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Did Charlie Munger just turn India's economics upside down?

May 7, 2015

In this issue:
» India's ranking on the market cap front
» An Indian fund manager writes a letter to Jim Rogers
» A round up on markets
» ...and more!


00:00
Ask people about India's number one problem on the currency front and most of them are certain to say oil imports. Indeed, our oil imports have been the proverbial Albatross around our necks since time immemorial we believe. And one could be forgiven if one has lost count of the money we've sent abroad to bring the crude oil home.

Therefore while Mother Nature has been kind to us in a lot of ways, her blessings seem to have fallen short on the hydrocarbons front. At least if we go by the current proven reserves that we have. Imagine if we were to meet all our hydrocarbon needs internally?

It would have done absolute wonders to our foreign exchange reserves. We could have easily diverted the billions of dollars that we currently pay out to bring oil and gas home into something far more productive.

For example look at what the whole fracking revolution has done to the US economy. It has completely reduced its dependence on the Middle East oil. Not to forget the tens of millions of new jobs created domestically that has given the economy a huge boost.

Consequently, having huge hydrocarbon reserves close to home and also the technology to tap them at will looks like the best advantage a country can have, isn't it? Especially at a time when the world's thirst for hydrocarbons seems almost unquenchable.

While this does seem the most logical approach to take, apply a little more thought and there are chances you may change your mind. In other words, throw some science and long term thinking into the mix and you get a totally different answer.

Fortunately, a man who answers to the name of Charlie Munger has done the heavy lifting on this one. And he has come to a conclusion that seems shocking at best. As a matter of fact, he has gone to the extent of calling 'Energy Independence' one of the dumbest ideas of our times.

His argument is simple. The importance of hydrocarbons to the survival of today's civilisation cannot be emphasised enough. In other words, running out of hydrocarbons would mean running out of civilisation. All of the things like drugs, fertilisers, fungicides etc that we have come to heavily rely on, all come from hydrocarbons.

And sadly, there's only so much hydrocarbon in the entire world. In the sense that it is not a renewable source of energy. Once used up, it turns into carbon dioxide and water and does not become hydrocarbon again for may be millions of years. Thus, the more of it we can save now and use later, the better it is for us.

Given this background, Munger is strictly of the view that oil and gas are absolutely certain to become incredibly scarce and very high priced. And therefore, a nation's best bet for survival is to be able to preserve its own hydrocarbons within its borders and instead, buy more of someone else's hydrocarbon.

Now this does turn India's economics or at least its calculations on the external balance front upside down, isn't it? For years, we have tried to bring down our energy bill and increase our energy independence by exploring for domestic oil. However, Munger's spin has given a whole new dimension to this issue.

Going by his logic, it doesn't matter even if we keep importing more and more oil. Our focus instead should be to earn more forex by shipping more of our goods and services abroad so that our oil bills are taken care of. Turns out, trying to become energy independent would be a dumb idea if we listen to Munger.

Do you think Munger's idea of depending more on foreign oil makes more sense over the long term? Let us know your comments or share your views in the Equitymaster Club.

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02:45
If Munger's thought on oil independence has left you bewildered, then Rogers' opinion on India will leave you dumbstruck. Recently Jim Rogers, in one of the most scintillating interviews, shared his perspective about India. His tone was a tad negative and he seemed critical of the government and its policies. In response, one Indian fund manager, questioned some of the profound statements made by Jim Rogers.

Herewith, we present what Rogers had to say about India, and how the fund manager critically responded to his views. Later we share our unbiased view on every topic as an important takeaway for our readers.

Statement No 1
Jim Rogers:- I bought India because of the new government.

Indian fund managers' contention:- India should have been a part of your core portfolio anyways.

Our view: As India is one of the fastest growing emerging markets it should be a part of any global investor's portfolio. While government policies do influence stock markets in the long run, it is the earnings that matter the most. In a nut shell, policy making is important but not the only factor while making investment decisions as there many sectors that have little or no government interference.

Statement No 2
Jim Rogers:- Exchange control rules are a hindrance to foreigners investing in India.

