»5 Minute Wrap Up by Equitymaster

On This Day - 11 APRIL 2012
Isn't this wealth destruction of another kind?

In this issue:
» Can 'land banks' solve India's agri problems?
» Lavasa Corp goes the Kingfisher way
» Faber advocates gold over stocks
» Does US need QE3 after the failure of QE2?
» ...and more!

----------------------- "An excellent analysis and narration on the present situation" -----------------------

Here's what a reader had to say about Bill Bonner's e-letter, The Daily Reckoning:

"THIS IS AN EXCELLENT analysis and narration on the present situation prevailing in developed economies, this does not need any explanation, this itself is an explanation by its own exemplary way of bringing the situations to the viewers. Thank you for your good article."

If authentic global news and views is what you seek, then we strongly recommend that you sign up for The Daily Reckoning.

Authored by Bill Bonner, a three-time New York Times best-selling author, The Daily Reckoning will help you understand the global economy better.

Sign up for the free e-letter and get a free Guide to Gold right away!


Every few months the chief auditor of government accounts (CAG) has been unraveling cases of preposterous wealth destruction. Over the months, the 2G telecom scam, the mining scam and now the coal block scam have conveyed one message clearly. That vested interest has destroyed sovereign wealth. In some cases the corrupt ministers benefited. In others private companies raked in profits with cheaply acquired government assets. However, that public wealth was destroyed stands uncontested.

In recent days, the government's actions against profitable PSUs have redefined wealth destruction altogether! True that the threat from rising oil prices has never impacted the Indian economy as sharply as it is now. Right from currency deprecation to inflation to high interest rates to retarded GDP growth to fiscal deficit. Every economic variable has been adversely hit. Hence the government has turned to the few cash cows in its stable to bail itself out from distress. The profitable or cash rich public sector companies were initially supposed to raise funds for the government through public offerings. However, volatile markets led to the debacle of the disinvestment plans. This forced the government to milk the PSU assets indirectly. Getting Coal India to pay for imported coal or Indraprastha Gas to supply fuel at rock bottom rates are part of the tactics.

No doubt better supplies of coal and natural gas can sort out India's energy needs to a great extent. That can also ease inflation and boost growth rates. But draining PSUs of their cash and other resources is certainly not the ideal mode to achieve this goal. Such random policies also show the lacuna in policy making. The government has realized the importance of investments in discovery of energy resources very late. It is a pity that more wealth destruction in profitable PSUs will cover the government's ineptitude.

Do you think that the government is resorting to wealth destruction in PSUs to cover its ineptitude in policymaking? Share your comments with us or post your views on Facebook page / Google+ page.

 Chart of the day
Before the crisis on oil prices magnified, the cause for incessant inflation was attributed to rise in food prices. However, data from Economist shows that Indians are amongst the lowest spenders on food and grocery items as compared not just developed but also developing economies. In fact Indians spent less than US$ 1 per day on food items in 2011.

Data source: Economist

In its most basic form, what do you think is the function of a bank? Well, we believe its job is to take capital from those who do not need the same at the moment and give it to those who are in need of it. An arrangement of this kind has worked wonderfully well since time immemorial, isn't it? So, how about using the same approach in the area of agricultural land? In other words, taking uncultivated land from people who neither want to lease nor sell it but are willing to give it to those who are in need of it. Well, an idea of exactly the same nature has been put before India's planning commission and is believed to be under its active consideration. The ET reports that the proposal will kill two major issues associated with India's agriculture at one go. On the supply side, it would address the concerns of landowners and thus bring under cultivation large tracts of underused or fallow land. And on the demand side, it would provide the needy sections of society an access to land, which they have not been able to compete for in the open land market. The implementation though is not as easy as it seems. Owners of land are likely to put up their land in the land bank only if there are strong land records and guarantee that land grabbing will not happen. Thus, it could be a long time before any such proposal sees the light of the day. India does not have such innovative systems though to realise its full potential.

