India Is The Only One 22. June 2012 Rahul value investing (1) The fear and pessimism in the world is unprecedented. However, India is the single biggest opportunity in this crisis and the only one in my opinion. The problem at the core of the global crisis is a complete collapse of private demand. This collapse has been primarily driven by households deleveraging their balance sheets after a three decade debt fueled consumption binge. The crisis is being further exacerbated by private sector financial institutions deleveraging their balance sheets driven by new onerous regulations and (in europe) a loss of confidence in their holdings of sovereign debt. Keynes and Krugman advise that governments around the world should aggressively step in to pick up the demand slack from the private sector and that austerity is a completely flawed proposition at this time. Governments are unable to step in at the size and speed needed due to politics and due to the discipline being enforced on them by market vigilantes. China has a big population and has a lot of domestic demand, however, it has built up capacity in the last fifteen years to cater to the consumption of developed countries. Private demand retrenchment in developed countries is devastating the Chinese economy. China has also become addicted to investment led growth and its economy suffers from chronic oversupply of everything. Brazil, Russia, Australia, Canada, Indonesia and the entire Middle East has grown due to a boom in commodity prices driven by investment demand from China. The problem in India is the exact opposite of China and all other commodity exporting countries. India is experiencing a structural surge in demand driven by demographics and rapid urbanization. It has chronic short supply of almost everything. It runs a current account deficit that is at 4% of GDP and it is a huge importer of capital and energy. India is experiencing high inflation due to a shortfall in supply. Not only is India short on supply, investment growth in the economy has come to a complete halt and as a result GDP growth is slowing. The entire world, on the other hand, is drowning in the supply of almost everything. While lack of policy reform in the government is a big reason for the slowdown in investment, in my opinion the biggest reason for the decline in investment is the complete drying up of capital availability. Given structural demand growth, Indian entrepreneurs are willing to invest despite all challenges. However, they have no capital available. Equity markets have been completely shut for the last few years, foreign FDI inflows have dried up and the Reserve Bank of India's (RBI) tight monetary policy and government spending has compeltely choked the availability of domestic debt. Poor sentiment is the biggest reason for the drying up of capital flows. In my view, sentiment toward India can change very quickly. Once sentiment changes, capital that is unable to find a home anywhere in the world will start gushing into the country. As capital inflows restart, the Indian rupee will start appreciating rapidly. The appreciating rupee combined with weakness is global industrial commodities will reduce inflation in India and will lead to lower interest rates. India's current account deficit will start expanding as a percentage of GDP as India starts buying more from the world. This will temporary ease supply bottlenecks in the country. In the meantime, investment spending will pick up in the economy and GDP will expand. In my opinion, this slowdown in India has not happened because of government inaction. This slowdown has happened due to excessively negative sentiment within and toward India. The government for its part has fueled the negative sentiment. The RBI has now become a participant in fueling negative sentiment toward India by refusing to loosen monetary policy. While India has suffered disproportionately due to negative sentiment in the recent past, India will be one of the biggest beneficiaries in the world as negative sentiment toward it recedes. In my opinion, sentiment around the world does not have to improve before sentiment about India improves. Sentiment about India can improve quite randomly even as the entire world remains gloomy and depressed. If you are a global investor with cash (you lucky/smart one you) that can be deployed, this is the time to stop overthinking, to get rid of your worthless dollars, euros and yen and to convert to Indian rupees that are trading at a big discount and to buy Indian assets that are available at once in a very long time cheap prices.