»5 Minute Wrap Up by Equitymaster

On This Day - 1 FEBRUARY 2012
Will India suffer for ignoring its biggest resource?

In this issue:
» Is the world economy teetering at the edge?
» No country will leave the Eurozone in 2012
» Foreign investments to swell in India
» Germany has lowest unemployment in Europe
» ...and more!

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India may be one of the fastest growing economies in the world, but on certain parameters it ranks worse than crisis torn nations such as Afghanistan and Yemen. And one such factor is primary education. For starters, the strong pace of GDP growth has not translated into improved basic educational standards for India's vast population over the past 15 years. Certainly, there has been a huge improvement in the enrollment ratio at 95%. But that has not meant that all of these students have had the benefits of any meaningful education. For instance, only 66% of the students enrolled actually turned up for classes, while in many cases the teaching standards were of poor quality and too much focus on learning by rote. Not just that, the social structure of Indian society has meant that many of the girls in remote villages have not been encouraged to attend schools. Even China, the most populous country in the world at present, has done a much better job in ensuring good quality education for its masses as compared to India.

All these paint a worrying picture. One of the advantages that India has over its less fortunate developed peers is an increasing younger population. These young people have been touted to contribute to India's growth and take it to the next level. Much has been harped on this topic. But in the long run, having more youth is of no consequence if there are no meaningful employment prospects for them. And employment prospects will improve only if they possess the required skill sets for which the quality of education becomes vital.

Not just that, just as there is very apparent income inequality in the country, there is inequality evident in the education system as well. So you have the IITs and the IIMs which compete with some of the best institutions in the world and attract top quality students. But these options are available to only a select few and the same cannot be said for the rest of the institutions be it primary, secondary or professional.

Both strong quality of health and education are necessary, if India's young population is to make meaningful contribution to the country's GDP. This is where the government needs to step in and spend on these social sectors which are highly productive in nature. But given how deteriorated its finances are at present, we doubt any major steps will be taken in the near future. For that the government needs to seriously cut down on wasteful expenditure. But that seems to be wishful thinking for now.

Do you think that lack of basic and quality education will seriously impact India's chances of growing at a strong rate in the future? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
With growth in the Eurozone almost stagnating, it has had a telling impact on employment prospects in the region as well. What is more, those economies which are saddled with huge debt and are struggling to keep head above water, not surprisingly, have the highest unemployment rates. As today's chart of the day shows, Spain, Greece and Portugal are grappling with high unemployment, while that in austere Germany is one of the lowest.

Data Source: The Economist

The guys who coined the term 'The new normal' are back with another metaphor to describe the current state of the world economy. 'The knife's edge' is what CEO of Pimco, Mohamed El Erian has now come up with. El Erian has penned a piece on foreign policy and has opined in it that the world economy is teetering on a knife's edge. And what would be the tipping point? Well, there are four as per Erian. European economic and financial fragmentation, Middle East unrest, central banks running out of tools to kick start growth and last but not the least, social unrest.

The Pimco CEO believes that addressing and fixing these problems would serve as a recipe to lasting recovery. So far so good we believe. However, we don't quite agree with whatever came next. Erian is of the view that the world economy can either break out of its current malaise to deliver economic prosperity. Or it can slip deeper into unemployment, financial instability and trade wars. We beg to differ though. Bad investments of the past will have to be written off to lay a fresh ground for long term economic recovery. These problems cannot just be papered over. Central bank and Government intervention will only delay the problem. It cannot possibly be avoided. Thus, there will have to be darkness before a fresh morning emerges. And Mr Erian does not seem to be on top of this reality.

2012 may turn out to be a year when governments across the world try to soothe taxpayer and investor sentiments after the tumultuous year we have had in 2011. The spate of elections across the world this year will make it more pertinent for policymakers to keep themselves on their toes in pursuit of rational policy making. But that effort may or may not sustain. International investor Jim Rogers believes that governments in the Euro zone can certainly be expected to work towards strengthening the economic variables this year. And that may ensure that our concern over the split of the Euro zone gets thwarted. Rogers does not see any European country leaving the Euro zone as early as 2012. However, this is not to suggest that the problems brewing in debt laden European countries like Greece will be solved for good. We believe that there is certainly more pain left for countries that are unwilling to end their faulty economic policies. When and how the Euro zone will try to get rid of them is a matter of political rather than economic convenience.

Being in a high growth trajectory, India had always been a hot investment destination for foreigners. However, overseas investments in the recent times have turned sluggish as policy paralysis and lack of transparency worried investors. But 2011 came in as a positive surprise as foreign investments in India rose for the first time in the last three years.

True that capital chases growth but here it seems that lack of investment opportunities in other markets attracted capital into India. Eschewing domestic worries, global investors left with no alternative investment opportunities turned back to India. Further, if a report from Ernst & Young (E&Y) is anything to go by, the foreign investments in India are likely to swell further in the coming years. However, we believe that while structural advantages like cheap labor and robust domestic demand provides comfort to India, it could get seemingly difficult to attract foreign capital in the future if governance and transparency issues are not resolved soon.

What could be the biggest risk to the US economy in 2012? Would it be the Eurozone debt crisis? Or would it be rising tensions with Iran that could send oil prices haywire? If a certain economist who was also a former US Secretary of Labor is to be believed, there is an even bigger threat to the US economy than these two critical threats. And that threat resides nowhere else but in its own land. The threat is rising income inequality. As the gap between the few filthy rich and the rest increases further, it poses a serious threat to the economic and political stability of the US. While productivity in the US has been rising, the number of working-age people in the job market has hardly changed. This means that companies are demanding more from the same workers instead of hiring new workers. Moreover, many jobs are lost due to technology and overseas outsourcing.

We would like to take this example to argue why GDP (Gross Domestic Product) is not the best indicator of a country's economic well-being. What is more important is how well is that wealth being distributed among the country's population. If history is any guide, most major political revolutions were triggered by very high income disparities.

In the meanwhile, the Indian stock markets remained in the negative throughout today's trade. At the time of writing, the BSE Sensex was down by 100 points (0.6%). Barring capital goods, auto and power stocks, all sectoral indices traded weak. Among Asian stock markets, Singapore, China and Hong Kong were among the losers. However, Malaysia led the pack of gainers.

 Today's Investing Mantra
"An organization's ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage." - Jack Welch

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