Indian fund managers' contention:- More than half of the free float in Indian stocks is owned by foreigners. Also, India still permits investments through P Notes.

Our view: While there are certain restrictions on FII holdings in stocks, there are enough opportunities for foreigners to invest. Though recently the taxation issue related to MAT is a cause of worry, foreign investors cannot run scot free by earning profits in an economy leaving nothing for the exchequer that allowed them to enter it in the first place.

Statement No 3
Jim Rogers: Indian government has been inactive for a year with no results to show.

Indian fund managers' contention:- All the qualitative and quantitative parameters have improved. However, it may take time for actions to deliver result.

Our view: Judging the performance of a government in 1 year which has a 5 year mandate is premature. Nonetheless, if not actual results, at least performance offshoots should be visible in one year. And we reckon that has happened with the Modi government. However, results may take time to show up. Some things just take time - An ordinary man cannot run at the speed of Usain Bolt but that doesn't mean he cannot cross the finishing line!

Statement No 4
Jim Rogers: All central bankers are bad but Rajan is less bad (not good)

Indian fund managers' contention:- It is unfair to compare Rajan with anyone. In fact, central bankers are not comparable as everyone has a different objective to meet. Having different mandates makes comparison futile.

Our view: We reckon Dr Rajan has done a phenomenal job so far. He has been under constant pressure to lower rates to boost the economy but he has not bowed to political or corporate interests ignoring inflation concerns. Plus, we reckon that India's banking system is well regulated. Though PSUs are facing some problems on asset quality front, the overall regulatory oversight in India is much better.

The Indian fund managers' response to Jim Rogers' views brings with it an important lesson for investors. Listen to all but act on your own. Remember, in markets everyone has a perspective. In fact, diverse opinions make markets. But it is for you to decide whether such opinions are just noise or if they can have any serious repercussions on your portfolio.

03:55
  Chart of the day
Not sure whether FIIs have frowned upon India after listening to Jim Rogers, but FII resentment has eroded the market cap of listed companies of India in a serious way. As seen in today's chart, India is placed way at the bottom when it comes to assessing the global market cap rankings.

Where is India placed in global market cap rankings?

And this position could get worse if sentiments continue to remain negative. Of late, foreigners have been exiting India due to concerns pertaining to retrospective taxation, poor earnings performance, valuations etc. Currency is another factor that could impact the ranking of India. Since the market cap is quoted in US dollars, exchange rate movement also plays an important role in the ranking. For instance, a depreciating Rupee can lower the dollar market cap, thereby the ranking and vice versa.

04:30
The Indian stock markets were trading in the red at the time of writing. While the BSE Sensex was down by 96 points, NSE Nifty was down by 36 points. All the Asian equity markets were trading in the red at the time of writing. European stock markets also opened in the red today.

04:50
 Today's investing mantra
"We think any company that has an economist has one employee too many." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah and Jinesh Joshi.

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11 Responses to "Did Charlie Munger just turn India's economics upside down?"

ANIL K kOTHARI

May 11, 2015

Looking at the development in technology tomorrow it may be possible to convert solar energy at a very cheap price or more atomic energy along with hydropower can change the whole energy scenario in world. If we do not explore the hydrocarbon now and allow the forex to flow out than it would harm Indian Economy. My strong view is that a proper study should be done that if dollar is at 45 what pros and cons would be applicable to indian economy.

Like 

SANKARAN VENKATARAMAN

May 9, 2015

Munger has echoed the view that US has been practising. Preserve their oil/gas and use somebodyelse' oil/gas at cheap price. In India, No serious efforts to popularise renewable energy(solar/wind) except lipservice. No sensible person will come for oil exploration after experience of Cairn or for that matter RIL in KG Basin.

