One unseen risk that can hurt your investments

Mar 22, 2010

In this issue:
» Runaway fiscal deficits worry Roubini
» A big source of money exists in India
» Oil trading patterns parallel Asia's rise
» Has the RBI delayed the rate hike?
» ...and more!!

What's that unseen risk that can hurt your stock market investments? Not bad stocks, or rising inflation, or a weak economy. It is demographics. Yes, you read that right! Favourable demographics - large proportion of working age population - is cited as one big advantage India has over other fast growing economies. But this very advantage can turn into a weakness and cause damage to 'India growth story' as many like to term it. This is if the thousands of youths that pass out of hundreds of India's colleges every year do not get proper employment.

Ajit Dayal, our founder, who recently spoke at the Equitymaster Investment Summit 2010, pegs the requirement of daily job creation at 27,700 per day for the next 10 years!

Now, this is a risk that doesn't make it to headlines, and it is most certainly not a breaking story on the news channels. But nonetheless, it's a risk that is as real and grave as risks can get. And it holds the potential to throw all your investment calculations out of order.

And if is not taken care of, India can potentially have an astounding 100 m unemployed youths by 2025. The amount and the pervasiveness of problems this can create is huge. This is because it is this section of the society that is most vulnerable to getting into antisocial activities if their energies and capabilities are not directed productively. And that stratum of our population, which could be one of India's greatest strengths, can very quickly turn into its nemesis. Yes, extreme social disorder can be overwhelming!

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 Chart of the day
If the proportion of women in a country's parliament is any indication of their rising stature in the society, Indian women have a long way to go. This is considering that only 11% of India's parliamentarians are women. As compared to this, 20% of Chinese parliamentarians are women. The recent passage of the women's reservation bill is thus seen by many as a way to empower more women to reach the pinnacle of Indian politics.

Source:, CNN;
Note: 2010 data for India, 2006 for other countries

"Runaway fiscal deficits worry me," says Nouriel Roubini, one of the few economic experts who predicted the global financial crisis. Roubini is worried about the way the US government and central bank is printing money on its way to fund the recovery process. "If we cannot raise taxes or cut spending, the path of least resistance is going to be running the printing presses," he told an international news channel. But then, he also agrees that there is possibly no other means of taking the US economy out of a recession. A Catch-22 situation, we must say!

Now this is something quite interesting. Do you know that a very big source of money exists in India? It is so big that it could fund the doubling of India's power capacity without breaking into too much sweat! Alternatively, it could create India's current cement capacity six times over and still have some money left with it! We are referring to the Rs 7.5 trillion windfall that could accrue to the Government by way of tax income. Income that the Government would generate if all the 'black money' in India is declared as legitimate earnings by individuals and companies.

As per a leading daily, the size of the black economy, comprising fake and counterfeit products, smuggled and pirated goods and things like bribery could easily run into 40% of India's official GDP estimates of around Rs 62 trillion.

Thus, if all of it is taxed at around 30%, it could generate tax revenues of Rs 7.5 trillion as mentioned earlier. This could then be used by the Government to build infrastructure in the country or to expand its welfare schemes. However, what has already gone looks like gone forever as it will be very difficult to retrieve the same. But the Government could indeed try and contain the spread of black money in the future. It is believed that the implementation of goods and services tax, which will soon become a reality, will go some distance in addressing the problem. If it does indeed succeed in its objective, the long term case for India would receive further boost.

The oil industry has been a good chronicler of world history. From the birth of the industry in the US, which went on to become a superpower; to the decline of the British presence in the Middle East as its reign as the premier imperial power ended. Today, the Asian giants - China and India - are on the ascent economically and sure enough politically. Naturally then, this shift in the global power structure is reflecting in the oil industry.

As per a leading daily, last year, Saudi Arabia exported more oil to China than to the US. In fact, the company has stopped the practice of selling oil to American refiners for about US$ 1 per barrel less than to Asia. Also, after Prime Minister Dr. Manmohan Singh's recent visit to Saudi Arabia, the latter outlined a goal to double its exports to India. As the head of Saudi Aramco, perhaps the single most important oil company in the world, says, "The writing is on the wall. China is the growth market for petroleum." Oil trading patterns have paralleled the rise and fall of nations. Maybe the recent patterns indicate the beginning of the Asian century.

