When fancy trillion dollar planning goes awry...

Dec 28, 2011

In this issue:
» Examples of how businesses should not be run
» Wall Street finally sees a correction of its own
» Not so good signs for Indian property market
» What high rates on NRI deposits will achieve
» ...and more!
-------------------------------------------------------- India In Crisis --------------------------------------------------------

The Indian Economy has hit a rough patch. And based on media reports it almost seems certain that our future is doomed!

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The whole idea of a plan is to enumerate a list of steps keeping in mind the resources in hand with a specific timeline, all with the purpose of achieving a stated goal. Now although the Indian government has been coming out with its 5 year plans as regularly as clockwork, meeting the objectives stated in these plans has been largely lackluster. But this time it seems to have gone one step ahead. It is December 2011 and the 12th Five Year Plan should have been ready by now. But it appears that there are some hiccups in this. So let alone not sticking to objectives of its plans in the past, the government has not done its homework in planning out the draft of its 12th Five Year Plan in the first place!

And so, more than 4 years in the making, and barely any days left before it become officially published, the Planning Commission is unhappy with the way the document of the 12th Five Year Plan has turned out. The Commission feels that the plan is neither credible nor compelling enough as a masterplan for India's medium-term future. The problems stated with it are that it reads like any other plan and has failed to address the goal of ensuring that all ministries and agencies work towards achieving certain common goals. Given that billions of dollars of investment will depend on the 12th Five Year Plan, maybe it is not so bad if the government decides to review it. But it should have been done before with plenty of time to spare.

This hardly reflects well on India. At a time when the Indian economy has been slowing down, rupee sliding fast and reforms put on the back burner, this was atleast one area where the government should have pulled up its socks and delivered. But the apathy does not seem to have an end. The economic landscape in India and abroad has undergone a sea of change in the last decade. And in such a scenario, it is important that the government is dynamic and nimble footed with the ability to adapt to these changing circumstances. And this approach needs to be applied in the planning process as well. What worked well in the past is not likely to have any importance in the future. And the 5 Year Plans with its objectives and goals need to highlight these. Otherwise, these will turn out to be just another set of documents in India's ever expanding bureaucratic set up.

Do you think that the Indian government will be able to do something different in the 12th Five Year Plan? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
China and India may be the fastest growing economies right now despite the slowdown. But if one compared industrial growth in both these economies then the difference is stark. As today's chart of the day shows, India's industrial growth in October 2011 slipped into the red, while China's still managed to log in double-digit growth. It must be noted that industrial production in India had slowed down in September as well and this latest poor data only confirms fears that India's growth engine is slowing down. The Reserve Bank of India (RBI) for its part paused its rate hiking measures with a possibility of cuts in the future. Whether that will do much in fuelling growth again remains to be seen.

Data Source: The Economist

Trust the RBI to be discreet in its actions. Until a few days back, the economic experts and government officials were falling over each other, trying to place the blame of depreciating rupee on the central bank. It was not until recently that they realized that stalling the rupee's fall against the US dollar with the use of forex reserves would have been a vain attempt. However, the RBI on its part allowed banks to make deposits for nonresident Indian more attractive. This, albeit for a temporary period, would make up for the flight of dollars from the country. Banks like HDFC Bank, Yes Bank and some smaller entities have responded with very attractive rates on their NRI deposits. However, the question now emerges is whether it was correct on their part to do so. Besides the fact that NRI deposits come cheaper than domestic deposits of the same tenure, banks not just look for such funds to serve the purpose of float. Instead using the savings account as bait, fee income from wealth management services and the like are important revenue boosters for the banks. Hence we do think that the banks have not done their math when it comes to pricing the NRI deposits. As to whether the scheme will stall the fall of rupee for a prolonged period? Well, that is something we are not sure even the RBI can answer.

If it is a business, it has to be run with the intention of making profits and not end up being a mere puppet in the hands of the Government. No better example of this can be found perhaps than the state power utilities. On the contrary, these firms are just the ideal way to know how a business should not be run. Whatever wrong can be heaped has been heaped upon them, right from power theft and technical losses to billing inefficiencies and an inability to pass on rise in costs to the end users. The result being huge accumulated losses and severe cash flow problems. Amidst all this though, there has emerged a small glimmer of hope. State owned lenders like Power Finance Corporation (PFC) and Rural Electrification Corporation Limited (REC) are no longer willing to lend to these loss making entities unless they seriously take up some long pending reforms. However, doing this would be akin to implementing some harsh steps, most of which would be detrimental to the end consumers. Thus, we should brace ourselves for a strong inflation in our monthly power bills.

If you recall some years back, investment banking was one of the most enviable profession one could have had. In fact, some of the best minds from top notch global institutions such as Harvard, Princeton and Yale all went on to grab the seemingly lucrative career opportunities on Wall Street. But this picture seems to have had a bad ending. Things have turned extremely sour on Wall Street thanks to the series of crises that have engulfed the global financial markets in the last few years. The belt of regulation is getting tighter on Wall Street. Firms will now be required to increase their capital, curb risk-taking and reduce their principal investing. Not allowing investment banks to make propriety bets would severely impact their revenues and profitability. In other words, the casino is slowly shutting down on Wall Street. We view this development quite positively. After decades of excesses and recklessness, Wall Street is finally going through its own correction. We wish it sanity for the years to come.

Apart from being need driven, real estate demand is also speculative in nature. For instance, demand in metro cities is somewhat speculative as people buy properties in anticipation of rise in prices. Speculative buying can lead to divergence from fair value as excess liquidity chases the inventory. And whenever there is a deviation from fair value, it gives us an indication that a bubble is just around the corner.

We know that prices of real estate in major cities are at an all time highs. But since the demand has started waning due to affordability factor the volumes have dried up. As a result, all the speculative long positions have become virtually illiquid. Further, even builders are facing severe cash crunch and it appears liquidating inventory at lower prices is the only solution as other sources of finance are virtually non-existent. Now if the builders lower their prices, the speculative longs will also flood the markets to exit their positions so as to save themselves from any losses. This can have huge repercussions on the property market as demand/supply mechanics would change drastically in a short span of time. Indeed, these are uncomfortable yet welcome signs for the property market of India.

In the meanwhile, the Indian stock market indices opened the trade in the negative and added to the losses as the day progressed. At the time of writing, BSE Sensex was down by 135 points (0.8%). Barring power and IT stocks, all the sectoral indices traded weak. Asia represented a mixed performance with most of the indices trading weak. However, China (up by 0.2%) and Malaysia (up by 0.3%) could manage some gains.

 Today's Investing Mantra
"If you want to have a better performance than the crowd, you must do things differently from the crowd." - John Templeton

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3 Responses to "When fancy trillion dollar planning goes awry..."

Tikam Patni

Dec 31, 2011

Indian Government has been reduced to Sonia Gandhi - Rahul Gandhi : A Maa Beta Government. It is their vision, if they have any, is visible in all actions / in actions of the Government. Hence the plan miss.


sarat palat

Dec 30, 2011

a big "NO"


Venkatesh Rao

Dec 29, 2011

The impending passage of benami property bill and the Lokpal Bill is giving jitters to many corrupt officials in Govt who are offloading all the benami properties mostly in Gurgaon in a desperate move. This can be checked from any property dealer.Looks like there will be a big correction.

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