|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 MARCH 2010
Any idea what will drive India's growth?
In this issue:
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However, while GDP growth has brought India into the limelight, there are certain important areas where the country still has to take big, bold steps. One such area is innovation and new ideas. As reported in Mint, in a recent survey on innovation created by Soumitra Dutta, a professor at French business school INSEAD, India slipped 13 places to 56th in a ranking of 130 countries. The reasons cited have been inadequate political stability, lower broadband and mobile phone usage (per 100 inhabitants) and insufficient infrastructure facilities. The last reason, may we add, is hardly surprising.
Of course, one does not have to take various surveys of this sort very seriously. But it is a fact that India needs to stress a lot on innovation. A country like the US has done many things wrong to land itself in the slump that it finds itself in but one thing that the US can pride itself on is innovation. India too has many things going right for it at present despite various hiccups. If only India took its innovation capabilities to another level, the nation then will be a force to reckon with!
Even in the matter of capital expenditure, Asia clearly comes out on top. In 2009, 40% of global investment, at official exchange rates, took place in Asia, as much as in Europe and America combined. Hence, taking into consideration economic output in PPP terms and capital expenditure, Asian resurgence seems firmly on track. However, the Asian economies would do well to remember that it is not all about the quantity of output but also the quality of it. As long as there are millions of people that continue to live below poverty line, no amount of GDP or capital expenditure can justify the region's top billing.
Sensing the risk, a government-appointed panel has suggested that capital markets regulator SEBI should oversee the operations of rating agencies in India. Currently, 5 rating agencies- Crisil, Care, ICRA, Fitch India and Brickworks are registered with the SEBI. The government panel has also warned the rating agencies against entering into business that may directly or indirectly have a conflict of interest with their core job. We welcome this move particularly because besides corporate credit, several capital market issues are also rated by the rating agencies and have a direct impact on investor sentiment.
Arguably, their size left governments no option but to bail them out despite the grave mistakes these institutions made. The most obvious solution would now be to reform financial regulations such that no institution is allowed to become so big in the first place. And the ones that already are big should be broken down into smaller and separate entities. One of the top executives at the US Fed, Richard Fisher, too evinced a similar view recently. His emphatic view is that markets can only function properly if institutions that take big risks are allowed to go under. But such a 'common sense' solution is proving too difficult to implement, especially because of the opposition from these very firms and their supporters. Which is ironical to say the least, as they have vested interests in not letting it happen. At the end of the day, who wins - the large vested interests or common sense - will determine how soon we will see the next crisis.
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