The size of this scam is 1.2 times corruption in India! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The size of this scam is 1.2 times corruption in India! 

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In this issue:
» Why the biggest hedge funds are holding cash?
» A state that can be a model for Indian economy
» Poor financial reporting hits Chinese companies
» A new industry to create 1 lakh jobs in India!
» ...and more!

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00:00
 
The power of compounding seems to be working overtime when one counts the addition of zeroes to the size of scams hitting India. Over the past 4 years, the numbers have been mind boggling! Corruption has been a menace that has hit the Indian economy harder than any natural disaster. Unfortunately, the roots of the same have been so widespread over the decades that tackling it has been a tall order.

An interesting article in the Wall Street journal had put into perspective how the government could have utilized the funds from the 2G spectrum had no scandal taken place. Food for every destitute Indian for the next decade. Funding of the flagship employment program for India's marginalized for the next five years. Primary schooling for every Indian girl for the next three years. The reduction in every Indian's tax rate by 15% for the next year, or the reduction of India's outstanding debt by 10%. Thus the absence of the scams over the past 2 decades could have meant a huge boost to the Indian economy. But the chronology of scams shows that policy inaction has left the culprits more confident over the years. In fact, in the biggest scam in Indian history that was uncovered in 2010, members of the government itself were found responsible.

Chronology of scams in India Size* (Rs m)
Bofors scam, 1989 400
Harshad M scam, 1992 6,000
Telgi scam, 1995 20,000
Hawala scandal, 1997 1,000
Ketan P scam, 2001 50,000
Satyam scam, 2008 90,000
CWG scam, 2010 80,000
2G spectrum scam, 2010 1,760,000
Overall corruption 15,550,000
Money laundering 18,860,000
Data source: Wikipedia, Equitymaster
*Estimated numbers


The synonymy of corruption with India has indeed left a bad taste in moth of global investors. Indian stocks witnessed a huge downgrade in valuations when the CWG and 2G scam were uncovered. Since then, investors have dumped every stock that has been even remotely in the news for being associated with a scam. But the problem does not end there. There's another scam that dwarfs absolutely everything that has occurred so far. And this scam answers to the name of money laundering. As per the results of a study on corruption, published by Rediff, the size of money laundered by Indians stands at staggering Rs 18.8 trillion. The same is apparently 1.2 times the overall size of corruption menace in the country. We believe that it is time both the government and companies realize that being corrupt is no longer going to take them too far.

We recently got some very interesting results from a poll conducted on the most trustworthy companies in India. Why don't you too participate and make your opinion count? Click here to participate.

01:15  Chart of the day
 
With most governments being held accountable for their inexplicable debt burdens, budgets are now being shot down. Expenditures like that on defense have been the major reason for the US' debt problems. Being the country with the second largest armed forces, the US has 1.6 armed personnel for every 1,000 civilians. This ratio is much smaller for China and India that have the largest and the third largest armed forces in the world respectively. Although defense continues to remain amongst the top priority for all governments, it is likely that some nations may see a cut down in budgets.

Data source: Economist

01:50
 
Investing is indeed tricky. For it depends taking a call on the future, which, as we all know, is highly uncertain. And this has perhaps never been truer than the current times. Clearly, the global economy is battling uncertainties of huge proportions. It is not about the fundamentals anymore. Although these are quite weak, Government actions can make them change in a jiffy. Imagine what will happen if the US congress finally decides to raise its debt ceiling? Or China decides to tighten further. How about Greek defaulting on its debt and the contagion spreading to other Euro nations? Indeed, any of these events has the potential to induce a huge price change in asset markets the world over. And in the process take a lot of investors by surprise. Little wonder, hedge funds across the world are treading with caution currently. Businessweek reports how prominent hedge funds like those belonging to George Soros and the like are moving into cash big time. They are reducing the amount of money invested in stocks, bonds and currencies and waiting for more clarity on global events. What bigger proof of this trend than Soros, arguably amongst the world's best big picture guys, admitting that he finds the current situation much more baffling and much less predictable. It does look like we are in dangerous waters.

02:35
 
Mumbai may well be the financial pulse of India, but the state of Gujarat is also staking its claim as the industrial future for India. Indeed, Gujarat's enterprising population has ensured that the state thrives despite not being known for its agricultural pursuits. In fact, Gujarat's long coastline and very little rainfall have not really made the state conducive for farming. But that has hardly impacted the population since many of the people there are traders and businessmen. What is more, many men work for small industrial firms and earn wages 50% higher than what they would have earned on the fields. Little wonder then that Gujarat accounts for 5% of India's population but 16% of its industrial output and 22% of its exports. The government has played its role too by reducing red tape to the minimum, not asking for bribes and ensuring that there exists constant electricity, gas and abundant water. It has also refrained from interfering much and has thereby enabled businesses to thrive. The real challenge for the Government then is to ensure that there is no outbreak of violence on communal grounds of the kind that was witnessed in 2002. Overall, Gujarat can certainly act as a model for other Indian states that are looking to enhance their manufacturing prowess.

03:10
 
Does it pay to have transparent reporting? Does good corporate governance impact shareholder value? Well, companies in China are facing the brunt of poor financial reporting and risky operating models. Their borrowing costs have skyrocketed to record highs. This was after rating agencies like Moody's and Fitch put up red flags on some of them. Certain companies were either overstating profit margins or exaggerating asset holdings. Some had long serving independent directors, and very high levels of private ownership. All these are serious issues.

