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Recurring blunders in India

Trends for both corporate investment and private consumption are weaker this year. The government, which previously contributed to growth through investments in infrastructure projects, must now tighten its belt.

Excluding government activity, the economy is growing by only 3.6 percent. Lower economic activity means lower tax revenue, and a cut in corporation tax back in April also means tumbling receipts.

The finance minister, appointed in July, wants to rescue growth through new stimulus and intervention in a number of sectors. She is offering three messages: Lower corporate taxes; state intervention to rescue the real estate sector and financial companies; and no rise in the budget deficit. Anyone can see that this does not add up.

This long-time investor in India does not know whether to laugh or cry. One government blunder after another. One month they announce that it is time for telecom operators to pay their spectrum fees for 3G. These are old debts from the government charging extortionately for the licences, and now they want the money to cover holes in the state finances, plus interest and penalties.

There are three telecom companies. Idea/Vodaphone has weak profitability and large debts, and announced that it was suspending payments. Bharti Airtel is also finding it difficult to pay due to large debts and investment commitments in new networks. Only Reliance Industries and Jio will benefit, with the result being a monopoly for Jio. It already has 350 million subscribers and plans to be debt-free next year after selling its telecom masts and fibre network.

If Idea/Vodaphone closes down, the banks will be left holding the baby. Idea’s network is financed by Indusind Bank. Birla Group, which owns Idea, does not want to provide new capital, which means more bad debt in the banking system.

The conclusion is to only own companies of the best quality, with net cash or low debt, and with business models that are not affected by the unpredictable whims of government.

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Carnegie Indienfond offers exposure towards one of the world’s most exciting emerging markets. India has in the last decade established itself as a major economic power with extremely high growth. The...

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