»5 Minute Wrap Up by Equitymaster

On This Day - 23 MARCH 2012
Did the govt make us poorer by Rs 10 trillion?

In this issue:
» This shows why investing in a newbie sector can be dangerous!
» Are we at the end of the commodity supercycle?
» Jim Rogers believes 2013 will bring in lot of trouble
» A slight breather for the airline industry
» ...and more!

---------------------------- Raise your voice before this turns into yet another scam! ----------------------------

When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


There is one aspect wherein the acumen of the Indian government has hardly any close match. It very consistently manages to beat all our expectations and keeps setting up new records. In case you haven't guessed it yet, we are referring to 'corruption scams'.

A leaked draft report of the Comptroller and Auditor General has yet again revealed something very disturbing. Reportedly, it states that between 2004 and 2009, the government gave away 155 coal acreages to private and public companies for five years. The biting aspect of this entire matter is that all this was done without a proper auctioning process. In the absence of auctions, it's obvious that the corporates managed to take hold of areas in which coal could be mined for dirt cheap prices. It is estimated that due to this the government exchequer lost about Rs 10.67 trillion (approximately US$ 210 bn). In layperson's languages, the country became poorer by that quantum. It is quite distressing to know of such happenings at a time when the country is facing a shortage of coal and paying a high price for it.

If this report is true, it just exposes how the government is sacrificing the wealth of the nation to narrow interests. A natural resource like coal legally belongs to the State on behalf of the citizens. It is unacceptable that such resources fall into private hands without appropriately compensating the citizens. A proper auction would have not just ensured transparency, but would have also made sure that the price paid is appropriate.

Whether the claims of this report are true or not is a different matter. But the fact remains that our government seldom works in the interest of the larger economy. By various means, it has time and again burned holes in the pockets of the country's taxpayers and investors. Sometimes it does so by milking cash-rich PSUs. Sometime it does so by bailing out ailing companies.

The way the government is taking the country for a ride is simply outrageous. Hence unless tax payers raise their voice against this gross misuse of our country's wealth and resources, such wealth destruction will prevail. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

Here are the results so far. In just a matter of few days, more than 4,250 have taken the poll and a whopping 96% have refused the government to use their hard-earned money for bailouts.

Do you think the government is exploiting taxpayers money? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
Today's chart of the day shows estimates of monthly per capita expenditure of National Sample Survey Organisation (NSSO) and national accounts during 2004-05 and 2009-10. As is evident from the numbers, there is a wide disparity between the two. NSSO estimates for 2009-10 are about half of what the national accounts figures are. Why are the two estimates for far apart? It is important to note that both are calculated differently. While national accounts are an aggregate, NSSO's numbers are a result of survey conducted across different income groups across India. Another reason cited for the difference is the expanding consumer basket. Whatever be the reasons, which numbers should one really believe in?

Data source: Business Standard
*Period of national accounts is April 1 to 31 March, for NSSO it is July 1 to June 30

It is not unnatural for a trend to find many takers even when it comes to investments. Once the media and brokers start propagating an investment, investors often get blinded by sheer optimism. When SKS Microfinance launched its initial public offer (IPO), every humble investor wanted a share of the pie. After all, a company with staggering growth, steep margins and social good as its business motto, seemed too much to ignore. What followed later was, however, every investor's nightmare. Not that all of it could be preempted at the time of the IPO. But there were several hints in SKS' track record that suggested the growth may be unsustainable. Lending to the poorest at steep margins did not exactly gel with the social motive of the company. Further, when other players in the financial space were lending at half the rate, loss of customers was given. More importantly, the regulatory knock and warning on asset quality were very high probabilities from the start.

Unfortunately, the nightmare is still playing out for the microfinance sector and its investors. As per a business daily, one in every three borrower from MFIs has defaulted. In absolute terms, the number is close to 9.2 m customers. While regulatory upheaval hit the lenders hard, the borrowers too are not in an enviable position. They may have gotten away without paying their dues for the time being. But with their credit history tarnished, the poor borrowers, largely from the state of Andhra Pradesh, have been blacklisted from lending. This means neither banks nor MFIs would offer them loans in the future. Thus, the regulatory callousness seems to have sealed the fortunes of both the borrowers and lenders in the MFI sector.

It goes without saying that we are in the midst of a commodity super cycle. However, there is a big debate whether the cycle will soon come to an end or it still has a lot of steam left. Lots of experts have given their opinion. Recently, Citigroup got itself added to the list. However, it has certainly come out with a refreshing perspective on the issue. It argues that measuring consumption on the basis of per capita is not the right way to look at things. What matters according to the firm is the 'total value in use' and thus on this basis, prices do indeed need to come down. The firm also argues that since China is becoming less and less efficient with its investment, this is one more reason for commodity prices to fall. While we share the same conclusion as that of Citigroup, our reasoning is far less complex. Nothing can go up forever. Over time, people do find ways to use the same resource efficiently or substitute the same with another cheaper resource. And this more than anything else drives down the price of a commodity, with no exception whatsoever.

High liquidity and government debt is expected to result in a good 2012 for investors. This is the opinion of legendary investor Jim Rogers. But come 2013 and he expects things to take a turn for the worse. He feels that loose monetary policies can only get the countries to grow till point x. But beyond that, governments will have to start tightening their policies and mopping up the excess money that they have flooded the markets with. The two rounds of quantitative easing (QE) or money printing undertaken by US have pushed interest rates down. This is expected to encourage hiring and investing in the economy. But so far, the improvements have been meagre. However, this flood of money cannot keep floating in the system forever. Eventually the government will have to pull the plug and suck the excess liquidity out of the system. When that happens, the stock markets will take a beating for sure. So as Mr Rogers says, the investors in the developed markets at least should enjoy the 2012 party till it lasts.

Given that the fortunes of the Indian airline industry are dwindling, the government had to do something to revive the sector. Thus, it plans to lift the freeze on private carriers flying abroad. This means that the latter can now look to increase their presence in the international skies, which will earn them higher yields. The civil aviation ministry has allowed increasing utilisation of foreign bilateral rights for Indian carriers to 40%. This will be effective from April 2012. The utilisation, thus, will be roughly equal to that by foreign carriers. Earlier, Indian carriers were utilising only 22.7% of the total foreign bilateral rights. This was because the ministry had, for some time, not been allowing airlines to fly abroad. This was to protect the interest of government-owned Air India (AI). But Air India has been steeped in losses and is on the brink of bankruptcy. And so it only makes sense to ensure that other carriers do not face the same fate. Thus, this comes as a breather for Indian carriers and will allow them to bolster their sagging revenues as well as their bottomlines going forward.

The Indian stock markets maintained their momentum and continued to trade in the green. At the time of writing, the BSE Sensex was trading 104 points above the dotted line. Amongst the sectors, stocks from metals and consumer durables were the biggest losers while technology stocks led the gainers. The indices in other Asian markets closed mixed in today's trade. European indices have opened mixed as well.

 Today's Investing Mantra
"Think about what the asset will produce. Look at the asset, not the beta. I don't really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price." - Warren Buffett

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