'Made in China' worries hurting India's 2020 goals? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'Made in China' worries hurting India's 2020 goals? 

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In this issue:
» Taxpayer money funding 3 decades of deficit
» RBI sees red in gold loans
» Indian HNIs show signs of philanthropy
» India solving Pakistan's gas problems
» ...and more!


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00:00
 
India's own economic goal posts may be well beyond her reach. But bring up any topic that undermines China's super power potential. The latter will certainly gather more newsprint and catch more eyeballs in India. In the same tone, speculations about China cannibalizing on India growth story attracts as much concern from policy makers.

Take India's growing trade deficit with China for instance. At an estimated US$ 27 bn in 2011, the deficit between imports and exports to the oriental nation is seen as an economic peril. The government is alarmed by the fact that India's overall trade defict has soared over the past decade. It went up from US$ 13 bn in 2000 to US$ 150 bn in 2011. At more than 6% of GDP India's trade gap is undoubtedly huge. The deficit has soared even as India has been the fastest-growing exporter among the world's top 10 economies. India's exports have in fact grown at the same rate as China's all this while. However, all our worries seem to rest with our export focused neighbour.

But the fact is that the deficit with China accounts for less than 20% of India's total deficit. Hence even if the trade deficit with China were to drop drastically, it would do little to improve the situation. In the bargain stopping imports of critical electrical machinery, nuclear reactors, boilers etc may hurt India's infrastructure dreams. Import prices for the Chinese products are more than 30% lower than that from suppliers in the US, Europe and Japan. Hence, Chinese companies have been the natural beneficiaries of India's growing appetite for capital goods. But curtailing Chinese imports completely could deal a heavy blow to India infrastructure outlay. Instead, demanding Chinese suppliers to set up manufacturing bases in India could be a smart long term policy.

Imported oil, gas, and coal are the major culprits for India's fiscal problems. These do not come from China. But from countries such as Saudi Arabia, Iran, Australia, and Indonesia. Fuel imports accounts for more than 65% of India's trade deficit. With lack of indigenous fuel resources, India's deficit problem is therefore here to stay. Distancing itself from China as a trade partner could only hurt India's long term economic goals. The government would therefore do well to focus on economics rather than external affairs when it comes to fiscal policy making.

Do you think India should curtail imports from China? Let us know your comments or post them on our Facebook page / Google+ page.

01:30  Chart of the day
 
As the Indian government frames new policies to facilitate the loss making PSUs, several unlisted ones remain in the shadow. For instance, data from the latest Economic Survey shows that the Indian Department of Post has been reporting deficits since the last three decades. While we understand that some PSU entities are meant to serve social causes, using tax payer money to support inefficient operations for decades is unacceptable. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

Data source: Economic survey 2011-12

02:04
 
It is not for nothing that India's central bank, the Reserve Bank of India (RBI), is termed the watchdog of the highest order. Its ability to sniff out problems from practically miles away is legendary. And it has done the same on yet another occasion we believe. The party at the receiving end this time is any firm that specialises in lending against gold. In other words, the gold financing NBFCs. Just yesterday, RBI tightened rules for such firms in the form of increasing the equity capital buffer and also lowering the ceiling for loan to value ratio.

Thus, companies having half their assets in gold will be required to maintain minimum equity capital of 14% by April FY14. Besides, they will also not be allowed to lend more than 60% of the value of gold jewellery. Although we don't think there is significant downside risk to gold prices just yet, RBI's mandate is of a different kind. Its task is to prevent any systemic risks from spreading to the financial system. It should thus guard against all events, no matter how extreme. Even if the same has a probability of 0.01%.

02:38
 
The Budget presented this year created an environment marked with duty hikes. This spread a general air of gloom for the individuals who were hopeful for some savings on the income tax front. But the government has finally released some good news to help these individuals out of their disappointment. The good news comes in the form of higher interest rates on the small saving instruments. These instruments would include National Savings Certificate, post office deposits as well as Public Provident Funds (PPF).

The government plans to increase the interest rates on these instruments by 20 to 50 basis points (0.2% - 0.5%). This would take the interest rate on PPF from 8.6% to 8.8-8.9%. One might argue that why would an individual invest in schemes like the PPF when you can earn a higher rate of interest on a bank's fixed deposit (FD)? After all, the current interest rates on FDs are close to 9%. The answer to this is that the investments made in these instruments are also available for tax benefits. Therefore, the total return on the instruments, interest rate plus tax savings, is higher than that on fixed deposits. As a result, this move by the government is expected to increase investor interest towards these small savings schemes.

