The biggest possible barrier to India's growth - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The biggest possible barrier to India's growth 

A  A  A
In this issue:
» Robust auto sales volumes in FY11
» The worrying factor of Gold ETFs
» Concerns on the US dollar intensify
» Corruption in India on the decline?
» ...and more!

----------------------------- Get FREE: The Guide to Gold -----------------------------

Will the gold prices keep rising in the future too?

Is it better to invest in gold or stocks? ...

'Gold Bug' Bill Bonner, answers these questions for you in the exclusive publication - The Guide to Gold

Quick! Sign up for our FREE newsletter, The Daily Reckoning and get this Guide FREE!


India has steadily increased its might in the global arena. In the three years before the global crisis and even after it, the country has been growing at a pace that has been the envy of the developed world. With so much more growth potential waiting to be unleashed, foreign investors have been making a beeline towards Indian shores for attractive returns. India's corporate world has also evolved and many companies have become world class organizations with ambitions to become renowned players globally.

Yet, this picture completely belies the state of affairs in India's rural hinterland. There, India's stupendous GDP growth has not made any marked difference to their standard of living. Poverty in these regions continues to remain a disease and highlights all the more the big economic and social divide in the country. One of the reasons that has made India an attractive destination is its so called demographic dividend. The idea is that the young working population will go a long way in bolstering India's growth in the coming years. But there is the other side to the story. One where India needs to actually find meaningful and gainful employment for its ever increasing population. That picture does not look very encouraging.

Take the Mahatma Gandhi National Rural Employment Guarantee Scheme for instance. This is a US$ 9 bn programme designed to create jobs through building infrastructure in a developing India's most-backward rural areas. But it has not really seen the success envisaged largely due to corruption. There are also complaints of new skills not being learnt which would enable workers to garner better jobs and improve their chances of lifting themselves from poverty.

Indeed, India's metros have seen remarkable progress and have led to the rise of the middle class whose standard of living has improved along with the country's growth. But this difference has to be felt in the rural areas too. Especially since it accounts for two thirds of India's 1.2 bn population. Otherwise, India will have to deal with increasing social unrest, which will surely thwart its attempts to take growth to the next level and discourage foreign investments.

Do you think that India's growth is making any difference to the rural areas? Share with us or post your comments on our facebook page.

01:26  Chart of the day
FY10 was a thumping year for the auto industry as sales volumes zoomed. Strong growth was seen across segments - commercial, two-wheelers, three-wheelers and passenger vehicles. This buoyancy continued in FY11 too, as total domestic auto sales volumes grew by a robust 26% YoY. This was led by healthy demand across both urban and rural areas. What is more, this growth was witnessed across product segments as can be evinced from today's chart of the day. That said, although growth has been robust over the past two years, whether this can be sustained going forward remains a challenge. This is on account of rising inflation which has led to RBI hiking interest rates and higher input costs.

* Multi-Purpose Vehicles;
* Commercial Vehicles (Medium and Light)
# Utility Vehicles;
Data Source: SIAM

Gold has seen its prices touch new highs. And along with it the gold Exchange Traded Funds (ETFs) have also seen their prices spiraling upwards. But the rise in prices of the latter has become a cause of concern for all. A large part of the price increase in ETFs is due to the huge amounts invested in them by the hedge funds. And these hedge funds tend to book profits when their targets are realized. Whenever this would happen, it would lead a decline in the prices of these ETFs. The worrisome factor is that the pricing of these ETFs is linked to the pricing of gold. Experts around the world, including IMF (International Monetary Fund) are concerned that any exodus of funds from the ETFs would lead to a decline in the prices of gold. However, the fund houses that have launched these commodity based ETFs have stated that they do have adequate mechanisms in place to prevent this from happening. Even commodity experts feel that any decline in ETF prices would not lead to a decline in gold prices. It is actually the other way round.

The US dollar is now close to slipping to all time lows. It has lost 8% of its value against major currencies this year. Now while this makes goods exported from the US cheaper, this decline has huge negative ramifications for the US as well as the rest of the world. A weaker dollar and the Fed's loose interest rate policy have two major effects.

Firstly, the near zero interest rates have been fueling asset prices across the world. Gold, silver, oil have all hit record levels. It has also pushed up inflation in emerging economies like India and Brazil, forcing these countries to either raise interest rates or to limit capital inflows.

