This new threat requires a different policy response

Mar 20, 2012

In this issue:
» What have Indian rating agencies done right?
» Several Indian banks to see downgrades
» US Treasury bonds to see an end to bull run
» Has poverty in India really come down?
» ...and more!

---------------------------- Raise your voice before this turns into yet another scam! ----------------------------

When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


The crippling slowdown in 2008-09 in countries across the world was no doubt a product of the subprime crisis in the US. That said, although developed nations struggled to recover, emerging nations had no problems staging a strong comeback in the following fiscal. Today, however, that recovery has not been sustainable and has been hampered by one big problem notably volatile energy and commodity prices.

What has made energy prices so volatile is the mismatch between demand and supply. Supply of crude has not been able to keep pace as existing reserves have seen some amount of depletion and new sources of energy remain costly to extract. Demand on the other hand has surged. As the population across the world has risen and incomes have increased, many are aspiring to a better standard of living. This trend has been more apparent in India and China, two nations which have played a role in bolstering the incremental demand for crude. Strong growth in these economies has been followed by a rise in energy and commodity prices thereby sparking inflation. Thus, this is a new situation, one that is likely to play out for a long time in the years to come and very unlike the stability in commodity prices that was seen from the mid-1980s until the early 2000s.

What this means is that central banks will have to keep price stability as a key factor while deciding policies in the current environment. This has not been the case so far in the developed world. So obsessed are the banks there to kick start growth of their floundering economies that they have not taken inflationary pressures too seriously. Most measures if any have been temporary with no real policy response. India, in this regard, has been more vigilant as the Reserve Bank of India (RBI) did not refrain from raising rates to combat inflation even when growth started slowing down. Basically, central banks in the US and Europe cannot entirely ignore the threat of inflation otherwise it could only lead to problems bigger than those that they are witnessing now.

Do you think that central banks should frame policies with the aim of maintaining stability in commodity prices? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
2011 saw a spike in consumer prices especially in the emerging nations which put pressure on central banks to raise interest rates. Today's chart of the day shows the Economist's forecast for consumer prices in 2012. While these are expected to come down for most country, for India consumer prices are still expected to remain on the higher side. Interestingly, the US is also likely to see a rise in inflation. How crude prices pan out will be one of the key factors that will have a bearing on the direction of overall consumer prices.

Data Source: The Economist

It is not for no reason do they say a picture is worth a thousand words. Take this one from The Economist for example. It shows how the share price of India's largest ratings agency, CRISIL, has moved vis-a-vis its US counterparts. Data since 2007 shows that while the former is up more than 4-fold, US ratings agencies have all hit rock bottom. This thus begs the question as to what CRISIL has done right that the US ratings agencies haven't quite. Good regulation and ring fencing from the rest of the industry has certainly helped the Indian ratings agencies. But these are not the only reasons behind their stellar performances. These firms have also resorted to some clever diversification and have absolutely shunned the structured products that spelled doom for ratings agencies in the US.

So far, so good we would say. But are the Indian firms up to challenges that the coming decade will tend to throw at them? The stakes will certainly get bigger from here on. Ratings agencies will be under pressure to react faster and the issuers will also be hit harder if they are downgraded. Consequently, sterner challenges await Indian firms and only time will tell whether they will be equal to the task or not.

It is okay to not have our economy grow at the feverish pace which China has in the past. But seeing our once perfectly healthy banks go downhill like some of their Chinese peers is painful. Humongous non performing loans (NPAs) have been typically associated with Chinese banking entities. This is because they are largely government owned and coerced into lending to large corporate. Many therefore risk not recovering the money that they have lent.

Several PSU and private sector banks in India too got aggressive in corporate lending since 2008. This was after risk in personal loans and credit card started surfacing. The government too coerced the PSU banks to lend to their brotherhood in need of funds. What followed thereafter was restructuring of loans as interest costs became unviable. However, most of the restructured loans are now staring at a possibility of write offs. With such high slippage rates, several banks in India, including some from private sector, warrant a downgrade from credit rating agencies. Many have already felt the heat. In such a scenario, capital infusion from the government is only a temporary reprieve. It seems Indian banks will again have to work hard to win back their honour.

Valuation is the key word when it comes to investments. It dictates the time to buy. And equally important, it also dictates the right time to sell. When the fundamentals no longer justify the market price that the investment is commanding, then it is time to sell. This is what seems to be the case for US Treasury Bonds as per legendary investor Bill Gross. He opines that the US Treasury Bonds will no longer see the spectacular bull run that it has seen over the past 30 years. The yields, measured as return divided by market price, are at their rock bottom at present. This shows that the bonds have finally run out of steam. As per him, the bonds may not see a bear phase where prices would fall sharply, but would certainly not see the huge appreciation that they saw in the past.