Like 

B.Sudhakar

May 9, 2015

Mother Nature did no injustice to India with respect to Hydrocarbon reservoirs.We have plenty of reservoirs yet to be explored,tested &commissioned. Whole of Northeast states,particulrly Assam & Arunachal, KG basin, Cauvery basin etc. are very promising. Why there is no big oil discovery for 35 years after Bombay High? Villian here is not ONGC or OIL but the subsidies Govt. is insisting from the upstream companies. Proactive Top level Management with billions of Dollars can significantly cut short our oil imports with minimum political interference but it requires a strong political will

Like 

allen peter

May 8, 2015

The next big development after oil is graphene. It is 200 times stronger than steel hight impact strength and can storee enormous energy in thr film form . It will make stuctures and vehicles lighter and stronger and store energy efficiently. It can be used for solar cells. Samsung is going to market ultra hin HD TVs in this year.It is thus a substitute for oil and much more.

Like 

c l seshadri

May 7, 2015

08.05.2015
The suggestion of Charlie Munger is most short sighted. I agree we should be energy independent. We should concentrate on energy sources like the nuclear and sun being the foremost. Look at what progress Tesla the US electric car company has made. That is the way.

Like 

S C Uppal

May 7, 2015

In an Indian context,we need to follow an approach somewhat different from Charlie Munger's.We should minimise our oil import bill by using alternate sources of energy like solar,water and wind;check proliferation of automobiles and substitute by means like metros;improve quality of roads,have more flyovers,reduce traffic jams,car pools etc to minimise wastage of fuel.Possibilities are huge.Savings in oil import bill may be used to develop alternate sources and improve environment.

I also hope research will bring out some new workable alternatives to hydro carbons.Necessity is the mother of invention.

Like 

V.Janakiraman

May 7, 2015

This is charvaka philosophy "rinak krithva gritham pibeth" Borrow money and drink ghee. Two reports one on energy policy and another on transport policy dated 1973 and 1981 went into these questions and predicted that Petroleum crude selling at that time about 5$/barrel and 18Rs/$ would touch $100/barrel; and recommended methods to avoid the catastrophe. Succintly put Road transport and Class transport cause a drain on f/e due to crude imports. So go for mass transport and rail transport/metro rails.
Bulk freight transport should only be by Rail, which is 6 times energy efficient compared to road. Electrify railways at 1000 rote kms /year. Had these been implemented we would have been in a much better footing today. China which was far behind us at that time took the cue and today they are far ahead of us. Our "Leaders" seem to have had their own reasons for taking action today 4 decades later; that immediately. Solar energy available in plenty should have been harnessed in a much bigger fashion. (We are having only token use of this inexhaustible source of energy).OUR OFFICIAL POLICY HAD BEEN TO IMPORT - AND IN LARGER AND LARGER QUANTITIES. Pl. connect with the case of IRAQ oil imports and the controversy surrounding it

Like 

vijayan

May 7, 2015

Energy independence & surplus is possible.
We dont need oil, coal.
Let GOI announce 10 or 100 crore prize, inventor gets the market. India spends 150000 crores on oil imports/ year.climate change we waste 30000 crores on Himalayan floods, bad rains.
India needs Inventors, not importers!Let GOI announce this Prize Our IIts,BEs can solve.

Like 

AMOL V SULE

May 7, 2015

THE IDEA OD IMPORTING OIL AND OTHER HYDRO-CARBON BASED THINGS IS INDEED VERY GOOD. INDIA HAS NO CHOICE OTHER THAN IMPORT SUCH THINGS SECONDLY WE SHOULD EXHAUST SUCH THINGS AVAILABLE IN WORLD BECAUSE BY VERY EXISTENCE OF SUCH FEW THINGS HAVE LED TO PARTITION OF WORLD INTO HAVE AND HAVE-NOT WHICH IS INCORRECT. BIG NATIONS DO NOT PAY HEED TO IDEA OF SHARING AND CO-EXISTENCE WITHOUT WAR AND HENCE ITS AN ULTIMATE IDEA TO BOW THEM DOWN IN NEAR FUTURE. AT LEAST OUR FUTURE GENERATIONS WILL BE EQUAL ONES.

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Chitranjan Gupta

May 7, 2015

The observation made by Charlie Munger is quite correct.

The world oil reserves are depleting fast. With depletion is stocks, the price of this limited resource will soon start moving up. It is better to buy crude at the current lower prices and use our internal reserves later when it is likely to be costlier.

Simultaneously, the country should start investing in alternative and renewable sources of energy like solar power, wind power and hydro power.

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