Reforms can do it... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Reforms can do it... 

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In this issue:
» Tatas aim big after the Rs 1 lakh car
» Indians to become more fuel-efficient
» Is the government finally 'confident' of reforms?
» Demographic dividend of a different kind
» ...and more

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 00:00    Tatas aim big after the Rs 1 lakh car...
After unveiling the world's cheapest car with a price tag of Rs 1 lakh, Indian auto major Tata Motors is now gearing up to tap the other extreme of the market with new models of its newly acquired luxury brands Jaguar and Land Rover priced in excess of one lakh pounds. Tata Motors acquired Jaguar and Land Rover for US$ 2.3 bn in April 2008 from the American auto giant Ford Motor.

Earlier this year, Tata group unveiled its low-cost car Nano, which is expected to hit the Indian roads in next few months, with a base model price of Rs 1 lakh. Compared to the Nano, the new models envisaged for Jaguar and Land Rover would be over 85 times as expensive at a price of over £ 100,000 (over Rs 85 lakh). Currently, the most expensive Jaguar model is priced at £ 80,000, while majority of its models are priced between £ 25,000 to £ 75,000. For the Land Rover, the most expensive model is priced at £ 72,000.

 00:50    ...and set the record for many more firsts
Another Tata group company and India's largest private sector power utility, Tata Power, is set to become one of the first power companies to own ships. It in talks with shipbuilders in South Korea to construct six big ships, which it will use to carry coal from its mines in Indonesia to feed its ultra mega power plant at Mundra in Gujarat. The company will invest US$ 550 to 600 m (Rs 24 to 26 bn) to buy the ships. The company has floated an SPV (special purpose vehicle) - TPC Energy Asia in Singapore for owning ships and trading in fuels.

Tata Power estimates it would need 8 to 9 ships to haul coal for the Mundra power project. The company is in a hurry to place orders for new ships and hire more on long-term contracts, as they have to be ready by 2012, when its 4,000 MW power plant becomes operational. The company although believes that getting ships built by 2012 seems may be a tough task as most global yards are fully booked till 2010-11. Tata Power will have to shell out a premium on the current market price to get shipbuilding slots.

 01:39    Indians to become more fuel-efficient...
The Indian government is poised to issue new, voluntary fuel-efficiency norms for four-wheeler passenger vehicles that will be made mandatory and more stringent starting 2010. It is estimated by the government that three in four passenger vehicles in India are so-called three stars, or having fuel efficiency equivalent to 12.6-16.8 km per litre of petrol. Under the norms, regardless of engine size, car buyers will have to be provided comparative information on fuel economy about passenger vehicles in the market. At the same time, the new norms could help boost sales of hybrid vehicles, which allow the use of petrol and an alternative fuel sources in India. Also, as in the case of energy efficiency labeling for appliances such as air conditioners and refrigerators, it will begin with a voluntary code that will later be made mandatory.

The road transport and highways ministry estimates there were about 100 m vehicles on Indian roads at the end of 2007, of which about 17% were passenger vehicles. The Bureau of Energy Efficiency (BEE) anticipates that three-fourths of vehicle models in the market will receive a three- or four-star rating at present and the combination of fuel economy standards and labeling programme will provide the necessary impetus for development of several five-star rated vehicles by the end of first phase of labeling programme. Preliminary estimates show that the labeling programme will result in up to 20% reduction in oil use in year 2030 just from passenger vehicles.

 02:09    ...though not as much as the Japanese!
According to the International Energy Agency (IEA), Japan, by many measures, is the most energy-efficient country among the world's developed nations. After the energy crises of the 1970s, the country forced itself to conserve with government-mandated energy-efficiency targets and steep taxes on petroleum. Energy experts also credit the same to a national consensus on the need to consume less. It is also the only industrial country that sustained government investment in energy research even after oil prices fell.

Japan had consumed only half as much energy per dollar worth of economic activity as the European Union or the United States, and one-eighth as much as China and India in 2005. While the country is known for its green products like hybrid cars, most of its efficiency gains have come in less eye-catching areas, for example, by cutting energy use in manufacturing.

Corporate Japan has managed to keep its overall annual energy consumption unchanged at the equivalent of about 200 m tons of oil since the early 1970s, according to Economy Ministry data. It was able to maintain that level even during the country's boom years of the 1970s and 1980s, as the economy doubled. Japan's strides in efficiency are clearest in heavy industries like steel, which are the biggest consumers of power. Over the past 36 years, the Japanese steel industry has invested about US$ 45 bn in developing energy-saving technologies. Now, they are used to power generators that produce nearly 90% percent of the electricity used by the steel plants. Such innovations allow the mill to produce a ton of steel using 35% less energy than three decades ago.

IEA believes that if the global steel industry adopted Japanese conservation measures, it could slash carbon emissions by some 300 m tons a year, equal to the greenhouses gases released annually by Australia.

 02:55    Is the government finally 'confident' of reforms?
Prime Minister Dr. Manmohan Singh would be moving the confidence motion in the Lok Sabha today soon after it commences its two-day session convened for the government to seek a trust vote in the wake of Left parties withdrawing support. At the end of the two-day debate, he is also expected to reply to it before the motion would be put to vote. Whether the prevailing government would win the confidence of the cabinet of ministers or not is anybody's guess, but the Prime Minister is certainly confident of ushering in some much-needed reforms if his government sails through.

