»5 Minute Wrap Up by Equitymaster

On This Day - 31 JULY 2008
US deficit can re-build India

In this issue:
» We may be a 'power starved' nation
» A case for disinvestment
» India rupee to depreciate by 6.4% against the US dollar
» India is outsourcing 'outsourcing'
» ...and more!

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We will be not food but 'power starved' nation!
The Indian government has asked power generation utilities such as NTPC to not shut their thermal power plants for repairs and maintenance during the monsoon season due to soaring demand and lower-than-expected output from hydropower plants, which have been plagued by weak rainfall and high silt levels. But this directive could result in significant problems and potential power outages. While routine annual maintenance takes around 10 days, capital maintenance requires plants to be closed for 50 to 60 days. The more intensive capital maintenance work is typically done every five years. The majority of these thermal power units are owned by NTPC, India's largest power generation utility, which has a power generation capacity of 29,749 MW.

India has an installed hydropower capacity of around 32,300 MW and plans to add another 16,500 MW by 2012. However, delays in securing environment and forest clearances have ensured that these targets will not be met.

According to India's meteorological department, though the country saw only a 2% dip in rainfall from what is normal (based on a 60-year average), the months of June and July saw shortfalls as high as 15% and 32% respectively in large parts of South and Central India. Historically, during the monsoon season, when there is a rise in hydropower generation, thermal generation units are shut for maintenance. However, with hydropower generation remaining stagnant mainly due to poor rainfall, there is no cushion to meet the growing demand. According to the Central Electricity Authority (CEA), India's apex power sector planning body, for the period between 1 April and 21 July 2008, hydropower generation in the Western, Eastern and North Eastern states fell short of targets by 8%, 14% and 20% respectively.

Though India is supposed to have the third fastest growth in the world's installed capacity for power over the next quarter of century, it will be so from a very small base. India's per capita consumption of electricity at 553 units per annum is one-third of China and one-fifth of the world average of 2,429 units.

Brighter than India...
(Gigawatts) 2004 2010E 2015E 2020E 2025E 2030E CAGR
USA 946 998 960 1,010 1,076 1,159 0.8%
China 391 510 631 764 886 1,014 3.9%
Russia 215 230 248 271 288 312 1.5%
India 131 165 201 233 262 296 3.3%
Japan 244 273 271 277 281 289 0.7%
Brazil 87 119 139 161 183 204 3.5%
Canada 118 122 136 144 150 155 1.1%
Mexico 50 56 68 80 91 104 3.0%
South Korea 59 77 83 86 89 94 1.9%
ANZ 57 63 69 73 76 81 1.4%
Source: International Energy Association

  • Also read - India's energy hunt

    A case for disinvestment
    Indian citizens are discovering to their horror just how empty the government's rhetoric of responsible budgeting has been. The damaging implications of fiscal indiscipline have so far been masked by a high rate of economic growth. With Fitch Ratings cutting India's debt outlook to negative, the veneer is now peeling off.

    Morgan Stanley in its Global Economic Forum has predicted that at an average price of crude oil at US$ 120 a barrel, the total budgetary deficit would be 10.4% of GDP in FY09, up from just 7.7% in FY08. If instead of US$ 120, the average price of oil were to be assumed to touch US$ 135 a barrel, the deficit estimate would rise to 11.4%. The last time the overall deficit exceeded 11% in India was in FY02. Back then, the economy was growing at an annual pace of about 5.8% YoY, against the RBI's forecast of at least 8% YoY expansion in GDP for the current fiscal. The inflation rate (WPI) was less than 2%, compared to about 12% now. Not to mention, the treatment of the deficit was done very differently than it is currently.

