It is not the QE! Blame your rising bills on this...

Mar 17, 2011

In this issue:
» RBI raises interest rates to control inflation
» Does the environment minister have blinders on?
» PE firms to drive consolidation for India Inc
» Japan rebuilding will boost steel demand: Mobius
» and more!

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India has been reeling under high inflation for a while now. Inflation has steadily eaten away our wallets, especially in recent times. Everything is getting expensive. And the blame for higher prices has fallen squarely on the developed world. Their faulty monetary policies, e.g. QE-I and QE-II, have led to a flood of easy money. And this had led the prices of commodities to spiral to dizzying heights. But is the developed world solely responsible for the higher inflation rates seen in India?

Not really. There is a bigger reason. Bad infrastructure and the snail like pace of its development, is stoking India's inflation woes. Private companies are at risk of paying more for freight and surcharges for delays in shipments of their goods. In addition to this, firms are already struggling with higher costs as they are forced to keep larger inventories due to supply-chain constraints and bottlenecks. All these lead to higher costs for the companies and add to the inflationary pressure.

It is high time that the government tightened its execution plans. Just committing higher amounts towards infrastructure will not ease the country's problems. These funds need to be used in the most effective manner. Just as a point of reference, the government invested only US$ 1 bn in the last 4 years of the current 5-year plan towards ports. And this is just 17% of the total targeted investment.

Unless words and commitments are converted into actions, the country will not see its infrastructure improving. And unless this is improves, the inflation rates may not be seen coming any lower. This is no matter how many times the RBI adjusts its monetary policies.

Do you think the government is doing enough to improve infrastructure in India? Share your comments with us or post your views on our facebook page.

 Chart of the day
India's population is the second largest in the world. China's is much higher than ours. However, if the country's population continues to grow at its current pace, then by 2050, India's population would exceed that of China. Today's chart of the day shows the results of a study by United Nations that shows India's population to be the largest by 2050. It is closely followed by China. China has been executing its one-child policy strictly and this is expected to help it control its population.

Data source: United Nations Population Division

The RBI has continued with its hawkish monetary stance. For the 8th time since March 2010, the central bank increased the repo rate by 0.25%. It now stands at 6.75%. The reverse repo rate also was hiked by another 0.25% to 5.75%. This was mostly in line with market expectations.

So, why another rate hike, you may ask? Well, the disastrous news flashing from Japan has made us forget two very important things. Oil prices and Middle East politics. While oil prices might have eased a bit lately, since Japan is a large oil consumer, they may be back up very soon. High crude prices are of major concern to the central bank. Troubles in Libya and Bahrain have still not eased. And with threats of a nuclear disaster in Japan, the RBI expects that Japan may substitute thermal energy for nuclear power. This may impact fuel prices further.

What does the future hold? With WPI inflation standing at 8% in mid March 2011, the RBI is still off its 7% inflation target. Thus the watchdog has indicated that it will continue with its current anti-inflationary stance until further notice.

Japan is on the verge of a massive nuclear crisis. And very obviously, the question is being raised about India's nuclear power plans. The limelight is currently focused on the Jaitapur Nuclear Power Project (JNPP). But the government seems to be wearing blinders. Union Environment Minister Jairam Ramesh is usually known for his strong stance on many environmental issues. However, as far as nuclear power is concerned, he seems too relaxed about it.

Let's look at some facts about the Jaitapur project. The plant, with a massive power generating capacity of 10,000 MW, is expected to be commissioned by 2020. It is located near the coastal area of the Arabian Sea in Maharashtra. According to the earthquake hazard zoning of India, it comes under Zone III - a moderate risk zone - on the scale of I to V. However, the Geological Survey of India revealed that the site and the surrounding area experienced 91 tremors between 1985 and 2005, ranging from 2.9 to 6.3 on the Richter scale and the area falls in Zone IV. Whatever the number be, the danger still remains.

Regarding the Jaitapur project, Mr Ramesh has stated that the seismicity aspects have been taken care of. Is seismic zone III or IV not a concern? And how about the tsunami aspects? To that, he seemed unsure if a tsunami probability was factored into the clearance process.

We agree that nuclear power is critical to an energy starved nation like ours. But probably the environment ministry needs to take some important lessons from the Japan crisis.

Gone are the days when companies had to wait for some degree of scalability and maturity in the business cycle to get to the inflection point. Businesses with promising prospects can meet their funding needs more promptly these days. And this can elevate them to the next level of growth. Don't make the mistake of believing that such things can happen only to the likes of Facebook. For several Indian business are already ranking high on the M&A lists backed by private equity (PE) funding. Data from Economic Times suggests that Indian companies have struck around 20 M&A deals worth US$ 150 m so far in 2011. In 2010 there were 170 deals worth US$ 6 bn. Thus whether or not the primary and secondary markets offer enough scope for fund raising, promising business are better placed to find investors. However, the fact that the PE investors look for attractive exit routes cannot be denied. Hence in the event of such companies coming out with an IPO at a later stage, investors need to be wary about the valuations.

