Demographics on either side of the Himalayas

Feb 23, 2012

In this issue:
» Is crude oil set to scale new highs?
» SUVs are seeing demand from an unlikely source
» India stares at FCCB conversion risks
» Akin to Greece, the Kingfisher saga continues
» ...and more!

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China's one child policy and aging population may just wipe out its biggest competitive advantage - cheap labour. It is the most populous country in the world with 1.35 bn people. But its populace is graying at a fast pace and there are too few babies born. According to government statistics, the proportion of the population aged between 15 and 64 fell to 74.4% in 2011. This was the first fall in ten tears. This Asian giant may face economic stagnation akin to Japan if it fails to adopt certain reforms to compensate for its shrinking workforce. Japan's demographic dividend disappeared in 1990, and its economy stagnated ever since.

Wages in China have been steadily rising over the years, even rising in double digits. Now they seem to be on a permanent upward trajectory. The standard of living has improved in many parts of the country. An aging population also calls for increased wages to pay for healthcare and other allied expenses. Possibly the only answer to this predicament is for China's growth engine to completely turn on its head. Rather than simply focusing on a cost advantage it needs to bring something else to the table. It needs to focus on innovation and productivity. Or can another country win the race?

On the other side of the Himalayas, India has a big advantage. India is one of the few countries in the world having a positive birth rate and a huge demographic dividend. Its working-age population mainly consists of youth (15-34 years). As a result its economy has the potential to grow more quickly than many others. But, it may not be doing enough to leverage on this potential.

Currently only about 2% of the Indian workforce has formal training as against an average of 75% in Europe. To bridge this divide the government needs to earnestly focus on skill development. The Prime Minister's National Council on Skill Development has endorsed a vision to create 500 m skilled people by 2022. But, will this be another target India fails to achieve? Measuring the quality of the training given is another matter altogether.

 Chart of the day
Oil prices have been and will always remain a big concern for each and every country. Since November last year, the prices had been fluctuating within a narrow band. Today's chart of the day shows that troubles brewing in Iran have caused oil prices to spike up all over again. As political tensions between Iran and the western countries continue to heat up, worries on the supply side have come back to haunt the global markets. The price of Brent had touched a nine month high of US$ 123 per barrel. The last time the price was this high was during the Libyan revolution. Since then, prices had started to ease up. But as troubles with Iran started to escalate, oil prices have started to move north in recent times as shown in the chart. Unfortunately there are no signs of prices coming down. Any further news of escalating tensions would only send the oil prices higher still.

Data source:

They say association with a bad business can ruin a perfectly sound one. If you happen to be a lender to the bad business, the odds are even heavily stacked against you. Indian banks seem to have learnt the lesson the hard way. Just yesterday, unconfirmed reports of top banks offering Rs 22 bn lifeline to the troubled airline company Kingfisher took a toll on their stock prices. The leading lenders State Bank of India (SBI), ICICI Bank and Punjab National Bank (PNB) lost in the range of 3% to 8% purely because of investor anxiety about their loan quality.

Most of these top lenders have already qualified their exposure to Kingfisher as NPA. Hence their appetite of taking on more risk was questioned. While none of this is yet confirmed, neither the banks, nor the government and not least the Reserve Bank of India (RBI) seem to be strictly against the idea. What, however, is a relief that the banks have refused to open the liquidity tap until they receive some dues.

Having said that, most lenders are banking on the government's intent to open up the aviation sector to foreign investment (FDI). Given that the proposal is still on paper, taking on huge risks on that basis could be ruinous. We seriously hope that the RBI steps in before it is too late. At least to ensure that the banks do not misuse depositor and shareholder money.

Does Kingfisher deserve yet another lifeline? Share your comments with us or post your views on our Facebook page / Google+ page.

While there is intense debate on whether a lifeline should be given to Kingfisher or not, it appears the troubled Euro nation of Greece has already received one. But as Bloomberg points out, nobody would be more surprised than the politicians themselves if the plan works out. The reason being there are some huge hurdles that lie in the way of success. For starters, what if very few private lenders agree to take a haircut on Greek debt Secondly, what if the austerity measures that Greece is trying to impose on its citizens are absolutely rejected? Needless to say, all help will be stopped if there are no clear signals of turnaround in the Greek economy. This thus shows that the EU union can hardly rest easy. They will also have to prepare themselves for a possible Greek exit from the Euro.

Its cost though is likely to be very high. And there is every chance that the crisis spreads further to other nations like Ireland and Portugal. Even Spain and Italy for that matter. If only, the EU policymakers would have treated this problem the first time it took center stage. Their dilly dallying and throwing of good money after bad is only going to make matters worse we believe.

Passenger cars saw poor growth in sales due to various issues this year. But that did not dampen demand for sports utility vehicles (SUVs). Indeed, sales of SUVs grew by an impressive 13% YoY in the year so far despite many headwinds impacting the overall auto industry. More importantly, demand for these vehicles was quite strong from the smaller towns and villages as well. This was largely attributed to increased disposable incomes through the sale of land, higher farm output, smoother roads and an improved law and order situation in states such as Bihar.

That SUVs are the next big thing was evident in the Auto Expo held in Delhi recently. Many companies showcased a range of models in this space. Further, dealerships have increased in smaller towns and villages. This has fuelled demand for SUVs as well. Not just that, with a sense of security now prevalent in states such as Bihar, Jharkhand and West Bengal due to proactive measures by the new governments, people have seen a rise in aspiration levels. Thus, these developments augur well for the Indian auto industry. And players having a strong presence in this segment notably Mahindra & Mahindra (M&M) and Toyota stand to benefit.