Secondly, a weaker dollar makes imports, including oil costlier for US consumers. Higher input and borrowing costs could hurt demand and economic growth. Either way, the Fed and the US government needs to take a long, hard look at its problems. It needs to slash its bourgeoning budget deficit, and increase interest rates. If things continue the way they are currently, the US will have a long, rocky road to climb back into recovery.

Scams and scandals in India have accelerated in the past one year. Hence, it would surprise some to know that as per CMS (Centre for Media Studies) Corruption Study 2010, there has been a marked decline in corruption rates in India from the levels seen in the year 2005. The study surveyed rural households in twelve states across the country. The results reflect that the households that paid bribes have halved from 56% to 28%. However, the rate is still alarming in states like Chhattisgarh, Bihar, Kerala and Maharashtra. The percentage of households that feel corruption has increased in public services involving the common man has come down by 25% from the levels seen in 2005.

The picture is not all that bright though. As per this study, rural households that access PDS (public distribution system) have declined by 10%. However, the government figures reflect a PDS food grain off take of 90%. This points to the diversion of PDS food grains to open markets despite strict laws in place. Nonetheless, the outcome of the survey comes as a breather. Hit by a slew of corruption scams, the timing for an image makeover for India could not have been better.

It was a mixed week for the world markets as markets in Europe and US closed in the positive while most of the Asian markets closed the week in the red. Germany was the biggest gainer of the week up 3% while China was the biggest loser of the week down 3.3%. European markets were helped by data from the US that consumer spending was up by 0.6%. As a result, the European markets were buoyant during the week. France was up by 2.1% while UK was up by 0.9%. In the Americas, US was up by 2.4% as a result of strong earnings being posted by companies. However, Brazil was down by 1.7%. In Asia, only Japan closed the week in the green (up 1.7%). Singapore and Hong Kong were down by 1.4% and 1.7% respectively. Even the Indian stock markets closed the week in the red, down 2.4% due to persistent selling by FIIs and expectation of another round of interest rate hike by RBI.

Data Source: Yahoo Finance, Kitco

04:56  Weekend investing mantra
"People calculate too much and think too little." - Charlie Munger
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...

Equitymaster requests your view! Post a comment on "The biggest possible barrier to India's growth". Click here!

12 Responses to "The biggest possible barrier to India's growth"


Jul 15, 2011

no, i dont think so the benefits are not received by the lower section of the society, and the main reason for all these problems is the rising rate of corruption in india.

Like (7)

Ganesh K

May 2, 2011

The NREGA scheme assures 100 days employment to unskilled rural people by digging pits and then filling them. This is because if 100 days work is provided by state government 50% expenses are borne by central govt. But if state govt. cannot provide 100 days work then state govt has to bear 100% expense. State babus come up with schemes to dig pits and then to fill them. Babus also get cut in it so everybody happy. This has devastating effect on availability of labour for agriculture. The rural skills like carpenting,black smithy, masonary is fast vanishing because these skilled people go to unskilled work of NREGA as wages are ensured, that too without doing work. Soon we may have to import carpenters and masons from china or Bangladesh. Long live UPA. Phookat Baith ke Khaao.

Like (7)

Priyadarshan Mehta

May 1, 2011

The biggest possible barrier to india's growth is the lack of will.Most leaders want to give great speeches but when it needs to be translated in action they fail.Most of the infrastructure and other projects are set up in areas that benefit the political leadership.It is now open that political leaders are more interested in making money for themselves than go in for public good.

Why do the benefits not travel to rural areas ? By giving doles they do not motivate the rural folk to work but live on doles. How many centres been set up to train tradesmen.There is a huge shortage of plumbers,carpenters,tradesmiths .There is a huge rush for govt. jobs because one may not work and get paid. We must instill in folks the desire to work honestly and get rewarded.

Like (7)

Nagesh Kini

Apr 30, 2011

India's great story is mired by the widening disparities between the haves and have nots - the numbers sleeping on the pavements of mumbai, the debt ridden farmers in the hinterlands that have neither water nor power. The Tax authorities don't have a count of private jets, yacts, vintage cars, ferraris and luxury villas and apartments with roof top helipads and swimming pools, spas and gyms!
pointed out
Mera Bharat Mahaan, hum sub pareshaan
kyo ki 99% beimaan!

