»5 Minute Wrap Up by Equitymaster

On This Day - 8 APRIL 2011
Anna Hazare's solution for the Indian economy

In this issue:
» US government to shut down?
» Indian banks raise capital from new avenues
» Dubai property 60% cheaper than Mumbai
» India to ink free trade pact with EFTA
» ...and more!

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"Corruption" may have been the most repeated word of 2010-11 as political and corporate scams sprawled across the Indian landscape. But something seems to be changing now. The chorus against corruption is amplifying. And the movement has found a face in Anna Hazare, the man who had earlier led the movement for the Right to Information Act (RTI).

But there is another important yet lesser known story about this Gandhian reformer that we believe has critical solutions to the Indian economy and the world at large. The story dates backs to the 1980s in a barren village called Ralegan Siddhi, located in the Ahmednagar district of Maharashtra. The drought-prone village was plagued by a perennial water scarcity. Almost 80% of the villagers were dependent on other villages for food grains. Many folks had abandoned the village in search of work elsewhere, while others opened liquor dens to sustain themselves. The social life too, as a result, was very turbulent.

Then a native of this village returned after serving the Indian Army. He decided to transform his village and to make it self-sufficient. All he had was will and wisdom. He started various programmes to conserve water and prevent soil erosion. The principle of his ridge-to-valley model was to hold the rain where it fell and to use that water to build the economic base of the village.

It worked! By the 1990s, the village turned around 180 degrees- from barren to green, from dependent to self-sufficient. Income levels had risen substantially. Over 25% of the village earned more than Rs 5 lakh annually. That was a time when the super-rich in India were defined as those who earned more than Rs 10 lakh annually. Even more important, the income disparities were low.

The success of Anna's self-sufficient eco-village model shows that ecological and natural wealth can create well-being and economic growth. At a time when the global economy is gripped with economic and environmental disasters, Anna's solution is what the world must be looking at.

Do you think Anna Hazare has the solution for the Indian economy? Share your comments with us or post your views on our facebook page.

 Chart of the day
The crisis in the European economies is very much alive and kicking. Greece and Ireland have already gone for a bailout. Portugal seems to be the next one in the line. And chances are that Spain may follow as well and Italy is not doing too good either. The term "PIIGS" is an acronym used to group these highly indebted economies. Today's chart of the day compares the unemployment rate in these ailing European economies with that of India. The numbers show that India too has a pretty high rate of unemployed people. The one major thing that differentiates India from these economies is the economic growth. But still, our country needs to find ways to fix the issue of unemployment. Otherwise, our long term growth may be severely hampered.

Data source: CIA World Factbook

Now this may sound a little amusing to us but there are strong chances of this event being played out in reality. We are referring to the US shutdown that looms ahead quite dangerously as of now. For the uninitiated, a shutdown is an event where the Government no longer has access to funds and as a consequence, all its activities are put to a halt. To understand some of the ramifications, all the places where the Government has a large presence will have to deal with laid off employees, closed buildings and out of work Government contractors. And this is not all. As the US Federal Government is a very big business in itself, a temporary shutdown would also end up disrupting a lot of private businesses. The reason it has come to this is because the US politicians are fighting over the budget and have been unable to strike a deal. The US Government has till Thursday midnight to try and come up with a solution. Failing the same, a nationwide US Government shutdown will be enforced as per the constitution. Important to add is that this is not the first time the Government is facing a shutdown. It happened way back in 1995 also when the Government was shut down for a significant period of 20 days. Back then, the US economy's growth slowed by a full percentage point for the quarter. A repeat of the same is something that the US economy can ill afford at this point in time.

At a time when capital in domestic markets is getting dearer by the day, Indian banks have to seek alternative sources of funding. They need to ensure that the spreads earned on borrowing and lending money do not get too thin for the entities to survive profitably or grow. At such times, near zero interest rates prevalent in the overseas markets have become very enticing. Also to ensure that their currency risks are hedged, Indian banks have chosen to borrow in non-traditional currencies like the Swiss franc. We do not see any imminent risks to the banks with this strategy in the near term. However, the condition here is that they should not go overboard with their foreign borrowings. Further, too much of cheap capital should not allow the banks to take undue risks in their loan portfolio. As with keeping their overall interest costs low, the same can be done by expanding their CASA (current and savings accounts) base as well. Believe us, there is plenty of scope there.

Mumbai and Dubai are one of the most favored investment destinations for property investors. Both these regions share equal interest amongst investors. So considering that, prices should be more or less parallel across these cities, after accounting for minor differences. However, it is interesting to note that there is a wide disparity in prices between these two regions. Property prices in Dubai are about 60% cheaper than in Mumbai. This is jaw dropping indeed! It is believed that during the hay days a lot of inventory was being build up in Dubai which ultimately was not absorbed due to a slowdown in the real estate market. Subsequently, in order to attract investors the government came out with a new draft of regulations favoring home owners, in order to revive the interest in Dubai's property market. Even the revival of liquidity in the mortgage market has generated interest amongst investors. Thus, we believe the disparity in pricing between the two cities is not likely to prevail for long. So, if not Mumbai, one can well look out for Dubai so as to get a better bargain.

One way of spurring growth of an economy is developing trade relations with countries and India seems to be doing well on that front. The commerce minister has stated that India and the four nation European Free Trade Association (EFTA) are set to conclude the ongoing free trade pact negotiations by the end of this year. The EFTA includes Switzerland, Iceland, Liechtenstein and Norway. The seventh round of talks took place early this year and discussions were held for market access for industrial products, fish and agricultural goods, technical barriers to trade, customs procedures, investment, intellectual property rights and dispute settlement. It must be noted that India already has active trade relations with Switzerland and this stood at US$ 18 bn in 2010. Indeed, free trade in areas such as infrastructure, food processing and biotechnology among others will further help in enhancing India's growth in the longer term.

In the meanwhile, the Indian stock markets are trading flat with a negative bias, after starting the day on a positive note. Auto and realty stocks led the decline, with most other indices also seeing losses. Consumer durables and FMCG stocks were among the few gainers. At the time of writing, India's benchmark index, the BSE-Sensex was trading lower by about 15 points (0.1%). Most Asian indices were in the green. Japan led the gains, even after another earthquake jolt last night.

 Today's investing mantra
"Volatility is a symptom that people have no idea of the underlying value." - Jeremy Grantham

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