Will the FM bat India to recovery? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will the FM bat India to recovery? 

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In this issue:
» Govt's hawkish stance on gold hurts jewellery stocks
» Senior citizens dominate corporate boardrooms in India
» The sad story of India's growth and reforms
» Why is the Food Security Bill a big risk?
» ...and more!


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00:00
 
During the UPA-II regime, everything that could possibly go wrong did. We saw (and continue to see) a slew of big ticket corruption scams. India's growth story started developing cracks with growth falling to decade-low levels. Inflation, on the other hand, has been consistently high. The Indian rupee has been on a free fall against the US dollar. Add to that the challenges on the fiscal and current account deficit front.

Of course, a lot of our troubles were exacerbated by the crisis in the global economy. But we cannot put all the blame there. The external factors only exposed our own vulnerabilities. One of the most pressing concerns that have been doing the rounds for a long time is the lack of much needed economic and policy reforms.

Finance Minister P Chidambaram now appears to be in a damage-control mode. You must recall that come 2014 and India will go on to vote its next central government. Given this, bringing the economy back in shape is an important agenda for the incumbent government.

Some of the measures taken up by the government have yielded some results. For instance, ratings agency Fitch returned India's sovereign ratings outlook to 'stable' after having downgraded it to 'negative' a year earlier. It cited that the measures undertaken by the government to contain the budget deficit as well as to revive investment and growth were bearing result.

However, the ratings agency did caution about several challenges engulfing India. Growth would continue to suffer until the investment climate is revamped. As such, the ratings agency maintained that consistency in introducing more reforms would be very important. But reforms in an election year are difficult to come by.

Mr Chidambaram acknowledged that the pace of reforms may be slow. But in defence he is supposed to have said, "It is not an ODI match, a wicket or a six is expected in every ball in an ODI, economic reforms don't work that way. "

Lastly, the FM did throw some brickbats at gold. You would know that the government has been trying several measures to curb gold imports as they tend to weigh on our current account. The FM underscored the point that India relied mainly on gold imports. And if India stopped importing it, the situation would improve a lot.

Lastly, Mr Chidambaram emphasised that it was wrong to think that gold was the safest investment. We understand the FM's antagonism towards gold but disagree with his views. The value of the rupee has been depreciating against the dollar for decades. In other words, Indians have been consistently losing purchasing power. Against this backdrop, people who have invested part of their savings in gold have benefitted tremendously.

Indians invest in gold as insurance against any kind of crisis. They have no confidence on policymakers. They don't trust the government to ensure that the value of their currency will remain intact. And this approach has kept them in good stead not only now but for thousands of years.

Do you believe the Finance Minister will be able to put the Indian economy back on track? Please share your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
 
The growth in the Indian economy has slowed down over the last couple of years owing to a host of domestic and global issues. Apparently, the start of the financial year 2013-14 hasn't been very promising. The official data on industrial production for the month of April 2013 was released recently. The chart of the day shows sector-wise industrial growth during April 2013 and the corresponding month of the previous fiscal.

Mining output continued its decline for the sixth month in a row. Output from this segment declined 3% year-on-year (YoY) as against a 2.8% decline in April 2012. The manufacturing sector grew by a meagre 2.8% YoY. Electricity generation remained muted with a marginal growth of 0.7% YoY. It is worth noting that the Index of Industrial Production (IIP) reported a growth of mere 1.1% YoY in the financial year 2012-13. This was a two-decade low.

Data source: Business Standard


01:50
 
The Finance Minister has held gold imports as one the main culprits responsible for our huge current account deficit. As a result, the government has set up quite a few roadblocks with the intention of curbing gold imports. But the recent hike on import duty on gold seems to have done the trick. As per Mr Raghuram Rajan, Chief Economic Advisor, gold imports have declined to an average of US$ 36 m a day in the fortnight ended June 7. This is much lower than the average of US$ 135 m a day in the 13 days until May 20. Gold imports were also hurt by the steep decline in the value of the rupee.

While the fall in gold import is a cause to cheer for the Finance Minister, however this has not impressed the jewelers in the country. Jewellery manufacturers now face a double whammy. On one hand, the cost of gold has gone up. On the other hand, they are also hit by the central bank's decision to limit imports for local consumption against cash. This means that the jewelers need to hold larger cash balances. This in turn means that their debt levels are all set to rise. These problems have already led the prices of the jewellery stocks to take a hit. The question now is whether this is a short term phenomena or a long term one. If this trend is more structural in nature then jewellery stocks will see a re-rating. But if it's a short term one then the current dip could be a good buying opportunity. In any case the better thing to do would be to study the companies' fundamentals. The ones with strong fundamentals and sound managements are best poised to emerge as winners.

02:30
 
Septuagenarians and octogenarians. In most other countries you would find them enjoying their twilight years in bliss. But in India you could find quite a few of them in corporate boardrooms as well! In a country where young talent is in abundance one would wonder why this is the case.

In fact as per an article in Economic Times, the return of Narayana Murthy to Infosys just underscores the trend. Most family owned businesses in India are still under the guidance of patriarchs well in their 70's and 80's. At 92 years, Basant Kumar Birla, the chairman of Century Textiles & Industries, is the oldest chairperson of a listed Indian firm. Brijmohan Lal Munjal continues to head the Hero group at 89. KP Singh of DLF, KM Sheth are some of the other octogenarians. In fact as per Economic Times, 10 companies' chiefs are in their 80s, 58 leaders are in their 70s and 43 in the 66-69 age group.

