Shocking! 'Made in India' has alarming rejection rates... - The 5 Minute WrapUp by Equitymaster
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Shocking! 'Made in India' has alarming rejection rates...

Jul 6, 2015

In this issue:
» What does Greece vote mean for India?
» After promising June rain showers, El Nino threat looms
» Do poor monsoons have a weak correlation with food inflation?
» ...and more!

 Chart of the day
Just some time ago the 'Maggi controversy' had taken the country by storm. Many were shocked to find that their favorite instant noodle brand was banned after it was found to be "unsafe and hazardous for human consumption". But if you thought this was a one-off event then you'd surprised to read what we just found out.

We came across an article in the Wall Street Journal that shared some alarming facts. Apparently, in the first five months of 2015, the US FDA rejected more snack imports from India than any other country. In fact, over 50% of all snack products that were tested and blocked from sale in the US were from India. And if you are willing to think that this year might be an anomaly, let us tell you that last year too India topped the list of snack rejects.

This is worrying because India is not even a large trading partner of the US. For instance, China's exports to the US are worth ten times as much as India's. Even then, China ranks eighth when it comes to snack rejects.

India Leads The World When It Comes to Rejections

An even more distressing fact is that it is not just Indian snacks that face a high rate of rejection in the US. Be it cosmetics, or ceramics or drugs, in every sector India faces high rejection rates.

As an investor, this is something that should worry you. We often talk about 'economic moat' or competitive advantage in the context of companies. A company is said to have an economic moat when it is able to maintain or expand market share without compromising on margins or return on investment. That concept can be extended to countries as well. If a country wants to grow at a healthy rate, then it has to have some edge in a highly competitive globalized economy. Else, it faces the threat of losing market share. India cannot afford to rely simply on its low cost advantage for too long. As an economy, we should aim to develop 'pricing power'. And that is possible only if we make our manufacturing infrastructure world class and follow stringent quality standards.

Do you think 'Made in India' is equated with inferior quality? What should corporates and policymakers do to change the equation? Let us know your comments or share your views in the Equitymaster Club.

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So the verdict is out! Greece will have none of the austerity measures. Instead, it chooses to walk out of the Euro zone. This may seem like the last scene of the final act of the drama that is going on for quite some time now. However, the denouement is elusive. The unexpected public vote in fact could be the first chapter in a new set of events that will have long lasting implications on the global financial system.

Back home, the markets have reacted negatively to this decision. While India has little exposure to Greece, it is unlikely to remain untouched in case a global financial turmoil follows the vote. A direct hit could be with regards to outflow of foreign money, especially considering Sensex's exposure to FII inflows.

However, if the Greece crisis is what is influencing your long term investing decisions, your approach could be misplaced we believe. You see, more than the Greek crisis, what will determine your returns in the long term will be the fundamentals of the companies you invest in and the valuations at which you invest. As long as these are in place, Greece, or for that matter any other macro economic concerns deserve little importance we believe.

Popular economic and political discussions often tend to get narrowed down to a bunch of macroeconomic variables and indicators. So if you ask many market participants or the so-called experts about what the Indian economy needs right now, some common responses you are likely to receive are 'interest rate cuts', 'GST' and so on. Now the problem here is that such an approach completely ignores real ground level problems that the economy might be facing. Here is one glaring example...

We came across a worrying piece in The Economic Times that pointed out to a brewing water crisis in the country that may have disastrous effects in the time to come. Already, in many parts of the country, the ground water levels have gone down to alarming levels. The rains, too, have been witnessing a declining trend in some parts of the country as forest covers are declining rapidly. So on one hand we have an increasing population and increasing demand for water, but the supply is not matching up. Here is a startling fact... As per World Resources Institute estimate, the national supply of water is expected to fall 50% below demand in a span of just 15 years.

Common sense suggests that supply of water is one of the key components for households, agriculture as well as industrial and commercial purposes. With this critical component significantly deficient, all ambitions of high economic growth and development are likely to be under duress.

The heavy monsoon showers in June in many parts of the country came in as a pleasant surprise. This has surely helped in planting of crops as well as in filling up reservoirs and ground water tables. But it would have been a bit premature to raise the toast.

Here is the shocker. As per US forecaster Accuweather, the northwestern region of India is likely to witness a drought. Yes, the El Nino appears to be resurfacing and it poses a threat to the grain growing belts of Punjab and Haryana. While the size of the drought area may be smaller, it would be a second consecutive drought in some parts. Certainly a matter of worry!

Does that mean food prices are set to go up in India?

Now, here is something tricky that we came across in a leading financial daily. A study by industry body PHD Chamber says that food inflation does not have a high correlation with the monsoons. In other words, poor rains do not have a strong correlation with rising prices. This may come as a surprise to many. Especially, after the RBI Governor said that the deficient rainfall this year would be one of the key risks to India's inflation. So what does the study suggest?

According to the study, major foodgrain producing states in India are not entirely dependent on monsoon. They have proper irrigation systems in place. So which is the factor that has the strongest influence on food prices? As per the study, the answer seems to be per capita income. There is a strong correlation between per capita income and increase in prices. About 40% increase in food prices can be explained by rising income levels.

