Rs 6 trillion stimulus may never be withdrawn

Dec 26, 2009

In this issue:
» Indian companies favour QIPs over foreign debt
» India may soon lose its dominance in voice based BPO
» CEOs of bailed out firms are still earning billions
» Navratnas set to become "Maharatna'
» ...and more!!

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That India has one of the best demographic advantages heading into the next couple of decades is now perhaps well known and extensively documented as well. And when you talk about this advantage, one tends to think about higher productivity nine times out of ten. What escapes one's attention is the fact that this advantage coupled with an age old Indian tradition is also capable of injecting some pretty big dosages of economic stimulus for a long, long time to come. And this is no ordinary stimulus.

As per a leading daily, even a conservative estimate of this stimulus could make it the fourth largest contributor to India's GDP. The stimulus that we are referring to is nothing but a collective muscle of the big, fat Indian weddings. With nearly half of the country's population below the marriage worthy age of 29, the wedding scene in India is likely to be a huge beehive of activity for many years into the future. And since a good part of an average Indian's wealth is spent towards wedding, this could easily translate into an economic stimulus to the tune of Rs 2 trillion to Rs 6 trillion. Thus, while experts may play a guessing game over whether India's Finance Minister may roll back its economic stimulus or not, this is one stimulus that they can happily count upon year after year.

 Chart of the day

As per the international statistics on internet usage, the internet penetration in the world is currently 25%. But do not dismiss this considering it a paltry number. Internet penetration has nearly quadrupled in 2009 and the maximum growth has come in from Middle East and Africa. Thanks to their population, at 43% Asians are the maximum users of the World Wide Web. But these are not mere statistics. They are having implications on businesses as well. While internet is without doubt the cheapest and most convenient means of disseminating information, the same is radically changing reading habits. As per Economist, the sale of electronic books is also expected to triple from 5 m units in 2009 to 15 m units by 2011.

Data source: The Economist

Funds raised by Indian corporates through depositary receipts have jumped from US$ 100 m in 2008 to about US$ 3.4 bn this year. Thanks to relaxed regulations and cheap liquidity abroad, money raised through external commercial borrowings was to the tune of US$ 9.4 bn until November 2009. But do not delude yourself into thinking that this route has been the most favoured among Indian corporates. Infact, the mode of fund raising that has caught the fancy of India Inc. are QIPs. There are many reasons for the same but the one that tops the list is the volatility in the rupee dollar exchange rate. A shift towards rupee-denominated funds and easing of QIP issuance are some of the other factors that have tilted the balance in favour of QIPs. Not just that, by opting for QIPs, companies can get larger amounts sanctioned by the board and raise the money in parts. Fathom this. The private sector raised Rs 325 bn through QIPs this year. This resulted in mark-to-market returns of about 15.8%, amounting to Rs 377 bn. Volatility has persisted in the currency markets for some time now. Therefore, it is hardly surprising that stability in raising funds seems to be the buzzword now.

Data for External Commercial Borrowings in 2009
Data source: RBI

World's back office, that's what India has been proud to be called for years now. A multitude of Indian youth all sitting in fancy offices, talking to clients around the world. This has been a typical scene of the India's sunshine BPO industry. But India's dominance in the world's voice based BPO market is slowly phasing out. Philippines, one of the largest English-speaking countries in the world, is quickly gaining prominence, challenging India's leadership position in voice-BPO. The country is finding favor because of better English accent as well as a time-zone which is more suitable for the US which accounts for 50% of the world's BPO. Not to forget the age old Indian problem of inadequate infrastructure. Arrangement of transport and security for employees, power backup in offices to take care of frequent power cuts etc are everyday problems for the BPO setups. Given the Indian English skills, the clients ignored these issues. But no longer!

Philippines, which is better placed with all this infrastructure, is offering better voice services at the same price. No wonder then companies are setting up shops there and India is losing thousands of BPO jobs. An attrition rate of over 25% is also of not much help. We believe that this complacency with respect to the quality of services as well as infrastructure will not do any good to the Indian BPO sector. It is high time efforts are made to contain the exodus of clients to other destinations.

Freddie Mac and Fannie Mae received a drubbing last year when the global financial crisis escalated. What is more, the companies' performance this year too has not been much to talk about. And yet, the CEOs of both these companies are likely to pocket a salary of around US$ 6 m for 2009.

