Libyan crisis exposes India's chronic problems

Feb 22, 2011

In this issue:
» Brazil, India to put pressure on China on Yuan
» Monetary & fiscal policies have to be tightened
» Will diesel prices be freed?
» IT sector to see pricing rise to 2007 levels
» ...and more!

-------------------------------------------- Union Budget 2011 --------------------------------------------
What does that mean for you and your investments? Which sectors are buzzing and which ones are flat? How will the BSE Sensex be impacted by the new policies? What is the economic forecast for YOU, the common man? To make sense of it in the context of your investments, Equitymaster, in association with PersonalFN, brings you
Our View on the Budget.

Libya produced about 1.65 m barrels per day (bpd) of crude oil in 2010. That's peanuts compared to 10.1 m bpd produced by Russia and 9.8 m bpd produced in the US. But Libya is still the third largest crude producing country in Africa. More importantly, in a situation where oil reserves across the world have been depleting, Libya sits atop large reserves of oil and gas that have yet to be developed. Little wonder then that protests there have sparked fears of the crisis spreading to other Middle East countries. Especially since the latter controls a significant chunk of the world's total oil production.

Indeed, what started as protests in Tunisia to topple its government there spread to Egypt and now Libya and Bahrain. Because of dictatorial regimes in many other countries of the Middle East, revolutions spreading there cannot be undermined. And this has fuelled worries in the global oil market. Crude prices have already gone past the US$ 100 per barrel mark and production in Libya has been curtailed. What all this essentially means is that a deadly combination of political unrest and shrinking oil reserves will keep oil prices firm in the longer term.

This does not bode well for India, which imports around 70% of the oil that it consumes. The government so far has protected the common man by subsiding retail prices of fuel. So that the latter does not feel the pinch and inflation remains toned down. But it is paying a heavy price for the same. Persistently high oil prices and unwillingness to free fuel prices means that the subsidy bill will just keep getting bigger and bigger. This will put a strain on the government's finances and restrict headroom for more spending in critically important areas such as infrastructure, education and health. Moreover, although Indian oil companies have been scouting for oil assets abroad, they have not been as successful in this endeavour as its neighbour China. At the end of the day, for all the brouhaha, the Middle East crisis might not get overblown after all. But it only highlights India's problems which do not seem like going away anytime soon.

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 Chart of the day
After two consecutive bad years as far as food production is concerned, there is something to cheer about in FY11. As today's chart of the day shows, output of major crops will see an increase in FY11 and that too almost at a rate last seen in FY08. Unfortunately, this has not really resulted in a major drop in inflation and for that the government may have to resort to some more tightening measures.

*Major crops include rice, wheat, cereals, pulses, oilseeds, cotton & sugarcane
Data Source: CMIE

Do you think anything of note can be achieved in a meeting where one man's poison is another man's medicine? If you answered in the negative, there is a good chance you don't have to go into all the details of the upcoming meetings of the group of 20 nations or G-20 as it is popularly called. As per the WSJ, Brazil and India are likely to join the US in putting pressure on China. To let the latter's currency appreciate at a faster pace and help solve some of the huge global imbalances that is. We can understand US being angry at China. But where does India and Brazil's new found disappointment originate from? Their respective currency regimes we believe.

India and Brazil have argued that while they keep their currencies partially or fully floating, China continues keeping Yuan pegged to the US dollar. This is thus giving China an unfair trade advantage over the other two emerging markets. However, this is not the only agenda at the meeting. Up for discussion could also be another controversial topic of capital flows and controls. Quite clearly, the noose around China is getting tighter by the day. But will the dragon nation yield? Our guess is as good as yours.

