Is 'growth at all cost' a sensible approach? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is 'growth at all cost' a sensible approach? 

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In this issue:
» Gold is the top performer in first half of 2010
» RBI thinks of capping bank CEO pay
» Greenspan says that recent correction is nothing to worry about
» Europe looks to implement reforms post debt crisis
» ...and more!!


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00:00
 
'There are no free lunches in economics', goes the famous age old adage. It implies that for every benefit there is a cost even if the cost is not seen right away. Indeed. Modern day economics has got this point spot on. But we think there is a small defect here. While talking of free lunches, the economists only take the interaction between humans and human institutions into account. But what about the non human environment? What about the enormous wealth that has been generated from the finite resources of the environment? Similarly, what about the disposal of expensive wastes into the world around us? By ignoring mother nature, isn't the modern day economics availing of one free lunch after another? Certainly. Thus, it is time the record is set straight on this one. Environmental considerations will have to be built into economic decision making. Otherwise we will end up creating a huge ecological disaster.

Thus, with this background in mind, we were disturbed when recently, India's civil aviation minister slammed the environment ministry for delaying clearances to a prestigious airport project. It is believed that the new project could end up destroying around 400 acres of forest, a blow that the environment ministry is clearly not willing to take. Honestly, such issues are not only sensitive but quite subjective in nature as well. Thus, we cannot know for sure to what extent economics can override ecology. But what angered us is the outright callousness of the aviation ministry. "I do not understand their objections.....We can't be overly obsessive about environmental issues. We can't give priority to 50-100 acres of degradation over a large infrastructure project", is what the minister is believed to have said. Please do not get us wrong. We are all for growth. But we are certainly not about riding roughshod over environmental considerations. Why can't we have both. Maybe, we are being idealistic? Do let us know what you think.

01:06  Chart of the day
 
The first six months of the year have been rather tumultuous ones for the global markets. While the start of the period was marked with cautious optimism what with stimuli working its way through the global economy, the latter half saw debt concerns come back with full vigour as few Euro nations looked in deep trouble. Hence, amidst such an environment, it would be interesting to see what some of the key stock markets and commodities were up to during the period.

As today's chart of the day shows, China was amongst the worst hit during the first six months of 2010, as its benchmark index fell by more than 25%. Concerns with respect to the Chinese economy witnessing a hard landing were majorly responsible for the downslide. Gold on the other hand, continued to have a stellar run as it rose an impressive 13% during the period. Looking at where the global economy is headed, more gains could be in store for the yellow metal in the time to come. As far as other stock markets are concerned, their movement was mostly sideways as after an excellent 2009, equities seem to be taking a breather and waiting for the dark clouds over the economic horizon to clear themselves.

Source: Yahoo finance, Daily reckoning

01:59
 
You can't teach an old dog new tricks, they say. And that's especially bad if you are referring to the former Federal Reserve chairman Alan Greenspan. After all, his old tricks are responsible for bringing the financial system to the brink of collapse. So imagine our surprise when newscasters even today seek his opinion on market events. In Greenspan's view, the recent stock market drop is nothing to get too upset about. In an interview on CNBC, he says, "That essentially is a typical pause that occurs in an economic recovery... this recent decline is more international than it is a domestic affair." He adds there is an inherent instability in the euro system. He also believes that the concerns in the US are due to a short-term fear factor. May be. But a vote of confidence on the US economy by Mr. Greenspan is hardly any consolation. After all, he's someone who let a giant bubble build right under his nose which nearly took down the financial markets as we know them.

02:34
 
One of the positive fall outs Europe's debt crisis could be reforms. Reforms such as making it easier for companies to fire workers and stare down unions. Helping government tackle bloated public payrolls, trim entitlements or force people to retire later. Moves that until recently were frowned upon in a prosperous and welfare driven Europe. But the recent crisis has highlighted the need for structural changes. Of course, it remains to be seen how such steps will go do down with voters. In our view, countries must strike a fine balance between welfare policies and running efficient economies. Now that the boom fuelled by cheap credit has come to an end, Europe will have to tighten its belt. It must let companies and markets do their work - allocate resources efficiently.

03:01
 
We are not too sure whether the CEOs of big banks in the US and Europe will be denied big bonuses. But their counterparts in India will certainly have to strive harder for a fatter pay check. Especially with a regulator as diligent as the RBI keeping an eye on they pay packs. Yes, the RBI has now proposed to limit the salary rises of CEOs and directors of Indian private sector banks. The upper limit for a salary hike will be just 10% to 15%. Also, there will infact be a provision for a pay cut in the instance of a poor show! The RBI is also reluctant to allow the banks to reward their top employees in cash. Guaranteed bonuses, if any, can only be in the form of employee stock option plans (ESOPs).

The regulator believes that only such delayed incentives can prevent undue risk taking. Foreign banks operating in India on the other hand need to submit a declaration that their CEO remuneration is in accordance with the international guidelines. These norms certainly make a case for prudent compensation laws within the country. However, we hope that this is not at the cost of losing our best minds to global competitors.

