The biggest possible barrier to India's growth

Apr 30, 2011

In this issue:
» Robust auto sales volumes in FY11
» The worrying factor of Gold ETFs
» Concerns on the US dollar intensify
» Corruption in India on the decline?
» ...and more!

----------------------------- Get FREE: The Guide to Gold -----------------------------Will the gold prices keep rising in the future too?

Is it better to invest in gold or stocks? ...

'Gold Bug' Bill Bonner, answers these questions for you in the exclusive publication - The Guide to Gold

Quick! Sign up for our FREE newsletter, The Daily Reckoning and get this Guide FREE!


India has steadily increased its might in the global arena. In the three years before the global crisis and even after it, the country has been growing at a pace that has been the envy of the developed world. With so much more growth potential waiting to be unleashed, foreign investors have been making a beeline towards Indian shores for attractive returns. India's corporate world has also evolved and many companies have become world class organizations with ambitions to become renowned players globally.

Yet, this picture completely belies the state of affairs in India's rural hinterland. There, India's stupendous GDP growth has not made any marked difference to their standard of living. Poverty in these regions continues to remain a disease and highlights all the more the big economic and social divide in the country. One of the reasons that has made India an attractive destination is its so called demographic dividend. The idea is that the young working population will go a long way in bolstering India's growth in the coming years. But there is the other side to the story. One where India needs to actually find meaningful and gainful employment for its ever increasing population. That picture does not look very encouraging.

Take the Mahatma Gandhi National Rural Employment Guarantee Scheme for instance. This is a US$ 9 bn programme designed to create jobs through building infrastructure in a developing India's most-backward rural areas. But it has not really seen the success envisaged largely due to corruption. There are also complaints of new skills not being learnt which would enable workers to garner better jobs and improve their chances of lifting themselves from poverty.

Indeed, India's metros have seen remarkable progress and have led to the rise of the middle class whose standard of living has improved along with the country's growth. But this difference has to be felt in the rural areas too. Especially since it accounts for two thirds of India's 1.2 bn population. Otherwise, India will have to deal with increasing social unrest, which will surely thwart its attempts to take growth to the next level and discourage foreign investments.

Do you think that India's growth is making any difference to the rural areas? Share with us or post your comments on our facebook page.

 Chart of the day
FY10 was a thumping year for the auto industry as sales volumes zoomed. Strong growth was seen across segments - commercial, two-wheelers, three-wheelers and passenger vehicles. This buoyancy continued in FY11 too, as total domestic auto sales volumes grew by a robust 26% YoY. This was led by healthy demand across both urban and rural areas. What is more, this growth was witnessed across product segments as can be evinced from today's chart of the day. That said, although growth has been robust over the past two years, whether this can be sustained going forward remains a challenge. This is on account of rising inflation which has led to RBI hiking interest rates and higher input costs.

* Multi-Purpose Vehicles;
* Commercial Vehicles (Medium and Light)
# Utility Vehicles;
Data Source: SIAM

Gold has seen its prices touch new highs. And along with it the gold Exchange Traded Funds (ETFs) have also seen their prices spiraling upwards. But the rise in prices of the latter has become a cause of concern for all. A large part of the price increase in ETFs is due to the huge amounts invested in them by the hedge funds. And these hedge funds tend to book profits when their targets are realized. Whenever this would happen, it would lead a decline in the prices of these ETFs. The worrisome factor is that the pricing of these ETFs is linked to the pricing of gold. Experts around the world, including IMF (International Monetary Fund) are concerned that any exodus of funds from the ETFs would lead to a decline in the prices of gold. However, the fund houses that have launched these commodity based ETFs have stated that they do have adequate mechanisms in place to prevent this from happening. Even commodity experts feel that any decline in ETF prices would not lead to a decline in gold prices. It is actually the other way round.

The US dollar is now close to slipping to all time lows. It has lost 8% of its value against major currencies this year. Now while this makes goods exported from the US cheaper, this decline has huge negative ramifications for the US as well as the rest of the world. A weaker dollar and the Fed's loose interest rate policy have two major effects.

Firstly, the near zero interest rates have been fueling asset prices across the world. Gold, silver, oil have all hit record levels. It has also pushed up inflation in emerging economies like India and Brazil, forcing these countries to either raise interest rates or to limit capital inflows.

Secondly, a weaker dollar makes imports, including oil costlier for US consumers. Higher input and borrowing costs could hurt demand and economic growth. Either way, the Fed and the US government needs to take a long, hard look at its problems. It needs to slash its bourgeoning budget deficit, and increase interest rates. If things continue the way they are currently, the US will have a long, rocky road to climb back into recovery.

Scams and scandals in India have accelerated in the past one year. Hence, it would surprise some to know that as per CMS (Centre for Media Studies) Corruption Study 2010, there has been a marked decline in corruption rates in India from the levels seen in the year 2005. The study surveyed rural households in twelve states across the country. The results reflect that the households that paid bribes have halved from 56% to 28%. However, the rate is still alarming in states like Chhattisgarh, Bihar, Kerala and Maharashtra. The percentage of households that feel corruption has increased in public services involving the common man has come down by 25% from the levels seen in 2005.

The picture is not all that bright though. As per this study, rural households that access PDS (public distribution system) have declined by 10%. However, the government figures reflect a PDS food grain off take of 90%. This points to the diversion of PDS food grains to open markets despite strict laws in place. Nonetheless, the outcome of the survey comes as a breather. Hit by a slew of corruption scams, the timing for an image makeover for India could not have been better.

It was a mixed week for the world markets as markets in Europe and US closed in the positive while most of the Asian markets closed the week in the red. Germany was the biggest gainer of the week up 3% while China was the biggest loser of the week down 3.3%. European markets were helped by data from the US that consumer spending was up by 0.6%. As a result, the European markets were buoyant during the week. France was up by 2.1% while UK was up by 0.9%. In the Americas, US was up by 2.4% as a result of strong earnings being posted by companies. However, Brazil was down by 1.7%. In Asia, only Japan closed the week in the green (up 1.7%). Singapore and Hong Kong were down by 1.4% and 1.7% respectively. Even the Indian stock markets closed the week in the red, down 2.4% due to persistent selling by FIIs and expectation of another round of interest rate hike by RBI.

Data Source: Yahoo Finance, Kitco

 Weekend investing mantra
"People calculate too much and think too little." - Charlie Munger

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 "The biggest possible barrier to India's growth". Click here!

12 Responses to "The biggest possible barrier to India's growth"

Naushad Patel

Apr 30, 2011

No, the money doesnt get to the bottom, whether corporate or government (whch is siphoned off along the way)
Can you imagine the growth and buying power that would be unleashed if all the money reached???


Mukesh Tandon

Apr 30, 2011

i am a regualar investor in Gold ETF managed by Quantum Mutual Fund. I find that the total AUM of this fund is less than Rs. 300 Million. Will the feared withdrawl of hedge funds will affect a fund of this size too. does quantum have suitable mechanism to protect its investors of this fund

Equitymaster requests your view! Post a comment on "The biggest possible barrier to India's growth". Click here!