Prices of commodities have indeed softened in the past few days. But if emerging market guru Mark Mobius is to be believed, this is just a short term phenomenon and the long term story is intact. It should be noted that the double whammy in Japan had made investors nervous about commodities. They were worried that demand for commodities would suffer as a large number of plants would be shut in the aftermath of the crisis. However, Mobius calls this as a short term phenomenon. He has argued that, rebuilding post the earthquake and tsunami is going to be tremendous. And this in turn would boost demand for metals like steel and iron ore, thus taking their prices higher rather than bringing them down. We certainly agree with this assessment. However, this boost is likely to come at the expense of the average Japanese tax payer. This is because Japan may have to take on extra debt to fund the rebuilding and the interest on the same will have to be borne by the country's tax payer. Thus, this may not be a win-win situation as is being made out to be.

In the meanwhile, Indian stock market indices have slid lower on the back of the hike in interest rates and continued inflation risks. The RBI hiked interest rates and projected inflation at 8% by the end of this fiscal, as compared to the earlier forecast of 7%. At the time of writing, the benchmark BSE Sensex was trading lower by around 150 points. Stocks from technology, realty and metals led the pack of losers. However capital goods and consumer durable stocks trade in the positive territory. The Asian stock markets closed in the negative territory. The European stock indices have opened deep in the negative as nuclear fears grow in Japan.

 Today's investing mantra
"The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions." - Seth Klarman

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6 Responses to "It is not the QE! Blame your rising bills on this..."


Mar 27, 2011

we are in the habit of blaming the government and pointing fingers when some scam is uneathed. is the rest of the society blameless?are they doing their bit? why cant editors guild chalkup a plan to undertake audit of all major spending departments ,especially the infrastructure related departments,and socil welfare and education departments with regard to their policies,their implemewntation, their drawbacks, targets etc,etc? ,thus keeping them on their toes. but ofcourse ,they have to ensure that the auditor doesnt compromise its integrity.
the retired officers ,who are worth their salt, should also chip in with their contributions in a more cohesive fashion to make an impact.



Mar 18, 2011

Governmeny is not doing anything except futile talks and tall claims. This is the worst ever central govt. India ever had. Entire burearacracy except few honest one and all the functionaries / minister of rulling govt are indulged in corruption and looting. This is a govt of thugs and corrupts. Days not far away when India would see a revolution like Egypt or Lybia



Mar 18, 2011

Last 3 years there has been a radical change that has set in with the National Highways, and the Roads that are trying hard to shape the destiny and future of the Indian Industry.
Notwithstanding, regional and the umpteen indifferences that we have set in for ourselves, the Governance that we have been patiently forbearing and the delays in execution of many projects.
Unlike other countries, we are privileged to have a vast sore line accompanied with some natural harbours. Thank fully these were created by nature. Where there has been human intervention, ironically, we have been badly hit. Nature is keenly watching, and if continue with our god forsaken policies and don't set about better governing councils, Nature will soon devastate us. There have been striking examples, I wouldn't like to quote.


Shome suvra chakraborty

Mar 18, 2011

Private investment and public-private funding is important.Venture capital should enter through project developers and equipment suppliers. Banks should tap capital markets for infrastructure financing. Sovereign wealth fund is important. Improving management of utilities, ensuring adequate maintenance, promoting regional integration, recovering costs while recasting subsidies to enable broader access, and improving allocation and spending of public resources are some of the techniques of gap financing.The weaker states should spend greater % of GDP on infrastructure.


sunilkumar tejwani

Mar 17, 2011

it's a sad commentary, infra is a only a pretext, infra was always a problem, due to presence of vested interests. Among them Road based transport manufacturers who bribed their way to prevent rail network from getting developed. High inflation is a result of cartelization by politicians & industrialists. JAY HO!


Kailash Chogle

Mar 17, 2011

The Goverment is trying to Improve Infrastructure but it fails to do so because in INDIA the corruption is Fundamental Rights of most of all Political & Goverment personals , as in India there is no Single Window Clearance for any Projects , so the time of completion of any development take more time( three times more) than the actual schedule , as whole world first develop Infrastrutre & than start developemnt but in INDIA development start first & to cope up the situation we start Infrastruture development which gives negative result .
In country Like CHINA the Infrastructre is first priority , so there are no Religions /Politicals / Judiciary Obstrcules came in between for any Infrastructure developemnts but in INDIA TEMPLES OR MOSQUES become hurdles while makeing Roads OR Bridges , till the completation of Bridges the another end of Bridge caputred by Slum Dwellers , this is common story of INDIA , India should have Strict Laws & the Law should be implemented Strictly.

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