Should India's budgetary wish list include this too? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should India's budgetary wish list include this too? 

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In this issue:
» FY13 to be a bleak year for India auto
» Why PE deals in India have slowed down
» China is not the world's biggest gold buyer
» Current account deficit worries RBI
» ...and more!

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What made the US a global power to reckon with in the twentieth century was its focus on innovation. This was the product of superior educational institutions in the country which churned out strong talent, which in turn contributed to the growth of the country. Although in recent years, the US economy has been down in the dumps, its educational institutions have lost none of their repute.

At a time when the focus has shifted towards growth in emerging economies, has India made much progress on the educational front? Not too much really. No doubt, barring the slowdown that the Indian economy is facing currently, it grew by leaps and bounds in the 3-4 years leading to the global crisis. But this cannot sustain for long if the basic foundation is not laid in the first place. The foundation being education and the creation of a skilled workforce. Sample some statistics. As per an article in the Economic Times, India had about 12.1 m primary education seats in 1951 against the requirement of about 45 m; a deficit of around 33 m. In 2001, the deficit increased to about 74 m. The situation is bleaker when it comes to higher education. At about 12%, India currently has amongst the lowest Gross Enrollment Ratios (GER) not only compared to the developed nations but even the major developing ones.

If a younger population is being touted as one of India's strong growth drivers going forward, then surely education will have a bigger role to play. Indeed, India may need to spend over US$ 100 bn in capital expenditure alone in the next 8 years, and create additional 6 m trainers. This is even if 65% of the 725 m-plus in the workforce by then have to be provided with some value-creating vocational skills. Given the widening fiscal deficit and the government's struggle to bring it down, this seems like quite a tall order. The obvious solution would be to cut down unproductive expenditure so that there is more headroom to focus on education and infrastructure. But given that the spending on unproductive areas such as subsidies is tied to vote banks, the government may show no such inclination. But this short sightedness is bound to impact the long term interest of the country. The Obama administration in 2012 had unveiled plans to create an elite corps of master teachers. This was to be a US$ 1 bn effort to boost US students' achievement in science, technology, engineering and math. Probably India should make such provisions too.

Do you think that lack of education will be the key reason that will adversely impact India's growth prospects going forward? Share your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
As today's chart of the day shows, auto sales continued to remain poor for the period April-January 2013. This clearly indicates two things - weak customer sentiments and the poor health of the economy. As per the Society of Indian Automobile Manufacturers (SIAM), passenger car sales are likely to decline during FY13. If this happens, it would be so for the first time in a decade. The industry body has been lowering the full year sales targets since the start of the year. Last month, SIAM expected volumes to remain flat. This change in view comes on the back of a 12% YoY decline in sales volumes during January 2013. This was the third consecutive monthly decline. In the year till date (April 2012 to January 2013), domestic car volumes have come in lower by about 1.8% YoY. Thus, the only reason why the overall passenger vehicle volumes have grown is largely because of strong growth in utility vehicles.

Sales of medium and heavy commercial vehicles are believed to have declined by a sharp 40% during January 2013. Worried over the same, SIAM believes a turnaround for the Indian auto industry is only possible with government intervention. This would be in the form of excise duty cuts for both the segments. In addition, SIAM has proposed a second round of Jawaharlal Nehru National Urban Renewal Mission scheme. Not only would this help improve the sales volumes for the CV manufacturers, but also would boost sentiments.

*Passenger vehicles **Commercial vehicles
Data Source: SIAM

Private equity (PE) deals in India have been coming down. As per a leading daily, the biggest reason for the decline is the flood of cheap money. This has led the valuations to go through the roof thereby reducing the attractiveness for PE deals. Corruption has not helped the situation either. With cases galore related to unscrupulous promoter activities, PE firms are hesitant to take a long term view on any company. Red tapism and political interference make predicting future and forecasting an all but impossible task. And let us not forget the 2 - 20 principle that PE firms go for. The '2-20' model creates a significant perverse incentive to investing faster and more, than necessarily waiting and doing all that it takes to invest in good companies. Hence, many, if not all private equity funds have come to terms with the fact that this is an industry that rewards 'doing deals', not necessarily 'doing good deals'. With so much of cheap money floating around, the stock prices run up like crazy within the first 5 years itself. In the subsequent period returns are lower. This is against the long term view that most PE firms have. Therefore it is little wonder that PE deals are seeing a slowdown. The way to revive them would be an overhaul of the system. We need policy reforms to provide clarity for investors. And most importantly there has to be a system which raises the level of governance and transparency. These are essential elements for any kind of investment. But even more important for long term investments like PE deals.

