Monday, November 24, 2008

Why is the India story intact?

Some fresh thoughts and points to ponder from Samir Arora, the CEO of Helios Capital Management, Singapore.

Till the other day we were listening to expert opinion which said the farm loan waiver was bad and the non-opening up of our banking and insurance sector to FDI was wanting and is not in consonance with the way the developments in the developed world are progressing. And then suddenly we find that our huge forex reserves are depleting at a rate which is worrisome. How should we read all this? It is an interesting and must read.

Some excerpts worth our attention:

A few months ago the government of India wrote off $16 billion of loans, made over the past decade or so, to more than 40 million farmers (at the rate of $400 per head) and was criticised by the whole world that economics was being sacrificed for the sake of politics. Now everyone (in most cases the employers of these "bearish on India" analysts) is asking for similar (and larger) and much more morally indefensible bailouts throughout the world.

Until a few weeks ago, investors were hoping that in pursuit of its reforms policy, the Indian government would accelerate the opening of its banking sector and insurance sector to foreign and private sector; and today all potential foreign partners are themselves seeking equity investments from their governments.

Last year India had less than $200 billion of foreign exchange (FX) reserves and I do not recall reading any reports that we had inadequate reserves which needed to be built up urgently. Now that FX reserves have fallen from $320 billion to $250 billion, economists are highlighting how we have had a record decline in FX reserves. It is a separate matter that more than half this fall can be explained by the strength of the US dollar which has reduced the dollar value of our reserves held in other currencies.

Indians (households) are the largest owners of gold in the world with their holdings estimated at more than 15,000 metric tonnes, currently valued at $400 billion plus. All the bearish doom and gloom analysts in the world have their price target for gold at $2,500 or higher. At $2,500 /ounce of gold, Indian households stand to make a paper profit of nearly $1 trillion (which is the same size as India's GDP). Contrast that with the total market capitalisation of the Indian market of $600 billion with Indian retail ownership of the market of around 20% and you can imagine why the average Indian may actually feel relatively much richer by the time the dooms day scenario comes along for the rest of the world.