Do reforms only favour the rich?

Mar 19, 2013

In this issue:
»  RBI cuts repo rates
»  Govt, owes Rs 20 bn to exporters
»  Valuation gap between PSU & private banks to narrow?
»  Drug recalls, a concern for Indian pharma?
»  ...and more!


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00:00
 
Has the 'supporting the poor' concept been overdone by the government? Ever since the UPA government has come into power, welfare spending has been its key mantra. As a result, the government left no stone unturned in ensuring that food and fuel remains subsidized. And it has also allotted considerable sums to schemes for providing employment to the rural poor.

There is nothing wrong with the objectives of the government, which is to ensure that food, jobs and energy is available to the poorer sections of society. What is questionable are the methods employed to achieve this. So far welfare spending does not seem to have done much. India continues to be beset by problems of high consumer inflation and a huge fiscal deficit. After the remarkable turnaround in 2010 post the financial crisis, faster and inclusive growth has continued to elude the country.

It all depends on what the mindset of the government is. Probably, the perception seems to be that implementing reforms tends to benefit only the rich. But nothing could be further from the truth. One of the reasons behind India's stupendous growth in the past has been its entrepreneurial spirit. This has brought to the fore many world class Indian companies making strides in the international era. And this has come about despite politics and inefficiencies of the government.

But the government's apathy cannot continue for long. It needs to change its way of thinking and focus on reforms that are conducive to doing business in the country. This is by focus on ramping up infrastructure and improving the delivery of basic public services such as law & order, education, healthcare and water. This is no way implies that only the rich benefit. Indeed, a healthy business environment encourages competition, which keeps a check on prices, raises the quality of products and leads to a form of capitalism that is to the benefit of everyone. What is harmful is crony capitalism which takes place when politicians tend to to retain authority over various economic decisions. Simply because this in turn breeds massive corruption. And the failure to understand the difference between healthy capitalism and crony capitalism seems to be hampering the current government.

There is a rising middle class and its aspirations to cater to. Thus, this burgeoning section of the society cannot be entirely ignored by too much focus on welfare spending. One of the reasons, why the US and European countries have developed in the past is because of the entrepreneurship of its people and the focus on innovation. India has the ingredients to achieve this too. But it now needs proactive support from the government more than ever.

Do you think that implementation of reforms tend to benefit only the rich and not the poorer sections of the society? Please share your comments or post them on our Facebook page / Google+ page

01:16
 Chart of the day
 
As today's chart of the day shows, auto sales continued to remain poor for the period April-February 2013. This clearly indicates two things - weak customer sentiments and the poor health of the economy. Slowdown was seen across all the segments in the industry. The only silver lining in the cloud was the healthy 54% YoY growth in utility vehicles and the decent 14.5% YoY growth in light commercial vehicles (LCVs). The performance of the auto industry is closely linked to that of the economy and unless the latter shows signs of picking up, volume growth in the industry would continue to remain subdued.

*Passenger vehicles
**Commercial vehicles
Souce: SIAM

01:48
 
The Reserve Bank of India (RBI) made another rate cut this year, in its mid-quarter policy review. This move was in line with general market expectation. The Cash Reserve Ratio (% of deposits banks have to park with the RBI) was however kept unchanged. The central bank has become increasingly dovish come 2013, as we predicted at the start of the year. Despite inflation levels not really being benign, the central bank made a rate cut of 0.25%.This was in order to stimulate growth in the flagging Indian economy. The repo rate now stands at 7.5% from 7.75% earlier. The Indian economy expanded at a 25-quarter low of 4.5% in Oct-Dec 2012 quarter, which is worrying. Although industrial production in January picked up to 2.4% growth after two months of contraction, the recovery is still weak. D Subbarao, the RBI governor acknowledged that there is limited headroom to ease monetary policy going forward. The government now has to play a key role in pushing growth. But with the deficit number hitting a record high, this is going to be a tough rope to walk.

02:26
 
Entrepreneurs indeed deserve most of the praises that come their way. After all it is they who put their capital and hard work on the line to ensure that jobs are created and value is added. Thus, no one begrudges their rightfully earned wealth. However, what if the venture of the entrepreneur is not successful and frequently runs into losses? Should they be allowed to go away virtually scot free? Certainly not. Just as they get most of the upsides from starting a venture, they should also be forced to bear the burden of the downside. Absence of this mechanism and the capitalist system would come to a halt we believe. However, rules regarding the same are not that strong in India and hence, we come across a lot of cases where promoters walk out of a loss making venture without too much damage to their own networth.

To make matters worse, it is the tax payers like us who end up absorbing most of the losses. The surge in non-performing assets of the banking system in recent times has once again bought this issue to the fore. And the finance minister does not seem to be in a mood to adopt a soft stance any more. He recently instructed lenders i.e. banks to take stern action for the recovery of dues. While the FM's heart does indeed appear to be in the right place, we doubt whether the debt recovery efforts would really be effective in the absence of strong bankruptcy laws.

