|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 APRIL 2012
Is Rural India in your stock portfolio?
In this issue:
----------------------- "An excellent analysis and narration on the present situation" -----------------------
A study conducted by Credit Suisse throws some very interesting insights. Unlike traditional perceptions, rural India is no more solely dependent on agriculture. For instance, back in 1978, 81% rural males depended on agriculture as their main source of income. Fast forward to 2009-10, the proportion has dropped substantially to about 55%. The study suggests similar trends even in female rural employment.
There are some solid facts that validate the changing trend. A decade ago, agriculture accounted for nearly 50% of the rural economy. Now, it has dropped to just about one-fourth. On the other hand, the share of manufacturing and services in the rural GDP (Gross Domestic Product) has ascended at a rapid pace. Between 1999 and 2009, manufacturing GDP in rural India has grown at 18% CAGR (compound annual growth rate). The same now contributes to about 55% of India's total manufacturing GDP. Increasingly, Indian villages are acquiring the characteristics of towns.
What does all of this mean to investors? This changing trend opens a sea of opportunities for rural consumption. A lot of urban consumption categories such as construction materials, two-wheelers, media, personal products, healthcare, etc. are set to make greater inroads into these high potential rural markets. Companies that manage to take advantage of this opportunity will find themselves on a strong growth trajectory. Even more, they will create significant wealth for their shareholders.
But is this a bad thing? Certainly not we believe. As a write up on Firstpost points out, large scale imports of gold is much better than the other large imports we are making i.e. crude oil, coal, fertilisers etc. While the latter are a result of lopsided Government policies, gold is largely being imported to protect against inflation and as an avenue for one's savings. Besides, if we should find ourselves in trouble on the external account front, it is only gold that can come to our rescue and not the petro products or fertilisers. Thus, experts and policymakers could do well to let the free markets dictate how much gold we import. They will be much better off trying to tame the demon of inflation and do away with wasteful subsidies.
On the other hand in the private sector, appraisals are an annual affair and pay hikes are determined based on performance measures. While there may be some disappointment, this is still an objective versus an arbitrary exercise. So should PSUs resort to the carrot and stick approach to better manage their large employee base? Well, we think so. It would help increase productivity, accountability and make sure these PSUs don't carry deadweight employees on their rolls.
No doubt that the problem of debt cannot be solved by adding on more debt and so austerity seems the only way out. But Joseph Stiglitz thinks otherwise. He opines that there has never been any successful austerity program in any large country. Moreover, austerity combined with the constraints imposed by the euro only amounts to a recipe for disaster. Stiglitz also believes that if Europe maintains the austerity approach, he sees a core euro area of only one or two countries. What this essentially means is that unless Europe comes out with a completely different solution to its current spate of problems, the bleak outlook will remain.
Every evolution has a side effect. When global economies evolve, they become more reliant on service sector than manufacturing. Statistically speaking, service sector may account for more of GDP. However, the importance of manufacturing can't be undermined. Its role goes beyond what the numbers suggest. Apart from the direct effects, it has a bigger role in the broad economic picture. Manufacturing provides upward mobility to the middle class and leads to economic stability. Besides, it serves as a critical link in the economic chain and has significant linkage and spillover effects for other sectors. Needless to say, if the manufacturing sector gets hit, it will drag the entire economy down. Unfortunately, there is no shorter term solution to the problem. The key to future growth of companies will be the ability to hire, train and retain talent so that the manufacturing boom goes on.
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