Markets may be worried about the central bank's cautious stance on interest rates. But if economists are to be believed there is a lot more tightening on the cards. In fact, the Wall Street Journal almost accuses the RBI of delaying the rate hike for too long. So much so that price rises in food and fuel will continue to affect consumers for quite some time.

The recent CRR hike and repo hikes may not seem meaningful, if one takes into account the current interest rates against the historical highs. However, the RBI as well as the government has been wary of hurting GDP growth rates so far. We believe that while the RBI's monetary tightening has most often been well timed; it cannot be alone when it comes to managing price levels. The government needs to offer its due support and go beyond making projections.

In reaction to the RBI's latest interest rate hike, Indian markets saw some volatility since the start of trade today. At the time of writing this, the BSE-Sensex was trading down by around 85 points (0.5%). Rate sensitive sectors like auto and realty were at the receiving end today. As for the other Asian markets, apart from marginal gains in China, markets like Hong Kong (down 1.8%) closed in the red.

 Today's investing mantra
"Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator." - Peter Lynch

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9 Responses to "One unseen risk that can hurt your investments"

Dr R Kapur

Mar 24, 2010

Another great danger is the social unrest and breakdown of law and order due to unequal distribution of wealth and rising unemployment in youth. The rising prices of food, fuel and fertilizers - advocated by Montek Singh Ahluwalia - without addressing distribution issues will be detrimental.



Mar 22, 2010

India has survived the recession only due to the black money which is freely available with our politicians and rich industrialists and corrupt government servants.
Nothing to do with Government. If we bring back the black money kept in swiss banks etc. India will be the leading economy in the world and there will not be any beggars in this country.The article is a real eyeopener.


Prem Khamesra

Mar 22, 2010

I agree with Mr. Dayal about Black Money but do not agree with the solution. Raising taxes by legalising black money is not a good solution.
1. This pre-supposes that an intention to pay taxes exists. It is not correct. The intention to pay taxes does not exist else a major part of the black money would not have come into existence at all. A solution must address this psychology.
2.Whether ill-goten or hard earned nobody wants to part with money, that too, for making it reach the Government.
3. The holder of blacker part of black money i.e. black money which has come from crime, corruption, etc., would never like to come to limelight by declaring his ill-begotten wealth.
A better solution would be to provide for a blanket exemption to sectors which require huge outlays like the power sector from any kind of verification/ investigation into their source of investment. Let all holders of black money put it entirely into an investment of national importance.



Mar 22, 2010



Mukta V

Mar 22, 2010

27000 jobs per day!!!!! Will our government and the politicians ever realise the implications. It is as serious as H1N1 hitting India. And if the unrest spreads it will really lead to a total chaos.



Mar 22, 2010

The urgent need for initiating requisite measures for tackling some of the prevailing major unfavourable factors like the alarming growth of unemployment and the large-scale accumulation of black money by some individuals and companies, which are proving to be the stumbling blocks to the India's growth, has been superbly highlighted in the day's write-up. There is a timely caution to the investors too.



Mar 22, 2010

sensex will cross 21,000 till june 2010,the article of mr ajit dayal,what he is predicting now or still sensex will cross 21000 till june 2010,he still stand with his prediction,than market must move above 1000 every month for next 3 monthes,what investores should do now ,go long on large cap ,midcap and small cap stockes by buying s and p cnx 500 index fund?


s shanthi kumar

Mar 22, 2010

The report is really an eye opener.I completely agree that the performence of the governament must be measured on the number of jobs created for the new generation.


Vijay B ( Dubai)

Mar 22, 2010

Completely agree with Mr Ajit Dayal, goverments should be measured on this count - employement generation.

High unemployement is a terrible curse for society, the consequences of which can lead to chaos.

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