India's Greatest Failure - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India's Greatest Failure 

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In this issue:
» The civil service has failed India
» Tax exemption limit to go up?
» The money is slowly flowing in again
» Massive Chinese imports flowing into India
» ...and more!

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00:00
 
If the recent mood of the stock market is anything to go by, the future looks really bright for India. But is it really? After all, there must be a good reason why we have failed so greatly in living up to our potential in all these years. Former cabinet secretary, Mr. T.S.R. Subramanian, in his recent book "GovernMint in India" has tried to find out the answer. He believes one of the major culprits is the Indian bureaucracy.

Politicians have an unfair and unchecked influence on the decisions of the executive and the judiciary. This lack of independence is the root-cause of all the trouble. Interestingly, the British civil service prior to India's independence was far more efficient than the present one as the British crown didn't interfere with the actions of the executive.

Highlighting the gloomy credentials of India's administrative machinery, he said "If the Indian government was a golfer, it would score quadruple bogeys on every hole, cheat on the score card, then grab the stakes the other players had bet with." Today, an average middle level civil servant either becomes indifferent to the corruption or becomes a part of it as it is in no one's direct interest to curb it. There is hardly any other way for the civil servant to live in the system.

Mr. Subramanian goes on to say that instead of hoping for a revolutionary change, we should focus on some practical steps to cure the system. Suspending politicians with criminal charges, setting up fast-track courts for government officials and publically exposing political miscreants would go a long way. Interestingly, he calls for a 'messiah' to rise from within the system with the conviction and public support to cleanse it. We hope the political class is listening.

01:05
 
Even as economic and financial commentators here in India express their dismay at India's slowed pace of GDP growth, the fact remains 'some growth' is better than 'no growth'. In fact, 'no growth' too can start sounding like a good thing when things are put in their right perspective. Ask countries like Japan, Mexico and Germany. Their GDP growth figures for the first quarter of 2009 are miserable, to say the least. Mexico's gross domestic product fell at an astonishing rate of 21.5% (annualised) during the quarter, its worst performance since the 1995. As for Germany and Japan, their GDPs fell 14.4% and 15.2% respectively. So now you know how 'no growth' too can sound not all that bad!

Image Source: The Wall Street Journal

01:31
 
As if the woes on both the domestic front as well as exports weren't enough, Indian auto component manufacturers now have to contend with large scale imports from China. As per a leading daily, imports of auto components from China have grown at a mind boggling compounded annual growth rate of 100% over the last few years and now poses a real threat to the Indian manufacturers. And any chance of competing vanishes into thin air when one considers the fact that the landed price of many of these components are on an average 35% lesser than components sourced locally. Particularly hit are those products where customisation is low and there is a significant after market like bearings and fasteners. Infact, Bharat Forge, India's largest manufacturer of forgings recently filed an application alleging that in the December 2008 quarter, Chinese imports accounted for the entire supply of a certain kind of auto components. It is on grounds such as these that the industry body ACMA is seeking a hike in import duties as they feel the current rate of 10% is on the lower side. The authorities indeed need to act fast.

02:13
 
Here comes another Chinese shocker. It's not just the auto component industry that is bearing the imports brunt. As per the RBI, China has emerged the largest source of India's imports over the last two years, accounting for a 10% share. Little wonder, items ranging from fabrics and nylon tyre chords to yarn and steel products have seen anti-dumping duties imposed on them by the government. The new found love for India does not have to do with the country's changed strategy. The fact remains that US and Europe, China's key export markets are in the doldrums and hence, the surplus production is finding its way into India. However, you as an investor need not be worried if the firm that you've invested in enjoys strong competitive advantages and makes products that do not have ready substitutes. But manufacturers of commodity products will surely have their hands full.

02:46
 
The hottest topic in the media these days is the key steps the new government will take.

As reported in a leading business daily, fuel prices will be freed from government control and will instead be linked to international prices if the draft cabinet note of the oil ministry is implemented. The immediate effect will be that petrol prices will be raised by Rs 2, while diesel prices will go down by Rs 0.3. However, the note mentions that the government will reserve its right of stepping in if crude oil prices breach the US$ 75 per barrel mark. In our opinion, it makes sense to decontrol prices now at a time when input costs i.e. crude oil prices can be passed on. However, we do not expect the government to let end user prices go up beyond a point, given the resentment it causes in the general public.