02:57
 
If allegations are to be believed, the government has figured out an innovative way of meeting its fiscal deficit target. It will simply not pay up what it has to. The sector to which it owes money is the export sector. The government has a duty drawback scheme by which exporters can get a refund of taxes on inputs that are used to manufacture the goods that they export. This duty drawback scheme ensures that the Indian exports remain competitive in the international markets. But the government has not paid around Rs 20 bn to the exporters since January this year. This has put the export firms under undue pressure. The exports of the country have already taken a hit thanks to the gloomy global conditions. In addition to that, cash flow troubles created for the exporters through the nonpayment of refunds has added to the burden on the sector. The government needs to understand that the best way to bring the deficit under control is through cutting down on wasteful expenditure. Not by nonpayment of dues.

03:38
 
The latest revelation of money laundering scam in private sector banks may not impact their fundamentals. But one cannot deny that inability to address the problem and implement stricter KYC norms will hurt their valuations. We also do not think any of these entities, irrespective of the fundamentals, deserve to be valued at a super normal premium. That is unless the managements do something extraordinary. Moreover, the private sector managements need to prove themselves better than the managements of PSU banks. Without that, there is no reason for the valuation gap.

The latest incident may be restricted to 3 private entities. However, we believe, it reinforces the need to strengthen governance and ethical codes across the banking system. Not being able to incorporate better governance codes to safeguard depositor and shareholder wealth could make the valuation gap of PSU and private sector banks narrower.

The RBI does a very meaningful review of the level of stress in Indian banking system. It keeps a close watch on margins and asset quality. We recommend that the regulator and bank managements take cognizance of each and every product being sold. Especially their fit in the customers' need profile. Without this, the money laundering scam will just be yet another case of 'mis-selling' by the banks.

04:09
 
In the past few years, quite a few India pharma companies have come under the US FDA scanner as their plants failed to comply with good manufacturing practices. This has the impact of slowing down sales from the US market, which is a key growth driver for the sector. And now, the issue of drug recalls is becoming an additional concern. As per USFDA website, majority of the Indian pharma biggies had recalled their drugs in the last seven months. Per se, drug recalls do take place in the overall industry. However, if they become too frequent, it raises concerns about manufacturing practices. What is more, it is not only large Indian companies that are facing drug recall issues. Even various global pharma companies had to recall the drugs which were manufactured by the other Indian companies. Indeed, the US FDA is becoming stricter over quality norms. This too is one of the reasons for increasing drug recalls. But that cannot be an excuse. Most of the drug recalls have taken place based on various complaints received from consumers and pharmacists end too.

There is no doubt that Indian companies need to take GMP (good manufacturing practices) norms more seriously. Else they will lose their edge in an already competitive US pharma market.

04:45
 
The Indian equity markets traded weak during the post noon trading session on the back of political uncertainty post the announcement of DMK pulling out of the UPA coalition. At the time of writing, the BSE-Sensex was down by nearly 250 points or 1.3%. Weakness was seen in stocks across the board with those from the realty, capital goods and metal spaces leading the pack of losers. As for the rest of Asian stock markets, they ended the day on a positive note with China and Japan up by about 0.8% and 2% respectively.

04:56
 Today's investing mantra
"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." - John Templeton

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4 Responses to "Do reforms only favour the rich?"

SWAPNIL

Mar 20, 2013

Going back in history which ideal ruler we reckon upon we found actual culprit is neither capitalism nor socialism its common attitude of public which influenced by Great emperor in fact principle of equity is main culprit which is misinterpreted in earning and cash and other opulence form where it is related to equal respect and place for each in an ideal society. Temporary solution will bring temporary illusion erecting deeper problem in long run in any history opulence was never equal which is tailoring nothing but extra ambitious, distressed and more troublesome life.So there is need for change in attitude of human influenced by few charismatic leaders.

Like 

SAKHEER HUSSAIN

Mar 20, 2013

"..leads to a form of capitalism that is to benefit everyone" !!! I strongly disagree and request yourselves to re-read history and economics. Capitalism can not exist without exploitation and exploitation can not benefit the exploited ! You may please come out of your ivory tower, think and then write !

sakir

Like (2)

premachandran

Mar 19, 2013

before openning up food prices were reasonable, people earning 10K bought flats. Afetr openning up food prices are hitting the roof. People earning 50 to 70 K are finding a flat difficult to buy. The rich buy alkl the flats and gobble up all the food. The poor are poorer now becaus of food & house inflation. So who has the openning up helped?

Like (1)

Ajay

Mar 19, 2013

Making reforms is one thing but ensuring their correct implementation is the task.

Like (1)
  
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