Can rural India be blamed for India's poor GDP? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can rural India be blamed for India's poor GDP? 

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In this issue:
» Mumbai is cheaper than Singapore
» Is Mark Mobius bullish on emerging markets?
» Geopolitical risks cannot be totally ignored
» Will gold touch US$ 7,000 an ounce?
» ...and more!

The economic slowdown has been haunting India for quite a few quarters now. Sluggish industrial and construction activity, stalled projects and lack of reforms have all taken its toll. What has made matters worse is that inflation has remained consistently high. As a result of which the RBI does not have much headroom to lower rates even when growth is slow. Thus, it is quite apparent that India suffers from stagflation. The latter is a difficult economic situation where prices remain high even when growth slows down.

The slowdown in growth has been due to a combination of factors cited above. But what has been the reason for the persistently high inflation? Firm food prices have certainly been one of the culprits. But that is not all. As per a report by Morgan Stanley and published on Firstbiz, rise in rural wages has also been a reason why overall prices are higher. And the government's populist National Rural Employment Guarantee Act (NREGA) has been blamed for this.

The current UPA government has always been a staunch backer of the poor and rural sections of the society. That is why it introduced the NREGA scheme in 2005, which guarantees 100 days of employment to poor households in the rural areas. But this has led to a distortion in the labour market. This is largely because, while wages have risen, there has not really been much of a rise in productive assets. The NREGA in some sense has also created a shortage of labour in the rural market. Overall, the NREGA has led to a structural shift in the income consumption pattern and has artificially increased inflation labour and input costs. Without raising either productivity or focusing on asset creation, the NREGA has only managed to redistribute wealth rather than increase it. Meanwhile, the purchasing power of households has instead deteriorated an account of high inflation. This has then impacted demand and contributed to the slowdown of the Indian economy.

The NREGA always had its share of detractors. And very rightly so. One of the arguments against such a scheme was that most people would take employment for granted and this attitude would gradually kill entrepreneurship and micro enterprises. Corruption seeping in was also another concern cited.

If the NREGA has not really contributed to the growth of the economy, then the very purpose has been defeated. Just increasing wages without any subsequent increase in productivity ultimately is harmful to growth. Only the general elections and a new government at the helm will crucially decide the fate of NREGA and other such populist schemes going forward.

Do you think that the government's populist Employment Guarantee Act has contributed much to the growth of the Indian economy? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
Most Indians staying in India but notably Mumbai will agree that the cost of living in Mumbai is quite high. Property prices are high, so are rentals. Cost of food items and other essentials are also probably priced higher than what they are in other Indian cities. But what is the result if one compares Mumbai to cities outside India? Indeed, the cost of living in Mumbai is much cheaper than that in either Singapore or Paris or for that matter Shanghai. Singapore has emerged as the costliest city to live in as per the latest data. It is interesting to note that although the cost of living remains high in European cities such as Paris and London, it is still cheaper as compared to the scenario 5 years back.

Is the cost of living in Mumbai cheap?

The safe time to invest is when there is blood on the streets, opined the emerging market guru Mark Mobius once. Little wonder he feels that Ukraine is in a sweet spot as of now and should do well in the long run. Of course the situation there is unfortunate but as investors, such opportunities should be grabbed as per him. Mobius also sounded bullish with respect to other emerging markets. However he cautioned that investors should not buy countries and sectors but stocks. He argued that no matter what the fundamentals are, there are certain stocks that are able to take advantage of the situation. And hence investors should focus on them. He further suggested that emerging markets are close to a bottom in terms of valuations. Therefore this along with the fact that there is still plenty of liquidity out there should bring good times for emerging market indices over the immediate to medium term, India included.

As the benchmark BSE Sensex hovers nears the new lifetime high, one is forced to wonder if any risk is being underpriced. Sentiments in the Indian markets are certainly buoyant for now in anticipation of poll results. Meanwhile, the risk of deficits, inflation, policy paralysis all seem to be in the backburner. But should one completely ignore global risks too? Mohamed El-Erian, the former CEO of Pimco believes that investors can do so at their own peril. He agrees that global markets have so far shrugged off geopolitical turmoil. For instance Russia's intervention in Ukraine has not had any negative impact on global markets so far. Meanwhile governments in the US and Eurozone are under increased pressure to act more forcefully. The power of unilateral organizations has also been blunted. In such a scenario investors cannot write-off the possibility of geopolitical crisis re-surfacing. And whenever that happens market valuations can certainly get hurt. Investors would therefore do well to factor in such risk in their portfolios.

Ghost cities evolved in China during the property market boom. Those were the signs that the property market was in a bubble and correction was due. And the prices indeed corrected in certain pockets since then. However, this wasn't a widespread correction for the bubble to burst. This was perhaps just a leg down in what turned out to be an unprecedented boom in property prices sans initial hic-cups.

But any bubble at the end does burst. For China, the property bubble has prolonged but there are indications that it may burst soon. For one, residential sales have fallen by 5% in the first two months of this year. Following weak sales even property prices have corrected for the first time since February 2012.

However, research indicates that China still needs to build 10 m homes per year to accommodate its populace. This means there is more demand for homes and property prices should rise from here on.

Yet, the prices have corrected. This contradicts the basic demand supply logic. The reason for falling prices is that the Chinese developed real estate for the wrong target market. Extravagant houses and huge malls were built in anticipation of rapid urbanization. However, the basic housing tenement requirement was not catered to. This led to an oversupply in high end housing and retail area while basic housing needs suffered. In short, China is a classic example of mis-allocation in real estate architecture. On side you have ghost malls and on other destitute do not have homes to live in.