As per another leading daily, the new government is likely to raise the tax exemption limit from the current Rs 1,50,000 to Rs 2,00,000 in the forthcoming union budget. Fringe benefit tax might also be withdrawn. Both these measures might cost the exchequer Rs 100 bn. These changes will have an impact on the middle class because government is likely to disburse the remaining 60% salary arrears of the 6th Pay Commission. Taken together, these steps will leave more disposable income with the middle class and is likely to act as a stimulus package.

It may be noted that some political commentators believe that investors will be disappointed if they think that the government is going to usher in a capitalist era. While it is probably going to push ahead will economic reforms such as raising the limits on foreign investment and removing layers of bureaucratic red-tape; it will remain suspicious of the ability of the markets to distribute prosperity equitably. We agree.

03:45
 
As we know, Indian companies went on an expansion/acquisition spree during the last boom. It was a combination of ambition and easy money. However, the sources of money dried up once the credit crisis truly kicked in. It seems like the money is slowly flowing in again even as there are early signs of a recovery.

As per a leading business daily, large projects have attracted funds to the tune of Rs 580 bn in the last one and half month. Indian Oil, NTPC, Krishnapattnam Port, Vodafone, the Sasan Ultra Mega Power project and Delhi Metro Express have received finance, although the cost of funds is said to be high. In fact, more than Rs 400 bn is likely to be raised in the immediate future in the form of rights, QIP and debenture issues. It may be noted that the fund raising is limited to domestic sources as conditions overseas continue to be tough.

04:32
 
In the meanwhile, the benchmark index, the BSE-Sensex ended the day with losses of around 325 points (2.3%). The NSE-Nifty closed lower by about 60 points. Incidentally, stocks from the small-cap space had a field day today, the BSE small cap index ended higher by 2.6%. While other Asian markets ended the day in the negative, the European indices were also trading in the red at the time of writing.

04:46  Today's investing mantra
"Sir John Templeton had one of the best methods for keeping emotion out of the process. He used to do his calculations of intrinsic value when there wasn't a lot going on in the market. He'd then place a margin of safety on those intrinsic values and place buy orders with his broker at, say, 40% below the current market price." - James Montier
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3 Responses to "India's Greatest Failure"

sasimann

Jun 4, 2009

The first task of the Government should be to tackle the
lakhs of cases in the courts,which are clogging the system and encouraging corruption.In UK tax cases are settled in six months while in India they can stretch
to more than a decade.No officer wants to make the right
decision for the fear of losing revenue and waits for a new ruling from the higher courts before deciding.There
must be a time limit for disposal of pending cases say
five years after that the file should be closed.
Since a new taxation system GST is slated next year the Govt must announce an amnesty to close the files after getting 10-20% of the demand.If the Government can write
of Rs 60000 crores from farmers why cant it do so for the small tax payers,small scale industries.
Next the Governemnt should stop making fresh revenue
collecting taxes like FBT,Transaction Tax,service tax on new sources etc,till the growth in the economy accelerates and employment increases.Surcharges on any
tax should be removed as they are time consuming.
The transport sector is an example,the transporter has to deduct TDS on payment to the truck operator,the
consignee deducts TDS on the freight paid and also has to pay servicetax on the freight.The paperwork involved is creating mountains.After GST is introduced the businesses with less than a crore rupees turnover should need to interact with only one revenue department.

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NIMISH PAREKH

May 21, 2009

WHY DONT U PEOPLE LOOK AND GIVE A BRIEF REPORT ON GOLD..

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S.K.DAMANI

May 21, 2009

As regards the first para and the book governMint in India, it is old story that it is the corrupt bureaucracy that rules in india.New Delhi is full of such officials. reminds one of Delhi ka thug. These are the new thugs. Also reminds of the famous TV serial
"Yes Ministe r".
Do we see in Rahul Gandhi such a person who w ith his new and young politicians will be able to cleanse the place? At present the ONLY hope.
Tha

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