The Union Budget 2011 is just a few days away. Let us see what the Economic Advisory Council to the Prime Minister (PMEAC) has to say. As far as the GDP is concerned, it has projected the economy to grow at 8.6% in FY11 and 9% in FY12. But inflation remains a major threat to sustaining such a growth rate. Hence, the PMEAC has advised that monetary and fiscal policies have to be appropriately tightened to curb inflation. It has called for the withdrawal of some stimulus measures that were given to the industry in the wake of the global financial crisis. This is a much needed move in the direction of fiscal consolidation. The Centre's fiscal deficit had risen to 6.3% in FY10 due to the stimulus measures. The PMEAC has projected the Centre's fiscal deficit in FY11 at 5.2% of the GDP.

There are several other measures that need to be taken to sustain the growth pace going forward. One is, of course, pacing up on the infrastructure front. Greater attention needs to be given to agriculture and related activities. And while the current account deficit should be contained at 2-2.5% of GDP, the flow of external investments in the country should also be encouraged.

No one can beat Indian Government when it comes to beating around the bush. The Government is now mulling over freeing diesel prices if inflation level eases to 6%. Earlier, the blame was put just on high crude prices. That seems to be raising the bar for diesel deregulation to see the light of the day. Diesel caters to one third of country's energy needs and with a high weight in the price index, freeing diesel prices is a political hot potato. The Government has already missed the opportunity once when it freed petrol prices. The current inflation rate and crude price levels have put it in a tight spot. Without a doubt, freeing diesel prices is a tough bullet to bite.

All we can say is that this story seems to be over stretched now with no decisive solution. With public issues lined up in the coming months, it is time to take a tough call and put an end to the mess in Indian oil economy.

Bull markets or bear markets. Inflation or deflation. Food crisis or fuel crisis. Whatever be the situation, emerging markets give one or the other reason to global investors to invest in them. And this fact is validated even now. Record high commodity prices have led to a sharp sell-off across emerging market stocks. However, not all investors are worried. In fact, some are even finding signs of prosperity amidst this adversity.

So as food prices rise, investors are looking for investing opportunities in sectors and companies that will benefit from rising farm income. Rising rural income is a theme that many foreign investors are betting their money on as of now. How sustainable this is, like most other themes, is though a matter of doubt.

The Indian IT industry is partying like a teenager on a spring break. In 2010, the industry saw a revival in growth as deals started to flow in. However, pricing was lagging as customers were unwilling to pay out more in face of the global uncertainty. But now this is expected to revive as well. As per the top honchos of the IT companies, they are witnessing pricing increase in some of their contracts. Wipro has seen its pricing increase by as high as 6% on some of its contracts. TCS has been touting that they are seeing better trends in pricing. Even the ever conservative Infosys has stated that they are seeing an upward bias in pricing. If things continue along the same lines, then pricing may return to their high levels of 2007. As we said earlier, Indian IT industry is partying and it has all the reasons to continue doing so in times to come. But higher staff related retention and acquisition costs may play party pooper for the margins.

In the meanwhile, at the time of writing, India's benchmark index, the BSE-Sensex was trading lower by about 95 points. Stock from the autombiles, banking and capital goods space led the pack of losers. The Asian and the European indices were trading deep in the red as oil climbed to the highest level in 2 years amidst the Libya turmoil.

 Todays investing mantra
"The price of a stock can be influenced by a 'herd' on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person." – Warren Buffett

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15 Responses to "Libyan crisis exposes India's chronic problems"


Feb 24, 2011

Hats to The 5 minute wrap team.. i think after our daily reading to your issues.. we will be able to digest world economics in a much better position. I work as a financial planner and feel much comfortable while talking with my clients on various issues.. Thanks once again



Feb 23, 2011

Dependence on oil as a form of energy for the daily needs is increasing with the automobile boom in the country and the Indian oil exploration companies do not seem to keep pace with the demand that consumers have for the oil hence we end up importing the balance and are highly dependent on the oil producing countries....... What has the country done in its 63 yrs of INdependence to come out of the dependence... ours is a tropical country with plenty of natural sun light and solar power though is picking up it is not up the mark ... the costs need to be brought down,we can take up nuclear energy in a big way ... and we have to restrict the usage of private vehicle and increase the public transport system and stop subsidising the petrol and diesel that itself will act as a deterrent and people will start consuming conciously...