The article contends that it is time the senior citizens gracefully handover the baton to the younger generation. We would however beg to differ. As long as the company has an adequate succession plan in place, the age of the Chairman should not matter. Especially if his insight and guidance is of critical importance to the company and its shareholders. Would Berkshire Hathaway want to do away with the guidance of Warren Buffett and Charlie Munger, both in their 80's? We think not!

03:10
 
GDP growth, as we've highlighted before, is not the best statistic out there if one were to track the real progress of a nation. How can it be? For it is totally agnostic about whether it has been achieved by producing more guns or more sickles. Besides, it also does not take into account whether the higher number of goods and services produced are being consumed by the same group of people or there are more people who are benefiting from it. This is extremely important because real progress happens only when disparities are reduced and right kind of goods and services are produced.

Sadly, India seems to be failing on many of these counts. Its GDP has grown alright but the growth in employment has hardly kept pace. Food production has also increased over the years but Indians seem to be living on a lower food intake than usual. And lastly the productivity, rather than improving, has come down as indicated by its abysmal performance on the export competitiveness front. Little wonder, an article in Economy Watch has called India's reforms Ponzi-styled reforms, which have run out of steam. But we doubt if the policymakers are listening?

03:50
 
The fact that consumer price inflation is still high in India despite the wholesale inflation coming down is an anomaly. Not surprisingly, the culprit for this difference has been food inflation. It is not that there are no food grain stocks available. Indeed, the government has in its stocks 77 m tonnes of grain right now. So if food prices are still high, it means that there is gross mismanagement on the part of the government. Dearth of infrastructure and lack of good warehousing facilities have been some of the primary reasons why there have been supply bottlenecks. Thus despite a good crop, considerable quantity was left to rot thereby contributing to food shortage. But now ironically, the food security bill could also be another reason for higher food prices. The Food Bill is aiming to ensure that subsidized grains are given to nearly 65% of the country's population. This means that the government needs to show that it has sufficient food grains in stock to meet the requirements of the law. This effectively will make the government the largest buyer and the largest hoarder of food grains. And as long as that is the case, one should not be surprised if food prices continue to remain high.

04:30
 
In the meanwhile, the Indian equity markets continued to trade below the dotted line. At the time of writing, the Sensex was down by about 195 points (1.0%). All the major Asian stock markets have closed the day on a negative note as well with China and Japan leading the pack of losers in the region.

04:50  Today's investing mantra
"Know what you own, and know why you own it." - Peter Lynch
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14 Responses to "Will the FM bat India to recovery?"

Alphones

Jun 14, 2013

NO, the FM cannot bat. Why our currency is falling? First is our foreign currency is draining out on oil import. All others are secondary. Until a week ago, the FIIS were pumping money into stocks. Still no recovery, Why? 3.5million barrels of oil to be imported daily. Exports are declining day by day. How to reduce the huge oil need? Only way is to drill for oil and bring the population under control like china controlled their population.

Like 

manoharkantak

Jun 14, 2013

We have full faith in Finance Minister, but he is not a magician. Our economy has been made a very complicated subject by our Late PM. Mrs Indira Gandhi, and her followers Today only a patriotic Government can bring the economy on track. Our Finance Minister is surrounded by people who do not even understand what will be the fate of our nation if it continues this way.

Like 

Jayanth TS

Jun 13, 2013

Not to be published. I am only sharing my concern for the honest people.

Corruption is the root cause of everything. this is the country where the honest people are victimized for being honest.

Like 

jayaram

Jun 13, 2013

It is difficult as the ground is too sticky to bat with too many players to face the googly

Like 

Kuruvilla Abraham

Jun 13, 2013

I am sure, all the gold imported into our country is not going into the jewellery market. At least part of it is going into hoarding by black money kings. Otherwise gold imports would not have hurt the country so much.

Like 

hemand

Jun 13, 2013

Indian economy is in ICU due to illogical advancement of policies which can not be executed by the people who are corrupt to the core and have intellectual deficiet. Story telling and strerio talking like reading bible have to be stopped. side lining the institutions and not respecting the constitution is the main core cause the people have to adress.

Like 

Gandhi Pankaj H

Jun 13, 2013

Very good issue.
Even in horizon,no promising future ahead.
Heads of India,are not an Indian,more-aver they are cunning,
cheater,inspires fraud,im-capable in a diplomacy un-like
U.S..NO value of a common mass,they are being looted.

Like 

bp

Jun 13, 2013

Chidu is ensuring that Gold is smuggled instead of coming by the legal route.

Like 

Smir Chatterjee

Jun 13, 2013

The days when Govt. could talk the economy into shape are long over. Economy responds to actual action and not empty talks. Growth alone, jobless increase at that does not solve the problems in a vast country like India. Investment in agriculture and infrastructure is the need of the hour. FII investments neither adds to productive asset creation nor emplyment generation, only transfers existing assets. There is no short cut, except to invest in infrastructure and creation of jobs.

Like 

MUSTAKALI SAIYED

Jun 13, 2013

YES, Indeed he is well capable FM of the country, he proved his ability and efficiency in past....no longer to wait....next week we found different scenario of the market/inflation ......THANKS

Like 
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