    The then president Mr. K.R. Narayanan had, in his address to Parliament, quipped, "Disinvestment in public sector enterprises is no longer a matter of choice, but an imperative," thereby setting the government's agenda. The government of then prime minister Mr. Atal Bihari Vajpayee turned the bleak fiscal situation into an opportunity to sell state ownership of key assets to private investors, in the process raising US$ 5 bn in three years. In May 2004, the government changed and it obliged to the Left's demand of halting privatisation. In the four years that followed, asset-sale revenue dwindled to US$ 1.5 bn, even as the benchmark BSE-Sensex almost tripled in this period.

    With the nuclear deal issue finally teaching the government that the 'Left may not always be right', probably it will take steps in the direction of disinvestments as well.

    The recent proposal to offload 21% stake in Axis Bank held through SUUTI (Special Undertaking of UTI, which currently holds 27% stake with 6% lock-in) to raise approximately Rs 53 bn out of the Rs 90 bn budgeted for this fiscal is already a step in that direction.

  • Also read - Manmohan Singh shaken but not stirred

    Banks see change of fortunes
    In what unfolded as a change of fortunes, both good and bad for Indian banking companies, the first quarter of FY09 was quite a revelation. Slower growth, treasury losses, lower margins, rising defaults, you name it and it was affecting the performance of players in the sector. It forced aggressive players like ICICI Bank to bite the dust and grow slower than PSU behemoths like SBI and Bank of Baroda. Even that did not help ICICI Bank from hiding its delinquencies. Public sector banks despite faring better than some of their private sector counterparts in terms of growth and asset quality, took a hit on margins because of lower lending rates and farm loan waivers. HDFC Bank saw the numbers of Centurion Bank of Punjab (CBoP) get integrated with itself giving it a quantum jump in size and scale but poorer margins and quality. Having said that, the quarter amply distinguished the players that can withstand the storm from those that can wilt under pressure.

  • Also read - Our view on performance of banks in 1QFY09

    "Teach your children Chinese"...
    ...says Jim Rogers, the creator of the Rogers International Commodities Index (RICI). Roger believes that China, which is clocking growth rate in excess of 10% year after year and saving and investing 35% of that, is set to change the world. The legendry commodity investor, however, also reiterates that the most populous country in the world, unlike India, will continue to have a linguistic problem and thus it is our duty to keep our future generation familiar with the Mandarin language. One may also recall that Rogers had advised Americans to learn Japanese way back in the 1980's!

  • Also read - Our interview with Jim Rogers

    US deficit can build another India
    The US government recently announced a record US$ 490 bn budgetary gap. The bigger shortfall reflects dwindling tax receipts because of the economic slowdown, the cost of the US$ 168 bn economic stimulus package and spending on the wars in Iraq and Afghanistan. The Bush government had inherited a budget surplus of US$ 128 bn in 2001. The budget worsened almost immediately because of recession, the Sept 11 attacks, the beginning of the war in Afghanistan and later, the war in Iraq. To date, the country's total debt - which includes the annual deficits accrued over time - is US$ 9.5 trillion. No matter which presidential candidate gets elected, the US tax collection and spending plans will be severely constrained by these massive deficits. With the announcement of the record deficit, it should come as no surprise that the US Treasury predicted it would borrow 53% more this year than initially forecast.

    The deficit amount, close to US$ 500 bn that is India's Eleventh 5-year plan (2007-11) infrastructure investment outlay, reminds us of funds wasted in developed economies that can help build, nurture and develop many developing and under-developed economies.

    Two Indian companies and a terrorist connection?
    Oh, don't get us wrong. We are citing a report from a leading business daily which says that Indian engineering majors - L&T and Punj Lloyd - figure in the list of several international companies that have teamed up to implement two multi-billion dollar construction projects - one each in Africa and the Middle East. The estimated cost of these projects is US$ 200 bn, with execution expected to take place over a 12 to 15 year period.

    But where's the terrorist connection? Well, the projects have been conceptualised by Al Noor Holding Investment, the company owned by Sheikh Tarek Bin Laden, brother of Osama Bin Laden.

