India: Motherland or Mafia land?

In this issue:
» Infosys faces a crisis across the 'board'
» Power shortage threatens India's growth
» Food prices push millions below extreme poverty line
» Indian banks tighten lending
» ...and more!

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00:00

The poor pace of infrastructure development in India is a well-known fact. When you look at the scorching pace at which the Chinese economy has developed its infrastructure, you are forced to ask this question: Is it so difficult to build roads, ports, power plants and sewerages? To start with, funds are really not a problem. There is a long line of investors waiting to pour money into India. We have the advantage of a huge unutilised labour force. And we also have the necessary technical know-how and managerial capability. What is lacking then?

Leading economist, Raghuram Rajan has very pertinently nailed the real issue plaguing our country: the murkiness of land rights. We must all agree that in a vast country like India, land availability should not be a problem really. Then what makes the land market so inaccessible and illiquid? For starters, land rights in India are poorly defined. Especially, in the poorest states, land and revenue records are badly maintained. In many cases, it is very unclear who has the formal title to a piece of land. A number of communities, especially the tribal populations spread throughout India, do not have formal title to land but have been customary users of it over centuries.

You may be wondering why the government has not hastened land reforms. Unfortunately, powerful interests who thrive on such murkiness of land rights never want any reforms to see the light of day. This group of powerful 'insiders' includes corrupt politicians, well-connected industrialists, developers and the mafia. They control much of the lucrative land market and make enormous monopolistic gains. As a result, land acquisition for outsiders becomes extremely slow and difficult. This, in turn, slows the pace of infrastructure development.

Now, do you realise the reason for the poor inflow of FDI in India? Do you also understand why only a few insiders grab all the large-scale infrastructure and industrial projects?

So we need some serious "land reforms" to smoothen and speed up the process of land acquisition necessary for creating infrastructure and industries. We need reforms that clarify ownership of land. We need reforms that will bring transparency and liquidity in land transactions. Farmers and tribals should be given their rightful land titles. This will not only make land transactions fair and easy, but will also protect these poor natives from getting exploited.

Actually, the reforms are not technically difficult. What is really needed is political will. And to tell you the truth, we have some classic examples in our own country that prove the point. We'll discuss them in detail in our next issue.

Do you think India seriously needs land reforms to pace up infrastructure development? Share your comments with us or post your views on our facebook page.

01:17		Chart of the day

According to an annual wealth report, China has almost a million millionaires. About 960,000 individuals have personal wealth of US$ 1.5 m or more. The chart of the day shows who these wealthy individuals are. What is interesting is that 20% of China's millionaires are property speculators. China has been bearing the brunt of high inflation for quite some time. Commodity and food prices are rising at an alarming rate. The Chinese government has also been trying to curb the growing bubble in China's real estate market. It has raised the minimum down payments on second home purchases and also hiked property taxes in some major cities. There are clear signs that the inflation is getting very much out of control.

Data source: The China Daily

01:43

IT major Infosys kick-started the result season for the Indian IT industry on a dull note. The company reported a meagre 2% QoQ growth in their sales as well as in net income. The lacklustre performance was mainly due to the decline in volumes. Clients have shortened the tenure of the contracts which has largely led to this decline. However, the company did see its billing rates go up during the quarter. Results have also been negatively impacted by the movement of the rupee against the US dollar. The management maintains its cautious outlook for the future.

On another note, the top management of the company saw an upheaval as its HR director Mr Mohandas Pai has resigned from the Board of Directors. The resignation of another key member would come as a severe blow to the company, which is already trying to look out for a replacement for its Chairman, Mr Narayan Murthy. With Mr. Pai's resignation, the company which was known for its army of industry recognized leaders unfortunately stands at the brink of leadership problems.

02:21

In India, power shortage is something that most industries and residential premises are grappling with. Even the metro cities are not spared from occasional power cuts. In fact, the shortage of power is destined to be the biggest drag on the country's GDP growth. That too, despite having the highest allocation of investments during the 5 year plans. Downward revision of power capacity addition targets is something that the Power Ministry has gotten accustomed to. Execution delays have ensured that just half of the targeted capacities are actually commissioned. But it seems that coal shortages are set to make the sector's future even gloomier. As per the Ministry's latest reports, coal shortages will force the newly commissioned power plants to operate at just 40% capacity. It is important to note that power plants otherwise operate at a capacity utilisation rate of 80%.

In FY11, just 60% of the targeted capacities were put up. But with the coal crisis mounting in the coming fiscal, the FY12 capacity additions may have to be reduced further. As much as the policy makers would want to make 9% + GDP growth projections believable, these facts make the scenario very blurred.

03:04

The seeds of the recent Middle East crisis were sown by the shortage of food and an increase in its prices. But this problem is not restricted to Middle East alone. It is a crisis that is being felt everywhere. What is more, since crops in many parts of the world were damaged by bad weather most notably in Russia and China, procuring food has become an issue. So much so that the World Bank has painted a grim picture by stating that the surge in global food prices has already driven 44 m people below the extreme poverty line. These are the ones who are living on just US$ 1.25 a day.

That is not all. An additional 10% increase in food prices would cause another 10 m people to fall below the poverty line, while a 30% spike would lead to 34 m more poor. Rising oil prices have also contributed to the surge in food prices since producing and transporting agricultural goods has become more expensive.

Further, the linkages between food and oil have become tighter with many countries resorting to using crops for producing biofuels. All this has put pressure on basic food production and could result in more uprisings and crises if not dealt with by governments across the world soon.

03:47

Easy access to credit at reasonable rate is a must-have for institutions in a growing economy. But unfortunately companies in India are neither having it easy nor cheap when it comes to loans. On one hand, the RBI (Reserve Bank of India) has ensured that higher interest rates deter borrowers from taking too much credit. On the other, banks themselves have been wary of lending to risky sectors, prime amongst them being real estate.

Corruption and poor quality of loans in the sector has almost prohibited banks from lending to realty players in the last few months. Sectors like aviation sector and micro finance too have been black listed by the banking entities for their poor fundamentals. But could that mean being conservative at the cost of growth? Even if so, we believe that banking sector is doing no wrong. Instead of being obsessed with high growth rates like China, Indian banks would be better off ensuring a more sustainable growth rate.

04:30

In the meanwhile, the Indian stock markets are trading in the negative zone, after starting the day on a weak note. IT stocks led the decline, with Software major Infosys declaring lacklustre results today. Auto and consumer durables stocks remained flat. At the time of writing, India's benchmark index, the BSE-Sensex was trading lower by about 258 points or 1.3%. Most other Asian indices were also in the red.

04:50

Today's investing mantra

"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger