India faces challenges bigger than corruption

Mar 29, 2011

In this issue:
» Avoid long-term fixed-income bets in US dollars
» Hotel chains are focusing on reducing debt
» Ninth NELP licensing round displays harsh reality
» Middle East crisis will not spur another crisis
» ...and more!

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Corruption in India has been in the limelight in recent times what with scam after scam being unraveled with constant regularity. The 2G spectrum scam and the Adarsh housing scam among others have tarnished India's image and sparked concerns of investments slowing down as a consequence. But corruption may not be the big problem that India will have to deal with. At least not according to the legendary investor Mark Mobius.

Mobius opines that corruption takes place across countries and not just in India and hence he does not think that long term investments would be hampered as a result. In fact, he is of the view that unemployment, inflation and water are the key concerns for India.

To some extent Mobius is right. Corruption in India is not new with many scandals unearthed in the past too. But India has managed to grow at a healthy pace inspite of it. Unemployment, inflation and water are certainly bigger issues that the government has to deal with. For instance, although India's GDP has grown at a brisk pace, it has not necessarily created employment opportunities as the unemployment rate at the end of 2010 was quite high at 10.8%. And for a country which is largely relying on its demographic dividend i.e. its growing working population for growth, surely unemployment will be a big evil that could seriously dent India's prospects.

Inflation has been a problem for some time now and although the central bank is raising rates to bring it under control, it is not likely to entirely solve the problem. Some long term measures are seriously in order like improving agricultural productivity, investments in adequate storage facilities and the like so that there are no supply shortages. Water harvesting is also another area where India should focus on in a bid to reduce dependence on the monsoons and conserve this precious resource.

Having said that, as long as the government is caught up in scams and scandals, there will be less inclination to do any productive work and so the corruption problem in India at least cannot be entirely discounted.

Do you think that inflation, unemployment and water are bigger challenges for India than corruption? Share with us or post your comments on our facebook page.

 Chart of the day
India has been battling with high consumer prices for quite some time now. In fact, today's chart of the day shows that prices at the consumer level are still amongst the highest in India as compared to its peers both in the developed world and the emerging markets. Although RBI has been raising rates, not much seems to be the effect as prices are above the comfort limits of the average Indian.

*Consumer prices are for Feb 2011 barring India (Jan 2011)
Data Source: The Economist

What is the most basic purpose of investing? Simply put, it is to improve one's standard of living. And for this to happen, it is very important that value of one's investments grow at a faster pace than inflation. Is this true in the case of bonds? Certainly not if the bonds in question are denominated in US dollars. It should be noted that the US economy will keep running a gigantic deficit for quite some time to come. And in order to make up for the same, it will have no other option but to print money. The end result? There will be far greater inflation few years down the line than is the case now. Hence, in such a scenario, long term bonds that pay a fixed interest rate based on the current inflation scenario may not be the best investment to make. It could well be one's ticket to the poorhouse.

Little wonder, even Warren Buffett feels the same way. He has argued that investors should avoid long-term fixed-income bets in US dollars because the currency's purchasing power will decline. "If you ask me if the US dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not," he is believed to have said. He concluded that he would much rather own businesses. Our view too is not very different.

The RBI has tried it 8 times in the last 12 months. However, the central bank's efforts to bring down price levels have not borne fruits so far. Especially when it comes to prices of food products. But speculations over whether the economy is overheating have been put to rest. Dr Rangarajan, Chairman, Prime Minister's Economic Advisory Council, believes that the inflation problem in India is primarily cost based. With investment to GDP ratio of 36%, the economy still has sufficient capacity to enhance production and supplies. What is needed is improved productivity. In a seminar hosted by RBI, the former governor also offered some lip service to the government's view on monetary policies. He opined that higher interest rates are the most ideal way to control demand pushed inflation. Notwithstanding rise in crude prices, he confirmed that India should be in a sweet spot if inflation lowers to at least 7.5% by the end of the fiscal. We truly hope that the economist's optimism bears fruit.

