The 80:20 hurdle to India's promising growth catalyst - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The 80:20 hurdle to India's promising growth catalyst 

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In this issue:
» Should bleeding PSUs expand aimlessly?
» To emulate China's success, India ties up with Africa
» Obama blames India,China for rise in oil prices...
» Can govts take away privately held gold?
» ...and more!

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20 kilometres of roadways a day. These few words epitomized India major thrust towards infrastructure since 2007. And why not? Ever since liberalization in the 1990s, roadways have been the major catalysts in India's growth story. Hence there was nothing better for the policy makers to showcase their resolve. That the planning was a tad too ambitious was a different story though.

However, the focus on roadways was not totally unfounded. As unlike power, ports and mining sectors, road building is supervised by an autonomous body like National Highways Authority of India (NHAI). The entity is far better off due to its independent governance and financing. Besides, NHAI gets around Rs 40 to 50 bn in the form of cess on oil. A part of the cess charged on petrol and high-speed diesel goes to NHAI. Hence better finances and governance were believed to be the key to its long term success. Nevertheless, a potentially small hurdle dealt a heavy blow to its building '20 kms- a-day' dream.

According to infra consulting major Feedback Ventures, the 80:20 problem in land acquisition is to blame for NHAI's failure. Though 80% of the land is given when the project is awarded, the remaining 20% leads to a major delay. The location of the land and environment clearances tends to become major roadblocks. Especially when they pass through green zones and villages. Little wonder that two most ambitious road projects (Golden Quadrilateral and North-South-East-West corridor) are close to completion but not there yet!

But land acquisition is not the only issue. Ironically in a populated nation like ours manpower problem has also shown up in road building. Every 100 km of road building requires some 70 engineers. However thanks to several projects like construction of metros, development programmes in Bihar and Uttar Pradesh and NREGA have taken away the major chunk of skilled and unskilled workforce.

Needless to mention that not having a chairman for over one-and-a-half years has brought a fair share of woes to NHAI. The once financially robust entity has also had problems with aggressive bids and stares at the possibility of default in payments some years later. But despite multiple problems, the NHAI is hoping to achieve its 20 kms- a-day target latest by 2015. In an economy like India, roadways will remain a key growth catalyst. Hence, policymakers would do well to ensure that the NHAI's problems are resolved at the earliest.

01:30  Chart of the day
It is not just the low GDP growth that is worrisome for to policy makers, corporate and investors. That the non agricultural growth rate has once again touched the lows of post Lehman bust crisis is eventful enough. As seen in today's chart, the last time non-agri growth rate touched a low of 6.8% was in the third quarter of FY09. High inflation and steep liquidity costs have taken a major toll on corporate expansion plans. But it would certainly take more than RBI's monetary easing for the growth rates to pick up from such trough.

Data source: Mint

There is a company which has been making huge losses for quite some time now. The company is completely lagging its peers in terms of grabbing its share of the expanding market. Now it is planning to expand its mobile phone network capacity by a million users. Yes, we are talking about our ailing state-run telecom company, Mahanagar Telephone Nigam Ltd (MTNL). The company aims at making a huge capital expenditure on its 2G and 3G networks. Now the question arises: should such perennially bleeding PSUs be allowed to expand aimlessly? That too, without a proper restructuring plan?

True, capacity expansion, per se, is not a bad idea. After all it helps companies grow and improve profitability, going forward. However, when a company is in a poor financial state due to mismanagement and other issues, expansion makes little or no sense at all. Recently, our country has witnessed the brunt of this when even a private player goes for irrational expansions such as in the case of Kingfisher Airlines. Then, if a state-run company takes the same course, it directly affects the people of India. After all, they are the shareholders of the company. In turn, they have to bear all the losses. As a custodian of the interests of the people of the country, the Indian government should not turn a blind eye to all this. Else, some day we all have to pay for this, directly or indirectly.

Should loss making PSUs be allowed to expand aimlessly? Share your comments with us or post your views on our Facebook page / Google+ page.

The 'dark continent' of Africa is rich in natural resources including oil, diamonds and various other minerals. Most of these resources are undiscovered or barely harnessed adding to their appeal. Over the years, China has strategically established diplomatic relations with 48 out of 54 African nations. It has invested in building roads, ports and other infra in the continent. Africa is now a stable trading partner and a supplier for China.

Trying to emulate China's success, India has jumped on the bandwagon. It is trying to gain a foothold into the continent. India plans to help African countries develop and market locally produced commercial products. It plans to offer scientific and research expertise. This may help poorer African nations improve their lot. And as quid pro quo India expects more access to Africa's mineral reserves. Access to these scarce resources will help wield significant competitive advantages in years to come.

Given the burden of debt across the globe, gold seems to be headed in only one direction, up. But historians may have a word or two of caution for all out gold connoisseurs. It should be noted that this isn't the first time that the yellow metal has gone ballistic. An event of this kind has happened in the past too. Thus, if the outcome back then is any indication, buying gold physically and keeping it outside the US could be the most sensible thing to do.