Dr. Singh is looking beyond the July 22 trust vote. Confident that the UPA government will ride through the looming storm, and in anticipation of the Left finally getting off its back, he is readying a package of ambitious reforms for three key areas - insurance, banking and pension. Much valuable time has been lost because of Left's opposition to these reforms. The main reform in insurance will be to raise the foreign direct investment (FDI) limit from the current cap of 26% to 49%. Secondly, the government wishes to create a statutory regulator for the pension sector and set the scene for breaking the monopoly of the Employees' Provident Fund Organization (EPFO), with which both government and the private sector have to currently park their pension money. It has also proposed to allow pension funds to invest in equity markets thus allowing more Indian long-term money to be invested in equities and at the same time earn better returns on the EPF. Finally, banking sector reforms that have been hanging fire entail allowing the government's stake in public sector banks to come down below 50% and raising the current 1% cap on voting rights that applies to all other shareholders in state-owned banks.

  • Also read - Manmohan Singh, shaken but not stirred

     03.19    In the meanwhile...
    After a terrific close last week, the Indian markets have infact underperformed its Asian peers, most of which have registered gains in excess of 2% in today's trade. The benchmark BSE-Sensex closed nearly 1.6% higher today, while the Japanese Nikkei was the biggest loser amongst the Asian indices. Key European indices are trading in the green currently. Gains in the Indian indices have so far been particularly driven by the sentiments in the US and European markets. While most of the June quarter results declared by the heavyweights of India Inc. have not really thrown up any surprises, the results of the confidence motion against the government holds the key to the market movement in the near term.

  • Also read - Our views on the June results declared so far

    The inflation pecking order...
    Country Inflation rate
    Zimbabwe 2200000.0%
    Burma 40.0%
    Iran 25.3%
    Vietnam 25.2%
    Egypt 21.0%
    Pakistan 19.3%
    Iraq 16.0%
    Bulgaria 15.0%
    Qatar 14.8%
    Source: Economic Times
     03.42    Z$ 100 bn can buy 2 loaves of bread!
    Grappling with record 2,200,000% inflation, Zimbabwe has introduced a new 100 bn dollar bank note in a bid to tackle rampant cash shortages. In January 2008, a 10 m dollar note was issued, followed by 50 m dollar note in April and were swiftly followed by 100 m, 250 m 5 bn, 25 bn and 50 bn dollar notes. Zimbabwe's chronic economic crisis has left at least 80% of the population living below the poverty threshold and shortages of basic goods in shops. The Zimbabwean dollar, which was roughly pegged at 30,000 to the US dollar before the exchange rate rules were relaxed, currently trades at about 800 m to the US dollar. Each Zimbabwean 100 bn dollar note can fetch only 2 loaves of bread. Zimbabwe tops the list of nation facing the highest rates of inflation in the world.

  • Also read - The all important inflation

     04.12    The reverse mortgage market set to triple
    According to the National Housing Bank (NHB), the regulator for housing finance companies, so far only 150 reverse mortgage loans have been availed by Indian senior citizens, whose numbers are estimated at about 87 m. However, according to a report on reverse mortgage released by global consultancy firm Celent, the market for reverse mortgage services, under which senior citizens can pledge their property for a steady income, will have a potential of US$ 113 bn in India by 2015, nearly triple of the current size of about US$ 39 bn.

    The reverse mortgage market potential calculated by the number of senior citizens establish that the current market size for the product is 3 m households and would grow to 6 m by 2015. The market is expected to grow owing to the rapid growth in the senior citizen population, driven by lower fertility rates, improved healthcare and better nutrition. The Indian government is now employing innovative strategies towards this section of demographic dividend and it has begun introducing financial instruments aimed at the senior population. The senior citizen population in India is estimated to become 117 m by 2015, growing from the current 87 m.

     04.32    Consumption demand to grow at 5%+ YoY
    The Center for Monitoring India Economy (CMIE) has projected that the private consumption demand in India is expected to grow in excess of 5% YoY in FY09. This is expected to be on the back of rising income in the hands of both rural and urban consumers, which will stall the erosion in purchasing power caused by higher inflation. While the rural consumers, having been rendered free of most of their debt burden through the loan waiver scheme, the urban consumers will have to pay lesser taxes and thus save more.

    Further, CMIE believes that farmers have benefited significantly through the sale of land on the outskirts of cities for the development of townships and industrialisation. Also, the government has nearly doubled the budget for National Rural Employment Guarantee (NREG) scheme while the IT/ITES sector is expected to create 3.8 lakh new jobs, thus offering sufficient employment opportunities to rural as well as urban consumers.

    Consumption continues to grow...
    (%, YoY) PFCE* GDP growth by consumption expd.
    FY04 5.8 8.4
    FY05 5.2 8.3
    FY06 8.7 9.2
    FY07 7.1 9.7
    FY08 8.3 9.0
    FY09E 5.1 9.5
    Source: CMIE Monthly review July 2008
    *PFCE - Private final consumption expenditure

  • Also read - The potential in the consumption story

     04.52    Today's investing mantra
    "Don't try and figure out what the market is doing. Figure out a business you understand, and concentrate." - John Maynard Keynes
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