»5 Minute Wrap Up by Equitymaster

On This Day - 16 SEPTEMBER 2011
India after two decades of economic reforms...

In this issue:
» RBI raises key lending rates 12th time in a row
» Petrol prices hiked yet again
» Indian promoters bag rich dividends in FY11
» TRAI proposes 'spectrum refarming'
» ...and more!
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A popular saying goes thus- "When you're already at the bottom of the pit, all you can do is go up." Rewind back two decades and you will find India in a pretty similar state. An economic crisis forced us to let go of the dead old ways. With a slew of economic reforms, the year 1991 marked a radical shift in India's economy. Two full decades have passed and we sure have come a long way. It's time to review what has worked for India and what has not.

The writer of a leading daily has presented an interesting perspective. According to him, there are two ways of looking at India's two decade performance. The most popular way, as we all know, is looking at the key economic indicators. The numbers look quite upbeat on that front. India's economy has been growing at an average rate of about 7-8%. This is quite superior to the 5-6% growth recorded in the two decades preceding 1991. Even at a time when the developed world is desperately trying to wriggle its way out of the economic turmoil and the debt crisis, India has maintained its position as the second fastest growing economy. There has been a laudable increase in exports and investment rates. Moreover, we have witnessed the rise of Indian enterprises as global entities during this very period.

Let's look at the other side of the coin as well. During these past two decades, the rich-poor gap has intensified, poverty still remains high, and employment generation has grown at a paltry rate. Here are the numbers- the Gini coefficient, which measures income inequality across households, has gone up from 25.8 in 1993-94 to 28.8 in 2009-10 in rural areas and from 31.9 in 1993.94 to 38.3 in 2009-10 in urban areas. The number of absolute poor in India has declined only marginally from 404.9 m in 1993-94 to 397 m in 2009-10. What is even more perplexing is that the average rate of employment generation during this period has been a meagre 1.3% per annum. This is significantly lower than the rate of population growth or the rate of growth of working age population. In fact, during the last five years the rate of employment growth has been the lowest at 0.2% per annum.

These numbers point to the grim fact that India's growth has been extremely skewed. We seriously need some important reforms to facilitate higher employment generation and to reduce the income disparities. What we fear is that important reforms similar to the ones enacted in 1991 will be put off until we again find ourselves in a situation when things go out of control. As they rightly say, history repeats itself. Or will it not? Time will tell.

According to you, who has benefitted most from India's economic reforms of 1991? Share your comments with us or post your views on our Facebook page.

 Chart of the day
Today's chart of the day compares the income tax rate of India with those countries with the highest tax rates. In India, 30% is the maximum marginal tax rate effective from taxable income of Rs 8 lakh and above. Though the numbers may suggest that India's tax rate is relatively lower, it would be unwise to jump to quick conclusions. Take Sweden for instance, where the tax rate is as high as 56.6%. What is worth mentioning here is the fact that the country has a comprehensive social security system which includes retirement pension insurance, health insurance, parenthood insurance, etc. Additionally, India has significantly high indirect taxes.

Data source: Rediff.com

With inflation stubbornly above the 9% mark, the RBI (Reserve Bank of India) had no choice but to continue with its policy of monetary tightening. The central bank believes that inflation will continue to remain a key risk, as prices are well above manageable levels. Oil prices have increased. Food inflation remains high despite a good monsoon. Thus, the RBI maintained its stance against inflation and hiked the repo rate by 0.25% to 8.25%. The reverse repo now stands adjusted at 7.25%. But, its stance going forward will depend on a downward movement in the inflation rate. A slowdown in domestic demand and a weak global environment are expected to contribute towards this. As policy action takes effect, inflation is expected to moderate in the second half of the fiscal. Or so we hope.

It's been more than a year since petrol prices were deregulated. However, it is hardly a freely priced product in India. In an inflationary scenario, state-run oil retailers still seek government's 'advice' before going for a hike. No wonder that under recoveries on this 'deregulated' product have already amounted to Rs 24.5 bn till date in the current fiscal.

To combat firm international fuel prices and slide of rupee against dollar, petrol prices have been raised to the extent of Rs 3 at the end user level. The adhoc price increase may to an extent reduce under recovery losses for state oil retailers and subsidy burden for companies like Oil & Natural Gas Corporation (ONGC). However, such piecemeal measures are just crude shocks to consumers and no substitute to clear pricing and subsidy sharing formulae for the sector. The lack of definite policies has led to too many casualties, the delay of ONGC FPO being the latest.

At a time when profits and return ratios remain muted, investors in equities have their eyes firmly fixed on dividend payouts. Dividends being tax free in the hands of the investor are also a preferred income stream. Companies that have a long and steady history of dividend payouts are certainly preferred for long term investment. But amongst them, ones having an attractive dividend yield (dividend to price per share) seem most alluring. It seems that large promoter groups in India Inc are making the most of their holdings by doling out dividends. As per a business daily, Azim Premji, promoter of IT heavyweight Wipro, took home the highest dividend than any other Indian promoter in 2010-11 (FY11).In fact, at 13.5 bn, his dividend receipts equaled 4.4% of the company's sales in FY11.

While profitability in India continues to be relatively higher than in the West, companies that are almost debt free enjoy significant free cash flows. Ones that do not have very capital intensive businesses do well by distributing dividends to shareholders, especially when the possibilities of lower growth rates and margin pressures in the near term have kept investor sentiments pessimistic.

Spectrum or bandwidth is the essential raw material for any telecom firm. But at the same time, the amount of spectrum available is limited. As a result, the government has a key role to play in terms of allocating this scarce spectrum in a fair and just manner. The telecom regulator (TRAI) has suggested that when the telecom operators' existing licenses come up for renewal in 2014, the government should consider 'spectrum refarming' as an option. Spectrum refarming essentially means that the users of the existing spectrum are forced out and the spectrum is reallocated in a manner that yields greater economic and/or social benefits. While this may theoretically sound like a good idea but what it entails can actually prove to be devastating for the sector as a whole. It would lead to chaos and turmoil for the users of the spectrum as operators would have to go through the bidding process all over again. For the operators too, this process may prove to be an expensive affair and would lead to increased costs. Considering the fact that they are already operating on thin margins, they would have no choice but to increase tariffs. This again would hurt the users. While spectrum refarming maybe a good idea in cases where spectrum is not fully utilised, it really does not make sense in a country like India where most operators are seeing full utilisation of their existing spectrum.

In the meanwhile, the Indian stock markets were trading in the positive. At the time of writing, the benchmark BSE Sensex was up by 185 points (1.1%). All sectoral indices were in the green except FMCG stocks. Asian stock markets too were up by more than a percentage each, led by South Korea (up by 3.7%) and Taiwan (up by 2.6%).

 Today's investing mantra
"If I had to sum up my practical skills, I would use one word: survival. And operating a hedge fund utilized my training in survival to the fullest." - George Soros

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