An area the govt cannot afford to ignore - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

An area the govt cannot afford to ignore 

A  A  A
In this issue:
» Michael Porter's appreciation for fundamental analysis
» The trebling of China's money supply
» IMF Chief's apprehensions about the current recovery
» Faber: We are currently in a gigantic asset bubble situation
» ....and more

The enactment of the Right to Education Act in 2009 was given a double thumbs up. With every child, aged six to fourteen, being given the right to full time and free elementary education, this development only seemed to have strengthened the base of the demographic dividend theme.

While it is important to get the children to enroll into schools, especially in rural parts of the country, what equally matters is what they learn and how they apply the same. Over the years, India seems to have done well in the first department. But when it comes to the latter, things are not going as planned.

As reported in the Mint today, the Annual Status of Education Report (ASER), a report released by NGO Pratham Education Foundation, has found that the quality of learning has not improved over time. And may have in fact worsened over the past few years! The foundation has come out with this conclusion through the learning it found by taking basic tests to test the knowledge of children. Nevertheless, a good point is that nearly 97% of the children are enrolled in schools now as compared to 93% in 2005. It may be noted that the government had levied education cess for this initiative. But then, it just goes to show that the funds are not being put to good use. This development is just an update to what we had written earlier about the concern over quality of education for India's young population.

Planning Commission Deputy Chairman Montek Singh Ahluwalia believes that the learning outcome is surprisingly disappointing. But he also has suggested that a similar study be done in urban regions to really gauge the intensity of this problem. If the findings would be the same, it would definitely need some major overhaul across. However, if the problems are limited to the rural parts of the country, then something needs to be done about the disparities in the respective education systems.

It may be noted that such ASERs are released every year. And the findings haven't been particularly encouraging. And yet, not much has been done about it! Which is where lay the problem. One solution being discussed right now is to develop a national standard for schools - something that can be learnt from the better performing schools and implemented on the not so good ones. While this may be good, the fact remains that the changes should be brought in at the earliest.

Instead of focusing on enrolling more kids into schools - something which is very close to the desired level, the focus should turn to improving the quality of education. Good quality education at a young age does play a strong role in shaping one's future. And for India, which is expected to have the largest working population a few decades down the line, it only makes sense to sow the seeds now to reap the benefits in the future. If such kind of a casual trend continues, India's demographic dividend story could possibly turn into a demographic liability.

Do you think poor quality education for India's burgeoning population can become a liability in the future? Let us know your comments or share your views in the Equitymaster Club.

By the way, we have now started accepting registrations for The Equitymaster Conference 2014. With Mr Ajit Dayal being the keynote speaker and the theme being 'Beyond Uncertainty' we are looking forward to an engaging session on 1st February 2014.

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01:35  Chart of the day
The Aam Aadmi Party's (AAP) promise of providing cheaper power in Delhi has started quite a debate. Some believe it is good for the people on the back of lower rates, others believe the plan may not be viable and could possible hamper the electricity reforms. Given the rising input costs, and the discoms inability to increase tariffs due to its being a politically sensitive issue, power tariffs are not close to what they should be. This had over the years led the discoms to bleed. As reported in the Business Standard, the combined losses of distribution companies stood at a massive Rs 2.4 trillion in FY12. However, the bailout package - in which discoms were asked to hike rates to cut down their losses - was seen as a sign of hope.

Power Tariffs: Will Other Cities Go the Delhi Way?
* - Post 50% subsidy; # - tariffs by Tata, Chd. - Chandigarh, Ahd. - Ahmedabad

Now, with the decision to provide 50% subsidy on tariffs in Delhi (for power consumption up to 400 units) taken by the new government, it seems that the demand for such tariff cuts is now being made across the nation. This would obviously be a difficult situation to manage and is not the best option given the very high requirement of lowering spending towards unproductive expenses (such as subsidies) by governments - both state and central. Today's chart shows the power tariffs in some of the large cities in the country, which shows that Delhi would have the lowest tariffs post the 50% subsidy.

It's not at all unusual to see well known value investors praising value investing. However, if the praise comes from a famous personality from some other field, it's certainly a proud moment. This is exactly what we felt when none other than the father of competitive strategy, Michael Porter himself praised value investing. In a recent interview, Porter argued how fundamental investing seems to have taken a back seat. He was particularly critical of this new fad in investing where most of the energy and efforts were being spent on things like indexing and momentum. What also riled him were things like algorithm based trading and this constant race to have better and faster servers so that one can trade in and out a little faster.

He argued - and rightly so - that these trends are taking away from the real purpose of investing which is fundamental wealth creation. Thus, it is in the interest of both the investor as well as the society in general that more importance be given to things like understanding companies, industries and competition. He couldn't be more correct we believe. Investing is sensible only when it is most business like. This means taking a long term approach. And also being patient with the company one invests in. Things like frequent trading and chasing momentum are nothing but acts of speculation according to us and no better than gambling. Thus, the more they are discouraged, the better off our society will be.

Investment guru, Marc Faber, recently made a prediction that could un-settle investors with nerves of steel. He is of the view that we are currently in a gigantic asset bubble situation; one that could burst anytime. Though the sentiments appear bullish the reality is that economy is slowing down. And this can have cascading effects on the world economy which is sterile. It may be noted that this is a view that he has stuck to for a while now.