Foreign Currency Convertible Bonds (FCCBs) are hybrid debt instruments. Thus, they present a cheap option for corporates to raise money in overseas markets. However, with stock prices of many companies falling below the conversion price, these corporates are facing a huge redemption risk now. In fact, as per Fitch reports, at least 20% of the FCCBs due for conversion are likely to default this year. Rupee depreciation and falling stock prices have increased the default risk.

In order to avoid default, some corporates have restructured the FCCB debt or have gone in for a re-finance at higher rates. However, companies, which have a stretched balance sheet and also liquidity issues, are under significant pressure. True, that FCCBs are cheaper financing options in the hands of companies. However, the benefit of the cheaper cost should also be viewed in the context of uncertainty in the forex rates (if the exposure is un-hedged). Else the low cost debt benefit can be completely wiped off leaving the company on the verge of default in testing times.

In the meanwhile, the Indian stock market continued to trade weak on account of selling pressure in heavyweights. At the time of writing, the benchmark BSE Sensex was trading down 105 points (0.6%). Most of the sectoral indices were trading in the red, led by realty, metal, consumer durables and capital goods space. Sterlite Industries and DLF were seen losing the most amongst blue chips. Major Asian indices performed mixed today with stock market from Japan leading the pack of gainers while those from South Korea and Singapore losing the most.

 Today's Investing Mantra
"An important key to investing is to remember that stocks are not lottery tickets." - Philip Fisher

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6 Responses to "Demographics on either side of the Himalayas"


Feb 27, 2012





Feb 23, 2012

Kranthi mark, thanks.
Useful and thought provoking info..

Like (2)


Feb 23, 2012

Dear Kranthi:

Thank you for your input, an eye opener.


Like (2)

ss Varadan

Feb 23, 2012

King Fisher Airlines:
Does it need bail out funds, again?
YES; from the entire UB Group, first, if at all!!

Like (1)

shirish patwa

Feb 23, 2012

Economics is a very funny subject.India's progress is hampered because of ever increasing population and its lack of control over population growth.Similarly,within India, the most populace States like U.P. and Bihar are are backward because(?) the density of population is more than most of the States.Again amongst minority communities Muslims don't follow family planning measures and their size of family is bigger as compared to ,say,christians or jains and later are more affluent economically than the former.

Like (1)

kranthi mark

Feb 23, 2012

The success of any economy depends on Human capital – how an economy efficiently using its human capital for development and providing employability referred as demographic dividends. And every one talk about India's demographic structure as key strength this strength is derived from the Marriage system in India.
We have to get educated to gain knowledge and wisdom , from wisdom , we derive the solutions which leads to revenue generation which translates as savings and spending for self well being and family prosperity this is the ultimate theme of majority of folks .For an economy people are key and their productivity is the lynch pin to run the economy . In the key financial planning of any individual your family will play a vital role which reflect in the economic development of the country .
Let me envisage the demographics of various nations. Chinese their average age is 37 years and 72% of population is in between 15 to 64 years and China also one of the aging population . Why Chinese household consumption so extraordinarily low , in part , it is because Chinese house holds can't rely on the traditional old age safety net in Asia namely children , As a result of government single child policy in past 30 years in China increased number of people above 45 years and indicates less productivity of nation and in a family of 5 every one depends on one young earning child .In USA because of increasing divorce rate and social system 50 % babies born in USA are born to unmarried girls and as per U.S state department statistics every year more than one l lac girls under 17 are diverted towards sex traffic .which will destabilize the nation over period of time . In Japan 25% of population is above 65 years and average age of Japanese population is 44 years which clearly indicates less productivity and consumption indicates clear threat to the nation . In Euro zone nations because of child delivering costs are very high , average European stopped giving birth and birth rate and population growth is very low almost it is zero which is impacting the Euro zone Economy . Very recently Russian Economy is very proactive to spur demand , it announced good number of schemes and incentives to its people who ever give birth to 4 children and above , if you want busy next 5 years migrate to Russia and enjoy the romantic life! .
Family instability too , is harder on poor children , poor less well educated couples are more likely to break up and when that happens the economic consequences are more severe than for the well off , the cost maintaining two establishments ,shuttling children between the two parents income , leaving less for the basic necessities , let alone counseling and remedial tuition to help devastated children cope with the breakup . Divorce therefore affects the children's health , hygiene and schooling far more in a poor family than in a rich family . In equality tends to further perpetuate it self through the social environment. To the extent that it is caused by significant part of the population is not being able to improve themselves because of lack of access to quality education it signifies tremendous inefficiency.
Father of Economics Adam Smith says that while population growth might increase the total wealth of nations but only improvements in productivity could make a nation richer on peer capital basis , it is not how much capital country has that makes it rich .It is how productive that capital is and according to Economist Solow the key to productivity is technology.
United states and other western nations countries did not became rich because of lucky endowment of natural resources or because of capital falling like manna from heaven . Rather they became rich through a virtuous cycle in which technology improvements led to capital became more productive , which in turn led to more capital investments, without technology growth , capital would grow in proportion to population and wealth per capital would simply level off.
The dynamics of economy and life changes for every decade, for example in 1970 civil engineering is demanding profession ,in 1980 banking was revolution and demanding profession in 1990 Media, and tele communication was in demand , in 2000 software engineering was demanding .2010 financial services is in demand . So I believe when your planning your family give greater gap between the children for greater diversification and you can't effort to have your children every one in the same industry , education and age group as dynamics of the economy changes . The greatest gift you can give to your children is education , of course every one endeavor is same but demanding education is crux . I encourage every married parent to educate your child in Chinese language , this is going to be the best gift you ever presented to your children . As we progress 70% business deals happens from China in future and this is going to change their business life.

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