China comparison not as irrelevant as FM believes - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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China comparison not as irrelevant as FM believes 

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In this issue:
» No reprieve from labour worries for Indian auto
» Risk of global economic collapse persist
» Indian IT cut back hiring plans
» Wind up time for BSNL?
» ...and more!


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00:00
 
Comparing apples to oranges? Well, that is how our honourable Finance Minister sees comparisons between India and China. According to him economic comparisons with India's oriental neighbor are irrelevant! As reported by a business daily, while courting queries from Hong Kong investors, the FM responded to that effect.

Now, we must acknowledge that at least he got the facts right. Most of China's economic statistics point in the opposite direction to India's. Fiscal surplus, burgeoning forex surplus and export of capital are yet foreign concepts to India's economic policy makers. Notwithstanding a few corporate overseas investments, India is still largely dependent on import of capital or FDI (foreign direct investment). Hence it is true getting close to China's economic stature is a distant dream for India. Not that we should ape the economy or its policies blindly. But a healthy comparison, however disillusioning, is necessary we believe.

Exactly why we do not agree with the FM on his views about India - China comparison. Comparing India's fiscal and forex positions to economies that are worse off is no solution. That the US and Euro zone are doing no better cannot be a consolation for India! And hence, however remote, benchmarking with China's economic achievements is a must have for India's policy making.

Further it is not just China's positives that count. We need to take lessons from the nation's failures as well. China is criticized for lack of corporate financial transparency and limited regulation on banks. This was a lesson that India took to heart. Large Indian corporate and banks today find more favour amongst global investors particularly for this reason.

Another factor that makes comparison with China inevitable is the similarity in demographics. Here too India has some warning signals to pay heed to. As per China's National Bureau of Statistics, the percentage of its working population started falling 2011 onwards. This is nothing but an early warning signal about impending change in demographic profile. For India, such a change is still in the distant future. But could nevertheless derail India's consumption story.

Thus India has not one but many cues to take from China. Turning a blind eye to the similarities and dissimilarities is not a solution. Hope the FM is listening!

Do you think Indian policy makers can afford to not make comparisons of India's economic progress to that of China's? Share your comments or post them on our Facebook page / Google+ page

01:35  Chart of the day
 
The Reserve Bank of India (RBI) is not as enthused as the government about issuing additional bank licenses. However, if there is any doubt about why the government is insisting on it, there is enough data to delve into. A look at the banking sector's impact on GDP over past 6 decades tells all. The share of banking sector's credit and deposits to GDP has multiplied 5 times and 6 times respectively during this period. At 52%, the non food credit to GDP ratio for India is nowhere close to that in developed world. However, a higher proportion of the same is inevitable to keep India's GDP's growth rate ticking higher than 6%. We are not sure if having more banks can help credit penetration. But at least the government thinks so.

Data source: RBI


02:05
 
After the telecom war began in India, the state owned companies like BSNL began to bleed. More so after the recent 3G and Broadband Wireless Auction (BWA). Procuring spectrum led to a huge outgo which deteriorated their financial health. Over staffing was another issue which hurt the bottomline. As a result, BSNL has decided to offer voluntary retirement scheme (VRS) to 1 lakh employees. It may be noted that salary burden constitutes 48% to the BSNL's operating cost. If the employees opt for VRS it may come down considerably. Also, these employees have an average age of 50 years and do not have the requisite skill set. Thus, relieving them is a better option for the company.

It is interesting to note that the profits of BSNL have been declining continuously since 2004-05. Now, it hardly poses any threat to major telecom players. It has lost market share and is suffering from operational inefficiencies. Also, the telecom landscape has changed considerably now. Call rates have been commoditized and there is stiff competition in the market. Thus, recovery happens to be far off for BSNL. May be, it's high time for the company to consider winding up rather than operate in losses. Nevertheless, it is considering various plans like monetizing its tower assets and lease out the network for revival. But we don't think that will be sufficient to re-gain the past glory.

