»5 Minute Wrap Up by Equitymaster

On This Day - 27 JANUARY 2012
Brazil has answers to India's biggest problem

In this issue:
» Indian govt to miss fiscal deficit target by wide margin
» US Fed sets 2% inflation target
» Could austerity measures be making Europe's crisis worse?
» US to face three major financial challenges in 2013
» ...and more!

---------------------------------------------------- Global Crisis Update ----------------------------------------------------

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What has been the main reason behind China's explosive growth rate over the past couple of decades? Why has India not been able to mimic that kind of growth? This is a question that we often confront. The answer is not very difficult to get. It is the nature of politics in both the countries that defines most of their dissimilarities. While China's economic surge has been propelled by aggressive central planning by an autocratic single-party regime, India's economic growth though appreciable, continues to suffer at the hands of a lousy democracy.

Does that mean autocracy is better than democracy for economic growth? Well, a country by the name of Brazil certainly chooses to differ. Brazil, which is the 6th largest economy today, has not only grown economically but has even become more socially equitable under a democratic regime since 1994. The country very clearly portrays the kind of phenomenal progressive change that can happen in a country if there are right leaders at the helm. Brazil was fortunate to have two visionary leaders. These leaders put their political careers at stake in order to implement some crucial public policies and structural reforms in the Brazilian economy. For instance, despite a strong lobby that preferred policies that would enable the wealthy few to corner the economic pie, President Lula da Silva (2003-11) expanded the social welfare and educational schemes and made sure they reached the real beneficiaries. What is commendable is that he did so while maintaining fiscal discipline.

Let us tell you that in the past, the rich-poor divide in Brazil was one of the worst in the world. But the economic inequality has consistently come down over the last two decades and is currently the lowest since 1960. Even more, as per Transparency International, Brazil is rated as the least corrupt among all BRIC (Brazil Russia India China) countries.

While both India and Brazil have emerged as powerful economies in the last decade, what differentiates Brazil is the fact that unlike India, the former's prosperity has indeed reached its millions of citizens. The main reason for this discrepancy is the stark difference in the leaders of both the countries. India's meek leadership is seldom successful in pushing much-needed strong reforms unless pushed to the brink of a crisis. We strongly believe our leaders have some serious lessons to learn from Brazil.

Do you think Brazil has the answers to India's problems? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The news just got worse for the Indian government. The fiscal deficit that has been worrying them has just burgeoned to Rs 1.5 lakh crores. This is nearly three times what was estimated just three months ago. Sluggish direct tax collections, mushrooming subsidy bills, and dismal disinvestment inflows have led to these fiscal troubles. The situation is so bad that the government is now counting on higher dividends from the cash rich PSUs to help bridge some of the gap. The combination of food, fertiliser and fuel subsidy has played havoc with the government's estimates since the budget was presented in 2011. It is no longer a question as to whether they will achieve the target but more a question of by how much will they miss the same.

Data source: The Mint
Target is 4.6% of GDP

If an entity improves its credit profile, the interest rate that it pays should fall, right? However, this does not seem to be happening with the Euro nations currently. The Economist points out how despite reducing their deficits, borrowing costs for countries like Germany, France, Spain and Italy have not gone down. This clearly indicates that investors seem to be focusing on short term rather than long term. As austerity is likely to hurt near term economic growth, people who are more interested in making money from speculation, will therefore focus on this near term trend and make their moves. From the economy's point of view however, this move is proving to be counterproductive. This is because an economy which is already under pressure from reduced Government spending will be hurt even more if its cost of financing goes up. Thus, going slow on fiscal tightening and not rushing things would be the way to go we think.

As the other major central banks do a better job of reining over macro-economic risks, the US Fed has consistently drawn flak for its myopic monetary policies. Printing money for short term benefits like liquidity and job creation has not brought in the desired results. On the contrary, the US faces the risk of unprecedented government debt to GDP and high inflation.

Hence, in a bid to soothe the nerves of economists and rating agencies, the Fed has diverted from its beaten track. It has now set an inflation target of 2%. This target will supposedly help the Fed keep its long term goals in line with the remedial measures needed to keep the US' debt burden in check. However, not everyone is happy with the set target. For many policymakers in the US believe that the inflation target will force the US Fed to put employment creation initiatives on the backburner. We are not sure if setting inflation targets are much of an achievement for central banks. Our very own RBI (Reserve Bank of India) has not had much success in meeting it over the past 12 to 18 months. Hence, what is important is that at least the US Fed recognises its mistakes.

If the world doesn't actually end in 2012, the US may have a tough battle ahead of itself in 2013. Three major events can actually spell the end to America's recovery efforts since the dawn of the financial crisis. By early 2013, the Congress needs to address critical legislation on Bush-era tax cuts, defense spending as well as raising the debt ceiling once again. Raising this level once again can further impact the giant's credit ratings. But it's not just the US that is expected to face a triple threat in 2013. According to renowned economist Nouriel Roubini, the world economy is also on shaky ground. A US double-dip recession, a Chinese slowdown and a European meltdown may take place in 2013. The pressure is on. Governments can either make it or break it come 2012-13. Going on a debt diet and having strong fundamental reforms are the need of the hour.

If the auto industry in India does well, the auto ancillaries sector is bound to be impacted positively. So it is no surprise that in a scenario where the e-commerce market in India is growing by leaps and bounds, e-commerce ancillaries should also find favour. E-commerce companies burn cash due to procurement, warehousing, logistics and delivery costs associated with every transaction. And many of them are shifting attention to providers of the above mentioned support services. E-commerce has seen growth explode in recent times. Online shops have been posting monthly revenue growth of 40-50% in a country with 100 m Internet users. Investors pumped at least US$ 500 m into the online shopping space across 68 firms in 2011.

And while many of these e-commerce companies found private equity funds or venture capitalists to fund their operations, the latter are also beginning to take an interest in companies providing support functions as well. So you have many companies which have sprung up and which offer services like payment platforms and solutions or courier services that are able to handle cash on delivery. All of this because the potential growth for the e-commerce industry is huge. But it must be noted that all e-start ups do not necessarily hold potential however big the opportunity and that is where the challenge lies. Indeed, the dot-com boom and bust is a painful reminder of the fact.

In the meanwhile, the Indian stock market shed some gains but still traded in the green. BSE Sensex was down up 100 points (0.6%). Barring banking, FMCG and realty stocks, all sectoral indices traded in the positive. Among the Asian stock markets, Indonesia (down by 0.2%), Singapore (down by 0.1%) and Japan (down by 0.1%) were on the losing end. All other indices displayed positive investor sentiment.

 Today's Investing Mantra
"The fact that people will be full of greed, fear or folly is predictable. The sequence is not predicatable." - Warren Buffett

Click here to read our series on 'Lessons from Warren Buffett'

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