Can this kill India's demographic dividend story? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can this kill India's demographic dividend story? 

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In this issue:
» Nearly 70% of MFs outperform benchmark index
» How to take advantage of the current market run up?
» Loose lending practices remerging in the US.
» Fed is unlikely to raise interest rates for now.
» ...and more!


00:00
 
Job creation in India is an issue that has been discussed for a while now. Given the slowdown in the economy, coupled with the pace at which the workforce is expanding each year (estimated at 10 m per annum), there are bound to be major hurdles in the future if this problem is not addressed right away. With unemployment levels of the youth (those aged between the age of 15 to 29) standing at two to three times that of the national average, it really is a serious sign of concern. Job creation has not been happening at the desired pace as well - between 2010 and 2012, the pace of job creation stood at a paltry 2.2%.

When pitching to India for voting for him as the next Prime Minister, Mr. Modi discussed a lot on his plans on focusing on job creation. And having won the clear mandate, the hopes of him sticking to his promise are very high. As was discussed by the new government recently, the focus is likely to be on reigniting the investment cycle - including by inviting foreign investments - and creating jobs in labour - intensive manufacturing sectors as well as expansion of job opportunities by promoting tourism and agro-based industries.

This seems to be in line with one of the findings of the RBI as well. The central bank recently released a working paper wherein it estimated employment elasticity of the Indian economy. What this study aims to do is simply calculate the change in employment with every percentage change in growth levels of the overall economy and specific sectors. Or as mentioned on the central bank's website "Employment elasticity thus represents a convenient way of summarising the employment intensity of growth and is commonly used to track sectoral potential for generating employment and in forecasting future growth in employment."

As per the findings, the aggregate employment elasticity stood at about 0.2 during the post-reform period. What this means is that the employment growth rate rises at about a fifth of the overall GDP growth rate. So, if GDP rises by 10%, employment is expected to rise by 2%.

When gauged from a sector specific point of view, it seems that the organized manufacturing sector - with employment elasticity in the range of 0.4 to 0.5 - is most effective in increasing employment. As for overall manufacturing sector, the elasticity level stood at about 0.3. The paper also finds that the services sector (including construction) has generally been employment intensive. Having said that, it turns out that this figure for the agriculture sector has been negative, thereby implying that for the purpose of creating employment, the focus on this sector would provide unfavourable results. The paper summarizes that for India to meet its demographic dividend challenge, the focus will have to be on the higher employment elastic sectors. This in our view would be a very crucial factor especially when aiming to resolve this issue over time. As reported in a leading daily today, India has the world's largest student population - in excess of 310 m - which is about a fourth of the entire population. By 2020, India is expected to be the world's youngest country with nearly two-thirds of its population in the working age group.

So, while it seems that the government is on the right track as its focus is in line with the outcome of the RBI's findings, the key challenge would be to bring the growth levels in the right areas to curb the unemployment situation and more importantly for creating more jobs in a sustained manner. And this makes it all the more important for bringing about major changes to the country's labour laws, which as per many industry leaders, are in need of an overhaul. And going by the hints that the government has been providing, major tweaking of the labour laws seems likely. This would be a major positive in our view.

What are your thoughts on Modi's ability to improve India's unemployment situation over the next five years? Let us know in the Equitymaster Club or share your comments below.

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01:40  Chart of the day
 
Talking about reforms, let's shift our focus from jobs to taxation. Implementation of Goods & Services Tax (GST) and retrospective taxation are two areas that deserve immediate attention. Hopefully, the FM will address them in the upcoming budget.

Corporate and individual* tax rates in various countries
*High end

However, the big question is will he also tinker with individual and corporate tax rates in order to plug the fiscal gap? While the move would be non-populist, if he indeed decides to raise tax rates, we believe he should revisit the corporate tax slabs. Despite Indian corporate tax rates being fourth highest in the world, the effective tax that companies pay is much lower. This is because of the various deductions available to them. With regards to individual tax rates, we believe the better move would be to bring in more people under the tax net rather than raising tax rates. Subjecting more people to taxes can raise government revenue without raising the tax rate itself.

Currently, many individuals try to evade taxes by various means resulting in a huge loss to the exchequer. As such, the focus should rather be on taking steps to curtail tax evasion rather than raising individual tax rates. Doing the latter would reduce disposable income in the hands of citizens, which would not be the better option in an inflationary environment.

02:20
 
It was not too long ago that mutual funds were at the receiving end of criticism ranging from poor management of large sized funds to underperformance. However, the last three months seem to have completely changed the fortunes of the mutual fund industry. PersonalFN, a specialist in mutual fund research and financial planning had analysed the performance of top mutual funds over different time periods in March 2014. Then the performance of largecap funds over both 1 and 5 year periods were trailing the Sensex returns. However, as per Business Standard, the fund houses seem to have made up for their poor performance of the past 3 months. The buoyancy in overall markets have helped 7 out of top 10 mutual fund schemes beat the benchmark returns over 5 years.

