Does India have the same problem as Greece? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Does India have the same problem as Greece? 

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In this issue:
» Wage boom shows poor have benefitted from India's GDP growth?
» Invisible mutual fund transactions can add to your tax burden
» More woes for mining companies
» Cheap power to help restart sick units
» ...and more!

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00:00
 
The Greek crisis has gripped the interest of everyone, especially investors and policymakers around the world. On unraveling, it sent tremors in the stock markets across the globe. The economy threatened the very existence of its currency - the Euro - thanks to its ridiculous debt management and economic policies. But what if we tell you that India has the same problems that Greece does?

It is true. The problems in Greece arose from its electoral politics. The country has spent more than what it could afford on populist programmes. Combine this with the country's huge parallel black economy and widespread corruption, no wonder Greece ended up borrowing more than it could afford for these programmes. And now when it faces one of the worst economic crises in history, the same government is unable to enforce austerity measures. Why? Its people just won't let it.

The story is pretty similar to India's. The government's policies are designed to suit the electoral masses. The idea is to make policies that would help the politicians retain power in the next elections. Little thought is being spared on the impact of these policies on the national fiscal deficit. Or for that matter on the industries in the country. At the same time, widespread corruption and the black economy have made sure that the government's measures never take shape.

An example of this is the widespread problem of food grain storage. It is not that money is not being budgeted for this. It is simply that the money is never spent on actually building storage bins. Somewhere along the way that money ends up in the bank accounts of the politicians and government officials.

Ours is a nation that has an esteemed economist as a Prime Minister. He is surrounded by educated economists who can understand that such populist measures can only help the country get this far. They need to wake up and adopt a more stringent approach. Otherwise, the country would head the same way as Greece did. It may not happen immediately but will definitely happen in the future.

Do you think that widespread corruption and presence of a black economy will lead India into a crisis similar to that in Greece? Share your comments with us or post your views on our Facebook page.

01:15  Chart of the day
 
India's inequality divide has time and again been harped upon. Not only does the country boast of being among the top few nations having rising number of millionaires, but also for large swathes of the population living below the poverty line. One would then assume that despite such stupendous growth in GDP, India's poor have not really benefitted from the same. But is there some grain of truth to this assumption? Not really, if one takes a closer look at the agricultural wages. This shows that actual agricultural wages, as distinct from legal minimum wages, are surging at the fastest rate ever. For instance, between January 2008 and December 2010, agricultural wages jumped by 106.5% in Andhra Pradesh and 84.4% in Punjab, Among the poor states, wages rose 58.3% in Bihar, and 62.8% in Orissa. These are significant improvements taking into account inflation of 30-33% in this period. Of course, India does suffer from problems of poor data collection and quality and different states could be adopting different data methodology techniques and hence one could not possibly rely on this data heavily. But these numbers, indeed, are sufficient to raise the question whether the problem of an inequality divide is not grossly overdone

Data source: Economictimes

01:45
 
Since most individuals would be busy filing their tax returns, how about a few tips to ensure that you've indeed accounted for every possible source of income? A leading daily has pointed out how invisible mutual fund transactions can prove to be tricky for investors. Take the case of dividends that are paid out by funds and which are chosen to be reinvested. It should be noted that in such cases there is no cheque that goes out from investor's side. The adjustment takes place at the mutual fund's end itself. Hence, there is every possibility that this transaction is missed out when the tax implications for the same are considered. Another tricky case could that be of inter fund transfers. Here again there is transfer of money from one mutual fund scheme to another of the same fund house but the money does not come into the bank account of the investor and then go back to the second fund. Therefore, this too presents the risk of missing out on transactions for tax implications. So, how does one ensure that such mistakes do not happen? Simple. Investors should ensure that the accounts for the entire year are considered and both the dividends received as well as consequent investments are considered.

02:35
 
A number of power projects in the country have been stalled due to the lack of supply of one primary resource coal. The reason for the delay is not so much a lack of availability of this commodity. But, more due to concerns that excessive mining of coal will impact local residents and the environment around the mines. A group of ministers seem to have found a solution to the above okaying the 'draft mining bill' on Friday. As per the bill, coal miners will have to shell out 26% of their profits to the government. Other mineral mining companies may have to share an amount equal to the royalty they pay to the government. This money will be used in order to compensate people displaced by these projects. This bill is expected to be tabled in the Union Cabinet by the end of July, before being formally presented in Parliament. This bill brings cheer to people living in the affected areas. However for companies like Coal India, Sesa Goa, NMDC, etc this represents a significant erosion of profits. And to counter the same, they may be forced to raise the selling prices of the commodities they mine.

03:05
 
In a power starved country like India, surplus availability of the same at reasonable costs seems most unlikely. However it seems that the power exchanges are flush with electricity that can be supplied at night. Moreover the supply can be available for as low as Rs 1.5 per unit. States like Punjab and Tamil Nadu that have given companies the choice to buy electricity from sources other than state distribution utilities are especially benefitted by this. The average per unit cost of electricity in the open market has come down to Rs 3 from Rs 10 about a year ago. This is because there is surplus power in the system due to low off-take by state utilities. As a result, factories that were either shut down or were operating for 2-3 days a week are running round the clock now. Companies are also lapping up the power to restart sick units by introducing night shifts. But state utilities, having enjoyed a monopoly for decades, are trying to protect their own turf. It remains to be seen how long can the other states afford to refrain its industries from accessing such an important resource at reasonable costs.

04:05
 
There seems to be no respite from the food price rises in the near future. Water scarcity could add further to this woe as water is one of the most critical components for food production. As per United Nations, food costs are increasing continuously for the last one year. Asian economic research at HSBC Holdings indicates that global food production is failing to meet the demand. All this will affect the developing countries more as they are trying to grow their economy. In addition to this, they will also need more water to fulfill the demands of every industry. As a result, they will face more water shortage. Countries having lower water supply including China would have to import more food grains from different parts of the world. This will propel the food prices further.

