One more reason to bet on India's future - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

One more reason to bet on India's future 

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In this issue:
» The Indian government passes a landmark bill
» Capitalists have erred big time, says John Bogle
» Regulation has come to India's rescue: Amartya Sen
» Tax defaulters owe India a bomb
» ...and more!!

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Clearly, this could go down as the single biggest achievement of the UPA government after it came to power. If implemented properly, it could provide a strong foundation to the India growth story for not years but decades to come. We are referring to the successful passage of the Right to Free and Compulsory Education Bill, a program that will provide free education to every child in India aged between 6 and 14 years.

Of course there are many questions that remain to be answered. The most important of which probably is how will the government effectively ensure the delivery of quality education to millions of children! The answer to this and other questions will be a debated a lot in the days and months to come. But what is important is that this is a huge step for India... and in the right direction.

Predictably, the stock markets did not even take an elementary notice of it. But for long-term investors, this is yet another reason to bet on India's future growth prospects.

What was shocking was the manner in which the bill was greeted by the polity of this country. Only about 20% of the parliamentarians participated in the discussion and subsequent passage of the Bill. It's time the people who are entrusted with the job of running the nation start showing more maturity or the chance that we currently have to take our country to the upper echelon of growth will be lost forever. But then this may be too much to expect from our politicians.

00:51  Chart of the day
Today's chart of the day maps the journey of market values of four big companies that went in for leveraged acquisitions during the previous bull market frenzy. Their market values for three different days have been considered, the day when Sensex closed at its all time high in Jan 2008, the day when it closed at the lows of the recent bear market and most recent close. While all the four stocks have recovered from their lows and are up around 3-fold, they are still a fair distance away from their peaks of Jan 2008.

Infact, it looks like Suzlon may never be able to scale back the same highs for quite some time to come, leading to enormous wealth destruction for the investors who would've bought the stock at its peak. Indeed, a big lesson in how a combination of both investor as well as corporate greed could damage a company's fortunes perhaps irreparably so. Viewed from another angle, if chosen rightly, it could also throw open some very genuine wealth creating opportunities. However, it is not as easy as it looks in hindsight.

Source: CMIE

The great Indian escape from the global financial crisis is now a part of folklore. Indeed, we are not remotely as badly impacted by the crisis as some of the developed nations are. And most of the kudos for the same was given to the country's internal consumption driven growth model and the soundness of its banking system. However, Nobel laureate Amartya Sen attributes the escape to one more factor. India is far from free markets. In other words, markets in India were not self regulated and the regulators had some degree of control over them. Sen, speaking to a leading daily, argued that western nations had a notion that the market should be a self regulating body free from control. But as the crisis has shown, if left on their own devices, markets can enter a self-fulfilling phase where both optimism as well as pessimism feed on themselves, thus setting in motion a vicious boom and bust process. Hence, as the example in India shows, some degree of regulation from time to time helps control the excesses.

With the kind of stimuli it has undertaken, the Indian government will have to borrow massively inorder to fill the fiscal deficit. Hence, any additional money that it can earn or recover would certainly be a welcome relief. Now, what if the money involved is so huge that it will fund a gargantuan project like the NREGS (National Rural Employment Guarantee Scheme) three times over? It may sound too good to be true but the fact remains that a staggering sum of Rs 1.4 trillion is payable to the country by the top 100 tax defaulters. The money involved and the name of the defaulters were brought to light in Rajya Sabha yesterday by the Minsiter of State for finance. Topping the list is disgraced stud farm owner Hassan Ali Khan with outstanding arrears of a whopping Rs 500 bn. Incidentally, the list also includes some well known corporates like SBI and Tata Motors.

The property market bust in the US which was responsible for fuelling the global financial crisis is still haunting the Americans and a greater amount of uncertainty still prevails as to when this scenario will completely reverse. However, legendary investor Warren Buffett has put a number to the timeline and believes that US' housing woes will be over by the end of next year. While this may provide some breather to the US, it may not necessarily mean that the property market will scale the heights that they had reached before the crisis erupted. Also, while concerns have been raised about the mounting federal deficit which has not left the Obama administration to maneuver about much, Buffet is of the opinion that while the current level may not be dangerous it could get precarious if the situation worsens further. Therefore, it will be interesting to see how the Obama government prevents the deficit from ballooning in light of the current recession, the massive stimulus packages that it has unveiled and the ambitious healthcare bill that it is hoping will get passed as law.

Coming back to Buffett, he's truly had a long investing career. But, while 'experts' give directional calls as a matter of routine, Buffett has commented on market levels only on few occasions during his entire career. One such occasion was October 17th 2008. He wrote an op-ed piece in the New York Times urging investors to buy stocks. Not many paid attention. So much so that the price of Class A shares of Berkshire Hathaway, the company Buffett runs, dropped from US$ 1,19,800 from that date to as low as US$ 73,195. As events have unfolded, the Oracle of Omaha has been proven right. And Berkshire's share price has crossed the US$ 100,000 per share mark again. At Rs 48 lakhs per share, that's some endorsement of Buffett's investment philosophy.