Sticking with RBI's rate hikes, the impact of this move was visible in the downward trend in the share prices of stocks in the banking and realty sectors. For it is not an unknown fact that higher interest rates spell tougher times for these sectors. But there is another sector that was impacted by the higher interest rates. And that is the hotel sector. The hotel sector has typically seen higher levels of debt, especially since the slowdown of 2008. Although things are improving in terms of occupancy levels and room rates, the industry is still cautious in its outlook. As a result major hotel chains have been raising funds in recent times to pay off the debt on their books. The idea is to bring down costs as much as possible. And with rising interest rates, the debt is only becoming more costly. Hotel companies like Indian Hotels and EIH have raised funds through stake sales to pay off their debt. This is unlike the previous occasions wherein companies had raised funds for expansion. Despite the better outlook, companies are holding off or postponing their expansion plans and are opting to clean up their balance sheets instead.

The ninth NELP licensing round has been a harsh reality check for India. Despite crude prices on a boil, foreign firms chose to stay away from the bidding. Even the RIL BP deal could not evoke the interest of foreign firms in India's oil & gas exploration blocks. Well, what else should we expect? With unstable fiscal policies and levy of service tax on exploration, the potential in India's energy sources can never be unlocked. The need for an overhaul in NELP regime can hardly be overemphasized. While the licensing round is already a lost opportunity, hopefully, it will wake up the regulators to sort issues with the Cairn Vedanta deal. But are they listening?

The political upheaval in the Middle East and North African (MENA) region has caught everybody's attention. It even inspired the US and its allies to go on a so-called "humanitarian" war with Libya. And we all know why. Because precious oil is at stake. Nobody would have cared otherwise.

Now let's hear what the World Bank President has to say about this. He says that the MENA region turmoil will not trigger another global financial crisis. As a side note, he adds that the impact will be limited to rising oil prices.

Wow! That's such a sweet logic. Rising oil prices don't matter much really. They only fuel inflation. They only undermine corporate profitability and in turn investments. They just deter consumer spending. And they only add to government deficits. That's all that rising oil prices do. The gentleman is so right in pointing out that there is no threat to the global economic "recovery". How we wish everything was so simple!

In the meanwhile, Indian stock markets have been trading firm at the time of writing, after opening on a flat note. The benchmark, BSE Sensex was trading higher by 140 points. Stocks from the power, consumer goods, and banking sectors were amongst the top gainers, while those from the realty space were at the receiving end. The market sentiments in other Asian regions were mixed with China, and Singapore trading flat. Hong Kong and Japan were trading in the green.

 Today's investing mantra
"When you combine ignorance and leverage, you get some pretty interesting results." - Warren Buffett

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27 Responses to "India faces challenges bigger than corruption"


Mar 29, 2011

Yes, Unemployment and Water are going to be key challenges India will be facing in near to long term.

Actually, even today rain water harvesting as concept is still on paper in all cities. In fact any residential project should not be approved until and unless it proves that 90% of surface water runoff from the area exposed to rainfall in that property will be harvested / saved / utilized.

Also river linking project is of utmost importance in which both centre and state need to do a lot and also the corporate.

Government must aim to reduce unemployment to less than 2% and should work closely with corporate as CEOs salary are too high in India


sn malhotra

Mar 29, 2011

corruption is a root cause for many of India's problems. It saps financial and time resources which can be otherwise productively utilised for fighting/arresting/solving a host of other issues which are symptoms of the underlying malady ie corruption.



Mar 29, 2011

Corruption aggravates the problem. To say that corruption less of a problem is not true because the problem gets more complicated , complex and unmangeable when corruption is on full swing.


