May 26, 2020
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It's A Buoy!

Stocks, property or metal, all's turning gold to the economy's Midas touch. Some clouds hover, however.

It's A Buoy!
It's A Buoy!
Rashesh Shah, commodity and stocks trader in Mumbai, is eagerly waiting to burst crackers after the moorat trading and puja on November 1, Diwali day, also the beginning of Vikram-Samvat 2062. He is confident the year ahead will be as good as the one that just ended, if not better. All around him, the markets are shooting off like rockets, new buildings and malls are coming up like Lego blocks, factories are humming, ports are buzzing with containers, rain gods have been kind, even the economy is smiling at the prospect of over 7.5 per cent growth. "Mitti sona ho rahi hai, aur woh bhi palon mein (everything is turning into gold, that too in a matter of minutes)," he grins.

Shah is not alone in his moment of profit-taking. Across the country, thousands are working hard to gain from a boom as prices of bullion, commodities and shares snake skyward, property prices gallop over mere months, debt instruments recover after two years of stagnation, corporate earnings get strengthened further, and even savings and investment rates seem poised to touch 30 per cent. Despite low rates of return, bank deposits have gone up by 24 per cent in September over the past year, while money supply is higher by 18 per cent.

For the first time in India's economic history, all the savings and investment sectors are zooming at the same time as a lot of cash is excitedly chasing India's growth saga. Traditionally, stockmarkets, property, or say, gold and dollar markets have had an inverse relationship—investors never had enough cash to play both. Not this time. It's like the Midas touch has gripped India—everything you touch turns to gold.

A saga of which, everyone seems to agree, only the first chapter is unfolding. Even rbi governor, the seasoned Y.V. Reddy, concurred, as he unfolded the monetary policy last week, and almost kept untouched the "rational exuberance", to paraphrase Alan Greenspan, the Fed chief who having controlled the global economy for 18 years gets ready to step into history. Reddy didn't want to upset growth, set to kiss 7-7.75 per cent this year, by raising bank rate, making India today a market that can be ignored only at the investor's own peril.

A market that's meeting all dreams and fuelling further temptations right now, all caution thrown to the wind. Ferraris, Lamborghinis, Bugattis and Maseratis, mean machines that cost between one crore and ten, are all set to rev into India. Almost all top companies have announced new projects in the last 12 months, across sectors, from sugar to plastics. The biggest of them, involving quite a few billions, are coming in oil refining, steel, garments, construction and, of course, the new economy of BPO and ITES. Such large investments are happening only the second time after the mid-'90s, the initial reform years. Union finance minister P. Chidambaram told reporters after the monetary policy: "There are indications of an investment boom supported by buoyant growth and one in equity finance. The business confidence index is at its highest level in 10 years." Just after 1994-95, India had witnessed similar rising conditions, but the scale and spread is much larger now.

No wonder then that the stockmarkets are chasing growth amid corrections. Analysts feel India has some of the best-run companies in the world—Hero Honda, for instance, is now the biggest motorcycle maker. Japanese investors, traditionally the last to get in on a boom, have been switching assets out of China into India. Says Rajnish Kansal, one of the biggest stock brokers in Calcutta: "At 15-16 per cent RoI, many small and first-time investors are entering the market and keeping it moving. This is just the time to invest in frontline companies in textile, cement, infrastructure and IT." Adds Vikram Kotak, VP of the Mumbai-based Techno Share and Stock: "Unlike earlier booms, this one is across all sectors. China has gone through the same phase in the late '90s. An underleveraged consumer sector and vast opportunities in retail and telecom will sustain the boom." A lakh of rupees put in equities in April 2002 is now worth Rs 3,34,661, or an RoI of 67 per cent a year.

It's the same story in property, where the mortgage penetration is only 3 per cent of GDP. Rental income yields are over 12 per cent in India; it's 9 per cent in China and 5-8 per cent in developed markets. Pent-up demand could hike that return. Analysts see an annual shortfall of 20 million housing units through 2011 and CB Richard Ellis estimates office real estate supply to touch 100 million sq ft next year, adding about 24 msf every year. Kumar Sankar Bagchi, MD of Bengal Peerless, a joint venture between the West Bengal government and the Peerless group, confirms that even in poorer Calcutta, the housing boom is led by ITES, people in their 30s and NRIs.

Even commodities are riding the peak of a business cycle that turned up in 2003, touching a 24-month peak in August. Trading in the country's three national and 21 regional commodity exchanges in the first five-and-a-half months of the current fiscal has crossed Rs 7 lakh crore, more than double last year. Market regulator Forward Markets Commission expects the year to end with record volumes of Rs 12-13 lakh crore, half of India's GDP.

India and China are identified as the driving force behind the copper, crude and gold rally. These two nations have also fuelled gold sales to a glittering $38-billion mark, says the World Gold Council. With 20 per cent of world gold stocks resting at any time in India and given our acute propensity to buy and hoard jewellery, the newly launched Gold Exchange Traded Fund scheme will now give a further fillip to gold trading. Copper, zinc, gold and oil prices are rated as "steady and satisfactory", provided there is no "supply turbulence" in the immediate future. In most rapidly developing and urbanising economies like India, demand for basic materials like lumber, steel, cement, copper, rubber and aluminium will stay high, keeping prices stable, according to Marc Faber, MD of the eponymous Hong Kong-based fund.

