UPA set to make another economic blunder! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

UPA set to make another economic blunder! 

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In this issue:
» Asset utilization ratio of India Inc. dwindles
» CPI set to be the new benchmark for inflation management
» Swiss banks in an overdrive to protect interests of rich clients
» Bill Gates makes a startling prediction for 2035
» ...and more!

In what could be dubbed as yet another electoral gimmick, the Congress led UPA government is nurturing plans to have job quotas in the private sector. If the legislation gets a go ahead, there would be job reservations for backward caste in private sector enterprises subject to certain conditions. We believe this move may well uproot the foundation of private sector enterprises. Jobs in private sector are based on merit. And when you have reservations there, it kills meritocracy.

In fact, the very premise that job reservations will create employment opportunities for backward classes is illusionary. Fathom this. Out of India's strong labour force which constitutes 484 m people, less than 3% are employed by the private sector. Hence, the move is likely to benefit only handful of people. However, its ill effects are many. For one, it kills competition which is the fulcrum on which private sector moves. Skill set which is a key factor on hiring agenda too gets ignored. Such moves shall kill innovation on which private sector thrives.

Job creation and not job reservation is the need of the hour. If the government indeed wants to improve societal economics, the focus should be on the unorganized labour force. Take steps to improve their skill sets. Impart necessary education at the grass root level so that even they can be a part of organized labour force. Having reservations under the garb of creating employment benefits on the basis of socio-economic status can well be termed as vote bank politics.

With India being a regionally diverse country, caste based politics is often resorted to for garnering votes. Till now, caste & creed were the basis of reservation in education. And now they are finding their way into private sector employment. It's sad that on one side we talk of equality and on the other hand frame laws that counter it.

It is not that the backward caste should be left on its own to fend for itself. It is the duty of the government to uplift them. But the upliftment support should not be of the kind government is talking about.

With respect to employment benefits, government should provide disadvantaged people with all external support to compete with the organized labour force rather than create reservations. This shall make the market more competitive. However, political compulsions prevent the government from doing so. It cannot afford to annoy any regional coalition by advocating meritocracy.

However, it's high time politicians take steps to create a competitive economy. Reservations will do more harm than good.

Do you think caste should be a basis for getting jobs in private sector enterprises? Let us know your comments or share your views in the Equitymaster Club.

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So here's your chance to send in your questions for Ajit!

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01:50  Chart of the day
Asset utilization ratio i.e., total sales divided by total assets is one of the key metric to measure the efficacy of assets for any company. However, it seems Indian companies are losing the game. As per an article in Business Standard, the asset utilization ratio for BSE 200 companies (excluding financial sector) in FY13 stood at 1.52x. This was the lowest in last 8 years. This reflects the slowdown in the economy. The decline in the ratio is not just because of lower sales realizations. Slowdown in demand and hence low capacity utilization is a key culprit behind a poor show by these companies. The key industries such as cement, steel, capital goods and power etc are facing pressure at the operating margin level. Some of the companies are forced to cut prices to generate enough sales that can recover their fixed costs.

Does this mean that investors should turn away from such stocks? We don't think so. In fact, this could be a good time to invest in some of the cyclical stocks. The adverse times have made it clear which companies are strong enough to survive the challenging times. As economic cycle takes a turn for the better, these companies are likely to witness benefits of high operating leverage and economies of scale. Now that most of the companies have already completed their capital spending programmes, significant upside is likely at the earnings and cash flow level once economy recovers.

Asset turnover ratio of India Inc
Note: Data based on BSE 200 excluding financial sector

Imagine a cricket world cup with a total of 63 matches to be played in it. What is the odd do you think that a person identifies the outcome of all the 63 matches correctly? Very low, isn't it? Well, make it very, very low. And it is because of this low probability that some firm can think of awarding the winner of this contest as much as US$ 1 bn in prize money. In fact, a firm in the US known as Quicken loans is doing just that. The only difference is the sport under consideration is basketball and not cricket and the tournament is NCAA basket ball tournament.