Dilip Coulagi

Mar 29, 2011

It may seem that inflation, unemployment and water problems are bigger than corruption, but who can tackle the former? Only a good government can tackle them effectively. And do we have as 'good' governement? Most emphatically NOT. Our netas and babus are interested in only one thing: how much money they can squeeze out of the citizens directly or indirectly. Corruption was not such a great problem in the past, but now it has assumed such dimensions as can no longer be accomodated by the nation's economy without severe damage. When we are harassed by the babus for various amounts ranging from a few thousands to (now particularly) multiple lacs if not crores, and we see the netas get away with loot of untold thousands of crores, it evokes feelings of utter disgust and despair among citizens, who are forced to become corrupt by this neta-babu structure. Hence, corruption is the first problem to be tackled by the citizenry, and the only weapon they have is the vote. If our citizens vote on caste basis, or sell their votes, we can expect nothing better than politicians who care nothing for the Indians, never mind their lip service or sops. We will get the government we deserve; there's no escaping from that.



Mar 29, 2011

in other countries corruption may be there but not to the extent prevailing in India in all most all that should have helped in building infrastructure and thus creating more jobs are stored in vaults in swiss banks.
The traders or middlemen are the chief cause of rising prices much more than warranted.Nobody does anything about them as most parties depend on them for funds during election time.
did you you say raising productivity is one of the concerns? what about protecting the grains already harvested. this year also the govt says they are going to rot.the opposition is not bothered as because of this the traders are going make windfall profits again which in turn means more fund for them.
Shame on Sonia ,PM,cabinet, officials and the opposition to allow food grains to rot when millions of children are undernourished . and I am equally to blame for doing nothing about it except writing comments



Mar 29, 2011

The loot was a couple of lakhs some decades back..and then increased to crores hundreds of crores to lakhs of crores now.The finishing line will be the whole GDP OF INDIA IN THE NOT SO DISTANT FUTURE.One must understand that the buck does not stop here and is a never ending but increasing phenomenon looting the honest taxpayer and increasing poverty which may may eventually lead to a revolt.


Prem Khamesra

Mar 29, 2011

Corruption is next to human nature and has always existed..even in Ramrajya.

Baron Acton famously said:
"Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."

This famous quote can be supplemented easily with: "Proactive people wielding power are generally suspected of corruption and very proactive people wielding absolute power are always accused of corruption. People in power can therefore choose to remain inactive and be seen to be above board or be proactive and be always suspected and accused of corruption."

In today's world of the shrill TV journalist who's always looking for the sensational, the hounding of proactive people assumes special significance.

And in this kind of a negative world all important things rightly pointed out by Mobius assume second seat. It is ironical that we need a foreigner to point this out to us.

We will never be able to eliminate corruption. All that we can do is to create an environment which discourages corrupt practices. And we as a society have to move away from this obsession with corruption reporting.


Digambar Kulkarni

Mar 29, 2011

Unemployment will be the biggest problem of India.
Employment opportunities will have to be created consciously by Govt. The employment should be in providing the basic need services such as food, shelter snd clothing. There will be enough customers for these!
Additional agricultural land must be developed to produce rice, wheat, cotton, fruit and vegetables, cattle, poultry and grass...


T Dasgupta

Mar 29, 2011

I agree with Mobius to a great degree. Many people and organizations have used every piece of bad news over the last three months to spread fear and setup for themselves a scenario to short stocks for gain. If Equitymaster does not protest this, its own integrity is questionable.


Vijay Garg

Mar 29, 2011

Inflation & unemployment are bye products of Corruption which is present in every walk of life in our country. For weeding out this cancerous menace Governance requires radical change by proper education and character building where faith in the nations assets is inculcated in every citizen. The national assets are not for distribution in the form of subsidies / grants / freebies etc as is being promised in election manifestoes of political parties.
There must be exemplary stringent punishment for economic offences / corruption and no person, may he / she be of any status, should be exempt in law for economic offences / corrution.

The water problem can be tackled if the government shows political will and creats infrastructure for 1.connecting various rivers in the country,
2.converting saline sea water into pottable water and
3.creating rain water harvesting infrastructure at every center emulating Princely states who created reservoirs / Baories / under ground water tanks etc during their rein which have now extinguished due to non upkeep / maintenance or other reasons.

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