Fitch has rated that around 35 Chinese companies may have closed the door to the capital markets on escalating corporate governance issues. Issues like these make investors once bitten, twice shy when it comes to investing in such companies or markets. Maybe China should take a leaf out of the book of some of India's top trusted companies.

03:50
 
The fact that the Indian IT industry is emerging as one of the biggest employers in India is not exactly new. But what is new and interesting is that just a single new segment in the industry would create nearly 1 lakh jobs by 2015. That's right. Cloud computing, a relatively new concept, is expected to create a large chunk of new jobs as per a study carried out by a management consultancy. The study goes on to state that the market for this business is expected to reach US$ 4.5 bn by the same year. It currently stands at US$ 400 m. In this business, the private segment would create roughly 1 lakh jobs from its current level of 10,000 jobs. Although, cloud computing is expected to be the next growth driver for the IT industry, it is still in very early days. The quantum of its growth may exceed all expectations as we have seen happen in the outsourcing industry.

04:35
 
After a positive opening, profit booking in IT, power and commodity heavyweights, led the benchmark indices in the Indian stock market to move below breakeven in the latter half of today's trade. At the time of writing, the BSE Sensex was trading lower by 100 points. Other major Asian indices, however, closed higher. Europe has also opened on a positive note.

04:50  Today's investing mantra
"To suppose that the value of a common stock is determined purely by a corporation's earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed." - Jim Grant
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10 Responses to "The size of this scam is 1.2 times corruption in India!"

Subhash Chandra Saxena

Aug 1, 2011

Please try to send copy to me also so that I should know the real fact of this corruption of this scame.

Subhash Chandra Saxena

Like 

Tinku

Jul 21, 2011

This is ridicular to put the size of 2G scam to 1.76 Lakh crore. This is the total amount the government could have garnered if they had sold as per 3G and got the same rates. Giving cheap licence is a government policy with the intention to provide cheap tariff to end user. Some time back J Mulraj had written article favoring this policy. Also, there is no guarantee that corporates would have given the same rates to buy 2G licence like 3G.

Like (1)

seth

Jul 21, 2011

Money is money. The question is the end use of money generated from scams or business or trading or whatever else. If the money earned thru unfair means is also ploughted back into the economy say buying assets, buying luxury goods concealing losses incurred in business, then it may not be unproductive. The unproductive money is the money that is stashed away under the bed, in foreign banks,in lockers .
We must be able to compute the percentage of productive v/s the unproductive money to arrive at the actual impact on our economy.
It is wrong to assume that this figure quoted is the amount of money available somewhere for the asking and could be deployed to feed the millions. The money has in all probability been utilised already except the funds stashed away which to my guess would be less than 20 %.
Most scamsters do not leave their money idle.

Like (1)

Aloysius

Jul 20, 2011

The scam figures are mind boggling, but taking these figures into consideration, the economic situation should be much worse with Rupee being just a piece of paper and things should be looking bleak for India. I wonder whether the figures are potential loss or some guesstimates. Because somewhere I have read that the Telgi scam was the likely loss the Government would have had if he would have been allowed to function.

Like (1)

S.K.DAMANI

Jul 20, 2011

Dear Sir,

The bogey of 2002 riots is unnecessaryly dragged against Gujarat. Agreed wrong has been done and snail justice is proceeding, but , as newspaper reports suggest, now the minorities are more than happy and secured than in many of the other states.
We are now 64 yrs old. People also understand the cards played by political parties. But development and secured livelihood is more imp for the people. And Gujarat is providing them. And most important fast decisions and WITHOUT CORRUPTION ( which is at its worst at Delhi and 2nd must be Maharashtra)
News about even Bajaj Auto and Infosys also moving there is really heartening.
The only wish is NArendrabhai should stay in Gujarat and not get into the traps of BJP leadership to move to Centre.
Better to be a king in your state rather than involved in the dirty, filthy environment of Delhi.
If he stays at Gujarat, very soon, he will create Shanghai, Dubai very much in our own country.
Wish him all the best. (Have no political affiliations)
Thanks
Damani




















Like (1)

mangesh vahalia

Jul 20, 2011

India's growth should be deducted/ reuced by the volume / amount of existing scams, because drained out fruits our productivity during th pereiod under review. may caital value of our assets ahve also depreciated to that extent. immeiate and urgent action is warrented for correction and recoupments of such 'stolen' assets through such scams irrespective reshuffle if any in the team or the party at helm.

Like (1)

girish

Jul 20, 2011

Gujarat jewu thaawa maate pheela guuju thaavu paade
bhaaya ne khaaya sivae kain sujjhe nahi

Like (1)

A J WADHWA

Jul 20, 2011

The money involved in corrupt practices finds it way in the banks abroad. Ana Harare can get ready reference and Baba Ramdev Need not take services of his Mahamantri for the arithmetic

Like (1)

anupam garg

Jul 20, 2011

China shld learn 4m india's most trusted companies or company...thr's just 1 word as per d survey...TATA

& wht is Mr. Jim sayn? the fundamental method of valuation is stupid?

Like (1)

Jeet Thakur

Jul 20, 2011

Cloud Computing isn't new. The internet itself is a big cloud. And all these websites are smaller clouds. So now you can figure how old the concept is.
But what's new is that somewhere, some marketing guys probably "discovered" ways of selling a product by wrapping it around the word "Cloud Computing". It's become a rage. It's a good thing. When sales guys make a discovery, they can find ways to sell it, envision new methods of application, and that's going to help companies bring out more products, more employment and more money to be made by all.

Like (1)
  
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