Enough reason why someone like Bangalore's Lovaii Navlakhi gave up a good corporate job in 2001 and turned a full-time financial consultant. From a one-man show, he has a 12-man company and a turnover which has grown five times in as many years. With the economy turning increasingly self-regulated and market-driven, and interest rates hurtling downward, investment and savings avenues have gone through major consumer preference shifts and risk-taking to reach this period of The Rising.

Why then are all the asset markets going through the stratosphere? What is so special this time? And will such good fortune have longevity? Unused to such self-earned prosperity, all of us must be dreading the answer to such a question. icra economic advisor Saumitra Chaudhuri blithely says that the bust could happen if there is a "global nuclear war or a large asteroid crashing into the earth". But economists and analysts are known to be a conservative, often gloomy, tribe. And all agree that the bust looks a long way off. Why? The answers to this lie in the roots of the boom in the first place.

Historically, India's always had illiquid, static asset markets, except in stocks and commodities which too were volatile to a large extent. Now they're as liquid as, well, water compared to the pre-reform days. Technology, which has acted as a great leveller between the industrialised West and the still developing parts of Asia, as well as systemic reforms have now made property and capital markets easy to get in and out of in just few hours. Says Sunil Sinha, crisil senior economist: "nse is rated as one of the top five bourses in the world in efficiency and scale. Electronic transactions have probably been the greatest revolution and the most important catalyst in this boom." R. Jayakumar, senior director, Fitch Ratings, says "markets have also been growing due to the strength in other markets. For instance, money from the stockmarket easily flows into real estate".

Secondly, as India shifts into a higher growth trajectory, it needs higher money supply to ably support and absorb this growth. This money—with the public, with banks, with exporters, in the invisibles account as foreign earnings, in NRI investment, and with foreign portfolio funds—needs to park itself. With links between the asset markets smoother now, it is flowing freely across all sectors. And a mere look at net capital inflows into India is enough to convince anyone that there's too much money chasing too few assets.

In fact—and that's the third reason—it's not even leading to inflation. Credit growth is at an all-time high at 35 per cent, after 31 per cent last year, and shows no sign of a slowdown. Despite RBI's caution on inflation, this may not be so difficult to sustain—China's done it for years now. In fact, the muted rise in inflation this time, in sharp contrast to oil price hikes earlier, reflect the economy's increased ability to absorb price shocks. Productivity growth across sectors has more than compensated for the cost hikes due to the sharp oil price rise.

The fourth reason is the real economy, which is alive and kicking, thank you. A look at the factors in GDP will tell us how broad-based the growth is, with agriculture also doing well and rainfall almost as good as last year. The portfolio money getting into India is not exiting in a hurry, though Prof Vivek Moorthy of IIM-B is worried about "disproportionate influence FIIs wield on our markets, even though India is not a capital-scarce country". But it's this unseemly influence of FIIs which may stop them from quitting en masse because that will send markets crashing and they won't get a good price. Says Siddhartha Roy, Tata group economic advisor: "A large part of the economic boom is supported by strong fundamentals and demand expansion. So, the bust scenario may be quite some time away." Across all asset markets, jewellery sellers, dealers, land developers express confidence that the price rise will continue, backed by linkages, fears of further price rise and rising disposable incomes.

The worries remain though. For one, says Singapore-based Samir Arora, formerly of Alliance Capital, "it is unreasonable to expect the growth of the last three years to continue at the same rate. If the markets stabilise, consolidate and then start moving up gradually, it would be enough". The brakes may come in two forms. One, higher inflation due to further oil price rise at home—remember we have effected only half of the actual global price rise and are still subsidising many petrogoods. The second fear is the US slowdown, "reflecting the terrible stresses of the global economy", leading to sharp rise in interest rates, calling back the floating foreign portfolio funds. North Block also fears a third: "A CPI(M) domination of policy, which has already paralysed economics," and that's exclusively Indian.

Probably, the most important negative is the increasing volatility across investment and savings segments, both globally and domestically. The stockmarkets have seen a steep correction—over a 1000 points from the sensex high of 8821 points—and intra-day swings in recent times have been mind-boggling. Similarly, commodities prices are swinging wildly and many experts contend that the peak has been reached in most products. Volatile markets are probably an early indicator of a tussle between negative and positive sentiments, of an inevitable battle between the bears and the bulls. Hence, the growing fear that if one sector crashes—stocks or property—it could drag down the others.

But the hopefuls outnumber the cassandras. Deutsche Bank's Sanjeev Sanyal sees the glass as almost full. He pins his money on the rising savings rate—35 per cent in the next 10 years (China has 48)—and an educated working population replacing our traditional labour class. You could do well to bank on him, and us. If you look at what we wrote in 2001 (Outlook, September 1), saying the next decade could belong to India, you'll know why.

Paromita Shastri with Archana Rai in Bangalore, Jaideep Mazumdar in Calcutta, Charubala Annuncio and Saumya Roy in Mumbai
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