An open letter to the new Finance Minister - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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An open letter to the new Finance Minister 

A  A  A
In this issue:
» Where are interest rates expected to head in June monetary policy?
» Is the realty market set for revival?
» Is China on the verge of a banking crisis?
» CEO pay packages are rising to absurd levels!
» ...and more!


00:00
 
Respected Finance Minister,

Congratulations for bagging the top job! We understand that you have a task cut out on your hands. Challenges galore as you are assuming office at a time when the economy is in complete shambles. But like us every Indian has great expectations from you as this was an election of HOPE. And with that very same hope we write to you today believing that you shall deliver on our wish list the same way electoral's did on your poll promises.

Here is our 4 point priority agenda for your government:-

Inflation is the biggest risk to our economy now. In the past we have seen the FM and the RBI governor at loggerheads on how to resolve the issue. Inability to curb inflation cost the previous government dearly. We expect that orchestrated steps will be taken with respect to this problem.

With the RBI admitting that inflation targeting will be its prime concern, better co-ordination is expected from your government to balance the growth and inflation mandate. We all know that the biggest culprit for rising inflation is food prices. And we have also been vocal about the draconian APMC act which is stoking prices further. We urge you to take immediate steps to stabilize food prices via an overhaul in the existing system.

Another issue which makes to our wish list is subsidy management. We have repeatedly shared our views on curtailing wasteful expenditure over unwanted subsidies. Diesel is a prime example. For how long will the guzzling SUVs of the rich be subsidized with cheap diesel? Isn't the common man, who pays higher price for petrol for his two wheelers, disadvantaged here? Agreed, that decontrolling diesel can raise transportation cost and thus food inflation. But addressing supply side roadblocks can curb food inflation. Thus, we fail to digest this logic of correlation between diesel and food inflation. We urge you to correct this anomaly soon.

Cleaning the PSU banking system which is saddled with rising NPAs is the third point on our wish list. Bad assets have plagued the banking system and confidence to lend for longer duration projects is at an all-time low. As a result, there is a dearth of liquidity and growth is suffering. We expect some constructive steps in these regards.

The last but not the least is to have fiscal prudence. In the past, extravagant spending desire of the government on wasteful expenditures increased the fiscal deficit. By being pro-populist, the fiscal agenda went for a toss. Hence, we expect a better fiscal consolidation roadmap from your government.

This four point agenda is critical for the revival of our economy. We hope that these issues are given due importance in your next budget speech. While we understand that there are various prerogatives in your hand and little headroom to manage the same, we hope that - achhe din - are not as far off as political promises generally are.

All the best!

Warm regards,
Aam Investors

What is your wish list from the new finance minister? Do you think he will be able to meet your expectations? Let us know in the Equitymaster Club or share your comments below.

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01:55  Chart of the day
 
We are back to interesting times again! Thanks to the Modi-wave, equity markets have surged to reach their all-time highs. And the Sensex returns have zoomed like never before. However, the grey areas still remain. By that we mean the new government in power has yet to combat the plethora of challenges lying ahead. And the first of its kind is the stubbornly high inflation rate. And the resultant negative real interest rates that have marred the household savings (in bank deposits).

Hence, to guard their wealth from further deterioration, investors have turned to equities and safe-havens. But interestingly, the yellow metal is losing sheen. Surprised? Have a look at the chart below. In the years of buoyant Sensex returns, the gold returns have tumbled. Consider the financial year 2010 for instance. With Sensex returns at record highs of 80, the MCX gold delivered mere 8.2. And the picture in the year gone by is not too different either. With the benchmark index offering 18.9 in FY14, the returns from MCX gold ran into negative. Higher returns from equities have renewed investor interest in a big way. That this will boost financial savings is a good sign. But bulk of the household savings still lie in bank deposits. Therefore, it is imperative for the central bank to work in unison with the new government so as to ensure that positive real rates for savers are maintained.

Can Sensex outperform gold in FY15?


02:10
 
Yet another entity that will shoulder as much responsibility of economic revival as the Finance Ministry, is the RBI. We have written to you earlier as to how the governors of the central bank, have been at loggerheads with the Ministry during Congress regime. In fact all credit to Dr Subbarao and Dr Rajan for not toeing in line with the FM's mandates. However, what will be interesting to see is how the new government accommodates our stubborn RBI governors. On a serious note, the upcoming Monetary Policy in June may not set expectations soaring about cut in interest rates. For Dr Rajan will definitely wait before taking cues from the fall in inflation. Unless and until he is convinced that the new government will do enough to rein in prices, he may not concede on interest rates. Moreover, as he has clarified before, Dr Rajan does not believe in stoking GDP with lower interest rates. In fact he has insisted that helping improve GDP growth is not only the RBI's job. It will be for the Finance Minister to convince the RBI that they will work in coordination to control inflation and stoke GDP growth. Thus while investors can have lower interest rates in the wish list, it will be some time before the FM can help the RBI deliver it.