02:35
 
Labour issues continue to haunt the Indian auto industry. Just when one thought that troubles at Maruti Suzuki were over, it is now Hero Motocorp which is at the receiving end. In the case of the latter, workers at the company's Gurgaon plant are demanding bigger wage increases and retirement benefits. Talks with the management do not seem to have worked out. And so these workers have decided to go slow on production as a means of protesting. Labour issues took a violent turn at Maruti Suzuki's Manesar plant last year when an employee was killed and several workers went on a rampage. As a result, there was a lockout declared at the plant and production halted. Not surprisingly, this adversely impacted Maruti's overall performance. Hero Motocorp is also bound to bound to suffer in this regard. What has made matters worse is the timing of these issues. The auto industry in the past several quarters has been struggling on account of slowdown in GDP growth, firm interest rates and fuel prices. Thus, a quick resolution to these labour issues has become all the more important.

03:03
 
2012 was a year full of worries. It seemed like the Eurozone was on the verge of a major disaster. China seemed headed towards a hard landing. The US was on the brink of a 'fiscal cliff'.

2013. The change of calendar has suddenly changed the global sentiment. Stock indices across of the world have been rallying upwards. Of course, there was some relief in the form of a delayed fiscal cliff. The Chinese slowdown was not as bad as anticipated. But does that indicate things are getting better? Apparently not! Swiss economist Klaus Schwab believes that the risk of a global collapse is still very much there. Unemployment is still quite high in many developed economies. People are losing faith in government and corporate leaders. The Eurozone and Japan are in recession. The US is struggling with its debt ceiling. Any major shock from these vulnerable stocks could send the global economy in a downspin.

03:22
 
The IT industry was one of the biggest hirers till now. IT companies were the hot favourites for nearly all colleges in the country. The reason was the quantum of individuals that they were willing to hire. Every year the number of planned hires by the industry was just going up. But in very recent times, companies seem to be cutting back on their hiring plans. One reason for this could be the tougher times that they are witnessing giving the global slowdown. But a bigger reason for this is the change in order types. Now the orders are more fixed price in nature. As a result there is every effort to cut costs wherever possible. Companies are now concentrating on improving their utilization rates rather than hiring more bodies to do the work. They are also looking at IP (Intellectual Property) related revenues that typically look at more productivity per person. As a result revenues get delinked from the number of individuals hired. Whether this is a short term trend or a new normal for the industry is something that remains to be seen. But for now, the doors would soon get closed for individuals looking to get picked up by an IT company.

03:50
 
Famous economist Nouriel Roubini is also known as Dr Doom. And his recent article leaves little room to doubt his moniker. He is of the view that fiscal austerity will envelop most of the world in 2013, leading to mediocre growth and even outright contraction in some countries. Not just this. The world is staring at substantive political and economic risks this year and while all of them will not happen at once, any one will be enough to prompt a global recession.

We cannot help but agree. Everywhere you look, you see hard times ahead. US, Europe, Japan, and China are all battling their own unique growth problems. Even Middle East is showing signs of instability both economically as well as politically. Little wonder then that below average growth for the global economy looks a strong possibility indeed. What we are worried about however is Government intervention. Should they try to inject life into their respective economies through expansionary policies, it will be difficult to predict the course of the economy in the short term. Long term though such actions are bound to lead to inflationary problems and even bigger crises down the road.

04:30
 
Profit booking in FMCG and commodity sectors led the benchmark indices in Indian equity markets below the dotted line post noon today. The BSE Sensex was trading lower by around 50 points at the time of writing. Other major Asian markets closed a mixed bag while markets in Europe opened flat to negative

04:56  Today's investing mantra
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid" -Warren Buffett

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    1 Responses to "China comparison not as irrelevant as FM believes"

    SIVARAMAKRISHNAN

    Jan 23, 2013

    The change in demographic of China, Even though the working population is falling since 2011, the population that worked until 2011 have done an excellent job and I seriously doubt that India's working population as of now or in the distant future will be able to achieve the same that China did.

    The Chinese are a lot more self-confident, hard working, agile than the lazy, laid back attitude, hero worship of larger than life cinema and cricket stars loving Indians.

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