The clicks that could add to India's GDP

Oct 6, 2010

In this issue:
» George Soros on why the US economy needs more stimulus
» Foreign banks set to double their share in India
» Dubai far more robust than the US
» CWG to add US$ 5 bn to the economy
» ...and more!!

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India has one of the lowest per capita consumption of most goods and services amongst developing economies. Telecom is the only sector where penetration is moving at a fast pace and has touched 60% so far. Bank accounts too have reached just half of India's population. It is even worse in the case of internet, where the figure is as low as 5%.

The causes of low e-savvyness are not difficult to find. Two thirds of India's population that resides in rural areas is increasingly getting familiar to mobile phones. But unfortunately, 84% of them are yet to get introduced to the internet. Infact, not just rural, but also a large section of urban Indians have few means of accessing the internet. Only 4% of Indians owned personal computers in 2009 as against 20% in China. One, computers are yet unaffordable to most low income families. Two, poor wireless connections have been a key dampener. But that does not mean internet has not proven its worth to Indian businesses. Firms offering online travel bookings, recruitment and retail have seen their sales soar in the past decade. Further they are together expected to lock in sales to the tune of US$ 7.5 bn by 2014.

As per the World Bank, the payoffs of higher internet penetration could be exemplary. It states that every 0.1% increase in internet penetration could add 1.38% of the per capita GDP in developing economies like India. The rationale for more Indians clicking on to the world wide web is thus well laid out. However, the pace of growth would be crucial. Only then would Indian companies eyeing a larger pie of the rural market be able to leapfrog their growth targets.

 Chart of the day
An article in Economist details the economic miracle that India has achieved despite bureaucratic hurdles. It stresses on the fact that both China and India increasingly liberailsed their foreign policies, which has been the key to their success in global trade. As today's chart shows, the sharp dip in India's collection of customs duties is testimonial to the country's willingness to import more. This has allowed Indian businesses access to better quality inputs at cheaper rates. Infact in most cases, it has also allowed them to become more competitive in the export markets.

Data Source: The Economist

George Soros. We believe that he is an investor of a completely different stripe. A refreshing change in a world full of quant heavy investors. While we may not agree with most of his views, his thoughts are indeed worth listening to. He gave a speech at the Columbia University recently and as usual, offered some really fascinating insights.

Soros compared the US economy with the skidding of a car. He opined that in case a car skids, we have to move the car in the direction of the skid. And only when we have regained control, we can correct the direction of the car. According to him something exactly similar has to be done with the US economy. The economy is not out of the woods yet. Hence, it will be foolish to do away with the stimulus measures as per Soros. He argued that only when the economy shows signs of recovering should deficit and debt be reduced. He further added that the first stimulus was spent entirely towards boosting consumption and this is the reason it failed.

Hence, he now wants any fresh stimulus to be spent towards building infrastructure and education. Soros believed that the Government would make a grave mistake by not coming out with any further stimulus. Of course, the US would ratchet up more debt if it spends heavily yet again but as per him, premature tightening may choke off the recovery prematurely. And this, he believes, would be a far more dangerous thing to do than taking up more debt.

At the beginning of a bull run, investors buy securities for the right reasons. Towards the end, they buy for the wrong reasons. And if Warren Buffett is to be believed, investors buying US bonds fall in the latter category. He says, "It's quite clear stocks are cheaper than bonds, (so) I can't imagine why anyone would want to purchase them (bonds) now." He also believes the US Federal Reserve's monetary policy will eventually hurt bonds by triggering inflation. He adds, "We are following policies that unless changed will eventually lead to lots of inflation. We have started down a path you don't want to go down." Given Buffett's track record of calling such inflection points, one should be extremely wary of holding US paper at this point.

Foreign banks look all set to play a larger role in the Indian banking industry. As per reports, the RBI will soon come out with a discussion paper that will suggest almost doubling foreign banks' share in Indian banking assets to 15%. Their share currently stands at a little below 8%. To be able to do this though, all new overseas entrants in Indian banking will be asked to incorporate themselves locally. Existing players too will be asked to go in for local incorporation and thus become subsidiaries of their foreign parents. This is as opposed to the current system where they function as mere branches of the foreign banks. Once locally incorporated, they will be treated almost on par with their domestic counterparts in terms of branch expansion.

The RBI has so far been following a restrictive policy as far as giving new branch licences to these overseas banks is concerned. All in all, the banking industry looks all set to have a much larger role being played by foreign banks. Something it has traditionally not been used to.

With the ongoing global crisis, emerging markets are gaining favor over the developed economies like US. Even noted author Nassim Taleb, prefers Dubai over US as the former is way more robust. As per Taleb, Dubai has been borrowing in order to construct fancy buildings. In case of financial difficulties they can put these buildings on hold and stop borrowing. Hence they can easily deal with any adversary situation. On the other hand, US needs to borrow just to keep their daily business running. This is a dangerous situation to be in. When the going gets bad, they cannot cut down on their borrowings and will eventually end up in a mess.

India's much maligned Commonwealth Games will have more to it than its glamorous opening ceremony. As per the government the event is expected to add US$ 5 bn to the Indian economy. In addition it will create 2.5 m jobs in the country. The 71-nation Commonwealth grouping is set to have huge potential in sectors like agriculture and infrastructure. The Indian government is hoping to tap them based on its new-found credibility after the successful opening of the games and its nearly hassle free conduct so far. Given that it has already spent around Rs 115 bn (as per some estimates) on the event, any economic benefit would be welcome. But given the financial stress that sporting events have caused to governments so far, we do not think the CWG will be any different.

