»5 Minute Wrap Up by Equitymaster

On This Day - 27 APRIL 2012
Is Rural India in your stock portfolio?

In this issue:
» Gold should not be blamed for India's deficit
» Is the future of coal in danger?
» The reason why productivity in govt jobs is low
» Global manufacturing suffering an irony
» ...and more!

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Let us start with a question. What is your image of rural India? Does it make you think of thatched roof houses and dirt roads? Does it draw images of farmers ever offering prayers to the rain god? If your answer is yes, then maybe you haven't visited rural India for a long time. Those who have will agree that rural India of today has gone through a massive transformation.

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.

Is your stock portfolio gaining from the changing dynamics of rural India? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
A recent report by Deutsche Bank compares prices of US goods and services to those of other economies across the globe. One interesting parameter, among other things, is health insurance costs. Today's chart of the day shows annual premium paid in US dollars for the most basic health insurance. As is evident from the chart, health insurance in the US is the most expensive in the world. Even Australia, which is the second most expensive country in terms of health insurance, has an annual premium which is less than half of that of the US. On the other extreme, emerging economies like India and China have relatively lower insurance costs. While it is certain that healthcare costs in India are quite cheaper in comparison to several other countries, poor healthcare infrastructure still remains a major hurdle.

Data source: Deutsche Bank
*For a basic policy for a local resident between 25-35 years.

Poor gold! It is perhaps the most faithful of all asset classes when it comes to inflation protection. However, it still gets treated like a pariah. The latest accusation against it being that of a spoiler of the country's current account situation. Most experts seem to be holding the yellow metal responsible for letting the current account deficit balloon to around US$ 90 bn in the year gone by. Indeed, nearly two thirds of that will be accounted for by gold.

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.

Coal may no longer be referred to as the 'black gold'! At a time when our own Coal India is struggling to meet the domestic demand for coal, globally the resource seems to be finding fewer takers. As per the US Energy Information Administration estimate, share of coal in US energy generation could fall to 40% this year. This is against 57% in 1985. The reason for the falling demand for coal is its struggle with ultra cheap natural gas. With all the shale reserves being unlocked, gas prices have steadily declined since mid-2008. To the point where they are hovering around US$ 2 per m British thermal units for the first time in a decade. That makes natural gas prices lower than coal prices. And more trouble lies ahead. A number of old coal-fired plants are scheduled to be shut down in the US by the end of 2014. There will be more such cases world over as environmental norms beckon. That could drive another 5% of coal demand out of the market. Hence, the faster Coal India gets its act together in meeting domestic needs, the better it will be. Else it may be too late for the PSU behemoth to reap the richness of black gold.

What motivates you to get up every morning and commute to work? Is it the paycheck at the end of the month? Or is it the satisfaction of doing something productive that you enjoy? Well, for most PSU employees, their salaries are determined by the Pay Commission. Thus annual pay and increments are predetermined. There is no way to judge good performance and reward the same. Nor is there any way to determine who is not pulling their weight. Unless a government employee commits a serious offense the employee will not face any remedial action.

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.

There can be no doubt about the fact that Europe is in deep trouble. Both Spain and the UK have reported a contraction in GDP for the second consecutive quarter. This effectively means that both countries have slipped back into recession. And the scenario appears bleak for other nations too. Indeed, Europe's problems have been the product of taking on too much debt. There has also been much policy paralysis as member nations seem to disagree on stimulus packages and austerity measures.

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.

As per a recent study, the manufacturing sector is well on its way of hitting a roadblock on account of global shortage of required talent. What is ironical is that this goes hand in hand with the high unemployment rate.

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.

In the meanwhile, the Indian stock markets were trading in a volatile manner today. At the time of writing, BSE Sensex was up by 10 points (0.1%). Among sectoral indices, earlier in the day, only oil and gas stocks were losing, but later realty, metals, pharma and FMCG too joined the list of losers. Asian stock markets were trading mixed while Europe opened the day in the red.

 Today's Investing mantra
"At age 19, I read a book [The Intelligent Investor] and what I'm doing today, at age 76, is running things through the same thought process I learned from the book I read at 19." - Warren Buffett

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