»5 Minute Wrap Up by Equitymaster

On This Day - 19 SEPTEMBER 2011
The hottest sector in this raging inflation scenario is..

In this issue:
» Owning a car gets more expensive
» Is RBI killing India's growth?
» Govt. plans to puncture oil subsidy balloon
» Power sector-paying the penalty of populist policies
» ...and more!
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Last week's inflation data was disappointing. There was no respite as prices continued to spiral upwards. As a result, the Reserve Bank of India (RBI) decided to put its foot harder on the brake by increasing the interest rates. Little wonder that this move had nearly all the industries and economic sectors screaming in pain as they expect growth to slow down. But there is one sector that appears to be partying harder as inflation goes up. And this is the agriculture sector.

Rising food inflation has brought to light the increasing demand for food. As a result the agriculture sector faces the daunting task of feeding a larger base of population. And that too with limited resources (agriculture land cannot be increased at will). This in turn has brought about a major change in which agricultural activity is carried out. Use of new technologies, technologically enhanced seeds, use of fertilizers, etc has now become a common thing. And all this has led to an increase in demand for companies that engage in providing these services or that rely on agriculture for their growth.

But the Indian government has tried to do its bit here by imposing price controls on the agricultural inputs like seeds, fertilizers, etc. The reason - the government feels that higher prices would hurt the farmers. Considering the fact that this sector is the probably the only one that is doing well, this approach of the government may just be another populist approach. Such controls discourage companies from entering the sector. This in turn hampers the overall future growth of the sector. Therefore, it is important for the government to adopt liberalized policies that would be to the benefit of all - the farmers as well as the companies.

Do you think the government is right in imposing price controls in the agriculture sector? Share your comments with us or post your views on our Facebook page.

 Chart of the day
A leading daily carried out an interesting study. It was to establish how expensive it is to own a car in the wake of increasing fuel prices as well as higher interest rates. For the purpose of the study, the daily studied the cost of owning a Maruti Alto that gives fuel efficiency of 14km /liter and is run for 5 years with 12,000 km each year. The study showed that cost of owning and driving such a vehicle has gone up by nearly 14.3% since May 2010, when the Reserve Bank of India aggressively started increasing interest rates. Combine this with higher fuel prices as well as increasing prices of the car itself, it is little wonder why demand for cars has seen a slowdown in recent times. In fact, the Automobile Association expects demand for cars to slowdown even during the otherwise robust festive season.

Data source: Economic times

Last week, the RBI managed to keep its image intact. Arguably, one of the most hawkish central banks in the world, it chose to raise rates on yet another occasion and took the inflation devil head on. This move though is not going down well with India Inc. And they are making no bones about letting their displeasure with the RBI known to the public. In fact, a few economists in the Government are also apparently miffed with the central bank's decision. With inflation failing to come down despite umpteen rate hikes, they are terming the RBI's policy as a failure.

Is that really the case? We certainly don't think so. Looking at it from a 'glass half full' point of view, one would realise that although inflation has not gone down, it would have run up even more had the central bank not intervened. Also, from a long term perspective what we need is low inflation and more equitable growth rather than have a strong growth that is fuelled by cheap money. As the US has found out, a growth fuelled by cheap money looks good while it lasts but wrecks tremendous damage when the bubble bursts. Thus, it is always better to grow relatively slower if that growth has a great deal of stability and low inflation. And this is exactly what the RBI is trying to accomplish and hence, should be fully supported in its endeavour we believe.

Oil prices have hardly been as much of a slippery issue for the government in the past. But years of callous subsidizing of oil prices seems to have finally landed the government in a quandary. Despite some recent bold moves like making petrol prices market driven, the under recoveries for oil marketing company look gargantuan! At Rs 1.2 trillion the under recoveries for the oil marketers in 2011-12 dwarf the budgetary support to meet the subsidy burden (Rs 200 bn). Hence the government is now looking at other ways to cut down the ballooning subsidy bill on oil. With a precarious fiscal deficit situation, the policymakers are left with little option. In fact even the rating agencies are keeping a close watch on India's fiscal situation and have warned of a downgrade if the scenario shows no signs of improvement.

Utilization of Rs 250 bn of government savings, cut down of expenditure on other welfare schemes and rollover of part of the burden to next year are some of the options being looked into. Cutting down outlay on rural development, healthcare and HRD schemes need to be handled with much care as this too can backfire. Rolling over subsidy burden to subsequent years is certainly not a wise or a long term solution as the high oil prices may prevail. Hence, we believe that the government should instead take a more sustainable approach and invest in building the country's own energy resources to make the economy more self sufficient.

The power sector has been dogged with problems, and reforms are long overdue in the space. According to a recent industry report, bank loans to the power sector for up to Rs 1.4 trillion could be at risk. The main reasons are non-revision of retail tariffs over long periods, non-availability of coal linkages and other delays. However, these risks are possible to mitigate with a few simple reforms. However, implementing these may be easier said than done.

Electricity regulators keep tariffs unchanged for a number of years; despite rising power costs. They do not raise tariffs mainly due to political pressure. Recently Delhi was given the go ahead to raise tariffs, after almost a decade! An efficient mechanism is needed to make power regulators more accountable and tariff revision needs to take place on a regular basis. The Prime Minister has called for such reforms, however when this will fall in place is a different story altogether.

The Indian telecom sector has been at the receiving end in recent times what with the advent of stiff competition and various regulations propounded by the regulator. What is more, metros and urban areas also appear to have become highly saturated markets as a result of which focus has now been shifted towards providing more value added services. But there is still hope for telecom companies to increase subscriptions and revenues. And a large part is expected to come from the semi-urban and rural areas. Indeed, rising disposable income in the hands of consumers living in semi-urban and rural areas is expected to boost domestic consumerism and the telecom sector is likely to benefit quite a bit from the same. Thus, most of the leading wireless operators are striving to increase their presence in towns and rural India. If one looks at the number of net subscriber additions at the end of July 2011 over a year ago, Reliance Communications accounts for 19% of the total net additions of 194 m users in B and C circles. Bharti Airtel (15% share) and Vodafone (13%) follow close on its heels. That said, the worry in these areas is that subscribers would have lower inclination to spend on telecom services which would impact profitability of companies since the average per user revenue would decline. However, this problem could be mitigated with the availability of low-cost smart phones that can offer functionality beyond basic voice and text services increases.

In the meanwhile, the Indian stock markets have been trading weak today. At the time of writing, the benchmark BSE Sensex was trading lower by 185 points (1%). All the sectors were trading in the red with maximum loss witnessed in capital goods and banking sector. Barring Japan, the other Asian stock markets too were trading weak with Hong Kong losing the most. The European stocks markets have opened on a mixed note.

 Today's investing mantra
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring." - George Soros

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