Most countries recognize the fact that the US is abusing the monopoly of dollar. If not for its currency the US's economic position would have been in a free fall since the crisis of 2008. The only hedge against such a catastrophe is buying gold. Now the yellow metal has caught the fancy of investors world over due to its inflation hedging property. Indians in particular have displayed enough inclination towards buying the precious metal. So much so that the government had to impose taxes to reduce gold imports. This, the Indian government believes would help the problem of current account deficit. Probably it is time the Indian policymakers take some lessons from their Russian counterparts with regard to gold buying. Only then will they relieve themselves of their myopic views on gold buying.

As reported by Moneynews, Russia and not China has been the world's biggest gold buyer in the past decade. The Russian central bank has added 570 metric tons of gold in the past decade. This is nearly 25% more than runner-up China! The added gold is in fact almost triple the weight of the Statue of Liberty. Now, despite the purchase, Russia remains the eighth-largest holder of gold as per the World Gold Council. It is still way behind the US, Germany, Washington-based IMF, Italy, France, China and Switzerland. Also gold accounts for 9.5% of Russia's total reserves. As against this, it accounts for more than 70% of reserves in the US, Germany, Italy and France. However, the gold buying binge at least suggests that Russia is betting more on a safer asset than fiat currencies.

India's estimated private gold holding is the largest in the world. However it ranks 11th in the tally of publicly held gold. At just 9.6% of its reserves in gold, we do not think the RBI has enough reasons to shy away from having more exposure to gold.

In the aftermath of the 2008 financial crisis, the global economic and financial landscape has gone through a paradigm shift. Prior to the crisis, global investment banks based in the developed world, mainly Europe and the US, accounted for a bulk of the investment banking fees in the emerging markets. In the decade ended in 2007, their share of emerging market fees never went below 59%. But this equation has changed drastically. Their share in the emerging market fees has been lower than 44% in each of the last three years. Some of the big names that have witnessed substantial erosion in some developing markets include Credit Suisse Group AG, Morgan Stanley and Citigroup Inc. These firms have been facing regulatory hurdles and cost-cutting pressures in their home countries. Lending by European banks in emerging economies has declined. As a result, they have been losing market share in emerging economies to smaller domestic competitors. At the same time, the local players in developing economies have taken advantage of the situation and upped their share.

The Reserve Bank of India (RBI) provided some relief to India in January by cutting policy rates by 0.25%. But, is there scope for further rate cuts? Well, not unless the government repairs its finances. India's current account deficit (CAD) is likely to reach a record high in FY13. As of September, 2012 it was at a record 5.4% of GDP. And last year it was at 4.2%. This gap desperately needs to be filled for the RBI to reduce interest rates further. According to RBI governor, D Subbarao, the country needed more foreign investment in assets such as plants and equipment. Currently most overseas investments are in equity and debt markets, from which investors can quickly exit. Instead of volatile fund flows, India needs more sustainable, long term investment into the country.

In the meanwhile, the Indian share markets have been trading in the positive since start of the day today. At the time of writing, BSE Sensex was up by 73 points (0.4%). Oil and gas and healthcare stocks witnessed highest buying interest. Barring South Korea, Asian stock markets displayed positive sentiments. Europe opened on a mixed note.

04:56  Today's investing mantra
"The four most expensive words in the English language are, 'This time it's different." - Sir John Templeton
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11 Responses to "Should India's budgetary wish list include this too?"


