»5 Minute Wrap Up by Equitymaster

On This Day - 25 JUNE 2011
Indians are now going abroad with a return ticket

In this issue:
» NSE penalised for abusing dominant market position
» Diesel price will send the inflation skyrocketing
» 51% of India workforce is self-employed
» Govt finalising US$ 11 bn infra fund
» ...and more!
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For answers to these questions, and more, click here to read on...


A couple of decades back it was trendy for many Indians to go to the lucrative developed world with a bag full of dreams. Students, entrepreneurs and employees who set aboard the ship to the foreign land seldom returned home. Why would they? The developed world had all the charms to mesmerise them: great opportunities, big money and high standards of living.

As a result, India suffered a "brain drain" as many of its brightest and highly talented folks left the country to work elsewhere. The problems back then were also that our own economy didn't have enough opportunities to harness the full potential of these natives.

But the picture has reversed drastically now. The centre of economic gravity has moved away from the Western world to the fast growing emerging markets such as India and China.

A recent research on entrepreneurship surveyed about 153 professionals who returned from the US to their native countries (India or China) to start a business. Majority of them asserted that there were bigger and better opportunities in their own countries than in the US.

This augurs well for India. Despite having a massive young workforce, we still suffer a serious dearth of highly skilled professionals, entrepreneurs and leaders who can drive the engine of economic growth going forward. So the returning emigrants will actually be valuable intellectual capital for our country.

But it would be too naive of us to raise the toast right away. There are several things that need to be fixed before we can gain the full advantage of such intellectual capital. Now, it is a widely known fact that start-up firms are very important for an economy's good health. For instance, 62.5% new jobs in the US are created by companies that are less than 5 years old.

But do we have a really conducive business environment for start-ups. Not really! Though our country abounds in opportunities, several factors such as a dearth of initial funding sources, lack of support infrastructure, regulatory hurdles, etc. are major roadblocks that entrepreneurs are constantly faced with. We need to build strong platforms to unleash the full potential of our returning emigrants.

Do you think India will live up to its promise for the returning emigrants? Share your comments with us or post your views on our Facebook page.

 Chart of the day
The government has done it again. Diesel prices have been hiked by Rs 3 per litre, kerosene prices have been raised by Rs 2 per litre and LPG (Liquefied Petroleum Gas) prices have been hiked by Rs 50 per cylinder. This price hike was largely anticipated. The state petroleum companies have been reeling with under-recoveries on oil for quite some time now. It was just a question of time as to when the prices would be raised to help ease the burden for these companies. The other alternative was to increase fuel subsidies which is not a very viable option given the impact subsidies have on the fiscal deficit. But this fuel price hike does not bode well for the country's citizens who are already facing the fire of higher inflation. Diesel forms nearly 4.7% of the total inflation basket. An increase in its price means that inflation is again set to spin out of control.

Such steep hikes in fuel prices are going to severely hurt both businesses and households. It is important to note that the hike would have been much higher had the government not lowered its taxes on fuels. The government has now abolished the 5% customs duty on crude oil. It has lowered the import duty on all petroleum products from 7.5% to 2.5%. Additionally, it has also cut excise on diesel from Rs 4.6 per litre to Rs 2 per litre.

Today's chart of the day shows that diesel prices in India are one of the highest in South Asia. While diesel costs a bit more in Pakistan, the same is substantially cheaper in neighbouring countries Bangladesh and Sri Lanka.

Data source: Hindustan Times

Remember the famous Microsoft antitrust case? It should be recalled that not very long back, the tech giant was accused of abusing monopoly power when it sought to bundle its flagship Internet Explorer web browser software with its Microsoft Windows operating system. It was alleged that this move prevented rival web browsers from competing freely in the market. Well, a similar battle seems to be brewing amongst the different stock exchanges in India. NSE, India's largest stock exchange and which, despite only setting up in the 1990s now dominates the market for equities, currencies and interest rate futures, has been slapped a fine of Rs 555 m for abusing its current dominant position.

MCX-SX, the rival of NSE and the firm which filed the case had alleged that the latter had attempted to kill competition in the currency derivatives market by, among other things, not opting to charge for its services. Competition Commission of India (CCI), which slapped the fine on NSE, found the accusations to be true and also directed the firm to refrain from activities that would unfairly protect its dominant position in the currency derivatives market. We believe that the action taken by CCI is indeed the right one. Trying to kill competition by cross subsidisation isn't really the right way to compete according to us.

Unemployment is a glaring problem around the world including India. Though the Indian government has already initiated schemes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), it is not proving to be enough for the existing work force. This is once again proved in the latest survey done by National Sample Survey Office (NSSO). As per the key findings of the survey, 51% of the country's total workforce is self-employed. Only 15.5% are regular wagers or salaried employees. Rest 33.5% are casual labourers.

The survey also highlights one more important point which is the difference between the wage levels of male and female workforce. Female-male wage ratio is 0.82 in the urban area. This ratio is even worse in the rural area, just 0.63.

It seems the Indian government's plans of revamping the country's infrastructure are finally beginning to take shape. As proposed, the government is finalising setting up of US$ 11 bn infrastructure fund. The debt fund will be used for financing the infrastructure projects of the country. It may be set up either as a trust or company. In the former case, it will function as a mutual fund whereby units will be issued to investors. If set up as a company, it will be in the form of a non banking finance company which will be regulated by the Reserve Bank of India (RBI). With this fund, the government is expecting to source long term capital from both local and overseas investors especially insurance and pension funds.

The Indian Government plans to spend US$ 1 trillion to build roads, ports and airports by 2017. The debt fund is expected to provide long term low cost financing options for these projects. The same is expected to get launched within a few months.

It was a mixed week for the world markets. While the Asian markets closed the week in the green, the markets in Europe and the Americas closed the week in the red. Hopes of the Greece crisis being resolved after the country's government won the confidence vote and release of oil from US' strategic reserve helped change the investor sentiments in the Asian markets. However, the European markets continued to remain cautious which put pressure on the major bourses in the continent. In the US, concerns on a possible QE3 programme after the unsuccessful QE2 programme ensured that the US markets closed the 7th week out of the last 8 in the red.

Japan was the biggest gainer of the week up 3.5% while France was the biggest loser down 1%. In Asia, China closed the week up 3.1% while Hong Kong was up by 2.2%. Indian stock markets were up by 2.1% after a surge of 513 point on Friday. This was on the back of positive sentiments that inflation would come down as the government would not raise diesel and LPG prices. However, the government's decision to raise the same late Friday night proved the markets wrong. Singapore closed the week up 2%. In Europe, UK and Germany were down 0.3% and 0.6% respectively. In the Americas, Brazil was down by 0.1% while US closed the week down 0.6%.

Source: Yahoo, kitco, cnnfn

 Weekend investing mantra
"Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes." - George Soros

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