Are we importing corruption with FDI?

In this issue:
» Mohammed El-Erian warns about 'central bank put'
» Labour shortage in China!
» Railways on its own for infra funding
» Black money and real estate
» ...and more!

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00:00

The tag line does not reveal it at all. The words 'Save Money. Live Better' make almost every retailer in the world emulate Walmart's popularity and success. Started in 1962 by Sam Walton, the company today employs 2.2 m people and serves 200 million customers per week. With 69 different banners in 27 countries, Walmart is the undisputed leader in modern retailing. But as we said, the tagline does not reveal the secrets behind Walmart's thundering success.

The company has been under the scanner over bribery allegations in Mexico. Several US dailies including Huffington Post carried details about how Walmart bribed its way into Mexico to fulfill expansion plans. It is also intriguing to know that the retailer battles around 5,000 legal suits a year. Given the maze of approvals required to set up a retail supply chain network in India, the story is unlikely to be different. Walmart's lobbying prowess also took centre stage when the Indian government recently approved foreign direct investment (FDI) in retail. That too against much opposition from other political parties.

No doubt, FDI is a must-have for capacity addition in several sectors. Without that, India's dream of double digit GDP growth rate will remain just that - a dream. But a recent interview of Columbia University economist Joseph Stiglitz, published in Economic Times, warrants a re-think on FDI. Stiglitz believes that India does not need Walmart's expertise in bribery. He also calls Walmart's famous supply chain a non-success. Apparently, it has not worked beyond the US. Stiglitz opined that Walmart can use its money power to bring mass Chinese goods to India. This will also help reduce the price of supplies from Indian producers. Moreover, the bribery culture that Walmart brings with itself is already something that India is struggling to shed.

Now bribery and corruption are neither new nor unique to India. Not just Walmart but several Indian entities are known to indulge in the same. Ratan Tata famously refused to pay bribe on three occasions between 1995 and 2001 to gain entry into the aviation sector. Thus the culprit is not FDI but red-tapism and the attitude of policymakers. Once, Indian entrepreneurs are freed from corrupt practices, not just Walmart but all other foreign entities too will toe the line.

Do you think India should do away with FDI in retail with the fear of importing corruption? Share your comments with us or post your views on Facebook page / Google+ page

01:35		Chart of the day

Everyone is making a case for lenient monetary policy in 2013. The Reserve Bank of India (RBI), however, is not so sure. After all inflation continues to hover well above its comfort levels. Plus excess liquidity continues to slosh around in the global financial system. Nevertheless, the pressure from the government to stimulate growth may cause the RBI to relent. A look at inflation levels and short term interest rates around the world explains why lowering interest rate is so difficult for the RBI. After all, India is amongst few nations in the world where despite steep interest rates, inflation still outstrips short term borrowing rates (repo rate for India).

Data source: RBI, JP Morgan presentation

02:05

For those dabbling in derivatives, the working of a put option is amongst the first things they learn. Thus, if a person buys a put option, he has the right to sell his stock at a certain pre-determined price. But what if a stock has an in-built put option? In other words, what if you know what the stock will sell at few months down the line? While this may sound ridiculous, few stock markets around the world seem to be witnessing exactly such a phenomenon. Here, central banks are providing endless liquidity injections to ensure that asset prices stay firm. No wonder such a strategy has come to be known as 'The central bank put'.

Those investors who are relying too much on the 'central bank put' would do well to heed the advice of one Mr Mohammed El-Erian. The CEO of bond giant PIMCO has warned investors to not depend too much on central banks to bail them out. Simply because there is a limit to how far central banks can pump up markets. Eventually, prices will come to be influenced more by fundamentals than liquidity injections. Thus, investors would be better off taking greater care and pursue opportunities that look sound on a fundamental basis. Portfolio that is geared too much toward the continued efficacy of the central bank put could prove to be risky as per Erian.

