Relax, things are not as bad as doomsdayers claim

India's poor run will stop sooner than later and it will be despite the government. Take, for example, the IT sector. Infosys and Cognizant have guided for slower growth this year, but the fact is that their hiring plans are still robust with each of them planning to up the workforce by over 20 percent.

Arjun Parthasarathy May 08, 2012 15:45:19 IST
Relax, things are not as bad as doomsdayers claim

Doomdayers are having a field day given our current market conditions. Calls range from the collapse of the eurozone to a fall in China's economy. India is receiving its fair share of dark predictions ranging from runaway inflation expectations, a sharp rise in interest rates and below-par growth.

If the predictions actually come out right, three-fourths of the world's population will be living in poverty for the next ten years. The small proportion of individuals that has managed to hoard wealth will be invested in US treasuries, which yield below 2 percent, and gold, which yields nothing.

Relax things are not as bad as doomsdayers claim

India's poor run will stop sooner than later and it will be despite the government. Reuters

But more likely than not, the doomsayers' predictions will not come true and the world will get on with its life, albeit with a few hiccups. It is the market sentiment that is giving rise to gloom and doom predictions, and these predictions will disappear once markets get back to normal. One has to remember that the theme in the 2000-2008 period was the collapse of the US dollar, unfettered growth in BRIC (Brazil, Russia, India and China) nations and an unstoppable rise in commodity prices.

None of these bull market predictions have come true: the US dollar is gaining, commodity prices are falling and growth in BRIC nations has come off leading to negative returns in BRIC equities over the past four years.

India is facing the worst market scenario since the 1990s. The Sensex and rupee are down over 15 percent from their peaks levels seen in late 2007, while ten-year benchmark bond yields are up by 350 basis points from their 2008 lows.

GDP growth has come off from over 9 percent to below 7 percent, while inflation has trended towards double digits from levels of below 6 percent over the past four years. India was once seen as a country that could do nothing wrong; now, it is seen as a country that can do nothing right.

Things will turn around for India

India's poor run will stop sooner than later and it will be despite the government. Take, for example, the IT sector. Infosys and Cognizant have guided for slower growth this year, but the fact is that their hiring plans are still robust with each of them planning to up the workforce by over 20 percent. The other majors of TCS, Wipro and HCL Tech are also having robust hiring plans. Why would IT majors hire if the outlook for business in the US and Europe are not good?

The markets have punished policy makers enough for their follies. The fact that the government provided fiscal stimulus and the Reserve Bank of India provided monetary stimulus post the 2008 crisis, and their inability to roll back the stimulus quickly in the face of rising inflation is seen in the weak financial markets. The government and the RBI are now ultra-cautious in their approach to the growth-inflation trade off, and that makes for sounder policies that the ones that were made in the clamor for growth in the 2000s.

The situation is similar to other sectors in the economy. Banks, especially the private sector banks have focused their attention of improving asset quality and the earnings growth rates of 30 percent and above for the biggies, ICICI Bank and HDFC Bank, shows the effort. Smaller private-sector banks such as ING Vysya have also delivered 30 percent or higher earnings growth.

Airlines are cutting costs and restructuring to become profitable. Consumer goods companies such as ITC and HUL are reaping the benefits of a ten-year competitiveness exercise and have shown earnings growth over 20 percent in the past year.

Doomsdayers, put your money where your mouth is

China has realised the folly of over-investment and directed lending after a property bubble and a stock market crash. China's equity index is down 50 percent from its highs seen in 2007 and its growth has come off from double digit levels to 8 percent and thereabouts. China's policies will now be attuned towards steady growth, driven less by exports and more by domestic consumption.

The US is still holding on to its status as the global powerhouse despite its issues on debt. Dollar bashers have had to hold their tongues as the dollar and dollar-denominated debt are still seen as safe haven assets.

Eurozone debt issues will persist, but will they lead to the collapse of the euro and the world? The questions each euro nation must ask itself is what will the consequence will be of leaving the euro? The consequence will be as bad as the ones faced by South American countries when their currencies were devalued, hyperinflation and economic collapse. Euro nations will strive to stay in the eurozone with help from Germany and the European Central Bank. Germany itself is seeing resurgence in its economy with unemployment at two-decade lows and consumer and business confidence holding strong in the face of many negatives.

Investors should also realise doomsdayers will never be short on markets even if they are predicting a market collapse. The reason is that they themselves do not believe their predictions. A true forecaster will put his money where his mouth is and doomsdayers are not true forecasters or risk takers. Hence, it is better to ignore doomsayers and look beyond the present.

Arjun Parthasarathy is editor of www.investorsareidiots.com, a web site for investors.

Updated Date:

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

also read

2020 in review: Digital payments policy initiatives in 2020 that could have a lasting impact
India

2020 in review: Digital payments policy initiatives in 2020 that could have a lasting impact

Overall, the RBI has shown a welcome range in its focus last year, from financial inclusion, promoting innovation to easing payments in the pandemic.

India's GDP within striking distance of attaining 'positive growth', says RBI
Business

India's GDP within striking distance of attaining 'positive growth', says RBI

In an article about the state of India's economy, the RBI said that e-commerce and digital technologies are likely to be bright spots in India's recovery, but pre-pandemic levels of output and employment are still a long way off

Google removes finance-based mobile applications from Play store after RBI red flag
News & Analysis

Google removes finance-based mobile applications from Play store after RBI red flag

Google says removing the apps reduces the risk of being exposed to deceptive financial products and services.