Feb 17, 2013




Feb 15, 2013

Dear Mr Sharad, Thank you for bringing this to our notice. We apologise for the error on our part and have made the changes in our write-up accordingly. Please do keep writing to us Warm Regards Team Equitymaster



Feb 15, 2013

I think Education sector needs "soft" investment as much, if not more than "hard" investment. At the root of the poor quality of indian education (In my work, I am alarmed at how poor recent graduates are in problem solving and critical analysis - areas indians and chinese have been traditionally rated highest in the world)is the same selfish intent of regulators and lack of vision. While China created a hierarchy of excellence through it's central and state universities, supporting thousands of colleges, in India we created standalone private universities, standalone private colleges and schools, and are now trying to make them "meet minimum standards". Excuse me, who is ensuring excellence, necessary for global competitiveness?? We are not creating a demographic dividend, but a demographic bomb which will go off in 2-3 years



Feb 13, 2013

yes education is one of the vital element for growth of a nation but more to this value to be given to an individual is required actually we do not need 1 Billion educated people for growth of this nation but only few million conscious fellows who value their lives and of others in fact no one would like to reach unto the root that this clerical education will neither make us value Indian nor bring any sort of growth we need a deep overhauling in our education with accepting rich scriptural heritage which comprises ultra modern knowledge as well as vision to make not only India but whole planet a better habitat proudly driven by we Indians.

Like (1)


Feb 13, 2013

People forget too often that the country's literacy % is more than 75 today. What we need is strong talent, exceptional qualitative and quantitative skills of innovation and number crunching respectively with the existing highly qualified people.

The most important is we need skilled workers for manufacturing to compete with the chinese and japanese who are way ahead of us and most of the time we depend on foreigners for technological know-how and expertise.

Like (1)


Feb 12, 2013

Mostly rubbish or copy from other newspapers. Nothing special in your news. You may argue that you are doing the best in the investment field. You may be able to cheet the poor or newcomers, but not the experienced. How many times did you extend your offer .Please don't extend further ! for god sake.

Like (1)

Amit Sengupta

Feb 12, 2013

Lack of education has been a problem for a long timme now. It's not that it will be a problem. It's already a very very big problem, so much so that it appears that there is an interest in keeping a large section of the society illeterate. After all subjudication adds to the vote bank or so is the belief amongst many literates in our society. And why vocational training alone. The society is not producing enough good citizens, who will be able to steer the country men to better quality living. The country lacks both in quality and facilities to educate the children and it will remain so till the time the polity decides otherwise.

Like (1)


Feb 12, 2013

"Innovation" itself has not been the basic ingredient of US-economic-success. The "innovation" was a by-product of the able-administration (not necessarily corruption free), decisions focusing on future, huge investments in infrastructure during II world war and above all liberty in true sense.
In summary environment was created to foster Innovation!

Cutting through all the statistics and crap-on subsidiary (these are not necessarily bad) etc, what India needs is "transparency" to begin with. Other aspects (able-administration, futuristic decisions, liberty) will follow.

Like (1)

Sandeep Sahni

Feb 12, 2013

Indian government has been a complete failure on the front of Education & Health care. Just look at the state of affairs of the government run primary schools even in the large metros. In-spite of having wide presence , highly paid teaching staff , no parent wants to send children to these school and for so called "Public Schools" they are willing to pay huge donations up front and monthly fee as well.Just increasing the budget allocation will mean more money to loot for the political & bureaucratic system. The real problem lies in implementation and accountability. The wide spread corruption is the main culprit. This need to be resolved, otherwise this nation does need enemies from outside. Present Political & Bureaucratic lobby is more than sufficient for our destruction.

Like (1)


Feb 12, 2013

Honesty and commitment at top starting from PM to Govt. employees involved in policy making is most important. Also we need Honest opposition really interested in national development. At present all political parties are interested in short term gains for party to make personal gains. It not correct to always harp on removing subsidies for poor. Per say subsidies by themselves do not harm the economy, if these are channeled to productive gains and not laziness. These subsidies again are not aimed helping the needy, but helping the people in power. Fee reimbursement in and Health schemes in Andhra Pradesh during the previous Govt. and continued in part by present Govt are best examples. In these schemes, no doubt, people are benefited, but major chunk of the went to the politicians and managements of Corporate hospitals and college managements. If this money was spent on improving Govt. hospitals and setting up more Govt. colleges results would have been much better. What is required id is firm commitment to do things and honesty.

Like (1)
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