»5 Minute Wrap Up by Equitymaster

On This Day - 7 JUNE 2011
Why Indian manufacturing is yet to become world-class

In this issue:
» Is the new flurry of internet IPOs worrying?
» French FM looks to India for supporting IMF candidature
» Consumption story gaining ground in emerging markets
» US banking laws lack muscle
» ...and more!
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One similarity between China and India is that both have exhibited scorching pace of growth over the past few years. But while China has established a strong foothold in manufacturing, India's growth has been fuelled by the services sector. And while it is no match to China in the manufacturing arena, India is looking to make improvements in manufacturing and production which will provide a further fillip to GDP growth.

But that may not be so simple. Today India boasts of world class companies which set strong standards not just in India but also in the global markets. India Inc. is also hopeful of strong growth in sales and profits in the years to come led by strong growth in the economy. But unless Indian companies are careful, certain issues could well prove to thwart their growth efforts. Take labour issues for instance. Recently, auto major Maruti has had to deal with loss of production of around 1,800 units at its Manesar plant due to strike by workers. Earlier this year, a 50-day long strike by a section of workers at the General Motor's Halol plant cost the firm to lose production of 2,000-2,500 units.

While for the time being these might be near term concerns for Maruti, India Inc. in general will have to ensure that this kind of labour unrest does not become a regular feature. For indeed, a restrictive labour law environment has been one of the major hurdles to the development of the Indian manufacturing sector. Thus, corporate India will have to evaluate existing labour laws which are quite archaic on a priority basis. It will have to work towards ensuring that there is a major overhaul in these laws in keeping with the changes in the economic and industrial landscape. Otherwise, India's hopes to become a world class manufacturing behemoth will only be a distant dream.

Do you think that India's restrictive labour laws are the prime factor that could hamper its manufacturing industry in the future? Share with us or post your comments on facebook page.

 Chart of the day
India's GDP growth in the first quarter of 2011 saw some slowdown on account of interest rate hikes to curb inflation and surge in commodity prices. But today's chart of the day shows that India along with China still emerged as the top nations in terms of GDP growth during the quarter. And although both these emerging behemoths are likely to face headwinds as they battle to bring inflation under control, growth in these regions is still expected to beat that in the developed world.

Data Source: The Economist

A new wave of internet IPOs has begun to make its presence felt in equity markets. While shares of LinkedIn Corp have sold faster than hot cakes, others like Groupon, Facebook and Twitter are waiting in the wings. Clearly, never since the dotcom bust have so many internet companies longed to go public at virtually the same time. Will the script go wrong this time as well? It should be noted that the last stampede into internet stocks had an ending that few would like to remember. Billions of dollars worth of wealth was lost. While there were lawsuits galore and quite a few investment banks were pulled up, we don't think things have changed much. In fact, things have remained the same for a period going as far back as 70-80 years. Thus, watching out for things like a sound management team, a long track record of growth and profitability and reasonable valuations remains our only defense if we want to prevent our hard earned money from getting lost in IPOs.

It was just about two decades back when India air lifted its gold reserves to pledge with the International Monetary Fund (IMF). This was against a loan to relieve India from a critical deficit crisis. Ever since then, India's debt servicing ability has improved from strength to strength. And so has the importance of India and other emerging economies in the eyes of global economic heavyweights. We are therefore least surprised at the news of French Finance Minister Christine Lagarde, proposed IMF chief, visiting India to seek support for her candidature. Unlike China, India has maintained her opinion about emerging economies finding more voice in organizations like IMF. Hence the French Finance Minister is certainly not the top choice of Indian policymakers. Also, the Euro zone's obsession with retaining the top position in the IMF does not bode well for the long term prospects of developing nations. Having said that we will not be surprised if Ms Lagarde manages to fetch the India vote. A Chinese candidate for the post may do little good to India's standing at the IMF. And in the absence of a suitable opposition to Ms Lagarde, India may be left with little choice.

The consumption story for investments has been doing the rounds for quite some time now. Investors are hungrily lapping up stocks of sectors that are expected to do well on the back of higher domestic consumption. The emerging markets have emerged as the investors' favourite destination yet again even for this story. Global investors are now flocking to the sectors that are expected to ride the consumption boom.

Markets in US, Europe and even Japan have seen tougher times. Lower economic growth as well as the heavy burden of debt has forced investors to look away from them. With higher returns, emerging markets have been attracting investments in recent times. However, a major part of these funds were invested in the commodity sectors. However, commodity prices have seen a cool off in recent times. This has led global investors to look at alternatives. And consumption driven sectors appear to be the new hot favourites.

It's close to three years since the Lehman Brothers collapse. But, new banking laws in the US still do not have the necessary muscle to prevent another meltdown. In fact, the very bankers that created the subprime mess have an unfair advantage over their European peers.

The US is yet to implement Basel II capital adequacy standards, which the EU implemented in 2006. Post the crisis, major industrialised nations agreed to cut back on incentives for risk-taking. But, the US mostly used non-binding terms to implement this deal. It does not enforce a particular cash-limit on executive bonuses. Paying fat-cat bankers hefty bonuses and later having to bail them out caused significant public outrage a few years back. For the public to have faith in the banking system and regulators, the US needs to work on ironing out these issues. They may not get a second life next time around.

It is close to four years now since OPEC has kept its official supply of crude unchanged. Speculations run high as OPEC plans to meet again. OPEC has a reputation to be indifferent to global energy needs. However, the situation has changed this time. We have seen supply crisis from countries like Egypt and Libya. Oil prices are running stubbornly high. The demand is expected to be high as summers arrive and of refineries' maintenance season approaches an end.

Saudi Arabia has already raised its production ahead of cartel's meeting. However, there are others OPEC members like Venezuela and Nigeria that choose to under produce. With underlying political tensions among the member nations, this meeting is definitely going to be a charged one. What makes the policy trickier is balance of supply among the member nations. Any proposition to change the relative share can lead to further political tensions among them. But what is in it for us? Any boost in quotas up to or less than 1.3 million barrels per day may not translate into actual increase in supplies. This is because the earlier supply limits have already been flouted and a limited increase will only formalize it.

In the meanwhile the Indian stock markets have been trading strong. At the time of writing, the benchmark BSE Sensex was up by 72 points (0.2%). All sectoral indices were in the green except capital goods. Asian stock markets were trading mixed with China, Japan and Taiwan among the gainers. The other Asian markets were trading weak. Europe has opened in the green.

 Today's investing mantra
"Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical." - John Templeton

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