at 770 rupees, they might be grumpier still. Though RIL’s motto is “growth is life”, its valuation implies that the years of plenty are over. Of RIL’s main business lines, refining is chugging along, and the firm is investing to double the size of its petrochemicals unit.

An important factor may be that the pool of potential outside investors has shifted from Indian individuals to institutions and foreigners, who are typically sceptical about the long-term prospects of the refining and petrochemical industries, which have a lousy track record in most countries.

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Godrej goes global its own way

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If a Western firm did this, it might be clobbered by fund managers for being too thinly spread.
Indian investors have been more open-minded: Godrej Consumer’s shares have more than tripled since the end of 2007, valuing the firm at $3.2 billion. Mr Godrej says the key is to pick niche products with sizeable local market shares which pass under the radar of big global rivals.
Aware of its limited pool of managers and knowledge of new countries, Godrej grants the acquired firms autonomy.

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The unreformed parts of the economy are becoming a drag on growth

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Taj Mahal, Agra, India.

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In June a deputy governor of the central bank predicted that the country’s economy would grow at a double-digit rate during the next 20-30 years. But in the past six months the private sector, which is supposed to do the heavy lifting that turns India from the world’s tenth-largest economy (measured at market exchange rates) into its third-largest by around 2030, has become fed up.
What happens in India is not because of the government but in spite of the government,” says the head of a pharmaceutical company. Corruption has “paralysed the government,” reckons the chief executive of one of India’s most prestigious firms.
The economy may still be slowing naturally, as the low interest rates and public spending that got India through the global crisis are belatedly withdrawn. To raise the economy’s growth potential, India could do with another dose of reform, aimed at markets for inputs, from electricity to labour and land, that are still choked. Foreign direct investment into India has been subdued for a year (though it did pick up in May). For India to grow at 8-10% a year, supply must at least double in a decade.
The central bank, which has raised interest rates ten times since the start of 2010, insists that the costs of getting richer-such as diets with more protein-are partly to blame. But India looks like an economy operating at full capacity.
A recent improvement in the current-account deficit, thanks to surging exports, suggests that India could be less reliant on foreign funds than in the past. Fundamentally the reason why bad debts haven’t built up is because the economy is doing so well,” says the boss of one lender.
Compared with a fragile world economy, an India on autopilot could chug along quite happily, growing faster than most other countries.

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The risks posed by high-frequency trading

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HFT, which accounts for two-thirds to three-quarters of all Wall Street volume, seems to have led to smaller spreads (the gap between bid and offer prices).
But as Andrew Haldane of the Bank of England pointed out in a speech last month, HFT firms may be benefiting at the expense of other investors.
Instead of being better informed about a company, HFT outfits are simply seeing and acting on market prices sooner than competitors. ”
The problem may be that, unlike market-makers, HFT investors have no obligation to trade in difficult conditions. ”
Although the market righted itself quickly, regulators are debating ways to step in when prices go haywire.

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Does India have a bad-debt problem?

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The Reserve Bank of India (RBI), which regulates banks and sets interest rates, has a record of running a tight ship.
In 2008, for instance, banks were allowed to restructure weak loans without recognising them as bad debts; these now account for 3-4% of all loans.
The stock of all provisions held against all non-performing loans is lower than in other countries, particularly at the state-owned banks that dominate the industry.
Banks dominate lending, so the risk of problems hidden in the shadows of the financial system is small.
Infrastructure loans have risen quickly to account for about 15% of overall loans-not enough to bring the system to its knees, but enough to harm a handful of banks if any losses are unevenly distributed.
But as elsewhere, its banks are a reflection of its economy, warts and all.

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