As per reports, Quicken has offered to pay US$ 1 bn as prize money to the person who correctly identifies the winner in each and every of the 63 matches to be played in the tournament. And guess who's insuring this prize money for Quicken? Well, it is none other than Warren Buffett's Berkshire Hathaway! Buffett's insurance guys are well aware that even if they get paid few millions on the deal, the risk is worth taking. Simply because it is extremely unlikely that someone will call it correct all 63 times. This is vintage Buffett we believe. Be it stocks or insurance, he believes in investing only when the odds are overwhelmingly in his favour. And can have the stomach to wait for years together if no attractive enough deals are to be found.

India's inflation problem has got unnoticed for a prolonged period. The real reason for the same, as pointed out by many economists, is WPI (wholesale price index) being the benchmark. As against WPI, the consumer inflation (CPI) which reflects food inflation, kept soaring in absence of policy initiatives. The central bank (RBI) has however, now decided to take some concrete steps to keep the CPI in focus of policy makers. It is well known fact that the key reason for the divide between the opinion of the Finance Ministry and the RBI on monetary policies has been inflation. The government chose to ignore consumer inflation and pressured the RBI to cut interest rates. Meanwhile the RBI maintained a hawkish stance on inflation. Not that the central bank governors have been too accommodating with the FM's demands. However, keeping CPI as the yardstick could help the RBI show the mirror to the FM. This at least we believe will keep the government from making unreasonable rate cut demands from the central bank.

We know it is questions like these on inflation and RBI's monetary policy that bother you the most while investing. In order to answer them and many more 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.

Will the world ever reach a stage where there will be no poor countries at all? The world's richest man Bill Gates certainly thinks so. As reported in the Financial Express, he is of the view that such a scenario will indeed emerge by 2035. Gates believes that by then, almost all countries will be either lower middle income or richer. So what will lead to this transformation? The poorer countries will benefit from the advancements made by the richer world. They will benefit from innovations in medicine, agriculture and digital revolution. Adequately educated, the labour force in these countries will attract new investments. Hence, Gates has envisaged a scenario wherein more than 70% of the countries will have a higher per capita income than what China has today.

Is Bill Gates too optimistic? Or will countries really see a substantial rise in incomes? It all depends on the will of the governments in these countries. Because they will need to put in place a slew of reforms that will ensure that bolster growth and improve the standard of living of all sections of society. This is especially because the past few years have seen growing income inequality. And this is not just in the developing countries but also in the developed world. Income inequality ultimately leads to growing discontent and is potent in sowing the seed of future unrest. And the consequences of that are not always positive.

No discussion on black money is complete without the mention of Swiss banks. For a long time, Swiss banks have been notorious safe havens for the unaccounted wealth of the rich people. But these banks have been losing their safe haven status on account of increasing global pressure for greater transparency. So now, these banks are finding new ways to entice rich people from India and other countries. They are offering services such as cash couriers and large metal vaults for storing valuable items such as currency notes, gold, etc. While countries such as India and others seemed to have stepped up their vigilance against black money, we think that strong political will to eliminate such an evil is still missing.

In the meanwhile Indian stock markets are trading firm. At the time of writing, the benchmark BSE Sensex was up by 41 points (0.2%). Pharma and Metal stocks were the biggest gainers. Most of the Asian stock markets were trading higher led by Hong Kong and China. The European markets opened on a positive note.

04:50  Today's investing mantra
"Don't pass up something that's attractive today because you think you will find something way more attractive tomorrow" - Warren Buffett
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36 Responses to "UPA set to make another economic blunder!"


Feb 1, 2014

In my opinion India should do away with reservation in all fronts including the present ones given in the government sector.

It has been more than 50 years we have had this and majority in the backward class have already achieved self sustenance to fend for themselves and for their community as large.

Infact there are more richer people in the reserved classes than in the open standard class.

Reservations do more harm that good to India as a whole.

