India v/s Bharat: Which side are you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India v/s Bharat: Which side are you? 

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In this issue:
» Time US went back to capitalism, feels Jim Grant
» China trying hard to remove US dollar's reserve currency status
» Greece crisis over for now, feels IMF Chief
» The Government should change focus to investment
» ...and more!

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That the fiscal position of the Indian Government is on a sticky wicket is well known. But there's one entity out there that does not quite mind the spend thrift ways of its polity. And this entity answers to the name of India Inc. Infact, to be precise, that part of India Inc, which has a significant portion of its revenues coming from rural India. Because had it not been for Government's pro-rural push, these companies wouldn't have seen the surge in their profitability they are seeing now.

Indeed, central government's transfers, on account of its various schemes like NREGA, now account for nearly 12% of the rural income. Needless to say, a good chunk of its income is finding its way towards consumption goods. This in turn is fattening the bottomline of corporate India. Buoyed by this trend, a lot of stock market analysts can't stop praising the Indian policymakers. Over the past few months, quite a few brokerages have come out with reports, arguing about how growth in consumer companies has been due to the role played by rural India. Obviously, these analysts are in favour of the Government continuing with this trend.

But is the Government right in doling out more favours to rural India at the expense of its urban counterpart? In other words, is Government's pro-Bharat leaning a good thing in the long run? Like with all things economic, the answer to this question too lies in the net present value calculation of such a program. Put differently, does the cash inflow of such a spending exceed the cash out flow? From evidence at hand, it does not seem to be the case. Despite such spending, the GDP growth has only slowed down in recent years. Not to forget the high inflation that has eaten into profit margins, lowering cash earnings even further.

We believe that the analysts seem to be taking a very narrow view of things. By seeing prosperity in a few pockets, they seem to be generalising that the society as a whole is benefiting. But this does not seem to be the case. What is instead happening is the classic case of Peter being robbed to pay Paul. And this is certainly not the recipe for long term wealth creation. Thus, what we prefer is neither India nor Bharat but a set of reforms that makes the whole society better off than before.

Do you think the analysts are right in praising the Government's rural push? Share your comments with us or you can also comment on Facebook page / Google+ page.

01:22  Chart of the day
India may have come a long way in reducing child mortality but still is certainly way behind other emerging and developed nations. As today's chart of the day highlights, far fewer kids die before they see their fifth birthday in countries like US and Japan. Even China has a much lower rate than India. A study ranked India a dismal 149th out of a total of 195 countries in the survey. Time for India to do some serious introspection we believe.

Source: The Economist

What was the reason behind the unprecedented surge of the US in the 20st century? The answer is capitalism- a system where market forces are allowed to play themselves out. But today, the US economy has several headwinds. The economy is slowing down, the government finances are in a mess, and the stability of the US dollar is in serious danger. What do you think could be the solution to all of US' miseries? A certain gentleman by the name of Jim Grant has a probable solution to offer and it is called capitalism. That's indeed very true. The main reason behind all of America's current troubles has been the excess intervention and market manipulation by the US central bank. For several years now, the Fed has been recklessly pumping easy money into the economy. It is now maneuvering interest rates at near zero levels. By all chances, this is not going to do any good to the US economy.

While most economists obsess themselves with the Great Depression of the 1930s, Mr Grant recalls an important lesson from the early 1920s. He says that during 1920-21, the US economy witnessed a major downturn. Nominal GDP declined by about 20%. Wholesale prices crashed 40%. How did US policymakers react to this then? The US Treasury balanced the budget. On the other hand, the US Fed raised interest rates. And the depression was gone. The economy bounced back to normalcy. Would Mr Ben Bernanke be interested in paying heed to this lesson? We doubt.

After being severely crippled by the global financial crisis, the US was in major deleveraging mode; the households at least. As the economy sunk into recession and unemployment mounted, households felt the pinch and chose to cut down spends as well as debt. The government chose the opposite route and borrowed more to solve its worsening fiscal situation. With the result, that debt on the books of the government has only ballooned.

