»5 Minute Wrap Up by Equitymaster

On This Day - 4 MARCH 2010
Any idea what will drive India's growth?

In this issue:
» Asia's resurgence is high in PPP terms
» SEBI could regulate rating agencies
» Big financial firms need to be broken
» Role of private healthcare is set to get bigger
» ...and more!!

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India has certainly made a mark in the global arena when it comes to economic growth. Before the financial crisis erupted, the country had logged in 9% plus growth for three consecutive years. What is more, even when the crisis was at its peak, India was still growing faster than the rich world. Infact, as compared to the developed countries, the outlook for India in the near future is also quite rosy given that the country has emerged relatively unscathed from the crisis.

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!

 Chart of the day
How addicted is India to smoking? Today's chart of the day shows that Indians consume lesser cigarettes per person per day when compared to some of its peers. But this needs to be taken with a pinch of salt. This is because in India, tobacco consumption happens in other forms as well. For instance, of the total amount of tobacco produced in the country, around 48% is in the form of chewing tobacco, 38% as bidis, and only 14% as cigarettes. In stark contrast, in the rest of the world, production of cigarettes is 90% of total production of tobacco related products. So Indians may smoke lesser cigarettes, but the country is still addicted to tobacco.

Data Source: The Economist

Many believe that the financial crisis gave one last push to the Asian economies to come out on top of the global pecking order. However, not all are in agreement. As per Economist, Asia's GDP is still half of its developed counterpart in dollar terms. Also, the region's 31% share of world's exports in 2009 was not much higher than more than a decade back. So, where is the resurgence of Asia that everyone is talking about? Hold on, isn't talking in market exchange rates a wrong thing to do? How about talking in purchasing power parity (PPP) terms? Here, three of the world's four biggest economies (China, Japan and India) are already in Asia and further, Asia has accounted for half of the world's GDP growth over the past decade.

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.

Rating agencies in the US had to partially shoulder the blame for Lehman's collapse. The lack of transparency in credit rating and fiduciary relationship with their clients brought them under the regulator's scanner. If the same crisis were to hit India, the case could have been much worse. For rating agencies in India so far have no regulator whatsoever!

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.

What do you do when something is too big for you to bite on? You try and break it up before putting it into your mouth. Seems quite obvious, doesn't it? Infact, you may wonder why we're even asking you such a common sense question. The reason is that the developed world is currently grappling with a similar question, but the answer doesn't seem to be so obvious to it. With the credit crisis that erupted in 2008, people realized that they have inadvertently let many financial institutions become too big to fail. They had become too big for regulators, or even the governments of entire countries to manage, or in other words, to 'chew on'.

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.

Hardly anyone you know will disagree that infrastructure is one of India's most urgent needs. But exactly how much infrastructure? The question can at least be partly answered by a recent statement of the civil aviation minister. He believes India needs 400 more operational airports, up from the current 90 airports. That's not all. "We have to add at least 500 helicopters and 200-300 aircraft to the fleet available in the country in the next five years." he says. If we were to achieve these targets, India could leapfrog from the 9th biggest aviation market currently to the 5th largest market. 10% of all Indians would be using the sector, up from 3% currently. One of the key hurdles in achieving this is the heavy indirect tax burden on the sector. Aviation turbine fuel is heavily taxed. This Union Budget has introduced service tax on the sector. While the indirect tax structure is important, in our view, the political will seems to be lacking. As a nation, we need to have a far greater sense of urgency about executing projects.

When it comes to healthcare spending in India, private spending healthcare has grown by leaps and bounds, while government spending has sadly remained stagnant. Alas, the government may have time and again stressed on the importance of providing quality healthcare but not much has been done on this front. With the quality of public hospitals deteriorating due to shortage of funds and lack of a comprehensive medical insurance cover, a large section of the population is unable to afford specialised care. Not just that, although the government has increased the allocation of funds to healthcare in its recent Budget, it has cut the budgets of some major central government funded public hospitals. Little wonder then that the role of private healthcare is now set to become bigger. The government needs to realize that what will drive India's growth is the quality of its people and not the quantity. But is it listening?

In tune with their Asian peers, the Indian markets were trading marginally in the red at the time of writing. The BSE-Sensex was trading lower by about 40 points (0.3%). The BSE-Midcap and BSE-Smallcap indices, however, managed to find favour. Stocks from the IT and oil & gas spaces witnessed some pressure today.

 Today's investing mantra
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

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