The big problem that India urgently needs to address

In this issue:
» Demand for gold set to rise
» Bernanke's absurd policies continue
» India to edge China in manufacturing
» Govt. looking to increase healthcare spending
» ...and more! ----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

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00:00

If there is one thing that has been more than amply evident from the global financial crisis and its aftermath it is the adverse impact of having too much debt. This problem was first faced by companies and banks across the world as those whose balance sheets were highly leveraged found themselves at the receiving end. Since then the problem has escalated to one of bigger proportions namely excess debt by governments in the developed world. Already, European countries are reeling from the blow of their debt burdens and the US' inability to cut its debt levels has led to a downgrade of its credit rating.

In such an environment then India's high fiscal deficit becomes a cause for worry. India does have the makings of becoming a fast growing economy in the years to come especially when domestic consumption is healthy and demographic profile is favourable. That is why noted economist Jim Walker feels that these positives could be undermined by the government's failure to address excessive spending and the country's weak fiscal position. Walker states, "We're now in a world where budget deficits are going to be the focus of everybody's attention, especially every rating agency and investor. And India is going in the wrong direction."

There have been structural issues in the spending patterns of the government for quite some time now. Government spending is good but only when it is towards productive areas such as infrastructure, education and healthcare which have the potential to take India's growth level several notches higher. The problem is that too much spending is being diverted towards subsidies, interest payments and government salaries which are doing nothing much other than bloating the government's debt on the balance sheet. The earlier the government realises this and begins to address these issues, the better off the Indian economy will be. Otherwise, the country will be faced with the prospect of low confidence in India's thriving corporate sector and low GDP for years to come. But given that the current government is busy trying to grapple with scams, terrorism and political issues, we wonder if the urgency to reduce debt will be felt now.

Do you think that in the current global environment, India's high debt is a cause for worry? Share with us or post your comments on our Facebook page.

01:26		Chart of the day

Today's chart of the day shows that China and India once again led the pack as far as GDP growth in Q2, 2011 is concerned. Having said that, while the BRIC countries did do better than their developed peers, the pace of growth has slowed down. Most of these economies are battling with high inflation, which has prompted government to raise interest rates which in turn has slowed down GDP growth.

Data Source: The Economist

02:01

Gold has been shining brightly since the dawn of the global crisis in 2008. The yellow metal has seen a surge in both its prices as well as its demand. However, in recent times its demand has witnessed a slowdown. In fact as per the World Gold Council (WGC), demand for gold dropped by nearly 17% YoY during the period April to June 2011. However, the WGC is confident that the demand would pick up by the end of 2011. And this demand would be fuelled by the jeweler consumption in China and India. The two countries account for nearly 55% of the total world's demand for jewellery. With the festive season around the corner in India, demand for jewellery is expected to pick up. Another thing that would help support the demand for gold would be the demand from the investment side. With the global uncertainty clouding world markets, gold still remains one of the safe havens. And this safe haven status would attract investor funds and consequently fuel gold's demand. Hence, we can expect the demand for the yellow metal to shine again by the end of this year. And this means its prices are not going to head south any time soon.

02:32

Unemployment rates in the US do not seem to be getting any better. But as far as the Fed officials are concerned, hopes of economic recovery are not still lost out on them. Ben Bernanke, in particular, continues to support even the most absurd measures for support economic growth. The latest to catch his attention is called 'Operation Twist'! Now before you let your imaginations run wild let us assure you that the term refers to twisting of nothing else but interest rates. Agree that the interest rates in the US are already near zero. Also they are expected to stay close to zero until 2013. So how much lower can they go? Well, Operation Twist suggests that Fed should shift the central bank's portfolio of government bonds to more long-term securities. With this it will have fewer short-term securities in its portfolio. This extension of the maturity profile of US papers will mean a further downward push to long-term interest rates. The same is expected to result in encouragement of economic activity. We do not think that this operation will yield any better results that QEI and QEII. But the US Fed will certainly find more ways to support its faulty policies.

03:16

India is all set to win back the manufacturing territory it had lost to China. The dragon nation is fast losing its competitive edge due to rising labour costs. These have more than doubled during 2003-09 in China compared to a moderate 40% rise in India during the same period. China's one-child policy and the resultant shrinking workforce are to be blamed. This clearly places India at the forefront as no other country has comparable human resources. Steady appreciation of the Chinese Yuan has also made Chinese exports costlier.

India is now more attractive in segments such as electrical goods, household goods and textile. Indian manufacturers are set to get incremental business in both the domestic as well as the foreign markets. This is evident from the fact that India's export of electronic goods surged 56% while its import of Chinese electronic goods fell 32% during FY11. MNCs will also step up investment in capacity expansion in India. Manufacturing growth in these sectors and the related vendor eco-system will lead to overall economic development and more revenues to the exchequer. While it is still pre-mature to quantify the benefits, it is nevertheless news to cheer for India Inc.

03:47

According to a study by World Health Organisation (WHO), India ranks 171 out of the 175 countries in the world in public health spending. This is even lower than some of the sub-Saharan African countries. While India ranks among the top 10 countries for communicable disease, it is today the world leader of chronic diseases like diabetes, hypertension and coronary artery disease. Per capita health expenditure is about US$ 32 in India compared to around US$ 4,590 in rich countries (more than 140 times) which is abysmally low. In the light of these facts, being the world's second most populous country, India has been increasing the allocation for healthcare for its population of over 1.2 bn over the years. Despite these efforts the spending for healthcare remains minuscule. The Government of India hopes to reverse this trend and increase spending on healthcare to 2.5% of GDP in 2012 from the current 0.96%. The contribution of healthcare sector to GDP as well as towards employment is significant and it is one of the largest service sectors of the economy. So far the onus of providing quality healthcare has fallen on the private sector which has done an admirable job, but the government on its part too needs to seriously deliver on the execution front.

04:11

Global stock markets plummeted this week on account of rising concerns about the debt crisis in Europe. It is being said that the crisis in Europe is similar to the 2008 crisis that engulfed the US and along with it the entire global economy. Greece in particular is facing recessionary conditions. The speech of the Greek Prime Minister regarding economic policy and the G7 meeting will be the ones to watch out for going into the next week. Barack Obama's announcement of US$ 447 bn plan to boost employment did not help matters and the US markets saw its sixth weekly decline in the last 7 weeks.

Indian stock markets managed to stay afloat and notched marginal gains of 0.3% during the week. Heavy buying was witnessed in consumer oriented sectors. The world markets fell but in varying proportions. Germany (down 6.3%) and France (down 5.5%) were the top losers.

Source: Yahoo Finance, Kitco

04:56

Weekand investing mantra

"The intelligent investor is likely to need considerable will power to keep from following the crowd." - Benjamin Graham