Inflation at 2,000,000% & more...
In this issue:
» High inflation in India, and in Zimbabwe
» Pay commission's recommendations to hurt fiscal deficit
» India policymakers' wishful thinking
» Economic benefits of industrial development
» and more...
00:00 |
Inflation at 12.44% is high... |
As was announced late last week, India's inflation (as measured by the wholesale price index or WPI) climbed to its 16-year high of 12.44% for the week ended August 2. This rise in inflation was on the back of soaring prices of commodities like pulses, fruits, spices and aviation turbine fuel. In fact, the fuel price inflation stands at 17.99% (-2.1% same lime last year).
All this gives the Reserve Bank of India (RBI) little choice but to raise interest rates further, the timing of which is still uncertain. The RBI has already raised interest rates three times over the past three months, with the last rate hike happening in July when the central bank raised its benchmark rate (repo rate - rate at which the RBI lends to banks) by 0.5% to a seven-year high of 9%.
Also read - RBI's lethal strike
00:51 |
...until you read this! |
01:13 |
Graham's value in Asia |
Bloomberg suggests that the decline in Asian stocks, spurred by the fastest inflation in a decade, the biggest increase in commodity prices in three decades and rising borrowing costs, have reduced share prices in the MSCI Asia Pacific Index to 13.9 times trailing 12 month earnings, the cheapest in at least 13 years and the lowest versus the Standard & Poor's 500 Index since 2002. Further, lower exports from Japan and Singapore and the collapse of the US mortgage market - saddling the global financial industry with more than US$ 500 billion in credit losses, led to apprehensions about the stability of the Asian markets.
Also read - Lessons from Graham's favourite student
Another reason why global investment firms are finding value picks in Asia attractive is because Asian financial firms, which have accounted for less than 5% of global credit loss, slid 25% this year, the biggest drop among 10 MSCI Asia Pacific industry groups. Not to mention the fact that this includes many of Indian financial sector behemoths which have lost nearly half of their market capitalisation since the high of January 2008. To put things in perspective, in Asia, foreigners have sold more than US$ 69.4 bn worth of shares since the start of this year (including US$ 6.5 bn net FII outflows in India). As per Bloomberg records, the sell-off has reduced the prices of Asian financial stocks to 12.6 times average earnings, which is 77% below financial stocks in the S&P 500. The difference is the biggest on record going back to 1995. So much for value!
01:55 |
In the meanwhile... |
In a major political development in South Asia, Pakistan's beleaguered President Pervez Musharraf has announced his resignation in the face of an impending impeachment motion by the ruling coalition government. Incidentally, as reported on Reuters - "investors in Pakistan's financial markets while appreciating Musharraf's investor-friendly rule which until this year saw strong growth and surging stocks, were expected to welcome his resignation as heralding an end to political uncertainty."
02:20 |
Will a bang follow this buck? |
Most of the economists agree that these wage hikes would not really impact inflation, which has touched 12.44%, in a big way as the latter has been largely driven by supply side factors. However, a burgeoning fiscal deficit is likely to put pressure on interest rates. Given the rising inflation, interest rates and likely slowdown in growth, an expanding fiscal deficit will only compound the government's woes further.
And, by the way, is anyone talking about improving the productivity of employees directly benefiting from the pay commission's recommendations?
03:02 |
Easy recommending, hard implementing |
It has also recommended that refineries should sell petroleum products to the marketers at export parity prices (i.e., excluding elements like freight, customs duty and insurance) rather than at trade parity prices. The oil minister has scheduled a meeting with the chiefs of the PSU refiners to discuss how, if at all, these recommendations can be implemented.
We believe that oil price hikes are not realistic at this point in time. With inflation crossing the 12% mark and state and national elections looming large, higher fuel costs would be politically disastrous for the government. It is another matter that the enormous subsidy burden threatens to derail its fiscal plans. It is likely that economics will play second fiddle to politics and the recommendations will not be implemented.
Also read - Fuel price hike: Impact on OMCs
03:41 |
Economic benefits of industrial development |
However, a recent report in one of India's leading business dailies is likely to provide much needed relief to the people who have fought against all odds to ensure that the project remains in Singur. As per the daily, first signs of economic benefits to the residents are already visible with quite a few people going on record to state that their lives have indeed improved for the better. Some of the youths in the town have also enrolled for special training courses provided by Tata Motors and have been absorbed by the company. Many more jobs lie in store once the ancillary units of the company are ready to roll. Citizens are also benefiting by way of the indirect benefits like higher rates for land, more mouths to feed and hence more income for roadside vendors, etc. Its time many more companies and politicians take a leaf out of this and ensure that there is a trickle down effect of the economic growth that is sweeping across India currently.
04:34 |
Weaving nuclear dreams |
In fact, India's state-run monopoly nuclear power generator, Nuclear Power Corporation of India Ltd., has already chalked out a plan for augmenting its generation capacity. It has identified sites in four states - Gujarat, Andhra Pradesh, Orissa and West Bengal - for setting up eight reactors of 1,000 megawatts (MW) each. The company has short-listed global players such as Westinghouse Electric Co., General Electric Co. and Hitachi Ltd., Areva SA and Rosatom Corp. for supplying reactors.
04:56 |
Today's investing mantra |
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