This could be a ticking time bomb for India... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

This could be a ticking time bomb for India... 

A  A  A
In this issue:
» Emerging markets have lost a huge opportunity
» Loan growth for Indian banks has slowed
» An appeal to NRIs to save the rupee?
» Krugman has bearish views on China
» ...and more!

At present all focus of the government has been on the immediate problems facing India. A slowing economy, rising deficit and a steadily declining rupee has kept it on its toes. Despite announcing reforms, the fact remains that no clear roadmap has been laid out in terms of how to implement these. In the meanwhile, deteriorating finances means that the government is hardly giving a thought to areas where more focus and emphasis will be required if India's growth story pans out.

One such area has been infrastructure. Ramp up in infrastructure is critical for high growth to be sustainable. But here, the government's record so far has been shamelessly poor. The other equally critical area is education. This especially becomes important in context of India's demographic dividend because the latter has been time and again touted as a significant growth driver going forward.

So how has progress been on the education front? The government had introduced the Right to Education (RTE) Act a few years back. The objective of this was to educate all children especially in the rural areas. As reported on Firstpost, PRATHAM an NGO released the Annual Status of Education Report (ASER 2012) for rural India recently. The findings make for grim reading. The learning skills of around half of the primary school children has fallen to alarming lows in the last 4 years. Further, because of such neglect, the decline in learning only accumulates making matters worse. The report also pointed out that private education has been making more of a difference in the rural areas. But the problem is that this being more expensive can be accessed by only those with relatively more money.

Overall, the report has found out that the introduction of RTE Act has only lowered the standard of education in the country. This only highlights the problems that arise when Acts are implemented more to gain political mileage without giving much thought to planning, rollout and implementation. There is also a much larger issue at hand.

Quality education is critical in a person's formative years because it sets the tone for the rest to follow. So if education is poor, more often than not, the skills learnt by the time that person reaches employable age may not add upto much. In such a case, India's demographic dividend will only become a ticking time bomb. The country will end up with a bloated youth population which will be largely unemployed. This is because these young people will not have the skills to secure and hold on to a job. And youth unemployment is dangerous as the unrest and protests in southern Europe and some of the emerging markets has clearly shown. Indeed, one wonders whether the government has really understood this problem and intends to do something about it. Maybe not.

Do you think that the Right to Education Act has made any progress in improving the standard of education in the country? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
Unemployment continues to be a major ill afflicting the European region. As today's chart of the day shows, Spain and Greece topped the pack as around 27% of the workforce in each of their respective economies remained unemployed in May 2013. In stark contrast, Germany fared much better as the unemployment rate during the month stood at 5.4%. Indeed, the region continues to be saddled with massive debt. And even though the central bank has been announcing quantitative measures, unsurprisingly it has hardly yielded the desired results. A much bigger problem for the region is youth unemployment. This is once again more pronounced in the southern European countries. And has been the cause of much unrest in those countries.

Data Source: The Economist

The term lost decade has been used mostly in reference to Japan. Some experts are of course pointing towards the same possibility in the US and Euro Zone. Still, these are all developed nations. But what is shocking is that the very same term is now being used to describe emerging nations!

An article in Bloomberg has talked about how most emerging markets have lost a huge opportunity that existed in the previous decade for transforming their economies. This was the era of abundant global liquidity that helped fuel the fastest expansion in three decades. However, with the liquidity now drying up, Governments across emerging nations have been left fully exposed. They failed to realise that most of the prosperity was on account of global factors and not a result of improvement in governance. Consequently, they did not take the steps they ought to have taken and are now paying the price for it.

Protests have erupted across most emerging countries over the inability of the Governments to produce enough economic growth as well as jobs. And while India is not witness to such a situation currently, its macro numbers are in equally bad shape. Thus, if doesn't take steps soon enough, large scale protests could reach the Indian shores as well.

