»5 Minute Wrap Up by Equitymaster

On This Day - 12 JULY 2010
Will anybody be answerable for these Rs 293 bn?

In this issue:
» Why fuel price hikes were essential?
» SEBI strikes mutual funds once again
» The government now takes the QIP route
» China's property prices snap 15 months of gains
» ...and more!!

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Loads of media space has been devoted to discussions on India's infrastructure investment plans. Most of it gathered steam ever since the Planning Commission outlined its US$ 500 bn outlay until 2012. An equal enthusiasm was shown towards the government's ambitious road building target. '20-kms a day' seemed rather fancy for a country known for its snail paced execution. But for once, many of us took these targets rather seriously.

It has been 3 years since the eleventh plan period took off. And it has been nearly a year since the road building target was laid. Neither has offered us much reason to cheer about. Be it building roads or power plants India's reputation for poor execution rate has remained intact. While lack of funds from private players has been a key reason, there are others too. For instance disputes over land acquisition. But the government believes that raising funds from retail investors could be a viable solution to the former.

With this in mind, it proposed issuing tax free bonds with a 10-year lock in period. If successful, these infrastructure bonds may attract investment to the tune of US$ 6.5 bn (approx. Rs 293 bn) from 35 m taxpayers. A respectable sum indeed! However, the question that begs a reply is whether the government's onus ends with raising the funds? The taxes that we pay are anyways meant to build and improve the economy's infrastructure. So there is no novelty in raising additional funds. But will there be any accountability for the usage of these funds? Or will this end up being another futile exercise? Had it been only paucity of funds, India's forex reserves could have been an equally viable option.

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 Chart of the day
India's growth story in the past decade has been largely attributed to 'outsourced' jobs. So much so that the US nicknamed it as 'hijacking jobs from Buffalo to Bangalore'. Well, India has been the back-office of the world for quite some time. But Indian companies have also staked claim to some interesting achievements in the past few years. Their latest feat is achieving efficiency in manufacturing. In fact, as today's chart shows, India has now been ranked second in the Global Manufacturing Index 2010, next only to China. A country known only for its outsourced service facility has been able to leave behind manufacturing hubs like the US, Japan and Germany. This is very encouraging to say the least. But that's not all. The report states that India will not only retain its position but move closer to China on the index by 2015.

*2010 ranking. Data source: Mint

After much dilly dallying, the government hiked fuel prices recently. The opposition promptly imposed a nationwide strike. We expect the next round of the battle to also take place soon. Of course, as far as the economics go, the hikes make sense. In fact, in a recent interview to a leading financial daily, Dr. C. Rangarajan said as much.

The chairman of the Prime Minister's Economic Advisory Council believes we had reached a point where some action on petroleum products had become essential. In fact, he believes raising kerosene prices was an even bolder move than raising petrol and diesel prices. We agree. Such matters are politically sensitive. Hence, we remain skeptical whether the government would be able to withstand the political pressure in the days ahead. Even more importantly, will it be able to pass on the burden if crude oil prices were to surge?

SEBI has struck once again. The securities regulator in recent times has displayed a canny ability to weed out disadvantages to minority shareholders and retail investors in the system. And it has now made another such move. As per reports, SEBI is set to ban mutual funds from launching multiple investment plans. These plans seek to cater separately to different classes of investors under a single fund. And in the process, they levy different expense structures for different categories of investors. Small retail investors usually end up paying the highest expense ratios under this arrangement. Large institutions on the other hand pay the lowest. This mostly applies to liquid funds and liquid-plus funds. They typically tend to have separate plans under single schemes. The charges differ as per the plan. This is despite their portfolios remaining the same. The SEBI may now issue new norms banning this industry practice. This will certainly go towards creating a more 'small investor friendly' investing environment.

There is a slowdown that is imminent in China's property markets. It may be recalled that property prices there had zoomed as banks resorted to indiscriminate lending. However, as per the Chinese statistics bureau, China's property prices snapped 15 months of gains. Not just that, banking lending also eased during the month. Further, while China has reported strong growth in the first half of the year, there hangs a cloud whether the same can be sustained. After all, slowdown in the real estate space would dampen construction. Plus, the austerity measures in Europe will cool off demand from those regions. And so, China's exports industry could once again face the heat. In that scenario, the possibility of the Chinese authorities loosening their monetary policy cannot be entirely ruled out. On the brighter side, with the slowdown in property prices, the threat of inflation and asset bubbles is likely to recede.

The Indian Government seems to have found its preferred method of raising bundles of cash. An auction to the highest bidders seems to be the right way to go. This is especially after the success of the 3G spectrum and broadband wireless auctions. And the failure of follow on public offerings!

It is now considering selling off some of its stake in public sector firms through auctions. Bidders for these stakes will be large institutional investors. Auctioning stakes in actively traded shares such as SAIL with a 10-15% public float may prove beneficial. Through this method, the government only has to set a minimum price, and the bidders do the entire diligence for making bids. The target for raising money through divestment is Rs 400 bn for this fiscal. If it goes through the action route, the government may even overshoot this target. Looks like the government is being advised by some well placed investment bankers who always prefer the QIP route!

After a buoyant start, the Indian indices shed some gains during the session today backed by profit booking in auto and energy stocks. Markets across Asia except Japan and Taiwan ended higher today. The BSE-Sensex was trading nearly 99 points (0.5%) higher at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"The stock market is designed to transfer money from the active to the patient." - Warren Buffett

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