Now as we all know, a high correlation does not always indicate causality. As far as rising food inflation is concerned, we certainly believe that monsoons are not the only factor to blame. Despite the fact that India is one of the biggest food producers, we face food inflation as poor logistics and storage systems lead to wastage of food. The middlemen in the agriculture sector further fleece both producers as well as the end consumers. Hence, instead of blaming monsoons or higher per capita income, we believe that the Government would do a better job by focusing on efficient supply chain management and sorting real issues.

The Indian stock markets started the day on a weak note and continue to trade in the negative territory. At the time of writing, the BSE-Sensex was trading lower by 113 points (down 0.4%). Barring healthcare and oil and gas, all sectoral indices were trading in the red led by stocks in the metal and consumer durables sectors.

 Today's investing mantra
"Just out of our respective graduate schools, my friend Warren Buffett and I entered the business world to find huge, predictable patterns of extreme irrationality. These irrationalities were obviously important to what we wanted to do, but our professors never mentioned them. Understanding the problem of irrationalities was not easy. I came to study the psychology of human misjudgment almost against my will. I rejected it until I realized that my attitude was costing me a lot of money and reduced my ability to help everything I loved." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Richa Agarwal (Research Analyst).

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12 Responses to "Shocking! 'Made in India' has alarming rejection rates..."

s natarajan

Jul 8, 2015

the foodstuff exported are invariably made by foreign companies. while it is necessary for us to be quality conscious and the consumers reject substandard stuff, things will improve. all that we see are not as clean as it seems.once in the US a scare was created that indian made rayon dresses burn quickly. the channel showed two similar dresses one from India and the other from China. they were burnt simultaneously and they both burnt. lo and behold the indian one burnt in 42 seconds. the other one burnt slowly and took fooorty five seconds.


Satish Tambe

Jul 7, 2015

I think Indian consumers are too price conciuos and do not care about quality much.They buy any crap if it is cheap.This leads the
manufacturers to lower the prices at the cost of quality. This attitude has percolated everywhere and same manufacurer cannot change the attitude for exported goods.hence the rejection.



Jul 7, 2015

I am not much surprised about the rate of rejection.A country`s fame depends on charecter of its men and women.Just observe how the charecter of indian people has been depleting alarmingly since the sixties.Contemplation of swachha bharat is beyond our ability. india is in abyss and unfortunately it has reached to such a depth ,it is incomrhenssible to rise therefrom.


Ron Harbin

Jul 7, 2015

As an American living in Kerala, teaching at Amrita U., I have only good wishes for my adopted country and am definitely pro-Indian. Yet from my experience made in India is associated with inferior quality. This extends to very simple non-technical merchandise. When I moved here a mere 5 mo ago I bought the normal household items. Already the handles on my cooking pots wobble badly. I bought a screwdriver to fix them, but the screws are frozen in place, so I can't tighten the handles. The lighting mechanism on my propane burner broke and I have to light it with matches. A few days ago the handle on my umbrella just fell off. I could go on, but I assume most of you know what I'm talking about. Is it that the manufacturers have very little pricing power and have to cut corners to make a profit? I am planning to bring back a suitcase full of basic items when I visit the US next summer. Unless this is solved India does not have an export future. My dad would never buy anything made in Japan because the quality had been bad when he tried them as a young man. I hadn't experienced that, so I gave them a try and found the quality had improved greatly. So India has some time, but the attitude somehow needs to change, and manufacturers need to take pride in providing their customers with goods that keep them happy, if exports are to become a source of wealth for India.


KJ Pappachen

Jul 7, 2015

The government should be strict in compelling the manufacturers to install the latest machines and equipments in the factories to improve the quality of products at par with international levels instead of devaluing rupee to help the industrialists after collecting huge amount of funds from them.



Jul 6, 2015

Why are you SHOCKED ??? Because, you bought Modi's spiel ??

Like (1)


Jul 6, 2015

Indians are normally unhygienic as far as snack food goes. They compromise health against the price. They will eat cheap dirty road side junk and compromise hygienic issues. The corporate judges the entire world wearing an Indian glass over their eyes. Nothing is surprising if there are rejects from other countries.

Like (1)

Ashok Golas

Jul 6, 2015

More shocking information for those resident in India would be to worry about quality of goods that are palmed off by these manufacturers (some of the foodsutff sold here may not be even fit for consumption by animals but who cares. Unlike US where punitive action is taken, manufacturers do not even care to register complaint - leave alone attending to them.

Further they always have the option to dump such rejects in Indian market under the garb of export surplus - Does this sound too familiar?

Like (1)

Ganapathy Sastri

Jul 6, 2015

Attitude with most manufacturers and sellers in India is: The customer is wrong. He is the only customer who is complaining like this on quality. All others are happy with our product.As for quality we are in 2015 where Japanese were 70 years ago. Another aspect is "safety last". The country does not pay much attention to safety aspects. Obviously unless India Inc gets its act together there is not much hope on export front or trade deficit front. We have one of the largest trade deficits. Absurd fraction like trade deficit / GDP is a cold comfort because trade deficit is in a currency that we cannot print and therefore, continued MASSIVE trade deficits are simply unsustainable despite a record FX balance held by RBI.

Like (1)


Jul 6, 2015

if the rejection rate is due to certain reasons other than retaliation for some other purpose one should analyze and see it is arms wishing by bigger markets. I wonder if such things are discussed in WTO and other forums.

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