Now, we have no reason to believe that the fund managers have taken any drastic measures to improve the performance. Instead, it is the temporary bull-run in the markets that the fund houses are riding on. Hence, investors must be cautious that the party may be short lived. It will therefore be meaningful to look at funds that have performed across market cycles before investing in them.

03:05
 
While your mutual fund portfolio may have created wealth for you, what about the individual stock picks? Have all the stocks in your portfolio outperformed the market, especially in this rally? The chances are probably not. There are bound to be underperformers in any portfolio. But should you get rid of them just because of the underperformance? A far better idea would be to cut the flab in your portfolio. By that we mean you should consider selling those stocks that have run up a lot but at the same time, the company's fundamentals have not improved or are weak in general. As per an article in the Hindu Business line, nearly half of the companies that have declared their annual results have seen their debt situation worsen. Yet about 90% of such stocks have given stellar returns in the last one year. Some companies with poor fundamentals in terms of debt-equity and interest coverage have seen their stock prices double or triple in this rally. As such, if you have such stocks in your portfolio, it will be a good idea to use this rally to exit them.

03:45
 
Loose lending standards. These three words sum up one of the biggest reasons why the credit crisis of 2008 happened. In fact, loose lending standard is perhaps the reason why many of the previous financial crises across the world took place. It is sad however that we've seemed to have learnt precious little from these events. For some experts are yet again flagging the risks to the financial sector due to re-emergence of loose lending practices in certain pockets. One such expert is Bill Gross of PIMCO and what's concerning him these days is the issuance of covenant-lite loans by US financial institutions. Covenants are nothing but financial restrictions placed on borrowers in order to give assurance to the lenders that they will receive their money back. And if you be a little liberal with your covenants, you are in effect taking greater risks.

Gross is therefore worried that the easing of these standards is leading to a bubble like situation. Well, no one can predict when the situation could blow up. However, what is important is staying away from these financial institutions and not taking any exposure to them. After all, predicting rain doesn't count but building the ark definitely does.

04:25
 
You must be well aware of how the easy monetary policies and lack of financial regulations led to the financial crisis in FY08. After almost six years, the global economy still remains haunted. However, instead of moving towards a stable economic system, we seem to be building the recipe for another financial crisis. At the centre of it lie the low interest rates that are feeding market bubbles. It is important to note here that developed economies are averse to raising interest rates so that it helps in the recovery. This further gets affirmed by a recent statement by Fed Chairman Yellen. She has suggested that Fed is unlikely to raise interest rates for now. Yellen has cited that doing so is important to ensure job growth and price stability. As far as bubbles are concerned, she believes that financial regulation by itself is enough to avoid them. We believe that this monetary accommodation and narrow focus will prove very costly in the long run. Not only to the US but also to economies across the world! While she is ready to ignore bubbles for now, she has not ruled out raising interest rates in case of extreme circumstances. Any such move is likely to derail the rally in the Indian stock markets that are currently riding high on account of FII money inflow.

04:25
 
The Indian stock markets have been trading flat. At the time of writing, the benchmark BSE-Sensex was up by 16 points. Majority of the sectoral indices were trading firm led by pharma and auto. Asian stock markets were trading strong with Singapore and Taiwan being the biggest gainers. However the Japanese market was trading negative. The European markets opened the day on a strong note

04:55  Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch
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5 Responses to "Can this kill India's demographic dividend story?"

Tikam Patni

Jul 6, 2014

Faced with job creation challenge, our myopic and incompetent Netas can only think of absurd schemes such as NREGA. They need economic vision and political guts, which most of them do not have; to understand that true job creation cannot happen thru charity and doles, but thru productive investment and justified ROI. Change labor laws which were created during British rule. They did not want India to have a robust manufacturing setup. They wanted to feed and run British factories from Indian raw materials. Our Netas must understand this. Gandhiji's Khadi and Namak andolans were the examples of this much needed vision.

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Swapnil Gangele

Jul 4, 2014

To reach a destination one has to start bike and most important direction should be confirm so is with our Newly elected PM. Now speed shouldn't be too much for safe journey so we could expect positive changes in discussed criteria in due course of time.

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Prashant Manohar

Jul 4, 2014

Today morning Live Session was a waste of time. It was only a marketing session and not a training session. Training Session was advertised for a price. No specific ideas or strategies were discussed, as it was made out to be- I quote from the 5 Minute Wrap Up- ".....he (Asad) is about to reveal trading strategies that you can use right away to generate consistent profits.......". Sorry to say that this was a misleading statement. Such a fraud was not expected from Equitymaster.

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patel

Jul 3, 2014

lot of thinking ,never implementing

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THOMAS

Jul 3, 2014

ArthaKranti suggests bank deposit based tax system
timesofindia
What is your view

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