THE economy is sizzling and foreign businessmen and investors are swarming to Bangalore and Mumbai to grab a piece of the action. India's year-on-year growth rate could well hit double figures at some point in 2007, and the country may even grow faster than China for at least one quarter. But things are so hot there is a big problem: India's current pace of expansion may not be sustainable.…
If one thought this article got it wrong, the NYTimes carried an article on the same theme. The article was titled "India finds its economy on the verge of overheating". The article had the following to say:
With breakneck growth, an outsourcing industry that leads the world and hundreds of millions of consumers demanding more class and comfort, India has an economy many countries would envy.
But now, after three years of near double-digit growth, signs of a potentially dangerous inflationary spiral are beginning to emerge. Prime Minister Manmohan Singh and his closest economic advisors gathered just last weekend over fears that India’s extraordinary economic expansion was starting to overheat, an issue they labeled as a “key short-term priority.”
As if this werent enough, cnn carried an article titled "India a superpower? Thing again". The article highlighted some of the deep rooted problems in India.
To add more ammo to the overheated debate - the seeking alpha website carried an article that made a compelling case why one should not buy Indian equities at current prices.
Since 1997, the Indian economy has grown 146% at a compound annual growth rate [CAGR] of 9.41%. Over the same time period, earnings of the 30 companies that make up India’s BSE Sensex have grown around 150%. No surprises there. However, over that same 10 year period, India’s BSE Sensex has risen 345% at a CAGR of 16.11%.
In comparisons such as the one above, an abnormal base period can distort the figures. And January 1997 was an abnormal month for the Sensex, characterized by a depressed price/earning [P/E] multiple of 13.5. However, had the Sensex been trading at a P/E multiple of 17, which is the average multiple over the 10 year period, the Sensex would’ve still risen 260%; way above underlying companies’ earnings.
There was another article in the same site that said Indian stocks are losing momentum compared to other stock indices in the emerging markets. But the article also said that so long as the economy keeps growing, there is little chance of a steep correction.
Overall consensus is that the Indian stocks are not cheap at the moment and it is not worth investing more at the current prices.