    In the meanwhile...
    While most of the other Asian indices held their ground today, the Indian benchmark index - BSE-Sensex - was volatile, closing marginally in the positive. Key European indices have started on a choppy note today due to concerns over job losses, particularly in the auto manufacturing and financial sectors. As reported on CNN's financial website, the US markets are expected to remain subdued as financial firms of all types have shed an estimated 63,000 jobs over the past year, according to the latest employment figures from the country's Labour Department.

    Global markets continue to take mixed cues from the results of financial behemoths that are still reeling with subprime write-downs and the efforts of the US government to salvage the same. The US government yesterday signed a bill to offer affordable government-backed mortgages to homeowners at risk of foreclosure. The law will also bolster government-sponsored mortgage finance giants Fannie Mae and Freddie Mac with a temporary rescue plan and stricter regulation.

    Dirty politics keeps development at bay
    The efforts of Samajwadi Party to stitch an alliance of the UPA with Trinamool Congress may prove to be a case of dirty politics that may ruin the prospects of much-needed industrial development in the state of West Bengal. The Samajwadi Party's support in the fight against land acquisition in Singur would certainly spill trouble for the Tatas. The former has already confirmed protest against Tata Motors' project as well as Trinamool Congress' campaign against large retailers.

    Indian rupee to depreciate by 6.4%...
    ...against the US dollar to 45.23 this year, says a report from the global investment bank, Morgan Stanley. While oil has come of its highs of US$ 147 a barrel, Bloomberg reports that Morgan Stanley expects Asian countries to see a fall in the value of their currencies even if oil was drop down to US$ 100 a barrel. The culprits responsible for the currency depreciation will be the high fuel cost imports and negative current account balances. As Stephen Jen, the chief currency economist at Morgan Stanley quips, "The biggest shock to Asia is not the US housing crisis but the oil shock." He expects the India rupee to depreciate by 6.4% against the US dollar to 45.23 this year.

    Due to huge fuel subsidies, Indian consumers to a large extent have been protected by the government from the crippling effect of soaring crude prices. This obviously cannot continue for long as the oil PSUs continue to bleed and the government did hike fuel prices in the last two months. Given that India's inflation is hovering dangerously below the 12% mark, higher crude prices will only aggravate the situation further. As regards its peers, while China plans to deregulate gasoline and diesel prices with a possibility of hikes post the Olympics, Indonesia, Malaysia and Vietnam have all undertaken price hikes in the past few months.

    India is outsourcing 'outsourcing'
    So reads the headline of a report in the New York Times. The report is about how Indian technology companies, to fight on the shifting terrain and beat back emerging rivals, are hiring workers and opening offices in developing countries themselves, before their clients do. Over the past couple of years, a trend of rising wages, volatile currency, growing demand for workers who speak languages other than English, and competition from countries looking to emulate India's success as a back office (including China, Morocco and Mexico) are challenging the Indian offshoring model. And managements of most of these companies have come to acknowledge that offshore outsourcing, which has mostly made its way to India, will increasingly sprinkle around the globe.

    This is the reason a host of companies, including the biggies like TCS, Infosys, Wipro and Satyam are buying out office space and hiring local people in countries like Mexico, the Philippines, Portugal, Romania and Saudi Arabia. Good to see that as outsourcing takes on new directions, old perceptions are giving way to a new line of thing in the Indian technology camp.

    Weapons of mass destruction have struck...
    ...the books of Deutsche Bank, the largest bank in Germany. As reported on the Bloomberg, the bank has reported a 64% YoY decline in profits on account of write-downs on mortgage securities (a.k.a. weapons of mass destruction for US capitalism). Despite these losses, the stock price of the bank remains unchanged over yesterday's levels plainly because the performance is "better than" what analysts were expecting! The collapse of the US subprime mortgage market has already led to US$ 480 bn of credit losses and write-downs at financial institutions globally. And if expert view is anything to go by, this is just half of the pain that is yet to be felt.

  • Also read - Trillion dollar meltdown

    Today's investing mantra:
    ""The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett

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