Statistics is a very concise and powerful tool. It helps to gain a broad understanding of any situation involving a huge amount of data. Governments and policy makers use statistics extensively. Not just in the policy making process but also to influence public opinion. But it is very important to read the fine print before taking any statistical data for granted. For instance, the Planning Commission has recently released data that makes big claims. It says that 50 million Indians moved out of poverty between 2004-05 and 2009-10. In other words, poverty declined by 7.3 percentage points, from 37.2% in 2004-05 to 29.8% in 2009-10. To an undoubting common man, this may seem like quite a noteworthy achievement. But as we mentioned earlier, taking such numbers at face value can be dangerous.

The important question to ask here is: what is the poverty line that has been assumed? Shockingly, the poverty line assumed is even lower than the earlier Rs 32 per day. So you see, just by tweaking the poverty line to their convenience, the government has suddenly reduced poverty. What a miracle, isn't it? But the implications of this will be serious. Because a lot of social welfare schemes are based on how the poverty line is defined. By lowering the poverty line, the government has effectively made millions of people ineligible for such schemes. With inflationary pressures not yet under control, this could probably push certain classes of people on the verge of extreme poverty.

The Indian stock markets finally gained some ground today after ending in the red on previous two days on announcement of a lacklustre union budget. Markets were trading above the dotted line for most part of today's trade. At the time of writing, BSE Sensex was up by 73 points (0.4%). Barring automobile stocks, all sectoral indices displayed positive performance. Asian stock markets presented a mixed picture. China was the top loser while Singapore was the top gainer.

 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

  • Test Your Warren Buffett Quotient Now!

  • Today's Premium Edition.

    Recent Articles

    All Good Things Come to an End... April 8, 2020
    Why your favourite e-letter won't reach you every week day.
    A Safe Stock to Lockdown Now April 2, 2020
    The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
    One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
    A stock with strong moat is currently trading near 5-year lows.
    Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
    This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

    Equitymaster requests your view! Post a comment on "This new threat requires a different policy response". Click here!

    2 Responses to "This new threat requires a different policy response"


    Mar 20, 2012

    Yeah, why not reduce the poverty line to Rs. 0.01 and bring the entire country out of poverty. What a concept? The Rs. 32 per day line in the sand was a joke. Now Rs. 26 per day criteria is a cruelty. Who are these Planning Commission people trying to fool? Montek Singh Ahluwalia has lost all credibility and needs to resign. Maybe we should ask him to live on Rs. 26 for just a single day. Then he'll understand that even Rs. 100 per day is insufficient in Indian cities. This UPA govt is worse than no govt. Now there's a thought...

    Abe Lincoln said :
    You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people's initiative and independence. You cannot help people permanently by doing for them what they could and should do for themselves.

    It's time for ALL POLITICIANS to learn something of real value from honest Abe.



    Mar 20, 2012

    Dear Sir, This govt is thinking that the money in the govt treasury is belongs to the congress party leaders fore father's earned money but not the hard sucked money from the tax payers of this country. They can wish so they can give !! Is it their right to give govt funds to people ditching companies like King fisher airways ? What Vijay Mallya did with the money made out of King fisher? Is this govt encourage or enjoy pouring the money into Bikinis of Kingfisher Calender ?
    Not only this, This govt is wasting the money into neighboring countries like Maldives. There the govt is sucking money and keeping the govt money unaudited out of the books of accounts and diverting into their upcoming elections. So one president is out, and this Indian govt poured another 50 million US Dollars to help the 'bankrupt' govt. Does this govt know how the Indians are treated there like slaves in various departments especially in Education sector? They attacked lady doctors in the night to send them next day to India ! They robbed Indian teachers' houses. When the thieves are roaming around they need to see the thief should agree that he stole the things then only they can punish them. Who is the idiot thief going to say he robbed some ones house ( without using third degree, there is no third degree except to torture the targeted few !) In Maldives teachers and workers earn money to send it to their families in India. But the govt of Maldives puts the ban on sending the money through banks and they limit by so many conditions, they cannot send even half of their money. What this bull shit Indian govt and Indian embassy is doing there?,Just to sleep with high paid salaries made out of tax payers in India ! Instead this govt is giving them millions of dollars? Whose grand property is this Mr.Indian Govt? In Maldives they removed and ill treated foreign principals and they made them as teachers to humiliate them... but our Indian govt is responded with millions of dollars to them !! Whose property do you think ? Don't you need to think how Indian are treated there ! Don't you have to set right the things for Indians who are working abroad to increase per capita income of India. Mr. Indian govt, we feel sorry to suffer this humiliation, Don;t think to bailout such scrap companies or govts like Maldives, It is being thought and being observed by all Indians and we give retaliating reply in elections. Beware , just do change your self and change the lives of Indians living in and out of India.

    Equitymaster requests your view! Post a comment on "This new threat requires a different policy response". Click here!