04:30
 
It was a mixed week for the world markets. Japan was the best performer up 2.7% while Brazil was the biggest loser down 3%. In Asia, all markets closed in the green. Hong Kong was up 1.5% while China was up 1.3%. Indian stock markets closed the week up 0.5% while Singapore closed the week up 0.4%.

Indian stock market benefited from flow of FII (Foreign Institutional Investors) money this week. With lower food inflation numbers reported in the country and the concerns over Greece debt abating, the risk appetite of global investors was in favour of emerging markets. Foreign investors pumped in more money in July in Indian equities than for the period between January and June. In Europe, UK closed flat while Germany and France closed the week down 0.2% and 2.35 respectively. US closed the week firm up 0.6%.

Source: Yahoo finance, Kitco, cnnfn


04:55  Weekend investing mantra
"There's a company behind every stock and a reason companies and their stocks perform the way they do." - Peter Lynch
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26 Responses to "Does India have the same problem as Greece?"

Saurav Bishal

Jul 15, 2011

No doubt India have the same problem as Greece.
Only God alone can save the Country by killing this demons
in form of shameless politicians
and it is not going to happen like previous time..so there is no hope at all....
lets prepare to suffer for this cumulative KARMA

Like 

Harish

Jul 14, 2011

Yes, you are right. Our politicians frame populist economy for the purpose of perpetual power. None of the ministers either state or central wish to remain without portfolio (power). If a minister loses portfolio on account of reason what soever including corruption, they are reshuffled from central cabinet to state and vice a versa but they are never punished for their misdeeds. All ministers are of the same category without any exception at state level or central ministry.

Like 

k sridhar

Jul 14, 2011

yah, we can face similar problem like Greece, if don't end up on populistic vote bank policies. Government is spending so much from tax payer's money, but how much actually reaching to real needy person. so, it is very much important to revamp the total structure of systems like PDS and ensure more direct benefit to the poor. Regarding Black money and corruption, which are inter linked demons, government should wake up atleast now after such Supreme court initiative, which could have been done by legislative & executive bodies.

Like 

Rishi Poddar

Jul 11, 2011

Isn't it surprising that the second fastest growing economy in the world which is the envy of others in terms of GDP growth is contemplating a future resembling that of Greece? Most of the comments made by people on this post have a lot of merit. Only GDP growth does not make us a superpower when the middle class and labour class are fighting for survival every day in terms of high inflation and rampant corruption. When the interest rates were headed down, the govt. was quick to reduce the rates on govt. savings like PPF from 12% top 8% but when the rates have been revised upwards 10 times in the last two years, the interest rates on PPF have not been revised at all!! The govt. is encouraging consumption at the cost of savings and taxing the savers and old people with lower rates on their savings. This is a recipe for disaster.

Like 

Kirti Shah

Jul 11, 2011

This article is an eye opener for the India Goverment. Still they turn blind eye,God alone can save the Country

Like 

Shankar

Jul 11, 2011

It has not happed till now, just because of the IT boom and opening up of the economy.
Such situation will definitely happen in another 5-10 years time. Think when a small country with small population cannot control and facing grave situation, think of India. Soon there will be riots on the roads.

Like 

Vikram

Jul 11, 2011

we already in the same league as Greece. We are living in the false hope of 8%+ growth projections. Remember that this 8% growth is fuelled by the Internal consumption. Many people think this is boon for us. Mark my words 10 years down the lane, we will have only consumers and no producers or exporters. A family/country needs to export to sustain itself, if we eat every thing ourselves what will we export.

Most of the country feels that our population is our biggest asset. Mark my words 10 years from now population will be our biggest curse.

Our people in the country feel that our present PM is a great economist and a very honest person. what we do not see is that he is a WOLF in SHEEP's clothing. Only great leaders like PV Narasimha Rao, can help economists like Manmohan perform, not with leaders like SONIA.

Wake up dear fellow indians. We became occupied by outsiders(Ghazni etc)900 years ago (approximately), we have already got our freedom now. Stop behaving like slaves.

Get up be a leader and lead this contry.

Like 

Veeresh

Jul 10, 2011

May be so, till the basic nature of the econimic challenges. This is also true that populist nature of policy ride over need-of-the-hour policies. Corruption and backmoney add to the same. But being vibrant democracy, and huge and growing middle class society, it would force the politicians and policy makers to think twice before inking something against this class. Not to mention the power of new media/ch (ex Egypt.) But, it requires each one of us watch, speak/blog, act/vote as required when required ...

Like 

Vaidya

Jul 10, 2011

Yes. Absolutely certain. It is only a matter of time. Unless some miracle happens and the politicians ( traitors ) start behaving differently. Or our people learn some lessons from Gujarat and Bihar and start electing people on merits

Like 

vijay

Jul 10, 2011

I think we are already worst than Grece. We have Countries within the country.No matter what the inflation rate is or whether we are in recession or not, this HNI country does not have any problems. This HNI group will even put Bill Gates of the world to shame when it comes to spending on their homes or luxuries. Then there is BPO Below poverty line) and MC (Middle Class) countries which are always under pressure in any economic condition. The Politicians through corruption and Bad policies use the BPO and MC Countries to fill the coffers of themselves and the HNI countrymen. So there will be a definite war between these countries because HNI country is not bothered abut the other 2 countries at all. And the Politicians are not seeing this danger..God help the generation which will face this war. And mind you all the countries will be affected. Mr.Ratan Tata has already said that we are Crony Capitalist and banana republic country.
vijay

Like 
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