Don’t Believe the Market Hype!


As all of you who’ve been keeping up-to-date on the happenings in the financial markets know, there’s been a good deal of turmoil and volatility continuing. GM and Chrysler, in the US, are begging for bailouts, small, medium, large and extra large companies are laying off people in droves (Citigroup will be laying off 53,000 people). Things are pretty bad in the US right now. We all know that, we all hear about it, and the US stock market shows us daily.

What about India? Well, if you ask the Prime Minister, the Finance Minister, various financial “analysts” on TV, etc. they will tell you that India is very well insulated and the India growth story continues, with a few minor speed bumps along the way. My personal opinion is that the politicians and media are generally telling us what we want to hear. They’re not accurately portraying the severity of the situation in India. The situation is about to get worse in India but, barring any further catastrophic meltdowns, India should see some incredible growth post 2011.

Relative GDP Growth

Let’s look at India’s economy on a relative basis. Relative to the US and other developed, highly deregulated economies, India’s still got a growth story, whereas, the US, the UK, Japan, etc. are all in a recession (negative growth). The talking heads in India tell us that India is still on track for 6.5% to 7% GDP growth in 2009. Assuming that is true and exactly what will happen, it’s huge number (in aggregate terms) compared to other developed and many developing countries! However, India still has roughly 450 million people at or below the poverty line. This is one and a half times the population of the whole US. In order for India to decrease the number of poor and continue to provide for the basic necessities of the economically disenfranchised and cater to the increasing consumption of the middle and upper classes, growth needs to accelerate, considerably. GDP growth in India MUST be at least 10% if India is to continue to grow, relative to other economies. In my opinion, 7% GDP growth is akin to a recession in a developed economy. How can India grow at more than 7% in 2009? It’s a complicated question that the smartest economists from Harvard, Oxford, LSE, etc. are trying to answer. I won’t be pretentious enough to suggest that I know the answer. However, I will say that whatever the answer is, it’s very complicated and it will most likely make a vast amount of people very unhappy. Hence, it won’t be politically viable, especially, in an election year.


On the 20th of November, there was a nice little piece on Livemint that quoted Cabinet Secretary KM Chandrashekhar, “Most of our productions are based on domestic demand. As long as domestic demand remains reasonably strong, I don’t think there would be any large-scale job cuts in India,” he said. Domestic demand for many goods and services is growing but is it growing enough to keep up with supply?

The article also went on to describe how Jet Airways was “asked”, by the government, to take back all of the 1,900 employees that they had laid off in October 2008. As a business, Jet Airways has every right to hire and fire the people they need to in order to stay competitive, and profitable. However, the Indian government, must also do what they can to avoid mass layoffs across large, high profile, Indian companies. Mass layoffs across Indian industry will have a devastating affect on the economy. However, how many additional companies can the Indian government “ask” NOT to layoff people before companies start feeling intense pain?

Smaller companies are laying people off and some are even shutting Indian offices. Zapak, a mobile games company, recently announced that they would be shutting their Bangalore office. In the Business Section of the Hindustan Times (Saturday, November 22, 2008 Edition), HSBC is predicted to layoff approximately 200 employees across India. Dell has decided to scale back their hiring of new employees. These are just large companies.

About ten days ago, I had spoken to an executive at a premium tissue maker in India. They said sales have fallen dramatically. People have switched from using premium tissues and toilet paper to non-premium essentials. If the current sales numbers continue, not drop, they will probably have to layoff some people.

When I told a family business exporter of garments that he must be happy since the USD has climbed dramatically against the INR, he told me that he’s more scared then ever. He told me that orders are being cut by his clients, some of them have begun renegotiating contracts to pay in INR rather than USD because they feel that the Rupee can only depreciate against the US Dollar. I’m not quite in agreement in that statement but it highlights a very important fact – sales are down globally, not just in the West.


The real-estate sector in India has slowed. There’s no questioning that statement even if developers/builders in your neighborhood are still jacking up rates. They generally see the downturn but don’t want to make a loss on their investment. Just wait it out and eventually, they will cave in. How can I say that, well, it’s simple. They made some profits from other deals. Those profits allowed them to get funding from a bank. They have a mortgage to pay and at some point, probably six months, they will feel the excruciating burden of carrying the property and will realize that they have no choice but to cut their losses and run.

Investments in second and third tier cities have dropped dramatically. Indian and foreign investment firms are finally stating the obvious, “The Indian Real Estate market is slowing”. Many projects from large RE developers like DLF and Unitech have been put on hold indefinitely. Indiabulls sees a 15% correction in the real-estate market over the next six months. I’d put the number a bit higher, closer to a national average of 25%. Marriott recently decided to shelve building a 250 room hotel in Pune, by at least two years.

For now, gone are the days when your driver or plumber is quitting his job to become a real-estate broker or a handyman is quitting his job to become a real-estate developer/builder.


The BSE Sensex is at a three year low. Confidence is shaky at best. Corporate earnings look ok (on a relative basis) but earnings growth appears to worrying investors. Most companies are no longer expecting 20% or 30% growth rates for 2009. Info Edge ( has said that they see fiscal Q209 revenues to be half of fiscal Q208. Earnings growth is slowing. The question to ask is, “Is the rate of deceleration increasing?”.

The BSE has failed to rally after two very big days of gains for the Dow. People in India are still bullish on the market and the Indian growth story so why hasn’t the BSE soared like the Dow did on November 21st and November24th? There’s still too much uncertainty and the Indian stock market is telling us that cautious optimism is warranted.


The Rupee is at an all time low against the US Dollar (though a one week high, as of November 25th, 2008). There are a great deal of challenges that India faces in the next two years – much like the whole world. I look at the Rupee relative to the US Dollar and I think that they INR should settle somewhere around INR 49 per USD by the second half of 2009. The US also faces great challenges but the Indian scenario is quite a bit more precarious in many ways. GDP deceleration, inflation (currently at 8.56%), rising import costs, FX reserves are much too low for comfort. Morgan Stanley expects the Rupee to depreciate to 57 before it appreciates. They may be right but the USD is going to be under a great amount of strain considering how much additional debt is going to hit US tax payers in the pockets.

It’s hard to say what will happen. All we know is that many many things can change, very drastically, fairly quickly. I believe the next two years are going to be very difficult, globally, and we should be prepared for it – financially and psychologically.



, , ,



2 responses to “Don’t Believe the Market Hype!”