The credit crisis had resulted in both Freddie and Fannie needing a gargantuan US$ 111 bn in taxpayer money to keep their heads above water. Not just them, the top honchos of some well known financial institutions had pocketed big pay packets despite the fact that they were bailed out by the government. Following intense criticism, the Obama administration had to put a cap on the salaries that top executives receive. Since then, many of these companieshave opted to pay back the bailout money so as to escape the salary constraints placed on them.

As per the board of Freddie Mac and Fannie Mae, it would be difficult to attract people to head these two troubled companies. And in that sense the high pay packages are justified. But both the CEOs then would have to reverse the fortunes of their respective companies to justify the salaries accorded to them.

Indian government owned enterprises are not particularly known for good business decisions. That is because they hardly have any independence in decision making. Most of their corporate decisions are the outcome of the government's social welfare and political inclinations. Be it PSU oil marketing companies or PSU banks, most of their books are riddled with subsidies and the resultant losses thanks to the government's generous streak. However, few PSUs have managed to overcome this limitation and are set to reap the benefits of the same.

As per a leading daily, 3 'Navaratna' PSUs, already the cynosure of the government's eyes thanks to their competitiveness to private counterparts, are set to become 'Maharatna'. What this means for them is that they get greater financial and operational autonomy. The entities to be bestowed this honour are - ONGC, SAIL and NTPC. Of the 18 Navaratnas, these 3 met the stiff criteria set by the government. This included a three-year track record of annual net profit of over Rs 50 bn, net worth of Rs 150 bn and turnover of Rs 250 bn, besides being listed entities on the bourses. The coveted status empowers these entities to take investment decisions up to Rs 50 bn as against the present Rs 10 bn limit without seeking government approval.

The Indian benchmark index - the BSE-Sensex ended the week higher by 3.8%. This was after a dismal performance last week when the index saw a decline to the tune of 2.3%. As far as global markets are concerned, the general optimism that the global economic recovery is strengthening seems to have spilled over to markets across the world. The UK markets led the gains this week, with its index ending higher by about 4%. After India, next in line were Japan and France, which ended higher by about 3.5% and 3.1% respectively. Most markets were propped up by technology and commodity stocks, which rose on the perception of a better outlook for a recovery. After last week's dismal performance, the Chinese and Brazilian markets once again found themselves at the bottom of the heap, rising only 0.9% and 1.2% each.

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

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7 Responses to "Rs 6 trillion stimulus may never be withdrawn"

Afroz Qamar

Dec 28, 2009

good one..very fruitful and up-to date information. It was also interesting to read


Prem Singh Dhankar

Dec 27, 2009

Looting public money by the in-charge is a phenomenon, seen ever-since the start of human race- nothing new, only size and boldness has increased.
Can we have some more Mr. Pandits to reduce this?
Another thing, no one seems to realize is that FIIs have gradually put in lots of dollars in indian market-do not know if there is repeat of jan 2009 in jan 2010- as for sensex is concerned!


m. bersohn

Dec 27, 2009

Alas, it's true, the quality of English pronunciation among Indian people, on the phone at least, is regrettably
poor. Also the writing is sometimes defective. For example no distinction is made between "few" i.e. "not many" and "a few" i.e. "some". That's a standard error. All of this can be and hopefully will be corrected. I doubt if pronounciation of English by Chinese people is superior to that of Indians. Bottom line, I prefer to outsource to India, but ...



Dec 26, 2009

Very crisp.timely and indepth brief of important economic developments and indicators. Keep it up!


Abhay Datar

Dec 26, 2009

This refers to the article on Freddie Mac and Fannie Mae whose CEOs have pocketed salary more that what they deserved. As was published in the newspapers sometime back, Mr. Vikram Pandit of the Citigroup has voluntarily accepted much less salary. And there was another news recently, that the Citigroup has paid its first instalment to the US government by strengthening its financials. I feel proud of Mr. Pandit who has set a path towards dignity and self conscience.


Sritanu Chatterjee

Dec 26, 2009

Dear Sir,

I very much agree , that India may lose its prominence as the back office of the world. That is also true in other spheres of India's economic success. Good English which has brought India as a nation to the global limelight is also becoming a major factor in sustaining India's economic prospect. A report by British Council of India comes out with some eye-opening facts in its report "English is India's passport to economic success". I will also like readers to refer to two recent articles in Financial times. One of them is "The march of English yields surprising losers" by FT columnist, Michael Skapinker and the other "India losing English advantage to China" by FT Asia Pacific correspondent Alexandra Stevenson.

With this I would like to wish a Happy New Year to everyone in Equitymaster and other fellow readers of The 5 minute wrapup.



Adv. Raja Ratan Bhura

Dec 26, 2009

Awesome Report....

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