The RBI's latest move to make short term lending dearer may have impacted bond prices. But the key objective of stemming the rupee's fall against the US dollar may remain unfulfilled. For Indian banks have way too much surplus liquidity to keep them going. Shortage of liquidity is therefore out of question. On the contrary, several banks have enough liquidity to even lower deposit rates if needed. As per an article in Economic Times, the incremental credit deposit ratio for Indian banks was just 45% at the end June 2013. This means that banks were lending just Rs 45 out of every Rs 100 of deposits taken. Given the relatively higher term deposit rates in India, bank deposits are still finding takers. Loan demand on the other hand has dried up with slowdown in economic growth. Hence the chance of banks toeing in line with the RBI objective of inflation control is thin. While the RBI wants interest rates in India to go higher and curtail inflation, banks may throw up some surprises.

The decline in rupee has been a cause of worry in recent times. To help support it, the government plans to woo its strong NRI (Non Resident Indian) community. For this, it may raise interest rates on NRI deposits and even issue bonds. This would be similar to what they did way back in 1998 when the rupee had declined. The thing is that the rupee has become weaker thanks to our current account deficit which has expanded to ridiculous levels. Therefore India badly needs funds. If it approaches the international community for funds, then the government is worried that it would send out the wrong signal to the investors. This would create panic thereby weakening the rupee further.

Another alternative could be to raise interest rates in the country and suck out the liquidity from the system. This is what the RBI had done by raising the short term interest rates. However, given the subdued economic conditions, this is not really the preferred option even though the RBI is most likely expected to follow on these lines. Therefore the government is looking at its NRI community to bail them out of this mess. As per Money News, this could help the government get an additional US$ 15 to 20 bn of the much needed funds. But will it be successful in its endeavour? That's something that remains to be seen.

China. No discussion on the global economy is complete without including the dragon nation. Given the sheer size of it economy, it has far-reaching influence on the health of the global economy.

Nobel prize-winning economist Paul Krugman believes China is up for major trouble. Let us briefly explain his point of view. For a fairly long term, China has grown at a robust pace backed by its investment-driven economic model. In other words, the country has been growing by investing heavily in new capacities, construction and infrastructure. But there is a huge imbalance between consumption and investment in the dragon nation. For instance, consumption accounts for about 70% of the GDP of the United States. Whereas in China consumption accounts for just half of that.

China's investment-driven growth has been facilitated largely by a surplus and cheap labour force. This is typical of countries that are in the early stage of economic development. On the other hand, consumption has remained low as wage increases were not substantial. But this is changing now. China is running out of surplus labourers. Wages are increasing. Investments are slowing down. And could fall sharply! If consumption fails to compensate for this fall, the intermittent consequences could be disastrous. And any major shock in the Chinese economy could throw an already frail global economy off balance. It seems like it's only a question of when.

Taxes are levied for income re-distribution. And this re-distribution job is done by the government. It taxes the rich for benefit of the poor. But when the benefit flows to the government itself, responsible taxpaying citizens are bound to feel cheated. In short, citizen tax enriches the government and not the poor. This is the face of Indian politics. Take the case of Karnataka. Recently, Rs 50 m have been used to buy luxury cars for the ministers of Karnataka. Not that these ministers don't deserve any benefits for serving the nation. But was this expense really needed? It may be noted that Congress came into power in Karnataka recently. The cars that the BJP ministers used previously are in good shape and condition. Hence, the new expense on cars is questionable. More questionable is the state department's policy which provides for allotting new cars every time the government changes! Any minister can also change his car if he wants to in every 3 years. And mind you all this money comes from the tax payers' pocket. At a time when most people in India are living below poverty line ruining tax payer's money on such luxury items is questionable. These ministers work for the society in general. Hence, they need to be frugal.

In the meanwhile Indian equity markets have extended their rally. At the time of writing, the benchmark BSE Sensex was up by 155 points (0.78%). All the stock indices were trading in the green. Consumer Durables and Realty stocks were leading the rally. All Asian stock markets were trading higher led by China and Hong Kong. The European markets also opened on a positive note.

04:56  Today's investing mantra
"Investing is simple but it's not easy. Because emotions get in people's way or greed and that sort of thing. They get all excited about stocks when they've gone up recently, and they get depressed when they've gone down" - Warren Buffett
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16 Responses to "This could be a ticking time bomb for India..."