02:45
 
Now if the interest rates in the near term remain firm, what kind of an impact will that have on the realty market? we all know, real estate developers in the last many months have been struggling to keep head above water. This is because the debt has bloated on their books and firm interest rates have only added fuel to the fire. The uncertain political climate before the elections kept most buyers on the sidelines as a result of which these firms were saddled with unsold inventory. But there appears to be renewed optimism in the realty market now that the Modi government has come into power. So much so that an article in Moneycontrol highlights how 60% of the Indians think that the next one month will be a good time to buy real estate. The real estate players are also gearing up to cash in on this euphoria. They are offering discounts to buyers to get rid of excess inventory. But will this be enough to revive the industry? As we have highlighted above, just because the Modi government has assumed office, it does not automatically mean that interest rates will reduce. That depends on inflation and how effectively the RBI and the government coordinate to bring this down. Thus, given the large scale debt on the books of real estate players, firm interest rates will continue to remain a burden we believe.

03:10
 
Even as there is a long to do list to fix the Indian economy, it seems our rival is not faring well either. Few days back we had highlighted the bad debt crisis in the Indian banking system. As an article in Bloomberg suggests, ours is not the only country facing this menace. China's biggest banks seem to be sitting on a pile of bad debts with the bad debt ratio likely to be highest since 2009! The economy seems to be stuck with declining corporate earnings, demand slowdown and curb over non bank funding.

The rising gap in overdue loans and NPAs suggests the problem might be much complex than reported. This is because lenders tend not to report the actual bad assets so that they can avoid keeping higher provisions. Another reason to hide the extent of damage is because it reflects poorly on their performance. The concern is quite evident in low market valuations of publicly traded Chinese banks. Given that the Chinese economy is expected to grow at its slowest pace in over two decades and also keeping in mind slumping property prices, we believe this is just the beginning. Things are likely to go further downhill for China!

03:35
 
China's banking problems at their core is of course about the Government interfering too much in the country's economy. There's no way a free market economy like the US can face similar problems, isn't it? But wait. What is the huge quantitative program that it has initiated all about? Isn't it also akin to Government interference? It certainly is we believe. And one of the places that its devastating results are showing up is the huge disparity between what a CEO earns and the income of an average worker. Huffingtonpost.com reports that a CEO in the US now earns a whopping 257 times more than what the average worker manages to take home. And come to think of it, this is up sharply from a ratio of 181 back in 2009. Now, what is it that a CEO does so exceedingly well that his lower placed colleagues can't? Well, we can't for the life of it figure out. What we can certainly fathom is that CEOs have gotten insanely rich as a consequence of the huge rally in stocks, their preferred mode of compensation. And this is where the irony lies. While the US Government attempted quantitative easing to ease the burden on the common man and increase his well being, most of the money has instead found its way into stocks and further worsened the rich poor disparity. So the US and China don't really seem to be different in the sense that their stimuli are having exactly the opposite effect of what was intended.

04:30
 
The Indian stock markets remained flat. At the time of writing, the benchmark BSE-Sensex was up by 4 points. Majority of the sectoral indices were trading firm led by IT and realty. Metal and auto were among the biggest losers on the bourses. Most of the Asian Indices were trading in the green with China and Hong Kong being among the major gainers. However, the Japanese market was trading in the green. European markets have opened the day on a mixed note.

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12 Responses to "An open letter to the new Finance Minister"

Dr.Pranay Mohan

Jun 7, 2014

We all hope from new Hon.Finance Minister ,everything would be solved although there is no magic but wait for outcome positive one,hear the voices raised by financial authority of INDIA a fantastic source--pranaymohan

Like 

S.Thirunavukkarasu Subramanian

May 29, 2014

Congrjulation tothe new fainance minister of india, I am very sure that he will bring changes on the positive note to the economy of india. Cut down the unwanted expences, let any indian citizen who wanted to work out of india to go freely because they will send overseas money into india.

