India will grow despite the government

Mar 19, 2010

In this issue:
» India growth story doesn't depend on the government
» Mountains of food stock goes waste
» Greenspan and Bernanke still in denial
» India's super rich farmers
» ...and more!!

How big a role has the government played in the recent India growth story? That's a question of great importance to investors. After all, investors place a great deal of emphasis on the management of a company while picking stocks. Surely the same should apply to the custodians of the overall economy.

In a recent interview to a leading business daily, a member of Prime Minister's Economic Advisory Council and Planning Commission talked about several policy areas. In the infrastructure sector he said, we talk about completing a project in two years, but that project is often completed in 3 to 4 years. He admitted that our record in project implementation is very weak. He also talked about India's vulnerability to rising commodity prices. Especially crude oil prices.

Turns out, India's growth story has not been because of the government. It has been despite it. Ajit Dayal, our founder, recently spoke about this issue at the Equitymaster Investment Summit 2010. No matter which party or coalition has been at the centre, India has grown at more than 6% over the last thirty years. Successive governments keep stumbling in getting their policies right. Indian entrepreneurs do what they have to do in spite of the government. We agree. An enlightened political class would do wonders for our economy. But in the era of walkouts and note laden garlands, the most businessmen expect is the politicians' benign neglect.

 Chart of the day

Source: Department of Food & Public Distribution

Speaking of government inefficiency, food prices have galloped at an alarming rate over the last few months. Some blame it on the poor monsoons. Some blame it on hoarding by greedy middlemen. In our opinion, the government unknowingly itself is a massive hoarder. As today's chart of the day show, the stock of rice and wheat in government granaries is way above the minimum requirement. Sadly, much of this excess stock is stored in the open. It either rots or feeds pests. In our view, this is a national shame. We cannot get the basics right in such a crucial area when food prices are spiraling out of control and millions of Indians still go hungry. Such stocks should be stored properly and released in small lots to stabilise prices.

Warren Buffett is a believer in value investing. And he has practiced it so much over the years that we doubt he has a similar respect for any other school of investing. Hence, when a man takes to a certain belief system, it tends to get reinforced over time. He may not be willing to change it even when presented with evidence to the contrary. And this is what seems to have happened to Messrs Greenspan and Bernanke. The world has seen the worst financial crisis since The Great Depression. Most experts agree that loose monetary policies followed by central banks, most of all the US central bank, have played a major role in it. But Greenspan and Bernanke are unmoved. They continue to put the blame on anything and everything but not loose monetary policy. And this we believe is a dangerous sign. For if they have failed to come to grips with the true cause of the problem, it is quite possible that the mistake would be repeated. Let us hope that someone really does drill some good sense into them.

An intriguing piece in the New York Times caught our eye today morning. The average Indian farmer brings to mind pictures of poverty, exploitation and suicides. Enter Bhisham Singh Yadav, farmer in the eastern outskirts of Delhi, and father of the groom who recently landed in his bride's village for their wedding. Yes, not arrived, landed. By helicopter.

As India's cities expand and engulf the surrounding peripheral land, farmers who have occupied these lands for generations are reaping a windfall. This is because many with an entrepreneurial spirit find this kind of land much more valuable than a farmer would, and are happily paying steep prices to acquire the same for construction and industry. In the bargain, many farmers are finding themselves rich overnight. To the extent that many don't even know what to do with this newfound wealth, and end up splurging on excesses they couldn't even dream of before. Excesses like lavish wedding ceremonies, international holidays, expensive cars et al. As the bulging Indian cities continue to expand, many Indian farmers in the surrounding areas may find themselves in this position. All in all, another aggressive push for the domestic consumption story.

The US and China are at loggerheads yet again. And the latest bone of contention is China's policy of pegging the yuan to the dollar. The Chinese are in a tight spot. Majority of their exports are to the developed nations as a result of which subdued demand in the latter has hurt Chinese exports. Therefore, an appreciation of the yuan would only further alienate US consumers as Chinese goods will become more expensive. The US, for its part, is stepping up its pressure on China by a notch. This is hardly surprising given that the US economy is in a difficult period with unemployment raging at 10%. And the Chinese are probably relenting a little. As reported in the New York Times, a Chinese trade official has said that his organization was polling more than a thousand Chinese manufacturers on how a change in exchange rates would affect their business. It remains to be seen though whether China will bow down to US's wishes so easily.