In this scenario, the quarterly flow of funds report released by the US Fed highlights an interesting aspect. It shows that Q4 household net worth did increase by US$ 1.2 trillion to US$ 58.5 trillion. But this was purely driven by the central bank induced ramp in the stock market; all of this and some more was due to the change in the market value of equity shares. Further, the most surprising data was that in Q4 2011 for the first time since Q1 2008, debt across all holder classes increased. And this is not just debt of the government, whose rise is hardly surprising, but that of households too. What this means is that deleveraging seems to now be officially over. And if this trend continues in the forthcoming quarters as well, it does not spell well for the US economy.

'Spring in the air'! Surprisingly, this is how IMF chief Christine Lagarde has described the supposed success of Greece's bailout programme! Ms Lagarde has in fact suggested that the Greek debt worry is over for now. That the effort is one of many and does not ease the Euro zone debt problem seems to have failed her notice. Moreover, bailouts by themselves cause a viscous cycle of economic de-growth.

The corporate bailouts of 2008, however, have failed to teach this lesson to key administrators. Ms Lagarde's job as chief of IMF should focus on ensuring prudent economic policies. Ones that do not drain the world of key economic resources. However, vested interests seem to be at play here. By playing the role of citizens who chose to not point out that the emperor was naked, the other Euro zone economies are doing a huge damage to themselves. We only hope that at least the policy makers remove their blinkers soon!

That China is trying to derail the dominance of the US dollar in the global financial arena is not news. It has been taking several steps to reduce the greenback's status as the global currency. In the latest move, the red dragon has stated that it will introduce renminbi loans to its BRICS counterparts. For this, China will sign a memorandum of understanding (MOU) with the other BRICS by the end of this month. By this, the China Development Bank would be able to lend in renminbi denominated loans. Currently it exclusively lends out in US dollars. China has already signed bilateral trade agreements with some countries vide which the trade is carried out in the Chinese currency as against the US dollar. One such agreement is with Japan. With moves such as these, China is seeking to internationalise its own currency and cut down the dominance of US dollar. But will it succeed or not? It largely depends on whether the developed world, which is the main buyer when it comes to international trade, is willing to agree to it. And that is unlikely to happen as US accounts for a large part of this developed world.

The countdown to the big Budget Day has begun. D-Day is exactly one week away. Fiscal deficit, subsidies, tax increases etc are the main numbers everyone is looking out for. But, according to Dr Ashima Goyal of the Indira Gandhi Institute of Development Research, these raw numbers are not as important as the quality of the adjustment. Government spending has increasingly gone towards consumption. However to have a long term benefit, this needs to shift more towards investment. For example in dealing with a persistent problem such as inflation, the government has to fix key supply side issues in food storage and infrastructure. Will these issues actually be addressed is the question?

Meanwhile, indices in the Indian stock markets have been trading very buoyant today with the Sensex higher by around 285 points at the time of writing. Heavyweights like ICICI Bank and Larsen & Toubro (L&T) were seen contributing the most to these gains. Most Asian indices also closed strong today with Europe too following the trend by starting firm.

04:55  Today's Investing Mantra
"I once owned 17 stocks. But that was way too much" - Philip Fisher
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5 Responses to "India v/s Bharat: Which side are you?"


Mar 10, 2012

A couple of points: India V/s Bharat, it is to be noted that most of the deciding authorities come from rural areas, make it big in India, and easily forget about Bharat. If bharat prospers, India will prosper. But the need is for providing infrastructure so that business/ factories/ mfg. units are able to go to bharat and set up their units. These would lead to more employment, restriction in migration to cities and prosperity. Instead of these measures, the govt, has started giving free lunches like NREGA. This has resulted in the rural youth becoming more lazy, many resoting to drinking liquor and doing nothing, huze corruptions so that only partial amount reaches the people, an amount which in the first place should not have been distributed at all.
Only if govt. think of Bahrat, can you ever dream of a properous and strong India. Or else you will ahv emany more dharavis spring over in all major cities of India.
Some are hopeful, the budget may have some measures for these to happen this time. Pray to Almighty, please give some sense to that youth who has migrated from bharat,reached the highest authority in India, but has forgotten his roots.
Thanks Damani