Like (11)


Apr 30, 2011

Dear Sir,
I refer to the news about a survey conducted by CMS, on corruption- Study 2010.That Corruption in India is prevalent in no small measure and is growing rapidly is very well known. Right from a clerk in a Taluk Office to members of Parliament and Legislatures and judiciary are corrupt. There are very few people that want to serve the community, enter politics. The saying "Politics is the last resort of a scoundrel" is more appropriate in India. But preventing corruption is not in the interest of the High and Mighty and Corporates. Corporate Crimes and corruption have taken Himalayan proportions.All businesses regularly pay speed money, large bribes to get licenses, Members of legislatures get cut on all contracts given by the Government. Corporates know how to generate Black Money to pay large bribes.Why there is such a demand to get a seat to contest elections. What questions are asked when an aspirant for an election ticket appears before Party Leaders for an interview for allotting a seat?They want to assess how much money the prospective candidate can spend. After winning elections the elected person's focus is on getting the money back several times over within the shortest possible time.
How many Parliamentarians and Legislative Assembly members have criminal backgrounds? Persons serving jail Terms are contesting elections. Persons arrested and on whom criminal cases are in progress continue to be members of legislatures.What kind of Democracy is this?
That a huge amount of money is stashed away in Tax Havens and that Indians form the core of such laundered wealth is common knowledge. Can a Government be lackadaisical in initiating steps to get the money back?
Vested interests prevent any worthwhile action being initiated.No attempts have been made to confiscate ill-gotten wealth. IAS officers in charge of Bhopal Relief amass wealth to the extent of Rs 300 crores. Nothing happens. Judges are accused of corruption in a large measure.They are transferred from one High court which has become noisy about the activities of the Judge to another High Court which is noiseless or less noisy about the corrupt practices of the Judge. They are happy and their tribe is increasing. Can some body tell me what is going on and what measures have been taken to combat wholesale corruption. The Years 2010-2011 have turned out to be 'annus horribilis' as regards Indian corruption. Merely publishing data to show corruption has halved by surveying a few households is a mockery of "Survey"

Like (7)

R S Chakravarti

Apr 30, 2011

Social unrest is a mild term for Maoism! Hope the upwardly mobile yuppies wake up before it's too late.

Like (7)


Apr 30, 2011

Dont know if you will post it./GOI is sleeping.Rural India is becoming poorer day by day.During UPA rule naxalites area of influence increased 300%.HomeMinister is utter failure.In the name of development tribals are removed from land by brutal force &land is given to bighouses.Where they will go?Every 32 km of Orissa coast is given to private port.What will happen to marinelife?Fisherman.Turtle?Total India's coastline is in danger.People living on sea are in danger of living their livlihood?Who is bothered?No political party ,no paid media.If we dont think about rural India then growth in urban area has got no meaning.What about urban poor??Think????/

Like (7)


Apr 30, 2011

Dont know if you will post it./GOI is sleeping.Rural India is becoming poorer day by day.During UPA rule naxalites area of influence increased 300%.HomeMinister is utter failure.In the name of development tribals are removed from land by brutal force &land is given to bighouses.Where they will go?Every 32 km of Orissa coast is given to private port.What will happen to marinelife?Fisherman.Turtle?Total India's coastline is in danger.People living on sea are in danger of living their livlihood?Who is bothered?No political party ,no paid media.If we dont think about rural India then growth in urban area has got no meaning.What about urban poor??Think????/

Like (7)

S K Bhattacharjee

Apr 30, 2011

You have written in one place of the article if dollar is weak then it makes imports, including oil costlier for US consumers. Higher input and borrowing costs could hurt demand and economic growth. Again, in another place it is written that weak dollar makes goods exported from the US cheaper. If this is so, then there will be Industrial Growth in the US. That means weak dollar may drive US in an advantageous position. Can you elaborate this a bit more?

Like (7)


Apr 30, 2011

Mahatma Gandhi National Rural Employment Guarantee Scheme is intended for offering jobs for rural mass during non farming season.This scheme created earnings and incresed the purchasing power.But the corrupt State officials and politicians of all parties have failed in implimentation and achive the development designed for the scheme.
I feel that the scheme has made increasing power of rural masses which is vital for growing economy.

Like (7)
Equitymaster requests your view! Post a comment on "The biggest possible barrier to India's growth". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407