Investing in India - 5 Minute WrapUp by Equitymaster

Has the government lost its mind? 

A  A  A
In this issue:
» Yet another hike in petrol prices
» 'India has a crisis within a crisis': FM
» Will clearances be sufficient to end the infra logjam?
» Is gold all set for another bull run?
» ....and more!

At times you come across news articles that question your faith in human intelligence. Such was our reaction to Oil Minister, Mr Moily's comments on austerity. He has stated that India needs to curb its oil imports to bring down the current account deficit. Now this statement by itself makes sense. But his method for achieving this makes no sense whatsoever. He has proposed shutting all petrol pumps from 8 PM to 8 AM every day. Seriously? Is this what one of the most intelligent political teams could come up with to get India out of the mess that it is currently in?

India is facing a crisis currently. The economy has been slowing down. Investments seem to be drying up. The rupee has been nose-diving. The deficit situation has been worsening. And in the wake of the higher crude oil prices, it is but natural that the deficit situation would only get worse. Therefore the government has to come up with a solution and has to come up with one fast.

For this the Oil Ministry has chalked out a plan that aims at reducing India's oil import bill. Measures proposed by them include importing more oil from Iran to control our dollar expenses. It also includes embarking on an austerity drive to conserve fuel in the country. Post these recommendations, the Oil Minister stated that he could consider shutting the petrol pumps at night. He immediately reiterated that this is just a proposal as of now.

So if we go by his proposal, India should ideally come to a standstill at night to help India solve its crisis. Going by this someone could also say that lets just shut the government offices to control corruption in the country. Someone else would say let's just shut down India completely to solve all problems. But are these really the solutions to our problems?

The Minister has now stated to a leading television channel, that this proposal is not really the government's idea but one that has come from the public. If that is the case, then how about taking other ideas from the public as well?

The public demands that the government wakes up and acts on policy reforms and actions. The public demands that the government stops wasting our hard earned tax payers' money on foolish populist measures and use that money to build up on the much needed infrastructure, sanitation, etc. The public demands that the government restores investor confidence in the country so that the investment cycle kick starts. This would create the much needed employment opportunity which the youth of India desperately needs. But is the government really listening to the public?

Do you agree with Mr Moily's ideas on shutting petrol pumps to drive austerity? Please share your comments or post them on our Facebook page / Google+ page

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01:10  Chart of the day
Continuing our discussion on the oil bill, the rising crude oil prices have resulted in yet another hike in petrol prices in the country. The increase this time is for Rs 2.35 per litre. This is the sixth hike in the past 3 months. As shown in the chart, petrol prices in the key metro cities now range between Rs 74.17 per litre to Rs 81.57 per litre. The oil companies also plan to increase the price of diesel by Rs 0.5 per litre (excluding local taxes and VAT). Post the revision, diesel prices would range between Rs 51.97 to Rs 58.86 per litre. While the move would certainly help the that have been battling fuel under recoveries thanks to increasing crude prices and falling rupee. But it would certainly add to the woes of the common man as it would drive up consumer inflation in the country.

Source: Economic Times

India's primary problem is not currency volatility. Nor are the ballooning fiscal and current account deficits the only things to worry about. Companies in India are not just frustrated with poor infrastructure and slow moving projects. Investors fleeing the country have more than poor GDP growth and low returns on their mind. India's corrupt, short sighted and unreliable polity has been the biggest disappointment for all stakeholders of India story. In fact the men at the helm of it admit it themselves. PM Manmohan Singh recently displayed his annoyance at how little respect he commands in the parliament. As per Economic Times, FM Chidambaram too has called India's political incongruity 'a crisis within a crisis'. We wonder what is it that took the senior politicians so long to recognize the crux of the problem. Most of the parliament's sessions were wasted on non legislative matters in the past few years. And even during times of economic crisis, hours were spent on issues that can cannibalize votes. The only bills passed - Food Security and Land Acquisition - are expected to do more harm than good to Indian economy. So we completely agree with Chidambaram that India is battling not just the economic but also a political crisis. We wonder of he has any solution for the same!