Bharat Nirman, an initiative that aims at improving the basic infrastructure in rural India has completed its first four-year phase. Unsurprisingly, some of the components of this initiative have faced flak due to the slow progress. As part of the plan for the sequel, the government has proposed big spending by setting higher targets, some of which include doubling the number of low-cost houses to 12 m, connecting 23,000 villages by rural roads, electrifying 40,000 villages and bringing nearly 3.5 m hectares of land under irrigation. The government is yet to estimate the cost of the second phase of the program. In addition to this, the program also aims at clearing a large part of the backlog of the first phase.

All we can do is hope that this time around, the government will learn from its mistakes and keep a closer watch on the progress of this development. If all goes as planned, this initiative would indirectly act as a stimulus as it would not only fuel rural growth and development, but also boost demand for commodities and related services.

In the meanwhile, after remaining in the negative territory for most part of the morning, BSE-Sensex, the Indian benchmark index was trading marginally in the positive at the time of writing. However, most Asian markets have ended in the red today. On the other hand, Europe is trading mixed currently.

04:52  Today's investing mantra
"We've long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett
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10 Responses to "One more reason to bet on India's future"

sudhir apte

Aug 6, 2009

What is the point in including fancy figures like 50000 crore owed by horse trader or racing punter ? To owe 50000 crore to IT dept he has to earn 150000 crore. Is it humanly possible for an individual to earn this kind of money? The minister should come out with some realistic figures. And you should not repeat such stupid data doled out by the politicians.


Yezdi Surty

Aug 6, 2009

The editoral is worth reading. It is short and up to the point



Aug 6, 2009

Very interesting & informative wrapup with deep insight.


anil vashist

Aug 5, 2009

please send the messages


Hitesh Bhatia

Aug 5, 2009

Talk about the Omaha man being right. Well, anyone who just believed in being bullish all the time appears to be right. The man bought Goldman shares and then they went down by 50% from the time he bot them. Its just because of the liquidity thrown by the FED we see the surge in the markets. At one point it looked like we are in a viscious circle which Amartya Sen referred. to. If we had entered that without the government intervention, you possibly would not have written the same about the man from Omaha. Nobody seems to refer to the risk associated with the markets here and we make heroes of those who are right for a certain length of time. It seems being bullish always pays and the central bankers make sure that works all the time by throwing in more fiat money.



Aug 5, 2009

Education definitely should come on top of the list of Govt, which gives long standing benefits.

Thanks to the author for highlighting this point. Its very sad to note the second point highlighted by Equitymaster in the same message, the extremely poor participation from politicians re this bill. No wonder the number of graduate politicians in this nation is still very low. In my view, like in many good schools, the minimum attendence that each politician should have for key parliamantary sessions should be above 90% or above.



Aug 5, 2009

I agree with your comments regarding Marketsmen. Many of the anchors of leading business channels, churn our day and out forecasts, none of them become correct. I used to buy share when these pundits tell me to sell. There is another lot, the experts who is generally hand in glove with some companies and recommend to buy or sell for their personal benefit. I realise that these guys are working on a career and for sure they never invest a rupee in the share they suggest. Fortunately, there is no distinction, all are either ignorant or crooks. Never trust any one of them. Some guys when they make a suggestion somehow that stock move to opposite direction.
May be few like Rakesh Jhun Jhunu walla, but he usually never recommend on daily basis.



Aug 5, 2009

very good 5 minute wrap up especially buffett share price company. so long term investment is best than day trading and short term. And also suzlon old price cannot reachable one. before investing analysing allthe aspect including it capital and pe ratio and book value
and future aspect of company.keep up the warp up thanks


Dr Rajesh Dave

Aug 5, 2009

I have been reading your column regularly and I am also a subscriber to your stockselect, midcap select and hidden treasure recommendations. Although I am not an exper economist, my common sense tells me that this hype of India being insulated because of its internal consumption and controls and banking etc is quite silly.
If you observe-and that is what I do most-then you will realize that the Indian economy runs because of "black money". Luckily for us this money which runs into thousands of crores was not in the banking system or any financial system. So this money was insulated from the greeds of "managers" controling various financial products.
Once again I would like to reiterate the fact that no matter what our Government or beaurocrates try, it is the parallel economy that drives the growth in India!!



Aug 5, 2009

For Right to Education Bill.

Why our parlimentarians are not participated is their children will not study in our indian schools and most of them will go abroad. so it is a waste of time and also no one will bribe them to speak on this debate. Shameful for a democratic nation.

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