Gautam Chatterjee

Aug 4, 2013

According to my perception govt. has paved the way to common and most of the rural population to take the advantage of this legislation who cannot afford to go for education.Repeated monitoring and corrections on the performance will definitely improve upon the outcome .

Like (1)

narendra vyas

Aug 2, 2013

from the beginning of independent it was the policy of the congress,that first of all get ride of the nationalism from coming generation,second they part the india on the basis of language,so they can not unite,there after each state parted in to district and so on continue,same policy is being adopted by the congress as when Britisher were ruled over india,so the people may indulged in problem of language,river's water,Hindu - Muslim and never focuses on the ruler of congress.Still congress is believe that india is the legacy of their fore father's propriety.It has rightly told by the CHARCHIL at the time of india's independent that now,india will be ruled by the PHINDHARAS AND VALAVDAS this both tribe known as robbers.and since last 65 years same legacy is continued openly they robbing india It is the bed luck of india that first pm become NEHARU, INSTED OF SARDAR,noe even god save india from the blody congress.,

Like (1)

sandeep bhobe

Jul 31, 2013

Education system in our country is bullshit, it does not provide knowledge required to earn money and make good citizen of our country but manufacture donkeys who do not use their brains and would prefer to sit idle then doing traditional work as they are ashamed of doing it. You cannot expect anything from our most of the politicians who do not require educational qualification to get elected . In Goa there was education minister who was eight standerd pass. Mera Bharat Mahan

Like (1)

S. Rajagopalan

Jul 24, 2013

RTE is a humbug to fool the people. The problem with poor quality education is that not only the people don't have the requisite skills for meaningful employment, they also shun and refuse to do what they were traditionally doing like farm labour, weaving etc. Hence there is shortage of labour in certain critical fronts like Agriculture and poor productivity in Industrial and service sectors due lack of skills.

Like (2)

surekha desai

Jul 24, 2013

RTE is based on very wrong psychological premises. A child from a poor background can be given a seat in an school for affluent children but can he be assured a place in the hearts of the other students? School is about children from similar backgrounds forming lifelong friendships. Here, these children will stand out like sore thumbs.
We all know that at a young age, children can sometimes be cruel & leave emotional permanent scars. So why deliberately subject poor children to this? Instead, it would be more prudent to give them free & good education in a school of similar children. Upgrade the existing govt schools, if required.

Like (1)


Jul 24, 2013

education needs to be made into a PPP (private -public-partnership)--rather than competing, in the rural areas the govt needs to fix the no of schools based on the student population and invite private participation--of course, strict norms and guidelines need to be laid down to ensure a minimum quality of education-- IT can be a big help here, especially in standardising the quality of education and facilitating access to remote areas, maybe govt needs to setup separate fund for this purpose, maybe by taxing the corporates and the private education providers. regds

Like (1)

PM Menon

Jul 24, 2013

Sadly education in India, thanks to the infinite greed and lack of national ethos of the political Class, has come to be a patronage system to appease those who the voters reject but are important to the political parties for their survival. Thus the quality, relevance, equitable availability etc has been sacrificed. It cant be a coincidence that majority of so called private colleges and schools are owned directly or by proxy by politicians. Where does the huge capitation fees etc get siphoned off to??
Is it that there are no others in India who would like and want to set up quality educational institutions?? Why not just open up the sector instead of keeping it as some sort of heirloom by interested parties?? sure a lot will mushroom, but in short time a lot will collapse and only the good will survive. the people, even the poorest are not fools. They give everything they have ,to get their child into a good education institution. The cost is not always the prime concern. A freely open sector will ensure real costs in due course. The Govt of course has a role: monitor and ensure adherence in a transparent manner to laid down norms.

Like (1)

sunilkumar tejwani

Jul 23, 2013


Like (2)

girish v shah

Jul 23, 2013

dear chintawaale u will get the answers to all ur questions about india if you can get the CORRECT answer to who buys all these tons and tons of gold ,THE POOR AND THE MIDDLE CLASS ARE OUT so who remains ?

Like (2)

Abhay Dixit

Jul 23, 2013

As regan said Government is the problem( BJP or Congress, they are no different). So let us not expect them to solve the problem. the only problem they are interested in solving is " how can I remain power ?"

Like (1)
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