The Indian Government recently announced that the economy expanded roughly at 7.2% for this fiscal year. Like China, this is an astounding growth rate and on the surface would justify the bullishness surrounding its stock market. However, as always, there is more to the story than meets the eye.
First of all, the Indian government always has a problem in managing its budget; even in good times they manage to run a budget deficit. Another problem is that you have budget deficits on two fronts: one from the central government and one from the provincial governments and their total budget deficit could run well over 12% of GDP. This puts them in the league with the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
India, like most nations, decided to stimulate their economy, but they decided to embark on monetary and fiscal stimulation at the same time. They lowered repo rates to 4.75%, but inflation is running at roughly 11% so what you have is a negative rate of interest here.
It held its lending rate, or the repo rate , unchanged at 4.75 percent and its reverse repo rate , at which it absorbs surplus cash from banks, unchanged at 3.25 percent.
Despite increasing inflationary pressures, the central bank has been under pressure from senior government officials to hold off from raising its policy rates, which they argue would undermine the economic recovery. [1]
When India’s deficits get too high it relies on foreign financing unlike China and so while the growth rate is high, investors might not mind financing these deficits, but a slowdown could cause them to flee and produce a similar crisis as the one that is currently plaguing Greece.
India is also suffering from a drought and food prices are rising at roughly 15-18% a year. The best thing would be for the governments to cut back seriously on public spending but the Congress party in command has a history of spending heavily on public projects, and so we cannot expect any change here.
A look at some of the top stocks indicates that they are pulling back or building up patterns that suggest all is not well. Our advice, if you are heavily invested in the Indian and/or Chinese markets, is to lighten…