It seems that the US taxpayers have to bear an even larger burden for keeping the zombie banks on their feet. Apparently, the Troubled Asset Relief Programme (TARP), which is the US government's bailout programme to help bolster the failing financial system, is expected to cost millions of US taxpayers US$ 109 bn over its life. This is up from US$ 10 bn estimated just 2 months back. This means that the US$ 700 bn fund is expected to depreciate to US$ 591 bn over the course of its life. However, what is worrying is that about half of the US$ 700 bn is outstanding or is still to be deployed. Yet the US Congressional Budget Office (CBO) is expecting the fund to lose about 16% of its value. Given this, we believe that CBO expects more banks to fail in the coming future.

If there is too much money with you to pay for few goods i.e. if you are willing to pay more for the goods you wish to buy, the RBI would want you to be cautious. The central bank, while not denying its concerns over the inflation number (WPI) hovering dangerously close to double digits, has cited supply side factors to be the key reason for the current price rises. The RBI has suggested that it will adopt all necessary moves the minute demand seems to pressurise prices. Meanwhile investors need to factor in the impact of higher interest costs in the earnings estimates for the next fiscal.

Meanwhile, Indian markets witnessed a choppy trading session today after a positive start. Amidst alternate bouts of buying and selling activity, the BSE-Sensex was marginally up by 13 points at the time of writing. While stocks from consumer durables, auto, FMCG and healthcare traded in the green, stocks from the realty, energy and IT sectors were among the ones that failed to garner investors' interest. Asian markets are trading in the positive today. European markets are trading a mixed bag.

 Today's investing mantra
"We don't have to be smarter than the rest; we have to be more disciplined than the rest." - Warren Buffett

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6 Responses to "India will grow despite the government"

Sukdev Banerjee

Mar 22, 2010

I love your informations as this keeps me on the toe as far as my profession goes( Mineral/Intrnational trade)
Sukdev Banerjee


surajit som

Mar 20, 2010

this refers to the story of a farmer in noida selling his land and spending the money to hire a helicopter for his son's wedding.

most people-particularly poor-are bound to misuse when they get a lot of money suddenly. this is destruction of wealth , bad for the society and ruinous for the individual. farmers may sell their land but the proceed should be regulated by a trust. it will function like a pension authority. they will guide the individual and invest his money professionally. the farmer will be allowed to withdraw his money only in a regulated manner, particularly during the initial years.the trust will also ensure that the farmer gets good price for his land and legal help if he is forced to sell his land under pressure.



Mar 20, 2010

The statement that India's growth is not because of the government but despite it is dangerously frank. Yet,it is heartening to note that though successive governments keep stumbling, they get things right and the economy records steady growth.

The observation that,of late, many agri lands are getting converted into building sites and that several relatively poor farmers who sell them have become rich overnight, is cent percent true. The only concern is that it should not lead to the shortage of vital food grains.


k k sharma

Mar 20, 2010

I am totally agree with you regaring our storage condition.I hv personally seen food grain stored in open in Punjab.We must act now..other wise it will be too late..



Mar 20, 2010

Ronald Reagan first gave the Slogan "the government is the problem not the solution". Then he led the great Republican effort to unravel all the safety nets and governmental controls that Roosevlt had painstakingly crafted to prevent another Great Depression.This had the disastrous consequences that we are seeing now with USA on the brink of a double dip recession.Better have 6% real growth with strong controls rather than a 10% bubble.Human beings are too greedy to regulate their own greed.This regulation has to be a collective responsibility of the society and if it fails the result would be a disaster as in the USA


Thomas Pullan

Mar 19, 2010

Thank you for mailing your 5 minutes wrap ups.If you don't mind mail to me 2 or 3 of your current recommentations for small caps which will be a proof to your credibility and depentability and give me confidence to subscribe to your products
Your's truly,

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