Impact 
After showing appealing expansion in March 2011, the Index of Industrial of Production (IIP) once again dwindled as it reported 6.3% growth in April 2011. When assessed on a year-on-year (y-o-y) basis the industrial growth is rather dismaying since in April 2010 it was 13.0%.
 (Source :ACE MF, PersonalFN Research)
The drop in the industrial output was due to the following reasons:
- Core sector growth: The six-core sector industries (crude oil, petroleum refinery, cement, electricity, finished steel and coal) mellowed to 5.2% in April 2011 (as against a 7.4% growth reported in March 2011).
- Slowdown in manufacturing: The manufacturing index (which constitutes 75.5% of IIP) which registered a appealing growth of 14.5% in April 2010 slowed down to 6.8% in April 2011. The effects of high inflation and raw material costs were also main contributors to the slow down in the manufacturing index.
- Poor sectoral growth: The consumer index was battered as consumption slowed down as the inflation bug bit into the pockets of consumers. The consumer good index registered marginal growth of 2.9% in April 2011 as against 13.8% registered in April 2010. Similar trend was also seen in consumer durables where they too dropped from 23.3% in April 2010 to 3.8% April 2011. Capital good index was also no different as it too registered a growth of 14.5% in April 2011 as against 35.5% in April 2010.
However, it is noteworthy that the data for April 2011 was for the first time compiled using 2004-05 as the base year. Moreover, the new IIP series includes a wider basket of goods with the manufactured items covered in the index going up from 281 to 410. The total number of items under the series has gone up to 695 from 538 earlier.
We believe that the slow down displayed by the IIP numbers is temporary in nature. So far the GDP growth rate of 8.5% for the fiscal year 2010-11 reveals that the Indian economy is robust, and this year if we experience a good monsoon the farm output would get a boost which in turn would provide an uptick to overall economic growth along with cooling down food inflation.
Also, it is noteworthy that the new IIP would be in a better position to capture the essence of changes in the industrial production of our country.
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A survey of global fund managers conducted by Bank of America Merrill Lynch revealed that India is among the least favoured equity markets for Asia-Pacific investors. In contrast to this, China, which is often mentioned in the same breath as India in terms of economic growth, is the second-most preferred markets for fund managers in this region, the survey held.
Though the reason for India being least favoured was not mentioned by the survey; "inflation", which is an issue everywhere in the region, has been one of the major reasons for such a set back for India.
Also, two-thirds of the fund managers, who participated in the Bank of America Merrill Lynch survey, do not expect the U.S. Federal Reserve to announce another round of its massive bond buyback, known as Quantitative Easing (QE). The second dose of QE is slated to end later this month. This could put a dry spell of FII (Foreign Institutional Investors) flows in the Asian equities.
We believe that though India may have lost its sheen in terms of an investment destination, fundamentally there is nothing wrong with the country. There are some major issues like tackling spiralling inflation, bringing back the black money in the country, which if resolved will put confidence in the minds of the investors.
Monsoons are expected to be good this season which could further boost farm output which in turn will help in bring down the food inflation. Another area where India should make a strong foothold is in the education system and infrastructure. A prudent education system will help the shape up a strong talent force for the country to drive the economy further. Good infrastructure in any form is a welcome sight as it helps in increasing economies of scale and boost industrial production.
Thus if the above factors are taken care off, then in the long term India may become the most favoured nation amongst the investor community. | |
Impact  
The Insurance Regulatory and Development Authority (IRDA) issued draft guidelines for insurers eyeing the capital markets. The IRDA had stated that a company will be allowed to list the shares under the provisions of Section 6AA, only on completion of 10 years from the commencement of operations. So far, HDFC Life, ICICI Prudential, SBI Life and Max New York Life have completed 10 years of operations.
As per the guidelines, insurers need to either have embedded value (EV) twice the paid-up capital or a profitable track record of three years to tap the capital market. The draft guidelines issued also stated that a company can reduce its stake only if it has reported net profit in at least three of the preceding five financial years, or its embedded value is at least twice its paid-up capital.
The regulator will issue a separate guideline on a standard method for calculating EV. Embedded value is the sum of the shareholders' net assets and the value of its in force business. The EV calculation has to be prepared by two independent actuarial or auditing experts.
We believe that apart from issuing guidelines for the listing of the insurance firms, IRDA should keep appropriate checks and balances to see whether the insurance company is being valued at its fair price, solvency requirements are met, and corporate governance is adhered to, because such parameters would be in the long-term interest of the policyholders / investors.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 17,870.53 | (398.0) | -2.18% | | Re/US$ | 44.90 | (0.2) | -0.36% | Gold /10g | 22,285.00 | (70.0) | -0.31% | | Crude ($/barrel) | 114.12 | (3.3) | -2.82% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on June 16, 2011
*BSE Sensex as on June 17, 2011
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This Week's Poll !!!
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Will India be able to curb the circulation of black money?
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In an interview with the Economic Times, Mr. Leif Eskesen - Chief Economist India & ASEAN at HSBC shared his views on interest rates in India, change in inflation dynamics, India as compared to BRIC countries and quantitative easing in the U.S.
Mr. Eskesen expects another 100 basis points hike in the interest rates during the course of this fiscal year 2011-12. He also believes that India is finally showing signs of cooling in response to the rate hikes that the RBI has undertaken so far. Thus effectively, he believes that the economy is facing a natural speed limit as reflected by the tight capacity in the economy. Explaining his stance further, he said, "Even though the economy is going to slow in our assessment over the next couple of quarters, again in response to the tightening undertaken so far and the further tightening we expect, it will still go strong enough to keep these capacity constraints tight and thereby keep pressures on inflation in upward direction. That is why they need to tighten further to take out this demand led inflation pressure that is still very prevalent in the economy."
According to Mr. Eskesen, the change in inflation dynamics in India over the past 12 months has been quite interesting. The inflation dynamics, he says are more driven by the demand side and one really needs to slow down the demand side and sacrifice growth in the short term to take out this type of inflation pressures.
As far as India is concerned, Mr. Eskesen believes that India stands out very favourably compared to the other BRIC countries and has clearly been in the growth premier league together with China relative to the BRIC countries. But at the same time, he’s of the opinion that India relative to the peers in the BRIC countries faces probably the biggest structural hurdles to growth going ahead (particularly in the area of basic infrastructure where India also lacks behind its peers in the BRIC countries). He further said that "In terms of product market and labour market, the issues there are that the structural constraints on growth are bigger in India. India effectively has to do more in terms of undertaking structural reform to easily structure constraints to remain seriously in the growth premier league among BRIC countries over the medium to long term."
Mr. Eskesen thinks that it is very premature to think about QE3 (Quantitative Easing - Round 3). He thinks that the slowdown in the global economy is going through a soft patch and recovery will pick up pace in the second half of the year. Thus in this scenario, he feels that there is no need for a QE3. However, he said "If QE3 should be on the table, which we do not believe at the moment, then of course you could start to see again that that would reflect somewhat lower prospects for growth in United States and would impact emerging economies such as India."
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Trade Deficit: An economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.
(Source: Investopedia) | |
QUOTE OF THE WEEK
"A simple fact that is hard to learn is that the time to save money is when you have some."
- Joe Moore | |