Saturday, 7 March 2009

the trickle-up effect...and the strength of India's rural economy

A wonderful note in the Hindu today (please click title to read)... a must read for anyone interested in the Indian economy. We kid you not.

Its gives some interesting thoughts to mull over...and why we must now focus (apart from the IT sector) on the capacity of the Indian consumer- rural consumer to deliver economic growth.

To which we add are two bits:
Over the past 9 months, we have been emphasising the need for Indian industry to be optimistic for various reasons.

a. The US has a credit problem, sure..its based on predominantly, the unsustainable house price bubble. US banks took on too many toxic assets. Now the economy has to correct itself.

b. Europe has had limited exposure to this. The UK and Spain have had significant asset bubbles and will take longer to correct themselves.

c. Germany is affected because it is an exporting country (like China) and its major markets are the US and China.

d. France and Italy, we believe, have limited banking exposure to the toxic assets. There, it is clearly a sentiment issue. Layoffs announced by companies are opportunistic. Companies are using this crisis to cut out all the fat which govt regulations and strict labor laws prevent them from doing in normal times. Add to this, govts are giving away cheap money... what company will not use this opportunity to become more competitive? But the French and Italian economy is a predominantly a consumption based economy which depends on its people's optimism.

e. in India, our exposure to the US market is essentially through the IT sector. Infy/ Wipro and TCS have not laid off anyone. The lay offs in the news everyday are mostly from the American companies (which goes back to point 1). Organised retail is weak, but the insurance sector/ telecom continue to be strong. Reputed companies like the TATAs are reducing work hours rather than number of employees. This is important and needs to be amplified.

f. The Indian auto sector (exports) will be affected a limited way since we do not export big numbers to the US. As the sentiment in Europe corrects itself, the auto sector in India will recover.

g. Now lets look at government expenditure. Farm loan waiver of 70,000 crore (14 Bn USD), Pay hike in the govt service, rural employment scheme of 30,000 (6 Bn USD) crore and new infrastructure investment of 70,000 crore. These are big numbers for the Indian economy....where the toxic asset problem is not a concern. Banks are fundamentally fine, the sentiment is awful.

This is a lot of public money which is slowly finding its way into the consumers hands.....but rather than a trickle down effect, govt expenditure targeted to the weaker economic class always causes a "tricke up effect". This will translate itself through purchases of mobile phone/ FMCG products (tooth paste etc) and basic white goods (TV, fridge)... then the 2Wheel segment starts to benefit. If you see, over the past 6-8 months, inspite of the economic slowdown, these industries have maintained robust growth. This rural/ semi urban sector (as pointed out in the note) does not invest in the stock market either, and have been untouched by the stock market crash.

h. It is true that as the foreign investor has withdrawn money from the India to pay off their loans and debts abroad, resulting in a crash in our stock market as well.
Companies have tried to collect as much cash as possible...lower manufacturing by TATA and Ashk Leyland , in our view, is an effort to reduce inventory levels and hence save cash.

If 14 Bn USD is being invested in infra, you need trucks to move things around.

So what am we asking? We are asking for optimism. It is irrational, this pessimism and it unfortunately feeds on itself and affects the lives of everyone.

We do not believe (if the govt continued to spend on infra and the rural scetor) , that the "slow down" in India will last much longer. We continue to invest in the market. This is our personal view.

thank you

Ritu and Venkat

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