An inflection point in world history - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

An inflection point in world history 

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In this issue:
» India's mounting deficit is a concern
» The damage of a poor rainfall
» Will fuel prices in India be raised?
» Corruption rears its ugly head
» ...and more!

The world is changing, and changing fast. Countries from the west that dominated the global economic and financial system still do so though their dominance has reduced manifold. And when it comes to energy consumption - the driving force behind growth of economies - we have reached a very important inflection point.

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As per statistics released by BP, primary energy consumption in the non-OECD countries exceeded OECD consumption for the first time in 2008. OECD, or Organisation for Economic Co-operation and Development, is an international organisation of 30 countries like the US, Canada, European nations, Australia and Japan. And given the fact that these countries have seen significant slowdown in their growth rates over the past few years, the energy consumption picture was bound to change, and it did in 2008.

World's primary energy' consumption Growth# in energy consumption
* Primary energy includes oil, natural gas, coal, nuclear, and hydro power; Source: BP Statistical Review 2009

In fact, the Asia-Pacific region accounted for 87% of the world's energy consumption growth during the year. While the Chinese consumption growth slowed for the fifth consecutive year, yet China accounted for nearly 73% of the incremental energy consumed in 2008 over 2007! India came in a distant second with 13% share of incremental consumption during the year. And what might interest the global energy policymakers the most, the US was the worst performer, as it recorded the highest decline in incremental consumption. In fact, consumption in the US fell by 2.8%, the most since 1982.

Primary energy consumption in 1965 Primary energy consumption in 2008
Source: BP Statistical Review 2009

So what does this indicate? We believe it is clearly indicative of the rising economic clout of emerging nations, especially the BRIC block made up of Brazil, Russia, India, and China, and their demand for a greater role in the world policy dynamics. Remember, the BRIC comprises about 15% of the world economy and, perhaps more important, have about 40% of global currency reserves. And these have also weathered the financial crisis better than the world as a whole, thereby marking their dominance on the world stage. In short, the world has changed in a fundamental way. But whether this change is fortunate or not, only the next few years will tell.

Staying with energy, everyone agrees that unless fuel prices in India are deregulated, the oil marketing companies will continue to bleed. Given the high expectations of reforms many have from this government, they believe fuel prices will be freed from state intervention. We don't think so.

As per the Wall Street Journal, the government is thinking about hiking diesel prices by Re 1 per litre and petrol by Rs 2 a litre. Now, this might seem reasonable at first, but it smacks of their unwillingness to let go. Their hesitation is understandable. With crude prices back to US$ 70 levels, letting market forces decide the price of fuels would stoke inflation and lead to political brickbats. It would have been easier for the government to deregulate fuel prices when crude prices were tanking. It might just be too late.

India's mounting debt is a matter of serious concern, as a result of which the fiscal deficit has soared. And now, the leading global rating agency S&P has pegged India's fiscal deficit to set to increase 6.5% of GDP, which will be the highest in almost two decades. What is more, this is excluding the off-budget liabilities such as fertiliser subsidies and compensation to state-run oil companies. Together, these liabilities are estimated to be another 4% of GDP, thus taking the total deficit into double digits.

Certainly, the Finance Minister will be kept on his toes in his present term and it will be interesting to watch how he manages to tackle this problem.

The GDP projections of various economists may be coming out in droves on hopes of a recovery in the economy. But all of them would be rendered meaningless if the monsoons fail to revive. It has been hard enough that the Indian economy was hit by the global crisis and the last thing that the country wants is poor rainfall.

A delayed monsoon will hit crop production immensely which in turn would churn poor agricultural growth numbers and consequently slower growth in GDP. Already there has been a 45% shortfall in rainfall. What is more, the World Meteorological Organization (WMO) has warned of a 'greater than average' chance of an El Nino, a weather anomaly that is globally associated with droughts and below normal rainfall. However, whether this phenomenon will impact India and to what extent remains to be seen.

Governments the world over may have committed US$ 5 trillion to induce a fresh lease of life into their respective economies, but if a report by one of the world's leading risk consultancies is to be believed, 10% of this total amount, or in other words, a whopping US$ 500 bn will be lost to corruption! We hold our breath on this one.

Divestment has long been a motive of the progressive part of governments that have come to power in recent times. But with the Left so far impeding any such move, the progress on that front has been painfully slow. Thus it was no surprise that, without the overshadowing influence of the Left, 'divestment' made headlines with the announcement of the election results this time. But now there's a new spoke in the wheel - the trade unions.

According to these unions, disinvestment is unwarranted as the overall performance of PSUs has significantly improved recently. Also, most PSUs now have enough reserves and surplus to meet any resource crunch or social sector spending. But then, the primary motive of the government might not even be to raise more capital for companies that do not need it. Its motive might merely be to sell a part of its own stake in these companies to raise money for itself, considering that it is in dire need of cash currently. In that case, the objections these unions have raised might not be so valid after all. Whatever may be the case, we hope this development does not become another cause for stalling the divestment process all over again.

From being deep in the red at open, the Indian markets surged during the second half of the day thereby managing to end the session just marginally in the negative. Gains were particularly seen in stocks from the oil & gas spaces. On the global front, while key Asian indices closed in the red, European indices are trading in the green currently.

Several months ago, a few CEOs from the western world had claimed that although India produces the second largest number of engineers in the world, more than half of them are 'unemployable'. Their view is now turned on its head by the CEO of HCL Technologies, Vineet Nayar, who (as reported by a leading news portal) has lashed out against American tech graduates for refusing to do the jobs that Indian techies eagerly perform. In a recent conference in New York City, Mr. Nayar said that American tech graduates are basically 'unemployable'. His view was that American students only enter the field to get rich or to dream up the next big thing. We hope Obama isn't listening!

04:59  Today's investing mantra
"Never invest in any idea you can't illustrate with a crayon." - Peter Lynch
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4 Responses to "An inflection point in world history"


Jun 24, 2009

I agree with the comments made by Vineet Nayar. It is sad to see that Indian engineers are unemployed despite their efforts to reach the top. This article has given an insight of the average US person who likes to dream high and not work hard to earn a living. I would be happy to forward this article to other fellow Indians.



Jun 23, 2009

On oil price regulation: If the prices are regulated (read cheap) then the individual will continue to splurge but the collective (the oil companies/our taxes) will bleed. If oil is allowed to become expensive individuals will conserve. Good for the environment too.


manish jain

Jun 23, 2009

The edition was very good and the collection of the news was very rich and refreshing.

good work done
keep it up


mjs puri

Jun 23, 2009

Nice coverage of the latest economic issues in general and micro analysis of the financial related issues in particular

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