The specter of this possibility has been raised by none other than Marc Faber. The man behind the Gloom, Boom and Doom report has argued that the Government could eventually take away privately held gold. This is because the financial mess will turn so bad that gold prices will go through the roof. And since only a small minority hold gold, the event could pass off without much resistance. Given the reputation the man enjoys, betting against him may not be the smart thing to do.

As tensions in Iran are pushing oil prices higher, US is beginning to feel the pinch. In the run-up to the US elections, Republicans are pointing fingers at the current president Mr. Barack Obama for his failed energy policy.Obama in turn is blaming India and China for the rise in fuel prices. He contends that as people and India and China become wealthier, the demand for auto sales in these countries will rise. This will result in firmer oil prices for the time to come. Interestingly, while high oil prices are keeping the world's largest economy on the edge, oil import data released paints a slightly different picture.

The data shows that US crude imports have fallen to their lowest level for a decade. This is a result of weak demand and growth in domestic production. Indeed, imports as a share of US oil consumption dropped to 44.8%. This is the lowest proportion since 1995 and is down from a peak of 60.3% in 2005. This is expected to make the economy more resilient to rise in oil prices. Whatever be the case, geo political issues will certainly cause disruption in supplies and prices in the medium term. However, in the long term trend supports high oil prices given the demand-supply mismatch.

The world stock markets with the exception of Brazil closed the week on a flattish note. The US stock markets were down 0.04% during the week. However, both Dow and NASDAQ reached historical milestones and touched 13,000 and 3,000 respectively during the week. But the rally fizzled out soon and the markets ended with a third losing week of the year. The stock markets in Europe ended the week on a mixed note (positive bias) as European Union Summit on Greek debt crisis eased tensions amongst investors.

The Indian stock markets were down by 1.6% during the week as investors chose to stay away from the markets ahead of key announcements scheduled in the upcoming weeks. Election results, monetary policy and union budget are key events eyed by the investors that will determine the course of the markets in next few weeks.It would be interesting to see whether markets embrace the policy action/poll results and extend the current rally which so far has been driven by easy liquidity.

Amongst the other world markets, Brazil (up by 2.8%) led the gains followed by Japan (up by 1.3%). However, the UK stock markets were down by 0.4% during the week.

Data source: Yahoo Finance, Kitco

04:55  Weekend Investing Mantra
"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." - Benjamin Graham
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6 Responses to "The 80:20 hurdle to India's promising growth catalyst"

rajkaran singh

Mar 4, 2012

It's simple No.One can't run economics on emotions, it is competitive world today and if we really want to be super power we have tro take bold and timely decisions. Their are many ways to make these sick PSU's first healthy. They shall differ from unit to unit but there are definitely the ways. One has to be concentrated to find them out. THE MORE DELAY WE DO IN DOING THAT THE MORE WE SHALL BE IN LOSS/PROBLEM.


sarat palat

Mar 4, 2012

Loss making PSU's should not be allowed to expand aimlessly. A detailed study to be conducted by an independent agency the reason for the current situation and it can be improved by further expansion. Especially in the telecom sector where the various private players are in full gear, it is doubtful a PSU in that sector could withstand the wind.



Mar 4, 2012

For a PSU to function properly it is essential to ensure sufficient autonomy in decision making without political interference. It is all the more necessary to appoint top management on merit and not on any other consideration. The compensation package must also be such that can attract capable persons.



Mar 3, 2012

The Government needs funds for its survival. It doesn't matter from where it comes. The MTNL expansion plan is an idea either of a bureaucrat or a politician. Whether it goes through or not is to be seen. ONGC share offer was one lesson to the Government. This is another experiment.



Mar 3, 2012

Talking of expansions by PSUs. With growing user base it will be endeavor of any business entity to expand. The question is if MTNL was expected to be a purely service oriented no profit no loss entity or a profit making entity. If profit becomes the main objective to exist then one should not crib about expansions. Not all expansions not always are bad or wrong. In our country there was a wave of privatization of PSUs and once private companies entered the govt is playing spoil sport albeit at the cost of common man's tax. If Kingfisher airlines runs in loss then govt says why bailed out but air india much older player runs in loss it is bailed out, why these double standards. If a company requires restructuring then whether it is a private or govt company should not be considered. The govt was anyway getting its revenue from Kingfisher by way of taxes. To me it appears that privatization move is only to squeeze money from promoters and public



Mar 3, 2012

Dear Mr.Mulraj,
If a rogue is not punished he/she will become a bane to the society.Similarly, in corporate world if a CEO of similar type(say loss making Co.) he/she should get a salary of lowest category worker in that Co.whenever the CO.makes losses after independent Auditor report(not former Satyam auditor).Then only they work honestly.

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