We know what happened when the sub-prime bubble burst. The current financial bubble is a cousin of the mortgage crisis in the US. After the housing crisis in the US, Fed resorted to relentless money printing. And this money found its way into asset prices like gold, equities, bonds and commodities moving them into a bubble territory. We feel that if this bubble burst's the repercussions could be severe than what they were in the past. There will be simultaneous correction in asset prices creating a panic in the financial system. Investors will have no shelter to hide. But it is quite possible that gold can come to the rescue in such cases. It is an insurance against inflation and cheap monetary policies of the West. Currencies and stocks may lose value due to inflationary environment that will begin after the monetary stimulus packages end. But gold being a store of value will protect investor's purchasing power and preserve wealth. Hence, investors would do well to have the yellow metal as part of their portfolio during such uncertain times.

If you thought Alan Greenspan was the grandfather of monetary stimulus programmes, think again! As per an article in Economic Times, the amount of money sloshing around China's economy has tripled since the end of 2006. As against this the money supply in the US rose by just 55% during this period. The Chinese central bank has by broad measures been far more aggressive than its counterpart in the US. And when it starts unwinding its monetary policy sometime this year, the effect could be far more startling. Most of the excess liquidity has gone into China's property market. And the asset bubble is clearly not sustainable. The mechanics of monetary policy of the two central banks have been different. Unlike the Fed's money printing, China has strived to keep the remnibi under valued against the US dollar. This has kept its exports competitive. However, as the two largest economies in the world start moving away from these policies, the cracks will be visible all over.

Suddenly, there seems to be a shift in the sentiments with regards to global economic prospects. Fed's decision to taper shows the confidence in the recovery of US economy. Even Europe seems to be getting over the worst pangs of recession. However, the head of the International Monetary Chief Christine Lagarde has some apprehensions about this recovery. And these are some valid concerns indeed.

The global recovery is too fragile at the moment and very delicately balanced. There are multiple factors that if not controlled can derail this recovery. Some of the disrupting factors could be asset bubbles in China and some European economies still reeling under high debt. Even for US, it is too soon to be optimistic. We are yet to see how the US economy responds to the taper. However, now that global economy seems to be getting a breather, it's time that policymakers focus on making sure that effective financial regulations are in place to avoid further financial crisis.

In the meanwhile, Indian stock markets were trading weak during the post noon trading session. At the time of writing, the benchmark BSE-Sensex was down by about 45 points (0.2%). Oil & gas, banks and pharma stocks were trading weak, while metals and realty stocks were trading strong. Asian stock markets were trading mixed. While Hong Kong (up 0.4%) and China (0.4%) found favour, Japan (down 4%) and Singapore (0.2%) were at the receiving end.

04:55  Today's investing mantra
"There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." - Warren Buffett
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4 Responses to "An area the govt cannot afford to ignore"

Ramachandran S

Jan 27, 2014

Quality Education is the most essential factor for India to hold on to the achievements of last 50 years and build up a strong and stable developed status for the coming years.We need to make education affordable and give merit the priority for admission in Government & deemed universities under UGC Acts.



Jan 17, 2014

It seems to be funny when one see an official pointing at another official within our bureaucratic order. Planning Commission chairman saying that the education initiative not working properly whereas it is the same Government but different ministries. First of all we Indians have learned to pass the buck and wait for somebody to act. From time immemorial we had a beautiful education system which was destroyed by the British. But how come we are unable to revive the same old tradition but rather blaming the British till today for our failures on education and the quality. Now for the best part, how will our politician will do this. It is like giving the stick to the public and ask them to beat the politicians. Knowledge is power and that should be denied for their safety and prosperity. It is sad that we need to live like this with no light in this dark tunnel.


S. Rajagopalan

Jan 16, 2014

Our present education systems needs total revamping. It is useless for most of the students and has no relevance to their job needs.It was foisted on us by the Britishers to make us clerks and feel inferior to them. After joining the job they need to be trained. As a result, agricultural activity and rural economy has suffered since after getting half baked knowledge through our ineffective education, most of the people are not interested in any kind of labour work or continue their traditional activity and want white color jobs.

Solution :
1.Change the educational system by weeding out unnecessary subjects at various stages in schools. Teach only language - Mother tongue and English, Basic Mathematics and basic science about Environment, Hyigene, About plants, trees, biology etc. upto 5th Standard. Moral values should also be taught throughout schooling since it one area the country has vastly deteriorated during the past 15 years or so.

2. History and geography etc. should be taught in 6 to 8th Standard along with language, maths and science and stopped after that.

3. From 9th standard onwards only Maths and science should be taught and various skills should be imparted in the afternoons - like machining, plumbing, electrical work, tailoring, liberal arts for those interested, farming, weaving etc. so that people will be fit for some work later in their life even if they drop out of school.

4. Education should be standardised throughout India. Govt should get hold of good teachers and record their teaching in DVD's and the same should be shown in classes throughout the state. Teachers in the class should only help in further clarifying what they saw in the DVD and if necessary teach it again and take care of tests, assignments etc. This way all students will get best of education irrespective of their location. The difference between the best school and ordinary school is only in teaching. This method of teaching will remove the disparity. Parents can also get a copy of the lectures and help their children by explaining them and removing their doubts - at home. Today each DVD costs only Rs. 10 at the most. Each subject can be covered in 5 to 10 DVDs at the most. Hence it will be cost effective method of teaching. The State Govt. has to ensure electricity availability during school hours.

This my suggestion for improving education and imparting skills.


Abhay Dixit

Jan 16, 2014

Since 1995, China has been growing at a much faster rate than India. However, Shanghai index has grown (549 to 2100) 3-4 times as against Sensex 5-6 ( 3500 to 21000) times. Also Sensex is close to life time high where as Shanghai Index is about 40% of its peak.

What is the secret? Can we invest because of good growth expectations?

Please advice.

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