First it was an airline in the sky, and now it is a realty project in the air that is all set to trouble banks. The problems at Kingfisher Airlines forced lenders to write off their loans to the carrier as non-performing assets. Now, the dream project Lavasa, championed by Hindustan Construction Company (HCC) has met with a similar fate. Lavasa Corp has failed to service its loans, so some banks have treated it as a non-performing asset for the fourth quarter. Failure to get environmental clearances and project delays severely dented its finances. The parent company is also in mucky waters. HCC has already been referred to the corporate debt restructuring forum to lessen its debt burden reschedule repayments. Banks have around Rs 80 bn exposure to the company. In light of a GDP slowdown in FY12, maintaining asset quality seems to have been the biggest challenge for banks, more so the public sector ones. We only hope that the situation gets better next year.

At a time when banks are struggling to keep their asset quality in order, restructuring the books of failing corporations could end up being disastrous. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

Whenever we want to enrich our macro-view of the global economy, Marc Faber is one of the bright minds who receives our full attention. So what is his opinion on investing now? He feels that the US stock markets are in an overbought territory. On the other hand, he is still pretty bullish on gold from a long term perspective. As per him, gold is not in a bear market, but in a correction phase. Instead of trying to time when the correction will end, he urges individual investors to gradually accumulate gold. Several factors such as negative real interest rates, chances of detrimental monetary policies in the US and Europe, as well as the political worries in the Middle East will keep the prospects of gold shining. Meanwhile the fundamentals of equities in Indian stock markets continue to be very different from that in the US.

It is all very well for to hope that India's GDP grows at 9% plus on a consistent basis. But it does not make sense if the benefits of this growth are not felt by all sections of population. And that is one big problem that Asian countries including India and China face. Developing Asia's rapid growth in recent years has given rise to a widening rich-poor divide. The Asian Development Bank has stated that if inequality in the Asian region had remained stable over the past two decades, growth over the years would have lifted 240 m people more out of poverty. This would be the equivalent of 6.5% of developing Asia's population in 2010. But instead, inequality widened even as Asia's economic growth took off. The share of income going to the richest households has increased in the past decade. Close to 20% of total income has now been cornered by the wealthiest 5% in most countries in the region.

Income inequality brings with it considerable perils. For one it can be a harbinger of social unrest of the kind we have been witnessing in the Arab world. It also leads to more pressure on the government to kowtow to populist polices many of which tend to be ineffective. All these then serve to malign growth itself. That is why Asian governments need to focus more on productive areas. These include education, healthcare, infrastructure and creation of quality jobs if growth has to be all encompassing. However, with Indian government finances in a state of disarray we wonder when the government will get its act together in this regard.

Just a few days ago, the US had released a report that showed the number of jobs created in the country was slowing down. This has raised an important question. Is the recovery in US sustainable? Or, does it need another round of quantitative easing (QE)? The question will most likely be answered today when the Fed Chairman, Mr Bernanke makes his speech at a Federal Reserve Bank Conference. Some experts and economists feel that the US recovery is still sluggish and this warrants the need for another round of QE. But some feel that US has already stretched its balance sheet to the limits. Printing more money would only find its way into the riskier equity markets and not really help the overall economic recovery. Going by the fact that most of the money printed in QE-II found its way into emerging markets rather than the US; we doubt that QE-III would do any good for US. They need a more sustainable long term program to boost their economy. Short term quick fixes will only get them thus far.

Taking cues from their peers across Asia, the indices in Indian stock markets opened below the dotted line and languished in the negative territory for most of the session today. Commodity stocks led by Jindal Steel, ACC and Ambuja Cements led the pack of losers. At the time of writing, the BSE Sensex was trading 46 points below the dotted line. The indices in most other Asian markets closed lower in today's trade. Those in Europe have also opened lower.

 Investing mantra
"As long as we can make an annual 15 percent return on equity, I don't worry about one quarter's results." - Warren Buffett

  • Test Your Warren Buffett Quotient Now!

  • Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

    Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

    This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

    This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

    This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

    As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407