One stimulus package that makes sense

Feb 19, 2010

In this issue:
» Disinvestment is the best form of stimulus
» Stockmarkets have peaked for the year: Faber
» Rationed food to counter food prices
» Government tweaks fertiliser subsidy
» ...and more!!

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One of the hottest topics being debated in economic circles today is, "Should we roll back the stimulus package?" Turns out we can have our cake and eat it too. There is one form of stimulus that does not need tax and interest rate sops. As a result, it also doesn't worsen the fiscal deficit situation. In fact, it helps erase the deficit. An interesting article on Business Today talks about disinvestment of government owned companies. The process helps generate money for the government and unlock the value of public sector companies on stock exchanges.

But the fact that is overlooked is that disinvestment can act as a demand stimulus for the general public. Initial public offerings of strong public sector companies have created enormous wealth for investors over the years. The majority of investors in India today are insurance companies and mutual funds. A great majority of the consuming class in India is invested through these institutions. Hence, unlocking of public sector wealth will eventually translate into demand stimulus. The funds that the government will receive will have to be used as capital expenditure in specific social sector schemes. That is also stimulus.

The government is looking to list about 60 odd profitable public sector companies. It includes Coal India and BSNL. Another option is to disinvest some more in already listed companies such as Engineers India. In our view, investors benefit by owning strong public sector companies. Interestingly, the economy does too.

 Chart of the day
The spread of telecom is one the major economic revolutions of our times. By the end of this year, there will be around 5 bn mobile subscriptions around the world. A decade back, the average mobile phone user spoke around 174 minutes a month. Today it is about 288 minutes a month. But as the chart of the day shows, some nations are more talkative than others. You would expect India to figure in the chatty list. But there are others who beat us by a handsome margin. Puerto Rico tops the list on the back of cheap plans and unlimited long distance calls. What this shows is that Indian telecom companies can keep trying to increase volumes. Perhaps it is with an eye on this data that telecom companies keep lowering their rates further.

Source: The Economist

Are you looking to make substantial gains from stocks in 2010? If yes, then you seem to be betting against the noted analyst and economist Marc Faber. Talking to Business Standard, Faber opined that it's quite possible that for the current year, the stock market high has been left behind. "The Sensex may make marginal new highs around 18000-19000, but the risk has increased and the days of big moves are over. I think markets will correct further", Faber has said.

Faber was also of the view that there is a 99% chance of China slowing down considerably and a risk of as much as 30% that the dragon nation may actually crash. As mentioned in yesterday's wrap up, Faber is positive on India and believes that since a lot of infrastructure needs to be put in place in India and also since its consumer markets are far from being saturated, there is an immense long term potential in the economy still waiting to be tapped. As is the case more often than not, Faber seems to be right on the button on this one.

With food prices rising beyond control, the aam aadmi's household budget seems to have gone off track. So what could save him from the impact of rising inflation on his pocket? A report in The Times of India argues that providing rationed food to all in India could solve this menace. Currently, only those below the poverty line can avail of the rationed foods through the public distribution system (PDS).

The report cites a study done by Centre for Budget and Governance Accountability (CBGA). As per this study, the additional cost for such an exercise 'of providing PDS to one and all in India' will be around Rs 844 bn.

The CBGA suggests that this expenditure is justified. This is given the poor nutrition levels among children and women in India. Given these stats, we find this as a good solution to solving the food crisis somewhat. However the question again arises, can the government do justice to their additional expenditure given that the food subsidies have not really benefited those it was meant to benefit in the past?

Recovery or no recovery, global corporates are certainly not out of the woods yet. In fact, investors will most probably have to brace themselves for another round of bankruptcies early this year. Overleveraging was a huge problem that plagued many companies at the height of the crisis. Many of them just about managed to keep their heads above water due to debt extensions which averted bankruptcies then. But if the economic crisis extends further than what is expected, it will be difficult for companies to hold off their debt obligations any longer.

As reported on Reuters, companies defaulted on a record US$ 329 bn of corporate debt worldwide in 2009 as the severe global recession thwarted companies' ability to service their debt. To stress further on how grave the situation has been this time around, during the 2001-2002 bankruptcy wave, there were US$ 342 bn of defaults. That was the time when biggies such as WorldCom and Enron collapsed. In stark contrast, in 2008 and 2009 put together, defaults have been at a mind boggling US$ 610 bn with more to come. These are not easy times indeed, given that the threat of sovereign defaults by governments also looms large.

With farmers forming a major vote bank in the country, the government has always been reluctant on rationalising fertiliser subsidy. However, with a ballooning fiscal deficit, thanks partly to a rising fertiliser subsidy, the government has finally woken up. The government will provide subsidy on fertiliser based on the nutrient it contains instead of the nature of the fertiliser. Moreover, it is raising the price of urea. With urea available cheaply, farmers have a tendency to overuse it affecting the yield of the crop. While this is a baby step to cut down the subsidy bill, we believe that it is in the right direction as it will provide an incentive to farmers to apply a more balanced fertiliser mix, thereby improving crop yields.

