Indices started the week on a modestly positive note, helped by firm global indices. After a firm start, they gave up most of their gains as select frontline stocks remained under pressure on earnings disappointment. Select technology stocks provided support while Jet Airways surged to its highest level in recent months

The government's decision to lower import duty on cement led to a sharp fall in cement stocks on Tuesday, though the prospects of higher cement imports into the country are low. Weak results from SBI led to further weakness and the indices ended with losses of over a per cent each

Metal stocks helped the indices to recover part of the losses on Wednesday. Steel stocks were the best performers on hopes of firm prices this year. Engineering stocks and select banking stocks also provided some strength

On Thursday, the last day of settlement for the January F&O series, indices were range bound till late afternoon as steel stocks rallied further and provided some strength. The last hour saw a sharp up move in the indices as some of the frontline stocks surged ahead on short covering. The Nifty touched a new lifetime high and both indices closed with gains of over a per cent each.

Sensex gained 101 points or 0.71 per cent during the week and the Nifty added 58 points or 1.42 per cent over the week. Gains on the Nifty were much higher because of the rally in stocks like Bharti and TCS.

Mid-caps and small-caps also started the week on a modestly positive note before coming under pressure on Tuesday. The losses were recovered on the last two sessions of the week. CNX Mid-Cap 100 index closed the week with gains of 33 points or 0.63 per cent for the week.

Domestic economic and regulatory action

• Goldman Sachs seems to be on a mission to endear itself to Indians with report after report predicting the country becoming one of the economic super powers in the next few decades. If the still widely-quoted BRIC report set the tone a couple of years ago, the investment bank has come out with an update which predicts an even better economic future for the country. Its latest report says that India would become the second largest economy by 2050 - overtaking the US. That is in absolute numbers and in terms of purchasing power parity or PPP, India would go past the US even earlier.

  If international rating agency Moody's was sceptical last week about the country's ability to sustain growth rates of over 8 per cent, Goldman has no such doubts. The investment bank says India can sustain its current growth rates as there is still a lot of scope for productivity gains. And how long can it sustain growth above 8 per cent? Till 2020, no less!! If the country can raise its investment rate by 16 per cent, the growth could jump to 10 per cent.

  The report says increased openness to trade, higher investments in technology and greater financial deepening have some more distance to go and would ensure that growth is sustained. As a result, India's influence on the world economy will be bigger and rise quicker than early estimates.

  Can anything spoil this rosy picture? Goldman lists the often mentioned risks like rise in protectionism, supply side constraints including business climate, labour and education reforms and environmental degradation. Despite the controversies, the report is very supportive of the SEZ policy which it says 'holds substantial investment opportunities'.

  However, in per capita terms India would remain a low income country for many decades, the report says. Per capita income growth has lagged overall economic growth by more than 200 basis points over the last 15 years and the equation is not expected to change anytime soon. The average Indian would continue to less affluent than his counterparts in other major emerging economies like China, Russia and Brazil.

• Many other global investment banks and financial institutions continue to believe that the trend growth for the Indian economy is still around 6.5 per cent and the 8 per cent growth achieved in recent years is only a short-term surge. Inflation remains a major concern and some believe that this may force the RBI to keep raising interest rates, like it did in the nineties, and pull down growth to lower levels. The second major concern is capacity bottlenecks because of weak infrastructure. Though the country is investing in infrastructure, the capacity build-up is not fast enough to sustain current growth rates.

  Another factor which is increasingly being cited by many economists and analysts is the shortage of skilled labour. Till now most studies presented a rosy picture on the labour front as the country has the youngest population among major economies. However, questions are now being raised over the employability of those entering the working age.

  Decades of underinvestment in education has ensured that a vast majority of the population does not have access to quality education. The sharp surge in salary levels in recent years is a clear pointer to the skill shortage. Average middle and senior level salaries are nearing global levels and would blunt the competitive advantage of Indian companies, especially in services. Million dollar salaries for senior executives in fast growing sectors are becoming increasingly common.

  However, it is the rise in entry level salaries which is causing more concern. Most third year engineering students in average or even below average colleges are now getting placement offers. Service sector companies are now expanding the search to regular colleges in smaller towns and are willing to spend considerable amounts on training them. When growth stabilises and margins come under squeeze, these companies would struggle with the higher human resource costs.

  With the incredible growth rates in manufacturing over the last couple of years, it is only a matter of time before this skill shortage becomes a major problem in that sector as well. Most of the manufacturing growth over the last few years was through efficiency gains and many companies were shedding surplus labour. Many large companies are now on an expansion spree and are setting up large plants. Current supply of skilled labour may not be sufficient to satisfy the demand in coming years.

  Sadly, the government continues to be caught up with issues like quotas in higher education when we need to give as much attention to education as we are currently giving physical infrastructure. Lack of initiative and direction in the human resources ministry is all the more disappointing and may prove very costly for the economy.

• Wholesale price inflation for the week ended 13 January declined modestly to 5.95 per cent from 6.12 per cent reported for the pervious week. Prices of primary food articles declined modestly after the previous week's surge and helped bring down inflation. Prices of manufactured products resumed the up trend during the week. Inflation was at 4.19 per cent during the same week of previous year.

US markets, global economy and oil

• US markets declined this week on rising concerns about the sustainability of corporate performance. Guidance given by companies and analyst estimates for the coming quarters are more subdued, despite signs of resilience in the US economy. The recovery in crude oil prices also dampened the sentiment, though higher oil prices helped oil stocks and limited the decline in indices. Reasonably strong economic data affected hopes of an early interest rate cut by the US Fed.

  After starting the week on a subdued note, the US indices rallied on Wednesday before giving up all those gains later in the week. The Dow lost 0.6 per cent for the week while S&P 500 also ended with losses of 0.6 per cent. The NASDAQ lost another 0.7 per cent after losing more than 2 per cent during the previous week.

• Crude oil prices ended its losing trend and surged ahead early this week on the US government move to double its strategic oil reserves. The US government is expected to start purchases from the open market within a few months which would bring down the production surplus. OPEC production would come down by 500,000 barrels a day from 01 February as part of a production cut announced last year. Important members of the oil cartel have so far declined to consider another round of cuts despite persistent demand from other members.

  Forecasts of colder weather across the US in the coming weeks also supported higher prices. Even a further rise in US oil inventories did not affect prices on speculation about higher demand for heating oil in the short term. Near month futures on the NYMEX surged $3.38 per barrel for the week and settled at $55.42 per barrel.
  

*Disclaimer: The author may have positions in the stocks mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.