After a very strong opening, profit booking in index heavyweights has led the Indian indices to shed most of the gains during the session today. The BSE-Sensex was trading 83 points higher at the time of writing this. Stocks from the FMCG, auto and pharma sectors saw the maximum profit booking today. Sentiments across the rest of Asia was upbeat with China and Japan leading the pack of gainers. European markets have also opened higher.

 Today's investing mantra
"Cash combined with courage in a crisis is priceless." - Warren Buffett

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5 Responses to "The clicks that could add to India's GDP"

April Flowers USA

Oct 6, 2010

Soros is a bit of an oddball, and apparently anti-capitalist, even though the system made him rich. When he speaks of government policy, you wonder about his motives. Destroy the American economy? I do agree, however, the stimulus dollars should be spent on infrastructure. Upgrading is badly needed, jobs would be created, and there is a return on investment, abet many years.



Oct 6, 2010

to make a killing



Oct 6, 2010

It is not just Soros, Nobel Laureate Paul Krugman amongst other economists have been crying at the top of their voices that Democrats should not make the same mistake that their FDR did in 30's, ie pulling out stimulus too soon; instead spend your way till you create sufficient 'employment', to get the US, for sure, out of depression; the generated add on to GDP will payback by way of tax, within few years, wiping out the newly created debts - frankly a simple logic and a very valid one (proven took if one look at what happened to America after World War II!).

Republicans who pampered Greenspan and are responsible for creating this mess, are now sitting on the other side of the fence and preaching austerity and hence contain budget deficit, albeit at a wrong time.

The much touted 'Change' man Obama has turned out to be a man without spine, flip-flopping in and out on any issue be it Gitmo, Iraq, Afganistan, Health care, economy or for that matter favourite pastime of Amrica: 'abortion'. To not have spine and enough votes in Senate too is only a double whammy.

Geithner one hoped will be able to present a case strong enough to Obama (after all Wall St supports it & everyone knows Geithner supports Wall St too!). It is very likely that he had done so; but the Great Change Prez, I am sure is sitting on it. That plausibility is rather confirmed by the absolute silence emanating from the Administration, in response to many voices (voices that count) like Krugman, Soros et al.

May be Obama's administration should learn from our desi scoundrels (I mean our majority MPs some of whom happen to be also Ministers/MOSs responsible for FRBM & such mother-hood and apple-pie matters), as to how to play the austerity calls and continue to spend too! As a measure of austerity, our scoundrels travel by the world's most inefficient and heavy Ambassadors that costs a packet to run more than umpteen other cheaper cars that have come since and I am not even talking about the horrendously expensive bullet-proofed Ambassadors (austerity!?), some of those jokers are entitled to! They took the cake on austerity, the last time they spoke about it in Parliament....within weeks of announcement that all foreign travels will be curtailed etc, as a measure of austerity, they passed a legislation that the MPs can take their spouses (or mistresses, to cater for the male members who have chosen to remain bachelors) and family members on board by air and train & who pays for the 'expenses' falling out of this austerity innovated - you and me from our tax paid!!

Some of the recent time FMs have the nerve to even say that our tax rates are much lower than Sweden, Canada, Singapore etc etc; hold on swindlers...their Govt in return give dependable quality free public health at old age, free education till univ level (desi, sarva siksha abayaan?! - more than half is eaten by the non-academic babudom, that when you open the taps at the school end -if you can call that a school- only paises trickle out...Govt has been collecting by way of Edu Cess for quite a few years as a percent on on all taxes - what is the quantitative and qualitative - dare I say qualitative? - 'asset creation' from that money? Zilch) and incase of Singapore, accommodation in relation to the size of the family in the land starved country etc etc oh! yes, roads w/o pot-holes and overflowing sewers. If we discount their tax rates for what WE DEFINITELY DONOT get, it is easy to see that we are being taxed like hell is much higher than what they pay and of that goes towards carrying the burden of MPs, MLAs, Duplicated ministries and the essential accompanied excess baggage of in-efficient Secretaries and multi-level Babus... Jai Hindustaan!

Tail piece: Outlook (I think) wrote years ago, two tigers got out of Delhi zoo; one said I am going to forest to look for food and the other said, I am going to the City. The City bound big-cat quietly sat under the stair case alternating between North and South block and at the end of every day quietly ate up one babu a day as they came out of their office EOD. After months the two met; the starved lean forest bound cat asked 'how come, did they not chase you' there are so many of them doing nothing that if you ate in small quantity I ate but regularly, no one will even know. The two decided to come back and settle under the stair case of the two 'Blocks' and happily live ever after!!! Administrative Reforms?!... Jai Hindustaan!


Mahendra Nagraj

Oct 6, 2010

Can someone clarify as to how

-- Adding internet connections will increase the GDP
-- How CWG could generate jobs which are long lasting


Sanjay P.Singhania

Oct 6, 2010

It was a great pleasure to read in summarised way of knowledge provided by you, which one must think how much fast home work one has to do to read in short with whole message.
Sanjay P.Singhania

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