One big risk that the numbers don't capture

In this issue:
» Ultra-rich and poor share the same space in Mumbai
» Indian IPO makes staggering Nasdaq debut
» China prefers Japanese debt over American
» Rural India a treasure trove for companies that get it right
» ...and more!!

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00:00

Most economists and analysts are busy predicting what will happen to the world economy in the short term. What effect the recessionary environment will have on various expected growth numbers is what is soaking up everyone's attention. However, there's another big risk to world stability. And no one seems to be giving much attention to it.

The year gone by saw the highest number of global unemployed youth ever measured by the International Labour Organisation (ILO). Infact, the youth unemployment rate grew twice as fast as for adults and stood at 13% in 2009. In absolute numbers, youth unemployment hit a record 81 m youngsters worldwide.

The ILO now fears that this could potentially breed a 'Lost Generation' for the world economy. One made up of young people who altogether detach themselves from the labour market. This is quite real possibility considering that the ILO report found evidence that some young people were so discouraged that they were dropping out of the labour market completely. "They're doing all the right things and the doors close in their face" exclaimed one of the authors of the report.

This is one of the most vulnerable sections of society. If after years of education and skill development many youth find that there are no takers for what they can do, disillusionment and frustration can quickly follow. This could be somewhat like the baby boom generation in the US. But with one difference though. The former had tremendously positive implications for the US and the rest of the world for many decades. The so called 'lost generation' on the other hand can easily turn out to have exactly the opposite effect.

01:02		Chart of the day

India might have the distinction of being one of the fastest growing countries in the world right now. But it scores abysmally worse on some other important counts. Even by other developing country standards. As today's chart shows, a little under 45% of India's population has been living on below US$ 1.25 per day. This is record better than only sub-Saharan Africa. China and Brazil on the other hand are ostensibly much better off.

Source: Earth Policy Institute.
*average of all developing countries put together

01:20

It's a well known fact that the gap between the 'haves' and the 'have-nots' has widened in India. This is despite the strong economic growth the country has seen over the past 20 years or so. The reason for this is that the fruits of economic development has not reached the lower masses of the society.

Nowhere is this more evident than in the financial capital of the country - Mumbai. Here, the rich and poor both are in abundance. And both co-exist together. So, while the poorest of poor live in the crowded slums of the city, the ultra-rich share the same space. Just that the latter live in the high-rises set up on slum lands.

Take for instance the 60-storey Imperial towers in Tardeo, South Mumbai. A penthouse here costs around Rs 600-650 m! It boasts of the view of the Arabian Sea, a golf course and Mumbai's horse-racing track. These towers were built on the narrow lanes cluttered with tin sheds that once housed 10,000 slum residents.

Well, builders blame this on the archaic land laws that prohibit them from the raising a building height beyond a point. So they end up finding spaces in shanty places to construct their luxurious residential buildings.

02:03

There is little doubt in it anymore. India is the flavor of the season in the West. The latest proof is the success IPOs of Indian companies on major international stock exchanges. After surging 89% on listing day, Indian travel site MakeMyTrip generated the best first-day gain in three years on Nasdaq recently. This standout performance happened at a time when six IPOs had a negative or flat opening day in the earlier week. Besides the debut was unexpected because the company has not yet posted a reliable stream of profits. Hence, the interest can squarely be attributed to the attractiveness of the fast growing Indian market. MakeMyTrip is India's largest online travel company based on gross bookings for 2009. Clearly, the pull of the India growth story has takers even in sluggish economies such as the US.

02:32

A growing market of 600 m customers. It would be a dream-come-true for any seller. But very few have actually tapped this market. We are talking about the Indian rural market. Most multinational companies (MNCs) have typically shied away from targeting rural India as they are skeptical of their ability to pay. On top of this there is also a question of logistics. How do you get your products to the people when there are no roads to reach them? Even if you do manage to get the goods across to these customers, then how do they run these goods (for consumer durables)?

However, Hindustan Unilever (HUL) proved that it is possible to target and grow in this market. It started providing sachets of soaps and shampoos. These could be easily distributed and were sold at a very affordable Rs 1 per packet. Other MNCs are now starting to design their products and services to be able to cater to this huge market. The mantra to succeed is simple. The MNCs have to get the right mix of product, price and distribution to reach to these customers. The ones that do get this right will be the ones who will capitalize growth from this huge growing customer base.

03:15

It is widely speculated that the US is headed towards a Japan-style slump. The Japanese central bank tried to use low interest rates as a weapon against recession for nearly 2 decades. But what followed was far from 'economic recovery'. The US seems to be making the same mistake. And who else to be most wary of this situation than the ones who have a huge exposure to US Treasuries. You may have guessed by now that we are referring to the Chinese. Economists in China have in fact clearly expressed their preference for Japanese debt over American. This is because they believe that Japan is far less exposed to a debt crisis than the US. After all, foreigners hold a third of US debt but only 5% of Japanese debt. Moreover Japan's current account surplus could help its currency move higher in future. All said, Uncle Sam seems to be swiftly losing out to the Oriental economies.

03:50

India's factory output may have slowed down in June. But that is not likely to dampen the GDP growth estimate of 8.5% this fiscal. The Index of Industrial Production (IIP) declined to a 12-month low of 7.1%. This is because demand cooled and the base effect of the last year faded away. It may be recalled that the past few months had seen India clocking strong in industrial output largely on account of high demand and inventory restocking. That is now coming to an end. Further, part of the slowdown was also policy induced as the central bank gradually began to withdraw stimulus measures. The slowdown was more apparent in basic and capital goods. Intermediate and consumer goods managed to withstand the slowdown. Of course, it remains to be seen whether this trend continues in the coming months. Having said that, the RBI most likely will not halt its policy tightening measures even if industrial production slows down as inflation continues to remain high.

04:25

After opening below breakeven, markets moved firmly into the positive territory in the afternoon session. The BSE-Sensex was trading 128 points higher at the time of writing this. Stocks from the consumer durables and realty space were trading strong while power and metal stocks were flat with a positive bias. Sentiments were positive in the rest of Asia, with all markets showing gains. China was the biggest gainer.

04:45

Today's investing mantra

"We have been trying to point out that this concept of an indefinitely favorable future is dangerous, even if it is true; because even if it is true you can easily overvalue the security, since you make it worth anything you want it to be worth. Beyond this, it is particularly dangerous too, because sometimes your ideas of the future turn out to be wrong. Then you have paid an awful lot for a future that isn't there. Your position then is pretty bad." - Benjamin Graham