03:13
 
India's medium term growth prospects are a matter of worry. There is no denying this. But India has witnessed unparalleled growth over the last couple of decades. And this has created a long list of high net worth individuals (HNIs). US-based Bain and Company conducted a survey of about 400 HNIs and emerging HNIs in some of the major Indian cities. The results of the survey are quite interesting. It shows that Indian HNIs have started loosening up their purses and are taking up philanthropy.

In 2011, India's HNIs donated about 3.1% of their total income. This is quite an improvement from 2.3% of total income in 2010. In fact, about 70% of the donors surveyed were novices. Meaning, they had less than 3 years of philanthropic experience. What is even more surprising is that about one-third of the donors were 30 years old or less. Where are these newbies putting their money? Interestingly, private foundations such as the Azim Premji Foundation and Shiv Nadar Foundation are increasingly gaining popularity.

03:45
 
India might have slipped in managing fiscal deficit. However, nothing beats it when it comes to bridging trust deficit. As the neighboring country Pakistan reels under a gas crisis, GAIL, the biggest domestic gas player has offered a helping hand. The latter has come up with a proposal to export LNG to Pakistan. In the past, Pakistan has declined the proposal of import of liquid fuels from India as it could get a better deal from Gulf nations. However, it may be a different case this time. This is because gas caters to 53% of Pakistan's energy needs. The ongoing gas crisis has led to factory shutdowns, the impact of which is evident from country's export statistics. What makes matters worse for Pakistan is the lack of its own imported gas terminal and a long time needed to come with a new one. Hence, accepting the proposal will make economic sense for it.

As far as GAIL is concerned, the extension of pipeline to Pakistan needs minimum investment and the proposal may spin money for the company. While we appreciate such confidence building measures, exporting gas at times when India itself is gas starved raises slight skepticism. As the proposal awaits clearance, we hope self sufficiency in energy gets due consideration.

04:15
 
In principle, hardly anyone can argue against the introduction of National Food Security Bill. After all, it is a shame that a nation like India, which has been growing its economy at a faster clip for more than a decade still struggling to feed its every citizen. Therefore, the bill is definitely a welcome move by the Indian government. However, the larger and more serious issue is the implementation of the proposed bill. As per the ministry of Agriculture, the country has enough food grains for public distribution till 2014. At the same time, it would not affect the exports of food grains. Taking this comfort, the Indian government is planning to implement the bill by the end of this year 2012.

However, the Indian government must not focus only on the availability of food grains. The country has been witnessing umpteen cases of wastage of available resources for a long time. Therefore, first the government must focus on the setting up robust public distribution system to curb the slippage. It would help implement the bill in its true spirit. How will the government cope with growing demand of food grains in the future, along with the worsening fiscal deficit situation by each passing year? This pertinent question still remains unanswered.

04:40
 
After starting in the positive territory, the indices in Indian stock markets slipped into the red as reports of a new Rs 1 trillion coal scam rocked markets. Stocks from commodity and energy sectors led by Coal India led the pack of losers. At the time of writing, the BSE Sensex was trading 126 points below the dotted line. The indices in other Asian markets closed mixed in today's trade. Those in Europe have opened lower.

04:55  Today's Investing Mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch
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10 Responses to "'Made in China' worries hurting India's 2020 goals?"

Sekar.S

Mar 24, 2012

To curb China's import to India, is the right step. we should realize that China is becoming a power which in the long run may dictate terms with the entire world. As on date they have projected themselves as the "world's supplier" of all items. Moreover the intentions of china is to make the entire world their dependents and so they can have control on all the countries. In short china is becoming a evil power, so we must stop this. As a first step everyone should try to live without buying china items, so that we can impose an indirect brake on their economical growth. Growth of china is alarming, particularly for India, so we must act fast. Allowing china to set up manufacturing units in India will be a suicidal act for India's growth.

Like 

VS Gurumani

Mar 23, 2012

To provide an economic dimension to an economic problem as you say, it will be nice if the government can start talking of managing our energy crisis (it is one though no one seems to be prepared to admit it) by: 1) focusing on conservation--the auto industry should not be allowed to hold up the fuel efficiency norms notification any more: 2) announcing that the only alternative to unfreezing diesel prices will be to start diesel rationing; 3) making the large individual consumers pay fair price for the diesel they consume (how about issuing a card like the UID for every fuel guzzling SUV and insisting on their paying a higher price at the pump?); 4) having a single energy ministry (like HRD) which can take a complete view of all aspects of the energy challenges; 5) using all the retail outlets and the PCRA to run an intense publicity campaign to reduce fuel consumption by say, 15% for each vehicle (this is possible through simple doable actions by the driver and vehicle owner). I could write more, but this gives the drift.