China's dumping of billions of dollars of US Treasuries seems to have rung the alarm bells at the US Fed. The US central bank that was so far complacent about rolling back its generous doses of stimuli is now doing a re-think. Although the Fed chose to deny a change in outlook, its recent move of raising the discount rate for short term borrowings of banks gave enough evidence. The Federal Reserve raised the discount rate by a quarter basis point to 0.75%. Although the first increase in discount rate after three years, the move widens the rate's spread over the benchmark federal funds rate, which is currently 0.25%. The Fed believes that it will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. There is now a wide consensus amongst bankers and economists that the urgency of monetary tightening will soon dawn upon the Fed.

Meanwhile, the Indian stock market found no solace from extensive profit booking across index heavyweights throughout the day today. At the time of writing, the benchmark BSE-Sensex was trading in deep red, lower by almost 238 points (1.4%). Midcap and smallcap stocks also had a harrowing day of trade with their respective indices on the BSE down by 1.8% each at the time of writing. Most other Asian indices including China and Japan closed in the red.

 Today's investing mantra
"When we invest we ask one question, how long do you have to wait to raise the prices? If you are an airline today and you try to raise your prices, an hour later, you will be lowering them because of competition." - Warren Buffett

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4 Responses to "One stimulus package that makes sense"


Feb 21, 2010

We are citizen of a funny country where the right hand doesnot know what the left is doing. The subsidy or stimulus etc are terms for the cheats and not the poor farmers. The farmer produces food items against all odds but the price they get is just 10% of the market value. I am a farmer and produce vegetablesand fruits. I feel happy if I get even Rs5/- per Kg at the farm but Iget only Rs 3 to 4 per kg. The payment I get is after 7-10 days. Kerosene oil is subsidized to help the black marketeers as the farmer or the poor man only gets an entry in the card and a bottle of illegal hooch andthe profit is by the shopkeeper only. Similarly the subsidy in agriculture is for the Government staff who take lions share of the subsidy. subsidy on agro implements or drip irrigation is to cheat the farmer by offerring substandard products at prices much above the market price. We are made to make statements in front of enquiry officer under duress about the subsidies. In case government is eager why not cheque payment to farmer or land owner. The land development fund is eaten in the tehsil/agriculture department. Similarly electric subsidy is marred by non supply of power completely. The farm produce is only grass in ares in some tehsils in Maharashtra. The agriculture officials dole out subsidy by charging 50 to 80 % or making the farmer pay by paying for frequent visits. The staff can go on leave but the farmer gets tired by paying for transportation charges. All the stimulus /subsidy should be withdrawn and farmer be given financial help as per land holdings. Say maximum upto 2.5 to 3 hectaires. This type of land holding is so unprofitable that farmers are in constant debt .The wholesellers must not hold power to sell in market and farmer be allowed to sell his produce directly and not through Mandis as they fleece the poor farmer on loading/unloading charges cma transportation charges cma commission of wholeseller,Mandi levy etc and the final amount is much below the rate at which he sells . I am 74 years old and lack power to dramatise the woes of the farmers but they deserve direct help and not through Agriculture deprtment/Patwari.



Feb 19, 2010

I could not understand the logic of 'crying over food price inflation'. I think we are forgetting who gets benefit out of this. Farmers- if they benefit, the rural is getting benefit. The surplus with farmers and in turn, farm labourers should make them better bargainers. It means that the terms of trade favours farmers. We should welcome. Its said the banning of slavery in USA improved the life White manual labourers.
Monetary policy (to increase the interest rate) is meaningless in this context.
We are moving towards a situation where all labour are respected and paid rightly. Food price inflation is an indicator of the same.



Feb 19, 2010

India is a country in which abject poverty and astonishing affluence co-exist. Farmers, as a class, are not poor. This aspect should be borne in mind while providing subsidies or extending tax exemptions. To be fair, those with affordability should automatically become ineligible for such concessions. There are millions of poor farmers, who are not able to make both ends meet. They deserve all help. with more than a hundred-crore population, extending PDS facility to one and all in the country does not appear to be feasible in the foreseeable future.

In the chart showing talkative nations, India is occupying the sixth place. The present pace of growth of mobile phone usage in the country gives the clear indication that India will quite soon move to the top spot.



Feb 19, 2010

Instead of giving subsidy to fertilisers, higher price may be offered to the produce. If fertilser subsidy is a must, it must be based on the area of land the agriculturist holds.Small farmers who have no other jobs may be given a higher subsidy and landlords with more than 15 acres may be given less subsidy.

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