Like 

BISWESWAR GHOSH

May 28, 2014

1. Relief in I-Tax for Pensioners
2. Ceiling on Price of Real Estate Rates
3. Free Inter-State movement of food without any Tax
4. Delivery of all types of Energy in all states of India at same Price. i.e. Unique Price for consumers of electricity for all Indians at all places in India. State Govts should not levy any other charge. Only the Energy Distribution cos. can levy local distribution cost.
5. Future Concept. Energy is Unique: sources are different. Combine Departments of Coal, Oil and Electricity together and fix prices of different types of energy applying the conversion factor so that the price-matrix shall be nearly equal for all types of energy and the consumers and Researchers shall begin to change the instruments, applications, engines, machines and become conscious about energy efficiency.
4. Continue subsidy on diesel and bill (one time) special tax on diesel powered SUVs and Cars at point of sale. Rich will not mind paying little more because reasons behind buying SUVs is fascination not price-consciousness. Besides Rich Middle and Poor have right to live and share same space, country with honour and equality only respecting each other. One's interest must not intrude upon the other. There is nothing wrong in SUVs becoming enjoyment for only the rich provided they do not eat into others' purses.
Nothing can be done by the FM or RBI until and unless the Planning people are efficient to find a most ideal Plan towards growth.

Like 

Rasikbhai Gandhi

May 28, 2014

Dear Sirs,
Instead of removing APMC markets all together the govt. has to control retail profiteering on agriculture produces. Retailers of essential commodities like grains, dals, Spices and dry fruits etc. charge more than 100% profits. Even ordinary fruit and vegetable vendors have joined the club of highest profiteering. The government have to take strong steps to control profiteering in retail field. The profiteering in retail trade of consumer goods needs special attention. Not only malls but traditional retailers are making profits innumerably. There should be some controls on them too. The govt. also should publish retail price index along with whole sale ones. We talk about FDI in retail trade but our own retailers are making tremendous loot which has to be checked.

Like 

KETAN MEHTA

May 28, 2014

1. CUT THE FOOD SECURITY BILL (SUBSIDY) BY 50% AND PASS THE SAVINGS THRU EXCISE CUTS AND PETROPRODUCTS PRICE REDUCTION. INFLATION SHALL START COMING DOWN.
2. INSTEAD OF WASTING FOOD STOCKS, SELL IN OPEN MARKET. INFLATION SHALL DEFINITELY COME DOWN.
3. INCREASE EXEMPTION LIMIT FOR SALARY CLASS TO MINI. 3.00LAC, EDU. ALL TO 2000/- PM PER CHILD, COMMUTATION ALL INCREASE FROM 800/- PM TO ATLEAST 2500/- PM, INCREASE LIMIT FOR TAX ON INTERES INCOME TO MINI. 50,000/-.
4. INTRODUCE WATER TAX, ELECTRICITY TAX FOR FARMERS (NO FREE ELECTRICITY).
5. INCREASE EXCISE ON DIESEL VEHICLES, HIGH END CARS AND MOBILES.

Like 

Biraja Shankar Hota

May 28, 2014

To say that FM & RBI were at loggerheads is far-fetched.Moreover, since inflation is a natural phenomena the govt. should decide how much inflation is tolerable.(2)Primarily, food price inflation is caused due to supply side mismanagement.One must realize that food articles in FCI godown and other govt. stockist are proving to be major hoarding agencies.(3)First, steps should be taken to stop leakage in subsidies distribution.Example of diesel can not be relevant to other subsidies.(4)Big loans have constituted major portion of NPA.NPA in PSU banks is more than Pvt. sector banks gives a fair idea that big business are treating PSU banks as if a milching cow.This must be stopped with administrative measure.

Like 

Alphones

May 28, 2014

Dear wish list members, Please note, none of your wishes shall be fulfilled. Don't worry; be happy.
1)Are you willing to control the population growth?(this need to be introduced in the school syllabus).
2)Are you willing to increase crude oil output with domestic companies only?
Note:- There is no buyer for your products when the world economy is affected. I don't think BJP leaders can boost the exports. No solution immediately.
Only quick fix of stock investing by FIIs, which is a way of selling our companies to the world.

Like 

DR RAKESH SHARMA

May 28, 2014

Your articles are all very interesting and I feel if really they could be brought to the notice of our FM et al.

Like 

mridul k. dholakia

May 28, 2014

The present financial condition, not of our country, but the global condition has gone beyond the imagination of a common man but out of control of Govt.
The present new Govt. & new Hon, Finance Minister,who happens to be expert legal person, can not only improve, but will he be able to handle such a worst financial situation of such a wast democratic country.?
Let us hope for the best., that wealthy will become more wealthy and poor will become more poor . The time that Indians have suffered till now.

Like 

p.k.yoyakey

May 28, 2014

a salary cut is must especially govt. employees.

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