Just see the quality of professionals being churned from the IITs, IIMs and other elite institutions of India. Just see the quality of service you get from the Banking Industry in India. Just see the quality of service we get from the Government offices in India and Abroad.

I must say the quality is just pathetic. Of course you cannot expect a good professional high quality service from people who have barely managed to pass with 35% in their degrees to give you the best. Because they do not have it in them.

I am facing so many of issues especially with people in the banking sector. And all of these are due to the lack of understanding of basic things which is their everyday routine job and they cannot do it right. And we expect high quality service?

The Government should create and offer better educational facilities at the grass root level. Create entrepreneurial programs to help them grow economically and create a path thereafter for them to set foot into the main stream but with the meritocracy in place.



Jan 29, 2014

Certainly NOT! If reservations are brought into force, It will definetly affect the over all progress of our nation in general and the talented will be deprived of the opportunity of serving better.Besides, it may increase the percentage of sick units to a high. As it is said, the various political parties,are trying to bring in such ordinance,only with an eye on the vote bank.
Certainly such moves should be thwarted even at the budding stage.



Jan 24, 2014

Quota system has already driven away many many meritorious persons out of India, in search of
Recognition for MERIT giving opportunities abroad


Swapnil Gangele

Jan 23, 2014

Its good to advice Govt. to not to take any of such move but if its about winning election who is there to hear you and me its about retaining power by hook or crook, who cares about nation. Govt. in power many times clarified its intention with past decisions. It is really so funny to advice something to such Govt. which is nothing but group of human one among us so It is the point need to be pinned down by making him aware that all these populist measures are kind of self destruction for this nation in which another human see a hope and vote for such crude politics no matter which party using these gimmicks every individual has to grow mature than only India will see a nice administration with a clear intention to give its public a better life.
BTW in this case if still any reservation criteria required it should be with linked with one's earning capacity in which people who are hand to mouth should given chance to grow from the very beginning.



Jan 23, 2014

Reservation in private sector should be absolute big NO, even in goverment this should be gradually reduced in phases to bring about greater efficiency and accountability. Yes, each goverment should help these people in all respects to uplift them up and bring them to the desired level, Free education, training coaching, financial help, social support etc, should be provided for the uplift ment. Reservation only should be there for the Disabled people who at cost cant be made equal to the able ones. Thanks



Jan 23, 2014

our politicians are capable of any thing.They are selfish can do anything for votes. It is quite pertinent to provide facilities in education to so called underprivileged in the form of financial support for education, free coaching for entrances, free books etc. rather than reservation.


Harish mehta

Jan 23, 2014

It appears from your various articles that you are totally biased against UPA.I do not recollect a single occasion when you have appreciated any of UPA's Policies.You must express totally UNBIASED OPINIONS.


vivek Rodrigues

Jan 23, 2014

Reservation in the private sector in India would sound the death knell of private enterprise i.e competitiveness.If the Congress has the misplaced belief that it would bring it more votes than they are highly mistaken.
Leave the private sector aloof from dirty politics. Won't it mean that after almost 70 years, mostly under Congress rule if the conditions of the SC/ST hasn't improved,than the Congress is accepting its policy failure.

Would another wrong undo a First wrong?.

Another fact,It has been observed that among the SC/ST it is the more effluent who corner the benefits and ensuring that the poorer among them remain so.

Reservation in the Government sector too has to be properly implemented to remove the creamy layers for real benefits to flow to the SC/ST and an equitable distribution of benefits for a larger good of society.

No doubt some of the deserving SC/ST could be talented,But what is important is to improve the skills of those even in the Government sector not lower standards for them.What has to be done is conscientious effort by the Government to improve the standards.


Rajiv Chopra

Jan 23, 2014

The private sector should, and all jobs should, be free of the caste stigma. The best ways to do this, is to:
1. Provide proper education to all;
2. Focus on skill and capability building
3. Let people get jobs based on merit. They should not be asked to put their caste status in any form



Jan 23, 2014

Let's not kill the bird which is
laying golden egg. Let us build capabilities to make these candidates competitive in the market.

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