»5 Minute Wrap Up by Equitymaster

On This Day - 5 AUGUST 2010
Can India 'whistle blow' its way into the future?

In this issue:
» Where is housing most unaffordable in India?
» Where do Indians invest most of their savings?
» The Chinese are buying their third homes!
» Rich Americans give US$ 60 bn to Buffett
» ...and more!!

-------------- Become our Fan on Facebook and get a Thank-You gift --------------
On 10th August, at 10 am, we will launch our brand new investment guide, What the Charts Foretell, on how to understand the stock market better.
And we will launch this guide only on ...Yes, you guessed it right - Facebook! So become our fan and as a thank you gift, get this guide FREE. Quick! Just Go to Facebook. Click on the "Like" button and Become a Fan of Equitymaster now!

India does need more doctors, engineers, accountants, managers and teachers. But what it needs the most are whistle blowers. People who can save companies and the country from economic loss and embarrassment. The current state of the organizing committee of Commonwealth Games is pitiable to say the least. A disgrace to an economy of over a billion people making a claim to grow at the second fastest rate globally. And the government's solution is - 'whistle blowers'! It is now looking to pass a legislation safeguarding those who make an attempt to raise a voice against corruption. Given the kind of embarrassment that the Commonwealth Games has brought to India, it's probably too late. But as they say, better late than never!

Corruption has for long been the biggest drain on India's economic potential. And it is high time that a solution is sought to this problem. By the way, in an earlier issue of The Honest Truth, Ajit Dayal had suggested a different solution to this problem. That the post of 'Minister of Corruption' be created! He reasoned "The value of all products, goods, and services sold in India every year is about Rs. 49,50,000 crores (about USD 1.1 trillion). Wouldn't it be helpful if even 0.01% of India's annual GDP was spent on a Ministry of Corruption with its own investigations staff, its own courts and judges, its own jails?" Not a bad idea we think. But more importantly, what is needed to stop corruption is the spirit of pride in being an Indian.

What is your take on the corruption scandal that has hit the Commonwealth Games and the proposed solution of encouraging whistle-blowers? Tell us or make a post on our Facebook page.

 Chart of the day

Data source: RBI

Another area where corruption and greed have been deep rooted is construction of residential houses in Indian metros. And this has resulted in houses becoming unaffordable to a middle class household. As today's chart shows, house prices have risen by as much as 36% in metros like Delhi and Mumbai in the past 12 months. Thanks to artificial scarcity of space and faulty land policies. Mr. Deepak Parekh, Chairman of HDFC and a veteran on housing policies believes that multiplicity of approvals creates scarcity of supply, keeping prices elevated. According to him, land transactions have been made complicated to ensure that supply remains constrained and prices remain high.

Did you know that urban households in India earn 85% more than rural households? Or have you heard that an average Indian household spends 51% of its routine expenditure on food? Better still, are you aware that 63% of the households in India save for social ceremonies? Well, you need to go through the NCAER survey on Indian households if your answer to any or all of these questions is in the negative. The economic body has compiled many such interesting statistics in its survey titled How India, Earns, Spends and Saves.

Of particular interest to us was understanding where exactly does an average Indian household save its hard earned money? While it was heartening to know that 81% of Indian households save in some form or the other, the fact that 51% of those keep their savings in bank deposits did not exactly get our juices flowing. And it is this group that perhaps all the asset management companies and companies engaged in financial services will have to target if the Indian markets were to reduce their dependence on FIIs.

If you thought rising home prices was a phenomenon that was only taking place in Indian metros, think again! This problem has become acute in China as well. It may be recalled that prices of properties in China have reached unprecedented levels since the past one year. Indiscriminate bank lending was one of the main culprits of the same. So much so that people in Chinese cities such as Beijing, Shanghai, Shenzhen and Hangzhou are looking to purchase their third homes!

To curb this, the China Banking Regulatory Commission (CBRC) has instructed banks to stop extending mortgages to people buying their third homes. Especially in the four cities mentioned above. This puts to rest the speculation that China may ease curbs once again. Speculations that were doing the rounds because the economy had started slowing a tad. However, only time will tell whether the step will prevent the Chinese economy from having a hard landing.

The debate on inflation has been raging in the parliament these days. And why not? Inflation has become the bane of every Indian household. And in his defence, Pranab Mukherjee has said that a significant interest rate increase to tame inflation may not be such a good idea afterall. Infact, he went as far as to say that any such move could easily end up becoming a huge deterrent to investment, growth and job creation in the country. And so, the classic central bank dilemma of growth versus inflation continues. However, it must surely be added that one would be able to attach much more credibility to the RBI's policy moves had it not had the responsibility to double up as the government's debt manager.

The Tata Group will get its next Chairman by the end of 2012. This is if all goes according to the succession plan outlined by Mr. Ratan Tata, the current head. With a view to smoothly pass on the baton, Mr. Tata will be setting up a 5-member team to identify his successor.

We had recently read Mr. Tata tell the Wall Street Journal, "It would certainly be easier if that candidate were an Indian national. But now that 65% of our revenues come from overseas, it could also be an expatriate sitting in that position with justification now." In a country where family ties run deep and the successor is generally the promoter's son or nephew etc., Mr. Tata's plan comes like a breath of fresh air.

Anyways, Mr. Tata's shoes will be difficult to fill. This is considering that he has overseen the growth of the group's businesses with such a keen eye all these 19 years.

He did it in 1950s and now he is at it again. Back then he got people to give him money to invest in the markets and in turn helped them all earn millions. Now he is again asking people to part with their funds. But the difference is that this time it is for charity. We are talking about investment legend Warren Buffett. Buffett has managed to convince the richest Americans to pledge US$ 60 bn towards charitable and philanthropic causes. Buffett, famous for practicing what he preaches, has already pledged a large part of his assets to charity. He was joined by billionaire Bill Gates. Together they are now encouraging the wealthiest in America (as listed by Forbes) to join them in publicly pledging their wealth. The public statement is a way to encourage others to follow suit.

After a volatile session, the Indian indices moved closer to the dotted line as profit booking intensified in index heavyweights. The benchmark indices shed gains backed by profit booking in energy and banking stocks. Asia markets are trading a mixed bag with Japan and Indonesia leading the pack of gainers. The BSE-Sensex was trading nearly 37 points (0.2%) higher at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past." - Benjamin Graham

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407