»5 Minute Wrap Up by Equitymaster

On This Day - 7 DECEMBER 2009
This can push India into darkness...

In this issue:
» US firms step back on outsourcing
» Dr. Y.V. Reddy warns us against the 'new normal'
» Why the global oil prices are perfect?
» A 'double dip' recession is a serious possibility
» ...and more!!

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It is not uncommon for households and industries in India to keep backups for energy supply. After all, load shedding has been a regular menace even in metro and urban areas. As per World Bank, in 2008, India faced a 16.6% shortfall of electricity during hours of peak consumption. This was on the back of a 9.9% gap in energy generation. Coal is seen as the key solution to India's power shortage, a daunting barrier to the country's development. Primarily because people in semi urban and rural areas cannot afford costly electricity produced from renewable sources.

India has 10% of the world's coal reserves. India's reserves are the biggest after the US, Russia and China. However, it had to import about 70 m tonnes of high grade coal in FY09, mostly for making steel. The country plans to add 78.7 gigawatts of power generation capacity during the five years ending March 2012. Most of it will be from coal, which now accounts for about 60% of India's energy mix. Even if India remains on track with its renewable energy plans, coal will still account for about 55% of its power supply by 2030.

The emerging economies have often insisted that rich nations have caused global warming. The developed ones that are done with their industrial growth are happy to comply with emission norms. Renewable energy is steadily gaining ground in the West. However, looking at the high cost of solar and wind energy, the questions that arises is - can India afford them? India, the world's fourth largest greenhouse gas emitter is still very low on per-capita emission. The country's industrial electricity tariffs are amongst the highest in the world, a measure aimed at deterring wastage. Nevertheless, it is under pressure to cut pollution to battle climate change. This is at a time when the nation's demand for power is rising with more Indian middle class buying houses and electronic items.

India has committed to contributing towards reducing "carbon intensity". It has set a goal to rein the amount of carbon dioxide (CO2) emitted per unit of economic output by 20 - 25% until 2020. However, what is the price that the nation will have to pay? Does this mean that India's future will once again be pushed into 'darkness'?

 Chart of the day

Source: Mint

China and India are today the toast of the emerging world due to their high GDP growth rates. However, they have also been at the core of green house gas emissions over the past two decades. As today's chart of the day shows, China and India have nearly doubled their carbon emissions since 1990. The World Wide Fund For Nature (WWF) estimates need for emission cuts based on per capita emission. Thankfully, India is very low on this count, even when compared to China. The WWF model projects that the average per capita emission in 2020 needs to be around 4.6 tonnes and between 0.6 and 0.7 tonnes by 2050. India's per capita emission is currently 1.3 tonnes as compared to 5.3 tonnes in China, 15 tonnes in the UK and 20 tonnes in the US.

Amidst talks of recovery of the Indian IT sector, business dailies have reported a different trend. Many US-based companies are shifting their call center operations back to the US from India. It seems that restrictive government policies and a drive to create jobs back home are triggering these movements. With its low-cost and high-quality talent pool, the US Mideast is being considered as an alternative. Moreover, downturn has taught the US firms to take customers a lot more seriously. They want to ensure full and flawless customer satisfaction. Nevertheless, we do not see a sizeable impact of this trend on Indian BPO industry. India's low cost talent pool and value advantage coupled with expertise in off-shoring services will keep its leadership position intact.

The man who saved us from the global financial crisis is now warning us against the 'new normal'. This 'new normal' he believes will be a lot different from what the world saw two years back. We are talking about Dr. Y.V. Reddy, the former governor of the Reserve Bank of India. He has said in a recent interview that the exit from the easy money policy is going to be difficult for central banks worldwide.

However, he is of the view that the problems could be managed with a certain amount of coordination. But then he is worried as he says, "...the problem is thereafter, what is the normalcy to which you are going when you exit and that should be the new normalcy and that new normalcy should learn lessons from the past and avoid the same mistakes." We are in complete agreement to these words.

There have been allegations galore that the US authorities have learnt nothing from the credit crisis. And that they are in fact repeating the same mistakes. Well, thankfully, at least when it comes to credit rating agencies, they have decided to make a clean break with the past. The US Fed has taken a lead on this front. As per Moneynews, the US central bank has decided to widen the field of credit rating agencies. It will allow rating agencies that are registered with the SEC and that have experience in the securities being rated to participate in an 'asset backed securities' purchase program that was initiated by the US Fed. This change is expected to break the oligopoly of the three dominant ratings agencies viz. Standard and Poor's, Moody's Investors service and Fitch Ratings, which together account for 95% of the securities ratings market. Many have held the callousness of these three ratings agencies largely responsible for the sub-prime crisis, the one which nearly brought the US financial system on the brink of a collapse. Thus, by expanding the field, the US Fed seems to have sent a message to investors and public that it is indeed serious about righting some of its earlier wrongs.

Buyers of any commodity would want a low price. On the other hand, sellers would prefer a higher price. What neither wants is volatility. It ruins the planning process of both the buyers and sellers. It is in this context, we must view the recent statement of Saudi Arabia's oil minister that current global oil prices are 'perfect'. The Organization of the Petroleum Exporting Countries (OPEC), which accounts for roughly 35% of the world's crude supply, has not changed its output level since last year's production cut of 4.2 m barrels per day. And given their preference for oil prices in the range of US$ 70 to US$ 80 per barrel, they are unlikely to change output levels. In our view, crude prices will witness a long term upward rise unless alternate sources of energy reach mass scale and commercial viability.

The Sensex continues its flirting with the 17,000 level. Probably, with the hope of better times to come. But renowned economist Paul Krugman certainly has a different view for the US economy atleast. The chances of a relapse into recession seem to be steadily rising according to him. That the US is going to have a 'double dip' recession is quite a serious possibility opines Krugman. The reason? First, stimulus driven growth will hit its maximum impact on the level of GDP in the middle of next year. Second, the rise in manufacturing production is to a large extent an 'inventory bounce' (companies restocking their severely cut down inventories), and this, too, will fade out in the quarters ahead. And if the US were to slip into another recession, the consequences for India's optimistic stock markets could also be dire.

Meanwhile, Indian markets witnessed a volatile trading session today after a weak start and the BSE-Sensex was down nearly 118 points at the time of writing. Stocks from the commodity and power sectors were amongst the lead contributors to the overall weakness. Amongst global indices, while the Asian markets are trading a mixed bag, Europe has opened in the red.

 Today's investing mantra
"Any fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction." - Albert Einstein

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