»5 Minute Wrap Up by Equitymaster

On This Day - 28 FEBRUARY 2012
Is this government scheme killing rural jobs in India?

In this issue:
» CVs take the cake in 9mFY12
» What a shrinking conglomerate discount means
» Delisting for MNCs is getting expensive
» Should the US continue to head the World Bank?
» ...and more!

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The National Rural Employment Guarantee Act (NREGA) brought into force in 2005 was considered a historic landmark for the UPA government. The aim of this act was to remove poverty by assuring at least 100 days employment. This to every rural household in which adult members volunteered to do unskilled manual work. At that time, certain issues were raised. These included the ability of the government to fund such a scheme given the state of its finances and the possibility of rampant corruption creeping in.

Almost eight years later, many of these concerns still remain and some more have come to the fore. The scheme has been attacked for many reasons. Some of these are bloating rural wages, corruption, lack of asset creation for money spent, and making farming uneconomic. But the real problem is that the scheme may be destroying the work ethic and jobs in general. According to a research paper by the Indian School of Business (ISB), the scheme has done its bit to alleviate poverty. But it is also raising people's dependence on government and killing off micro enterprises. The data provided by the National Sample Survey Office also paints a telling picture. Between 1999-00, there were 92 m small jobs created. This figure stood at a paltry 2.2 m between 2004-05 and 2009-10. Not just that, during the latter period, there were 27.7 m new jobs created, which was offset by a drop of 25.5 m in the self employed.

Is this such a bad sign? After all, the drop could partly be explained by more people pursuing higher education. Or more women dropping out of the workforce altogether. Also, people cannot be blamed for opting to quit tough farming jobs for employment under the NREGA. This then raises the question whether jobs under the NREGA are productive in the first place. Are they adding much to the growth of the economy? With corruption ruling the roost, one would hardly surprised if many are getting paid without doing any work at all.

The government's intention behind this scheme to eradicate poverty can be appreciated. But maybe it is time now for the same to undergo a serious overhaul. Already the government's finances are under tremendous pressure. Thus, allocating vast sums of money to schemes which are not contributing much to the overall economic growth and improvement in standard of living does not bode well in the long run.

Do you think the NREGA has done a good job in reducing poverty in India? If so, do you invest on the basis of their fundamental strength or go by the movement in prices? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The Indian auto industry has faced many headwinds in FY12 so far such as high interest rates and fuel prices impacting demand and rising raw material costs. But certain segments in the industry still managed to do better than the others. Today's chart of the day shows that CVs performed the best in 9mFY12, while passenger vehicles volume growth lagged far behind. Besides the above mentioned factors, the other reason why the latter did not do well was the strike at Marut's Manesar plant. Had it not been for the impressive growth in utility vehicles (UVs), the performance of passenger vehicles in total would have been quite poor. Commerical vehicles put up a strong show despite industrial growth slowing down.

Data Source: SIAM

Five years could be worth a lifetime in a lot of instances. But in the business world, it is nothing but a small blip we think. Thus, when a sweeping conclusion is made after studying just a five-year trend, the conclusion does need some serious re-consideration. And this is what exactly needs to be done in the case of a study done by the Boston Consulting Group. The study has concluded that big conglomerates are returning to favour as the conglomerate discount shrank from 10% to a little over 7% between 2005 and 2009.

Conglomerate discount is nothing but a discount that is given to the share price of conglomerate companies as opposed to smaller, more focused companies. This is because the latter are believed to be more nimble, more transparent and easier to compare with peers. The whole study is rather redundant we believe. For valuations depend on factors like competitive advantages and the management of the firms. The fact that a firm is a conglomerate or a standalone entity does not really matter. As long as it will continue to create value for shareholders, growth in stock price will follow. The rest should be discarded as mere noise as per us.

Not wanting to share a pie of profits in the subsidiaries is something that multi-national (MNC) giants are known for. The likes of Reckitt Benckiser, Cadbury, Philips, Panasonic, Ray Ban, Otis and Carrier have proven that in the past by delisting from Indian exchanges. However, going forward, delisting themselves from Indian bourses may cost the entities dearly. As per an article in a business daily, the affair is set to be an expensive one. Especially, with the stock prices of companies proposing delisting going through the roof. In several cases, the delisting could cost as much as 10 years of accumulated profits. Hence this may cause several of the entities to rethink their decision. FDI rules not longer make listing mandatory for MNCs. However for the policies to remain in their favour, many entities may find it profitable to have deeper roots in Indian financial markets.

The leading provider of grants and loans to the poorer countries is all set to see a change in leadership. This time around, the emerging markets hope to put one of their own in the top position as head of World Bank. Till date this position has been dominated by the United States. And for a very good reason too. US is the largest shareholder in the World Bank. Naturally, the position of the chief goes to them. But the emerging markets have argued that they too could represent their position as a statement of their growing strength in the global economy. They are also confident that the more liberal Obama government will support them as the former has stated several times the need for change at global institutions. However, the bigger problem they face is who to elect for this position. The emerging markets do not really have much unity as a block. Therefore reaching a unanimous decision on any one person may be difficult. That said, it is not that there is a dearth of suitable candidates in the region. But would any one of them finally make it to the top? Only time will tell.

We are yet not out of the woods when it comes to the global financial crisis. We are not seeing widespread bank failures this time, the likes of Lehman Brothers or Merrill Lynch. But we may soon see widespread downgrades if Moody's has its way . The rating agency warned that it may cut credit ratings of 17 global and 114 European financial institutions. This is another sign that the euro zone debt crisis is spreading like wildfire across the global financial system. A weak funding environment, increased regulatory pressures and a tougher economic environment is making life difficult for many global financial firms.

A number of big names in the banking space such as UBS, Credit Suisse and Morgan Stanley could see their long term credit ratings drop by three notches. Barclays, BNP Paribas, Deutsche Bank, Goldman Sachs, etc could see a two notch drop. Out of the 114 European financial institutions being downgraded a number of them are in Italy and Spain. A few are in France and Germany as well. Investors and companies alike are paying heavily for Government excesses. And there seems to be no end in sight or no real solution in the offing.

Last year in the month of August, Dr Manmohan Singh, the Prime Minister of India, stated that India is well-positioned to emerge as the world's third largest economy by 2025. Recently, the global energy giant BP plc corroborated the same view. However, it expects this to happen by 2030. In the Energy outlook 2030, BP plc states that India would be the third largest energy consumer as well by 2030. Good point is that the yearly energy demand growth is expected to slow down to 4.5%. This would happen on the back of improvements in energy efficiency. The average energy demand growth was 5.5% during 1999-2010. BP plc also expects that while share of industry would grow in the total GDP (Gross Domestic Product), services would continue to have a higher share of GDP.

No doubt, India has potential to become the third largest economy in the next two decades. However, all this definitely calls for an agile and proactive leadership at the centre. Without this, it may take longer than the set timeline.

In the meanwhile, the Indian stock markets hovered above the dotted line throughout today's trade. This was mainly led by positive cues from Asia. At the time of writing, BSE Sensex was up by 255 points (1.5%). However, IT stocks bucked the trend and were down by 0.5%. Among the Asian stock markets, Malaysia was the only loser.

 Today's Investing Mantra
"Stock speculation is largely a matter of A trying to decide what B, C and D are likely to think-with B, C and D trying to do the same." - Benjamin Graham

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