Under attack from all sides, the Government announced last week that it had fast-tracked approval of a bunch of infrastructure projects running into billions of dollars. The move, it hoped, would help take a few infra projects off the ground and get the economy going. However, will it be all that easy? We don't think so. The biggest hurdle this step would face is financing according to us. Already, the infrastructure is the biggest source of rising bad loans in the financial sector. And thus, expecting the banks and financial institutions to open their purse strings for infra projects and that too in times of huge liquidity constraints like the present one would be too much we reckon. Besides, just getting the go ahead from Government is not enough. There are many more clearances waiting in the wings like the one for environment. And a lot of times months could pass without things moving an inch on issues like these. Consequently, any hope that the Government's latest move would provide support to India's record low growth should be serious kept low we believe.

The relentless money printing unleashed by the governments in the developed world, had led to a spectacular rally in gold. Investors flocked to the precious metal to protect themselves from inflation that was bound to follow considering so much money sloshing around in the system. But the rally then sputtered. Indeed, gold was down 27% from the record set two years ago as confidence in the metal failed. But this is now beginning to change. The latest trigger is the crisis in Syria. With the possibility of a military strike in Syria, there are expectations of disruptions of oil supplies from the Middle East. This would lead to higher oil prices thereby fueling inflation. We believe that this is not the only reason why gold will rally and investors should have some amount of the metal in their portfolio. The Fed might be talking of withdrawing its QE program. But this is easier said than done considering that the rally in the asset classes was a result of this quantitative easing. Meanwhile, governments in other developed countries are bound to stick to their QE programs. This means that even though there might be hiccups in gold prices in the near term, the long term trends still favour a rally in gold.

Here's more proof about India's worsening economic growth. For April-June 2013 quarter, India's Gross Domestic Product (GDP) grew at a mere 4.4% year-on-year (YoY). This is lower than the 4.8% growth achieved in the immediately preceding quarter. And also the slowest rate of growth since 2009. Everything seems to be going the Indian economy. The current account deficit is above sustainable levels. And given that foreign capital is pulling out of emerging economies, we are vulnerable to capital flight. The rupee has tumbled about 16% this year. Inflation is still quite high. The RBI has had to raise interest rates in July to contain inflation and the rupee fall. The high interest rates are putting a strain on investments and economic expansion.

It's turning out to be a vicious circle of high inflation and slow growth for India. There is no quick-fix solution to bring India out of this economic mess. The fact is that Indian policymakers seldom take any corrective steps unless they are pushed to the brink of economic disaster. And then of course, they are left with no alternative but to take the tough decisions. People often credit Manmohan Singh with the slew of economic reforms that brought India out of the 1991 balance of payment crisis. But was it his genius that saved India then? Or were we in a circumstance where we had no alternative but to initiate major economic reforms? In our view, it was the latter. So be prepared for a much bigger crisis before things get any better.

In the meanwhile after opening the day on a positive note the Indian equity markets continue to trade above the bottom line. At the time of writing, the Sensex was up by about 232 points (1.2%) . The other major Asian equity markets closed the day on a mixed note with China and Japan leading the gains while markets in Indonesia and Korea closed in the red.

04:55  Today's investing mantra
"Pessimism is the most common cause of low prices. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." - Warren Buffett
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36 Responses to "Has the government lost its mind?"


Sep 4, 2013

Mr Moily should shut his mouth from 8 pm to 8 am instead !


sumana srinivasa

Sep 4, 2013

I have an idea to make the rupee go back to 50. first stop giving subsidies on all the things weather food ,,fuel, studies, scholarships, anything. & make all the people to pay taxes right from the bottom line up to the politician, and the way it has been spent to be in transparancy. (do not do it in coal type). avoid red tapism .



