Inflation, inflation everywhere! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Inflation, inflation everywhere! 

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In this issue:
» Agricultural productivity on the decline
» Rising oil prices worrying Saudis
» Airlines feeling the heat
» Ranbaxy on a settling spree
» ...and more!

 00:00    Agricultural productivity on the decline
India's agricultural productivity leaves a lot to be desired. This is despite the fact that the country's supply of arable land is second only to the US. While the Green Revolution was a big success in making India self sufficient in food, there have not been any significant improvements since then. Infact, India has resorted to importing some staples from the international markets. The International Herald Tribune states that while the production of cereals more than doubled in India between 1968 and 1998, since the 1980s, the government has neither expanded irrigation and access to loans for farmers nor has it advanced agricultural research significantly.

Indian agriculture is beset by a myriad of problems. While dependence on monsoons is one of them, an increasing number of small land holdings (36% of all cultivated land is small and marginal that is less than one hectare) is the other major concern. And most of these farmers are indebted - 61% of all farmers having land holding below one hectare are indebted in contrast to 6.4% of those whose land holding size is above 4 hectares. As indebtedness is generally a function of poor incomes, this throws light on the unviability of small land holdings as a source of livelihood. While rising number of suicides among farmers prompted the government to waive off farm loans to the tune of Rs 700 bn, this is only likely to send out wrong signals rather than significantly improve the situation.

  • Also read - On agriculture and poverty...

     00:44    Saudis and oil
    While the escalating crude prices are giving the Middle Eastern countries something to cheer about, Saudi Arabia seems to have reacted in a manner, which is in contrast to that of its peers. Readers would do well to note that Saudi Arabia has announced that it would increase the production of oil by 500,000 barrels per day. The Saudis are worried that increasing oil prices would lead to a slowdown in demand, which in turn could impact their revenues and profits akin to the oil price shock in the 1970s. The fact that nations are on the lookout for alternative sources of energy (biofuels in particular) could also have alarmed Saudi Arabia, which heavily depends on oil revenues to fuel its economy.

    That said, this view is not necessarily shared by its Gulf counterparts, who seem to be content with the state of things as they are now. Given the geopolitical tensions in the Middle East and insatiable demand for oil in the emerging economies, oil prices are likely to stay firm. However, if such high prices continue to persist, at some point, if not already, demand across the world would definitely reduce and in turn could cool off prices. When this scenario is likely to emerge is anybody's guess.

  • Also read - Dealing with high oil prices

     01:22    FIIs looking to exit?

    FIIs these days are spooked. Subprime, rising oil and food prices and inflation appear to have gone a long way in eroding their returns. It seemed that as long as the emerging economies in Asia were relatively insulated from the subprime crisis, these markets still retained their sheen of delivering strong returns. Alas! This was not to be. The subprime crisis propelled FIIs to book profits in the emerging economies to offset losses in the US and Europe. And with inflation and escalating crude prices impacting developed and developing economies alike, the picture is looking bleak indeed. During 2008 so far, FIIs have sold equities to the tune of US$ 5.7 bn already. This is in sharp contrast to 2007, when FIIs had purchased equities to the tune of US$ 17.2 bn.

     01:48    Inflation, inflation everywhere!
    India's inflation soaring to 11% has created a panic among consumers, economists, the central bank and the government; the latter's ability to hold on to its chair now in serious jeopardy. However, inflation is not just an India centric problem with rising food and oil prices having an adverse impact on countries around the world. The ill effects of the subprime crisis having dominated much of 2007, the focus this time has shifted to inflation. While affecting an interest rate hike seems like the obvious solution to counter inflation, it is not without its own share of problems. In the US for instance, rising oil prices, which have been the chief catalysts stoking inflation, could put the brakes on spending and hiring; a rise in interest rates will add fuel to the fire. The International Herald Tribune states, "Because oil is priced in dollars, its price rises when the dollar slips. That raises fuel costs for Americans and stunts growth in the world's largest economy. But for non-US consumers, it makes oil cheaper, bolstering demand".