02:35

Did you ever think that the phrases 'most populated' and 'labour shortage' could be applied to the same country? Well interestingly, these are the phrases being used for the dragon nation China. Till recently the country's low cost labour was a major attraction for global majors to set up manufacturing hubs. But off late this labour advantage seems to be fading away. The country's one child policy has led the rate of new additions to the population base to decline. At the same time the increase in higher education enrolment has further depleted the number of new workers joining the workforce. Migration of labour to higher wage areas has also worsened the situation. Such is the condition that companies are increasingly looking at student interns as a way to make up for the labour shortage. These interns provide low cost temporary solution for the companies facing labour shortage. In the long run, most companies operating in China would be forced to pay higher wages to attract workers.

03:03

The power sector is the growth engine for any economy. If this sector is not growing well, it has repercussions on other sectors of the economy as well. It is not exaggeration that India misses out about 2% of GDP growth because of poor infrastructure. The growth of India's power sector has faced several headwinds. One of the biggest roadblocks has been the inadequate supply of coal, the chief fuel for thermal power plants. As a consequence, the power sector has been an underperformer on the bourses as well. Since the beginning of 2012, the BSE Power index has witnessed just about half the gains in the broader markets. Even these gains were mainly attributable to reforms pertaining to restructuring of state electricity board (SEB) debts. Coal supply also improved marginally towards the end of 2012. Subsequently, electricity generation increased in the December quarter by 4.25%. It must be recalled that the same had plunged to 2.49% in the September quarter. There are indeed some indications of things getting better. Thermal power plants have reported better capacity utilisations in October and November. Decline in international coal prices has been another booster. But adequate fuel supply is still a major concern and will affect future capacity additions. So, though the situation has improved somewhat, it is far away from a full recovery.

03:22

That infrastructure in India needs to be seriously ramped up is a fact well known. But given that government finances are in a state of disarray, it is already beginning to feel the pinch. Take the railways for instance. The Planning Commission seems to have conveyed to the Railway Ministry that the latter will have to raise resources on its own. This is to fund ambitious projects such as the Dedicated Rail Freight Corridor and high speed bullet trains. One of the reasons for this was the sharp rise in costs in the first phase of the railway corridor project. These appear to have ballooned from the estimate of Rs 280 bn to 1,240 bn. As a result of which the final cost of the project will be much higher than what was estimated. Thus, the railways may be left with no option but to cover this rise in costs through a rise in fares across the board. Whether this will be enough to cover these extra costs remains to be seen though. More importantly, we wonder why there is such a huge gap between the estimates and the reality. Have the likely costs been grossly under estimated? Or have the actual costs surged on account of much inefficiency? One may never know.

03:50

Significant prevalence of black money in the real estate market is a known fact. But what is unknown is the fact that this black money is leading to increase in property prices. You may wonder how? Let us explain. For any property that you plan to buy the seller invariably asks you to pay for a certain proportion in cash. Isn't it? This is the black money component since it has no official record in the Income Tax (IT) books.

But this black money which is circulating in the system will also be utilized somewhere. But where? And the answer is real estate itself! That's because black money cannot be invested in any legitimate investment instrument as it will catch the eye of IT officials. Thus, the black money that is generated in real estate remains in the system itself. In fact, it keeps on circulating in the system and leads to increase in property prices. The menace can be curbed only if there is a close scrutiny of every real estate transaction by the IT officials. However, we do not feel that India has the political will to do so as there is a strong nexus between politicians and builders. And this means that property prices will continue to be where they are right now.

04:30

Despite selective buying interest in auto and pharma stocks, profit booking in IT and commodity sectors kept the benchmark indices in Indian equity markets closer to the dotted line today. The BSE Sensex was trading higher by around 24 points at the time of writing. Other major Asian markets closed higher while markets in Europe opened flat to positive.

04:50

Today's Investing Mantra

"In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen." - Warren Buffett

Warren Buffett - The Value Investor