ravi kishore

Feb 23, 2011

What IS CMIE as mentioned in chart as source




Feb 23, 2011

Taxes and governance are another subject.
Oil imports are one major reason why we continue to remain a poor country. If we reduce our dependence on oil imports, we would have a trade surplus and the Rupee would appreciate to Rs20- for 1 USD.
Car and petrol junkies can then buy their USD50,000 worth Audis for Rs.12 lakhs instead of for Rs40 lakhs now.

This would also result in other imports (including the imported food that we will need to feed our 1.4 billion population in 2020) becoming less expensive. Also fuels like Uranium and Lithium, which will again need to be imported.

@Manoj Kumar
You have hit the nail on the head - we do not have plans for the impending energy and food crisis. China is already the leader in Lithium battery technology and other alternative fuels. Our private sector too seems to be napping. I do not see a Tata Chemicals who produce salt, looking and refining Lithium which would be more profitable.


Manoj Kumar

Feb 22, 2011

Yeah! Our dependence on oil from the Gulf is understandable but our dependence on technological breakthroughs in west(Advanced Countries) is absolutely dumbfounding. Why can't India with the largest pool of talent in science and technology can find its own alternative energy solutions?



Feb 22, 2011

tak, you are talking like insane / uneducated person. increase price of petrol to Rs.200 per liter?. Why?. We are already paying more then 100% tax on current petrol prices, yes government should free DIESEL prices but should also reduce tax on fuel prices as we are already paying all kind of direct/indirect taxes. Why the hell we pay so much high FUEL taxes when we pay

1) income tax
2) municipal tax
3) housing tax
4) VAT
5) sales tax
6) octrio tax (4%)
7) tree tax
8) water tax
9) electric surcharge tax
10) indirect tax
11) toll road tax
12) 10% additional tax because i earn little high
13) education sess
14) 200% tax on alcohol
15) 12% tax on food (fastfood industry)
16) entertainment tax
17) water tax
18) transport tax (airports etc).
19) forest taxes
20) road tax
21) service tax

so many taxes, it seems Indian government is charging us taxes like some western economies but when it comes to providing such facilities there are none.


arjun runganadhan

Feb 22, 2011

The oil industry in India has known since the late '90s that oil is abiotic and that there is therefore an infinite amount of oil deep beneath the surface. Had BP's Gulf Oil well which exploded, been successful it would have persuaded that world that the price of oil is artificially high. The more deep sea or earth oil exploration continues the better the chances for India to be free of the Middle East stranglehold!



Feb 22, 2011

Unfortunately Oil is one of the resources where we are dependent on others and we can’t change this fact. If we retain the subsidy on Oil, Govt. will have to take heavy burden of uncertainty and the price will have to be paid by even those who are not directly consuming this resource. As things look, if anything, this uncertainty is only going to increase in the future. Good economics says the subsidy must go, but good politics/administration probably may not put the citizens in line of direct fire. One way out may be to create an “Oil buffer fund” to tide over this uncertainty. However, how does a nation that is short of money for so many schemes, keep so much money out of circulation. Again probably a half solution may be to use the interest for other schemes and keep the principal for this purpose only.



Feb 22, 2011

Harish has put up the facts of oil pricing in India! The Govt is fooling the public by raising the spectre of Subsidies when it is raking in all the money. Abolish all the taxes and add a small consumption tax on petrol and diesel. Pay tax for as much as you consume. For the poor BPL give tax free petrol/kerosene/diesel to meet their genuine needs everymonth.



Feb 22, 2011

I went though to-day's report.It was very comprehensive and factual.It's very useful for stock and commodity traders.
Pl. continue.Thanks

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