    Inflation fears have gripped China and Europe as well. While China has responded by raising oil prices in the country and cutting back on fuel subsidies, the European Central Bank has given signals of raising interest rates in early July.

  • Also read - The poorer Rupee

     02:33    In the meanwhile...
    The Indian indices closed 1% lower today amidst considerable volatility. Mixed activity was witnessed in the other Asian markets. While Hong Kong and Singapore closed lower by 1% each, China registered gains of 2%. Rising oil prices and concerns about a slowing global economic growth weighed heavy on some of these indices. This is not surprising considering that a majority of these Asian countries depend upon exports to spur their economies. As per reports on Yahoo Finance, amidst tensions in the Middle East and supply disruptions in Nigeria, oil prices climbed by US$ 1 per barrel to above US$ 137 a barrel. The European markets have opened in the red impacted by persistent selling activity.

     02:54    Ranbaxy on a settling spree
    Ranbaxy is on a roll when it comes to settling patent suits. While the company's aggressiveness in challenging patents of global innovator companies is a well-documented fact, in recent times it has been displaying its skills in settling suits out of the court. Through these deals, Ranbaxy has already bagged exclusivity periods for the blockbuster drugs 'Imitrex', 'Valtrex' and 'Flomax' for CY08, CY09 and CY10 respectively. The cherry on the cake is its settlement agreement with AstraZeneca for the latter's drug 'Nexium', which is at present the second largest drug in the world with revenues of US$ 5 bn. As if that was not enough, the company last week settled the suit with Pfizer for the latter's largest selling drug in the world 'Lipitor' having revenues of US$ 12 bn and newspaper reports suggest that a settlement with the Japanese company Takeda (for 'Actos') is on the anvil too.

  • Also read - Pharma: Looking to settle

    The biggest positive that can accrue to Ranbaxy by settling the patent suit outside the court is the certainty with respect to the exclusivity period, consequently enabling it to generate substantial revenues and profits. Also, given that patent challenges entail sizeable legal costs with no clear visibility in terms of revenues, out-of-court settlements mean that pending lawsuits get dropped obviating the need to incur more legal expenses.

     03:36    Airlines feeling the heat
    The airlines industry in the US seems to be losing steam. UAL, the parent of United Airlines, plans to lay off 950 pilots (accounting for 15% of its pilot workforce) and cut domestic capacity to counter the impact of rising crude prices. The airline industry has been beleaguered by soaring oil prices, and in an effort to arrest declining profitability, airline companies are struggling to reduce capacity, become lean and charge higher fares.

    The Economist states "The International Air Transport Association (IATA) calculates that if the oil price were to stay at about US$ 135 a barrel, then the world's airlines would suffer a combined loss of US$ 6.1 bn this year. Even if oil prices fall by 20% or so the industry would still face big losses. A couple of months ago, IATA thought that the industry would be in profit over the same period to the tune of around US $4.5 bn. In the past year, fuel prices have doubled: kerosene now accounts for as much as 40% of an airline's operating costs".

  • Also read - Global aviation industry: An overview

    The Indian airline industry is at the receiving end as well. As per reports, Indian airline companies are delaying payments to oil companies, as the escalating oil prices are putting a strain on cash flows, which are being needed to run core operations. Even if one were to keep the fuel issues aside, the airline industry across the world continues to be beset by problems such as massive capex, intense competition, low returns and profitability, strong influence of the external environment and the cyclical nature with longer period of recession and shorter recovery.

     04:23    Producing excess wheat
    While increasing food prices are fanning inflation across the world, India can breathe a sigh of relief; at least when it comes to wheat. As per the Food Corporation of India (FCI), wheat output for 2007-08 touched 78 m tonnes. This is expected to keep prices stable in the domestic market. Infact, as per reports, FCI has stated that besides stability in the domestic market, the high output has contributed to the international prices falling by 40%. This indeed comes as a positive for the Indian economy, which is reeling under a high inflation of 11%. Whether this excess production brings down inflation to some extent remains to be seen as oil prices continue to soar to new heights.

     04:45    Today's investing mantra
    "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."- Warren Buffet

  • Also read - More lessons from Buffett
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