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K.R.C.Reddy

Mar 23, 2012

It may be worthwhile for govt. of India to take your suggestion and try permitting large and welknown power and infrastructure equipment manufacturers from China to create their own manufacturing facilities in India to supply their Indian clients.Such manufacturing capacity can be restricted to 5% of total imports of power and infrastructure equipment of that sector on experimental basis initially.It can be modified after some years of expriment.

Like 

shirish patwa

Mar 23, 2012

In stead of worrying about the trade deficit with China,we should worry about the overall trade deficit.As it is ,more than 65%of our import is accounted by fuel imports alone where we hardly have any choice.There should be three pronged attack on trade deficit.
1)Promote alternative fuel consumption pattern.We have talked more on alternative energy sources than done anything substantial in the field.We need to tap more oil resources available in our own country.And we need to avoid wasteful uses of fuel.This includes promoting more efficient public transport system so that uses of private vehicles can be curtailed.We can make railways more efficient,so that handling of goods and passengers by truck and private vehicles respectively can be reduced.Import substitution,especially in the field of defence purchases should be given top priority.How long should we depend on Western countries for our defence requirement?W
2)We should concentrate on doubling our export.Proper market survey,developing amicable political relations with countries where there is potential market for our goods,

Like 

kusalovir

Mar 23, 2012

China has evil designs against India. India should adopt such measures as do not help the industry and economy of China, and at the same time give a boost to the Indian industry and trade. For example, heavy duty on export of raw material to China and on import of manufactured goods from China.

Like (1)

Adi Daruwalla

Mar 22, 2012

Govt should not be asking Chinese companies to set up bases in India. China while being a trade partner has been at war with India in the past, and in recent past has built up its substantial defence across the border. Also Chinese products in the Ifra sector could be 30% cheaper but does not mean that they are reliable and long lasting. Wherever there is a discount in price there is a compromise either in quality or the products longetivity. Also the Chinese product could be cheaper due to cheap labour, low QC qulity checks, and some more reasons. The solution is that in some cases even if the pricing is high from other trade partners, India should be trading more with those countries to get better products for the Infra sector. (If u get discount, remember that (money) it could be going from someones pocket, maybe Indias. There is never a free lunch. We have a hughe knowledege base from the IIT's and the engineering institutes, we should use them for the betterment of our Infra related product manufacturing.

Like (1)

tnbala

Mar 22, 2012

In the context of trade deficit, gold is around 50 bl $ currently and china has nothing to do with it. It is totally unproductive and needs to be curtailed. I feel one of the important priorities of the government is to channelise the huge gold stock in various forms with public to productive investments. May be an attractve gold bond and/or an attractive acility to hold in demat form.

Like (1)

Suresh Kumar

Mar 22, 2012

It's strange that our government is ever ready to bail out all the governments including those of US and China, whose heads of states make air dash to New Delhi, by awarding huge contracts of planes and capital goods. However, we feel shy of helping our own power goods companies by imposing import duty of cheap chinese goods. Chinese labour is far costlier than Indian labour. Why should we bail out Chinese capital goods maker if they want to dump their equipment at dirt cheap price, in order to keep their factory running or following unfair labour practices ? Is it wisdom, if we harm the development of our industries by not encouraging them, by putting high duties on them ? Once, we get addicted to cheap and poor quality Chinese goods, we would never be able to get out of this mode.
Will China ever relent on staple visa, dam on Brahmaputra, Arunanchal border issue or Kashmir issue? We just dont have guts to take a position.

Like (1)

manmohan

Mar 22, 2012

No need of curbing import from China. Instead Govt should follow on your suggestion for asking Chinese companies to set up base in India. We need to promote companies who are exploring & extracting fuels in India by providing all kinds of support & encouragement. It will go a long way in making our country self reliant in fuel.

Like (1)

Deva

Mar 22, 2012

All said about Chinese, still they are the main suppliers for our infrastructure requirements. We should say thanks to our brainy guys who graduated from our premium institutes to work abroad to earn more money and create wealth in the west and latter the west transfer the technology to China to earn more and Chinese best known for their ethics are creating cheap stuffs at the cost of others and make money. Why it is not happening in India? Here we should thank our politicians to create such an environment in India that anyone dare left bruised. So the choice left is just feed the Chinese with our precious forex and make life easier here for those who have vitamin M.

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