Mar 9, 2012




Mar 9, 2012

Equitymaster you yourself has already replied " Peter is being Robbed to pay Paul" . Mr Kranthi Mark has also rightly posted his views.And there are many ways India / Bharat could have been shining - not branded as the Most corrupted country in the world had our forefathers would have supported those Kranti Karis Bhagat Singh & Subhash Bose and India would have achieved its Freedom . British has cleverly transfered the Mantle of rulling India to Nehru & Co ( the Pro-British Gang ) to squize India till today. Times of India has written Maoism Breeds out of hunger,gives Cartoon showing Pratibha Patil entering Presidential pllace with 6 bags representing its family Scam and APJ Abdul kalam comming out with 2 bags -one of his personal belongings and the other of Books.Our politicians starts Dancing knowing their financial irregularities will be enquired by CBI is the Cartoon.
Are the Financial experts going to pay attention or at all paid any attention to your suggesstions what should really be done?
Fed up of listening the word "REFORM" - to common man its an OGL to owners of Industries to throw out of employment the employees of no fault ( Jet airways example ). But King Fisher going sick Politicians are loosing sleep ready to bail out from Tax payers money.


Paresh V

Mar 9, 2012

The difference of Bharat vs India has been overplayed now since many years because of the socialists and leftists as well as UPA's penchant for propagating a pro-poor line through large spending programs.

The programs may have delivered some money to some groups, but they have resulted in massive inflation over several years. How does such inflation benefit "Bharat" is very hard to imagine. Such programs also generate massive corruption and creation of another set of vested interests, who would like to perpetuate such spending binges. The huge outpouring of support for Anna's movement across all sections of society makes us again hard to believe in this India vs Bharat stories.

Thirdly, the recent elections results in UP should be another eye-opener. If the so called pro-Bharat policies of UPA were so popular with "Bharat", then there should have been some impact of it, considering the high decibel campaign carried out by the UPA leaders. The SP, while also promising some freebies like laptops for students, mainly focused on law and order, using the modern face of its new leader - Akhilesh Yadav. While Akhilesh spoke in hindi lost of the time, he did not try to sound rustic or be apologetic about use of technology. In the process, most of the votes against the incumbent party seem to have been successfully garnered by SP, in a state which most experts consider to be battle-ground of caste and religion.

The media also makes the mistake of this artificial divide of India vs Bharat. The ground conditions in cities and rural areas are different. However, there are aslo similarly vast differences among different cities and also among different rural areas. The aspirations of people, youth, women etc are quite similar - education, better jobs or other means of livelihood. We should recognise and respect people's yearning for good livelihood good jobs or businesses. The people crying the Bharat vs India slogans are mostly those who wish to perpetuate the system of making people dependent on Government through massive spending. The facts do not seem to support such actual division.


Kranthi Mark

Mar 9, 2012

Whether it is India Or Bharat one thing is common Tax avoidance ....This is what making the difference between the both.Only 20% of population pay income taxes to the federal government which in tandem will be used for the developmental activities . We just had election in 5 states ... this is one more physical stimulus to the rural economy ... Yes !! You have to believe ... Election is the time , All the unaccounted money stored under the beds and in gunny bags will come our and used effectively during the election season.
Ministry of finance have to lay foundation to revamp the entire Cash payment system & Structure in India irrespective of Urban or rural . If common Indian want to invest in a small mutual fund scheme you required pan card and KYC , but if any one want to buy a Kilo gold or tone Silver federal system don't require any proof. Majority of real estate dealings are in cash nobody pays tax in Bharat ???. And Bharat accounts for 85% of governmet subsidies because it is 85% of vote bank again. We need tight and stringent policy makers for India/Bharat .... till the time we keep on differantiating India Vs Bharat ...
reach me at www wealthmills blogspot com.

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