03:43
 
Sticking with RBI, in a surprise move, the central bank raised its key policy rates this week ahead of the quarterly review. It has raised the repo and reverse repo rates by 0.25% each. Repo and reverse repo rates are short-term rates at which the RBI lends (repo) and borrows (reverse repo) money from commercial banks. These rates will now stand at 5.5% and 4% respectively, and with immediate effect. RBI's act comes on the back of its views that the economic recovery is now showing signs of picking pace. It has cited the examples of improving manufacturing growth and rising exports. It has also hinted at the credit pickup in the banking sector. Then, the good monsoons that the country is receiving currently also raise chances of a robust GDP growth during the current year. The central bank has also raised its concerns on the inflation front. All these factors seem to have forced it to raise interest rates ahead of schedule.

04:16
 
The past week turned out to be a terrible one for stock markets across the globe. Most Asian markets fell on a weekly basis, with China leading the losers. Sentiments were negative on concerns over the US jobs data. European markets also declined on the back of poor economic data from China and the US. Worries about Spain's credit rating being downgraded by rating agency Moody's further spooked investors. The Indian markets ended on a flat note this week as well. A substantial portion of the gains that the markets witnessed during the start of the week, were shed during the latter half. The key reasons for the same were the slowdown of the Chinese economy and uncertainty over the impact of fuel price rises.

Source: Yahoo finance, Kitco, CNN

04:52  Weekend investing mantra
"Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar's destiny lies with Congress." - Warren Buffett
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69 Responses to "Is 'growth at all cost' a sensible approach?"

ramaraom3

Aug 1, 2010

every objection raised by the environment ministry must be examined in its entirity by an unbiassed expert committee on environment, transperantly and a solution arrived at by suggesting alternative sites or measures to really restore and replant and grow the forest in a degraded forest area twice or even thrice the project affected area being divested. it is a shame that a whole lot of projects are in cold storage only because of environmental issues while most of the affected area is degraded forest. this has become a great farce. a broadbased committee should go into the reality in the objections raised by the environment ministry.

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J N MAMTORA

Jul 11, 2010

IT IS THE SHORT SIGHTED POLICIES AND ACTIONS LIKE THIS THAT HAS LED TO THE GLOBAL WARMING WHICH NOW IS A FACT OF LIFE

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Amish Saraiya

Jul 8, 2010

Sure.. I totally agree with your concern for the Forest. We are sort of very keen in cutting off our Lungs (forests) to expand the Stomach (to create better standards of living). One day there will be 3/4th waters and 1/4th Concrete structures on the earth and not a single living being.
We ought to vote to create a system equivalent to that of Carbon Credits. This shall be for replacing green cover (natural forests) in building infrastructure as also expansion of Cities/Towns and Agricultural Land. But keep in mind, a forest takes 200 years to come into being.
I do want growth and do want to sustain Ecology too. This is the challenge to the young people of the world like us.
Love, Amish

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Manoj Kumar

Jul 8, 2010

Development is okay, it can bring us riches and may be reduce some poverty but environment is vital with environmental degradation no amount of riches can help us survive. The development is for me but environment is for my children. The humans and other species have survived for ages without the development but without the environment nobody can survive and even if we survive what kind of life would it be without the nature's boundless bounties. Sorry, we don't want a development done overriding the environment concerns. For us development is development of green technologies.

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k c navada

Jul 7, 2010

your concern is right.The ministry concerned should discuss the ecological issue with their counter parts and find out alternative sites if required rather than taking it as a prestige issue.by the by what is PMO doing on this issue.In inter ministry wrangles they have to sort out the issues

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Punit Jain

Jul 6, 2010

I believe that Growth at all costs is NOT a sensible approach. Protecting our environment is very important for sustainable living. At the same time Growth is important.
We have to find an acceptable/ innovative way to meet both these objectives. eg. In this case, is the developer willing to commit to 100 acres of forest development in place of this degradation?
I recall MNCs investing in factories in Indonesia & Thailand being asked to invest in Town and infrastructure development in addition to awarding rights for the factory and land required.
Development must meet the holistic needs of Society and sustainability.
Else in our hurry, we will shoot ourselves in the foot !!!

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chirag

Jul 6, 2010

I think that retail investors are fool enough to believe his agent and they should be continued to be fooled until they ask for the detailed breakup of what they pay and in return what they get in the form of units, insurance and any other benifit from the agent like good service. Investor should get atleast the break up of this 3 parts if not more. One of the major component which an investor fail is that of allocation charges, he is not even aware of how much units will be allocated to him and what will be the charges!!! it is hard to believe that any body gives his hard earned money without even knowing where they are going.. surprising but it is true.

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KRISHNAKANT BATAVIA

Jul 5, 2010

YOU ARE RIGHT. WE SUPPORT.

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Keshav P. Godbole

Jul 5, 2010

From 1/4/2011, long term & short term capital gain becomming one & on it tax will be about 40% as per new tax code introduce from April 2011 onward. Considering this, what will be the strategy to be adopted of share holder holding share more than 2 or 3 years & gain on share prise is about 80 to 100% or more . Kindly advise about it.

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joseph

Jul 5, 2010

Dear Sir,
I completely agree that we need to grow. But not at the expense of environmental exploitation. The ministries should not be working independently to achieve their targets....the Govt should make sure that the inter-departmental coordination should be better and all ministers should be sensitised to such important areas like environment, alternate sources of energy, pollution etc etc......Growth is a must, but not at the cost of important and sensitive matters of which environmental degradation is the most sensitive. The govt needs to strive to balance all the points and take things forward...

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