Sep 3, 2013

I have an idea which can help the country come out of this increasing fuel crisis. The demand of diesel is much high compared to petrol. Thus the amount of loss or fiscal burden that the economy is facing is due to high consumption of diesel. I think the government should hugely subsidise petrol and relax duties and taxes on petrol vehicles. This will make petrol much cheaper than diesel and thus more and more people would convert to the environment friendly fuel. This will improve the imbalance of consumption between petrol and diesel. Diesel consumption is and will always remain high as it’s required by industries, trucks and public transportation. So subsidising diesel will always be a problem for the economy. Government can compensate the loss arising from petrol subsidy from the huge additional revenue generated by not subsidising diesel. Industries and Logistics will transfer the cost of increased diesel price to the people but people will save a lot by subsidised petrol rates as the daily commute cost will go down. This will also become a populist measure, which is ideal at this juncture to retain people’s confidence. I hope will al honesty that this plan will work.



Sep 3, 2013

such casual comment from minister raise serious doubts about the intention and ability of the Govt to handle the current crisis and will weaken the investor confidence in the economy...person at the helm of affairs is expected to be more responsible while making comment in the public...Hope wise counsel will prevail in future..

Like (1)

Gurudas Aras

Sep 3, 2013

The present government has not only lost the direction but now its evident that it has even lost the interest. Its totally foolish to come out with such laughable solutions. Tomorrow they might say that the ATM machines will not operate during night in order to stop slide of the Rupee. Instead of touching the fundamental problems of infrastructure,education and healthcare, the Government is busy wasting money on all populistic measures. First it was NREGA which motivated people not to work, thus creating big problem for the industry and now with Food security bill they make people sit at home and get subsidized food. This way the whole country will become non-productive soon. Does Congess want country go back to 1960s and 1970s just because of their dirty vote bank politics? Such dangerous decisions will nothing but increase the unemployment, corruption and ultimately the tax burden on all those who are productive and efficient while rewarding all the inefficient ones. Earlier this Government is thrown out of power, its better for our country. Thanks to UPA for forcing India out of so called 'BRIC' nations, by doing all wrong things.This time is for mourning the death of our dream to take India to developed nations !! Do not get surprised if UPA comes to power again (which some how they will manage with religion and caste politics).Then we can certainly expect India to slide to 'under-developed'nation category from 'developing' nation status.When all other developing countries like Indonesia, Vietnam, Brazil, Russia are doing all the right things to take their countries ahead, our government is putting all the brains and might to pull it backwards.

Like (1)


Sep 3, 2013

The Loss of mind is not correct but the main & Important aspect is the wasted interest. The simple reason is that the 5% ethanol mixing with Automobile Oils i.e. Diesel, Petrol ( and even 1% in carosin) will save at least 5% of our present expenditure.

But the Strong Lobby of the Babu's, Political Neta's & the strong lobby of the wasted Interest, does not permit the same even the decision was taken long back.

Just imagine the amount so to realize that National Interest is secondary to the Personal Interest.

SWISS black money & taxes there of will also save substantial amount at NICK of time which we needed badly.

Big talks are only to divert the public mind elsewhere.

Like (1)

Tikam Patni

Sep 3, 2013

Utterly as stupid as the food bill...

Like (1)

Jitendra Amin

Sep 2, 2013

Government can not ignore much avoided poor mass of the nation in favour of loudly speaking self centered persons like industrialists who think for their money making projects and expoiting public.Only poor people are extreme sufferers who has no voice.Rich persons should pay
more in favour of poor.Government policy is in right direction.

Like (1)

sunilkumar tejwani

Sep 2, 2013

it's like treating ulcer with superficial surgery. the entire ministry of U P A government appears to be foolhardy. Be it P.C (lungi) , another lungi Veerappa Moily or the Pagdi (watching every scam with a hapless plastic smile) or the armchair economic adviser ( another pagdi) all are a living in a fool's paradise, sooner they are thrown out the better it will be for the country. A strongman from Saradar Vallabh bhai Patel's motherland is expected to do some thing good for the country. for the simple reason: this man means business. W ether recession or boom, the country needs to rid off corrupt and self serving politicians.

Like (1)

joe prakadan

Sep 2, 2013

some steps recommended are:-

1. Put into effect an efficient public transportation system.
2. Educate and publicise advantages of use of mass transportation vehicles instead of smaller vehicles with a bit of co-ordination eg, use of buses instead of cars for marriages/ functions.
3. Use of shared/pooled vehicles by people working in same places/offices.

Like (1)
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