Column : More brickbats than brics

Written by Shobhana Subramanian | Updated: Dec 29 2011, 08:37am hrs
Ten years after the acronym BRIC was coined, Goldman Sachs Jim ONeill says, of the lot, India has been the biggest disappointment. Hes probably right because the Indian growth engine is sputtering when it should have been roaring. Instead of clocking what would have been an enviable 8% or even 8.5% this year, the countrys GDP will now grow by barely 7%; and if the government doesnt move quickly enough on reforms, we could see it slip to an anaemic 6.5% next year. The aggregate outflow from BRIC funds this year has been roughly $8.4 billion: while Russian funds attracted flows of $44 million, India-focused funds have seen outflows of $4 billion, Brazil saw outflows of $1.8 billion and China saw outflows of $2.7 billion.

However, at an aggregate level, foreign institutional investors (FIIs) have sold some $500 million worth of stocks this year after having shopped for equities worth $29 billion last year. One reason why FIIs have stayed away can be traced to the weak sentiment in equity markets across the globe, and rising risk aversion following the sovereign debt issues in the eurozone. However, the bigger reason is that the government has done nothing to tap Indias advantages of being home to one of the largest, youngest earning populations in the world and to a bunch of bright businessmen. Entrepreneurs have been sapped of their confidence by a government that hasnt been able to push through reforms and initiate policy changes while consumers have been left to devise their own ways of dealing with inflation, again fuelled by government spending on social programmes.

On the other hand, inflation in China is easing. For all the talk of a hard landing, the authorities in China say it would manage an 11% growth in industrial output next year; Moodys says the worlds second largest economy will report a growth of 8.7% and adds that while downside risks may have intensified, they are manageable. In contrast, the government back home seems to have lost control over its expenses and will most certainly not meet its fiscal deficit target of 4.6% of GDP. Meanwhile, the policy paralysis will continue to hurt corporate profits: earnings estimates for the Sensex set of companies have been pared by about 8%, since the start of the year. Its not surprising then that fund managers, who not so long ago were willing to pay a huge premium to invest in the countrys equity market, arent willing to wager a dollar.

For evidence, look at how the MSCI India trailing price earnings (PE) multiple has contractedfrom 20 times at the start of 2011, its now just above 14 times. The biggest blow to foreign investors has been dealt by the sharp depreciation of the rupee of nearly 18%; as a consequence of this, India will end up among the worst-performing markets this year with the Sensex losing close to 35% in dollar terms. Indias market capitalisation

has come off to just over $1 trillion with the turnover in the cash segment at a seven-year low. Needless to add, corporates have hardly been able to access the equity markets in 2011 with just $10 billion being raised, way below the $28 billion mopped up last year.

One could clutch at strawscore sector growth for November may have come in at a robust 6.8% year-on-year. But fund managers will wait for signs that the companies are once again adding capacity before they put in more money. The biggest threat to the economy is the weak rupee, which will not just push up the import bill and stoke inflation but at some point could also lead to a currency crunch; Indias trade deficit in October was a record $20 billion. No wonder then that conviction levels among fund managers are low: the Sensex now trades at a one-year forward premium of 13 times compared with nearly 17 times at the start of 2011 and below its historical average of 15 times. For the Indian market to be re-rated, the government needs to get on with its business so that companies can get on with theirs. In the immediate term, therefore, whats needed are reforms through a DTC or a GST or a new Companies Bill. And a dose of liberalisation through foreign direct investment in multi-brand organised retailing. Over the longer term, the corporate sector too needs to reform; it must start playing by the rules. For too long have companies taken advantage of loopholes in the law and for too long have businessmen been cosying up to the powers that be. If India is to attract stable long-term money, whether from overseas or from the home market, corporate governance standards need to improve. Right now, things dont seem to be going Indias way. Indonesiawith its Goldilocks scenario of strong domestic growth and manageable inflationis a favourite with fund managers. So much so that many believe the I in BRIC will soon stand for Indonesia rather than India. That would be a pity.