Given the difficultly in valuing gold as an asset, future predictions of the metal do tend to vary substantially. While some believe that the golden days of the yellow metal are over, others are of the view that gold prices will only rise and as such people should start accumulating gold in present times. All of this can easily leave one confused. But, when you hear a statement such as 'gold will touch US$ 7,000 to US$ 9,000 an ounce over the next three to five years', it cannot help but get one to sit up and take notice. At the current price of US$ 1,310 an ounce, this could possibly turn out to be a 4 to 6 bagger, i.e. if the prediction comes true.

This prediction has been made by James Rickards, who is a portfolio manager at West Shore Funds. His reasoning for the same includes the inflated asset prices in the US, especially in stocks, which seem to be bubble situation. He also expects the confidence in paper currencies to collapse. He further adds that the excessive supply of gold (to the tune of 500 tones) which was dumped onto the markets last year has now been absorbed, and thus has led to a situation of more demand than supply. Given gold's high price of US$ 1,920 an ounce, Mr. Rickards prediction is very aggressive. Nevertheless, we do agree with his view that investors should allocate some portion of their portfolio towards gold (to the tune of 5-10%) as an insurance against any catastrophe. This would especially be true given the current overly optimistic market sentiments seen in certain parts of the world.

By the way, we are happy to announce that Mark Ford, who is a very successful American publisher, entrepreneur and real estate investor, will soon be giving us a peek into his best wealth building ideas, thrice a week through The Daily Reckoning

In the meanwhile, Indian stock markets continued to trade weak. At the time of writing, the benchmark BSE-Sensex was down 32 points (-0.2%). Oil & gas and IT stocks were the biggest losers. Barring Taiwan and China, majority of the Asian stock markets were trading negative led by Hong Kong and Indonesia. However, most of the European indices have opened the day on a positive note.

04:56  Today's investing mantra
"Stick with businesses whose profit picture for decades to come seems reasonably predictable." - Warren Buffet
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16 Responses to "Can rural India be blamed for India's poor GDP?"

Sanjeev Kumar Singh

Mar 27, 2014

The thesis is not supported by data. Should come out with the data. This is a common argument that any subsidy to poor is a waste and subsidy to Industry in form of exemptions of all kind is beneficial. The time has come to see the cost and benefit in terms of overall benefit not just in financial terms.



Mar 26, 2014

Dear Friends,

- To forecast any conclusion on China’s existing status is indeed difficult.
- Writeup on Gold is interesting.
- We welcome Mark Ford to The Daily Reckoning for his expert comments on Global Stock Market.
- "Stick with businesses whose profit picture for decades to come seems reasonably predictable." - Warren Buffet is quite impressive, which can be treated as Fixed Deposits for our children to enjoy the profits!

RS Rathore



Mar 26, 2014

whatever schemes are launched by government in the name of poor, infact the same is exploited for funding itself and its party workers, it may be NREGA, Ladli laxmi,BPL,PDS etc. etc. They know very well that out of every rupee they will receive 85 paise and a bit 15 paise are to be shared. It is accepted fact by government, neverthless they increase their budget for such schemes because after all they will receive the lion's share

Like (1)


Mar 26, 2014

First of all NREGA is for rural employment not to boost the country's economy. The side effects of NREGA may include country's economy. But main purpose of NREGA is 100 days minimum rural employment.
It is populist scheme money flows to the rural areas thro this scheme. Inflation require a perfect system to control, not any schemes.

Like (1)

satish s dabholkar

Mar 26, 2014

Rise in inflation is due to various unproductive government schemes by which flow of money in the economy rises.Another reason is black money,corruption by which some people have excess money which they use for purchasing the goods,commodities without bothering the price of the same.These unaccounted money also do not come under RBI control system

Like (1)

Mohanlal D Mahyavanshi

Mar 26, 2014

Egarly waiting for 2 year Retirement Plan and hope to gain from the same and wish that others too get the benefits.

Like (1)


Mar 25, 2014

Rural employment scheem is a vote bank political idea to get votes of benefisries . As now many places are not getting manual labour and here name sake of emloyment people are getting paid and even these peple are expecting pension like our legislaters are getting .. join this scheem and roaming with them cleaning some streats and tomarrow they be eligible for pension for that they have not paid any thing other than tax payers for welfare activities passing through unsuccessful task...

Like (1)

Biraja Shankar Hota

Mar 25, 2014

Though it has not contributed to growth, it is certainly not responsible for stagflation.

Like (1)

suneel khandekar

Mar 25, 2014

all the points in the article citing government's populist Employment Guarantee Act has contributed much to the growth of the Indian economy albeit in a reverse manner are perfect
to say for us living plush life in cities but we will have to understand the other side of the coin also wherein it ( the scheme) has really helped the poor and needy; some one will have to throw light on those stories also

Like (1)


Mar 25, 2014

Populist measures like 100 day work guarantee to my mind is a political move rather a economic necessity . People must be encouraged to work rather being given dole as the dole make a person more dependent. In a village today with mechanical means at their hand like tractor, hand pump and thrashers , you can find people sitting, gossiping and drinking thus wasting precious human energy which was utilised for productive works in the past. It is high time that masses must be taught their duties and rights along with education so that we create a healthy and strong nation rather a weak society living on dole.

Like (1)
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