»5 Minute Wrap Up by Equitymaster

On This Day - 22 OCTOBER 2011
Can India Inc. continue its current way of doing business?

In this issue:
» Youth unemployment in the West on the rise
» Balancing growth & inflation a tougher task for US Fed
» What will be the RBI's next step?
» Traditional banking business has declined
» ...and more!
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India Inc. has come a long way. And it is the private sector that has put the country on the global map given that companies in this space have been more dynamic, optimistic and nimble footed than their peers in the public sector space. And if India is to become the world's third largest economy in the future then all hopes will be pinned on the private sector to help the country achieve its goal. Especially if the government continues to be myopic in terms of introducing reforms that will take India's growth to the next level.

What makes Indian companies unique is that many of them are family run businesses who are ready to take the responsibility and spend large amounts of money on long term projects in India. This has helped many of them to become conglomerates. This business model is viewed favourably by quite a few companies since it gives the management more headroom to raise capital without having to cede control. What is more, the inadequacies of the government have also in a sense helped family run businesses to thrive. Legal issues are a grey area, infrastructure is often poor, supply chains not well developed, red tape a hazard, and markets for people, materials and finished goods unreliable. As a result, as the Economist points out, companies have take upon themselves the responsibility of doing things on their own and have worked out a system by which they can capitalise on the shortcomings of the government. Unfortunately, in many cases, it has also led to wide scale corruption.

But can this style of doing business continue for long? Indeed, today's way of doing things reflects a rational response to the way the government operates, and has helped India's economy motor along despite them. But at some point, the returns may not be that beneficial. Because at the end of the day, for India to be even considered as a country to be reckoned with, it will have to tackle the chronic issues of poor infrastructure, corruption, land allocation, education among others. It then follows that if the government is able to suitably address these concerns, the current way of doing business in India will no longer hold good. Given how slow and ineffective the government has been, this may not be such a big problem now, but is certainly a scenario that cannot be ruled out.

That said, Indian businesses do have the ability to adapt and the above scenario playing out may not turn out to be a very big challenge. But they will have a bigger responsibility towards the Indian people who have much higher expectations from them than they have from the government. And those companies which will have the ability to lead and not merely follow and at the same time have impeccable corporate governance practices to match will certainly stand the test of time.

Will India Inc. be able to continue doing business the way it has in the years ahead? Share with us or post your comments on our Facebook page.

 Chart of the day
It is a well documented fact that prolonged recession in the developed world has resulted in a surge in overall unemployment. And what these countries will have to worry about more is the unemployment prevalent among the youth. As today's chart of the day shows, youth unemployment has risen in the developed world with Spain leading the pack at 46%. Indeed, over time unemployment among the young population can be a dangerous thing as it means years lost due to no jobs, unattractive salaries and the diminishing prospect of getting a better job in the future. What is more, it creates great unrest and the prospect of revolution of the kind we have been witnessing in certain countries.

Data Source: The Economist

We may be blaming the Reserve Bank of India (RBI) for being incompetent in taming inflation. But balancing growth and inflation could be tougher task to handle for the US Fed as compared to any other central bank. According to Fed Governor Charles Plosser the US Fed needs to step up on its monetary tightening act. Else the will be too much liquidity chasing too few goods. Plosser believes that the US economy could grow between 2.5% to 3% in 2012, if no major obstacles crop up. However, in the current excess liquidity scenario, even a nominal growth rate could spurt price rises in the economy. More importantly he offered a very critical advice to the US central bank. That of safeguarding its own reputation. By stoking inflation under the pretext of supporting economic growth with loose monetary policies the Fed may not be doing any favour to itself. We wonder why Mr Bernanke has chosen to turn deaf ears to some smart advice at his disposal!

The RBI has thrown everything in its arsenal at stubborn inflation. But prices refuse to budge. The latest food inflation number, based on the wholesale price index, came in 10.6% higher from a year earlier. All eyes are now on the central bank, who meets early next week to decide its latest monetary policy stance. Is 13 the lucky number for the RBI, or will it stop after a dozen rate hikes? 12 rate hikes and a 5% increase in policy rates have done nothing to dampen inflationary pressure. Since it hasn't succeeded at cooling inflation, maybe easing its aggressive stance to not damage growth further may be a better option. But, since its prime responsibility is to tame inflation, India may not be out of the woods just yet.

The commercial office space business, which has been the only bright spot in a grim real estate market has also hit turbulence. Rising interest rates and inadequate financing are blamed for the slowdown. Moreover delays in clearances have also added to the builders woos. According to a leading consultant firm, leasing activity has fallen around 33% in the commercial segment in the last quarter. This is the first decline in over a year. The report has also said that sale of office space, has fallen by 35% month-on-month and 25% year on year, indicating a slowdown. However developers point out that while companies might not be taking space for expansion at the moment, consolidation of space is still happening. Corporates are feeling the need to have all operations under one roof, which will bring economies of scale, as there is pressure to cut costs. They have reduced space per employee by decreasing common area sizes. These measures are helping companies optimise their real estate usage and reduce costs by at least 25%.

There was a time, not too long ago, when the best business to be in was the business of banking. However, this does not seem to be the case anymore. Go anywhere in the world and every banker has a sob story. The global financial crisis has hurt them all in some way or the other. Business from the traditional banking business has declined as people no longer wish to avail loans due to their own financial troubles. To top this the increased regulations have made it difficult for banks to earn through the innovative financial products as they used to in happier times. Increased regulation has actually hurt banks in more than one way. In addition to killing the lucrative business from financial innovation, it has also led to higher costs of compliance. This in turn has increased their cost income ratios thereby hurting their margins. One may think that the situation is better in the developing world. Well to some extent it is. Banks in countries like India are not bleeding. But higher interest rates have hurt their business as well. Nevertheless they are still in a much better position vis-a-vis their western counterparts. And we all know who to thank for that - the RBI.

It was a mixed week for the global stock markets. While the US and the UK were up by 1.4% and 0.4% each, most of the Asian and European markets closed the week in the red. The US markets in particular saw their highest levels since early August in anticipation of the upcoming European Union summit. The US markets also got a boost from strong earnings declared by blue-chip companies. As per Thomson Reuters, most of the S&P 500 companies that have declared results so far have exceeded analyst expectations.

Indian stock markets however fell by almost 1.7%. The markets were plagued with a number of fears including the worsening of European debt crisis resulting in the outflow of FII (Foreign Institutional Investor) money. There were concerns about inflation remaining at intolerably high levels and the RBI hiking interest rates yet again. Amongst the other world markets, Brazil and Germany were up by 0.4% and 0.1% respectively. Asian stock markets were down led by China (down by 4.4%).

Data Source: Yahoo Finance

 Weekend investing mantra
"What you really want to do in investments is figure out what's important and knowable. If it's unimportant or unknowable you forget about it." - Warren Buffett

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