It's official: India is in a drought - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

It's official: India is in a drought 

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In this issue:
»  US$ 39 bn to be mopped up in stake sale
» India suffers due to poor customer service
» Impact of poor monsoons on monetary policy
» Employment market in the US remains weak
» ...and more!!

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After days of dilly-dallying, the government seems to have finally bitten the bullet. It has now confirmed that India has been indeed drought affected, with the country's northwestern region, known as the bread basket being the worst hit. As per a leading daily that has quoted the Indian Meteorological Department, 31 of the 36 weather divisions have got deficient or scanty rain with the shortfall increasing to 29% from last week's 25%.

To make matters worse, there are indications that monsoons may even withdraw earlier in mid-September instead of early October, thus affecting the Rabi crop as well. Needless to say, a significant damage has already been done to the Kharif crop.

As far as the damage of poor rainfall on the economy is concerned, these seem to be early days yet to make any meaningful estimates. Fortunately, things don't seem as bad as they were during the drought of 2002. For one, we are having a large buffer stock of wheat and rice that may help in curbing runaway prices and secondly, with the government running many pro-poor schemes like the NREGS (National Rural Employment Guarantee Scheme), damage to an average farmer's income could also be minimised. Even some well known economists are not willing to downgrade India's growth just yet. Having said that, the CMIE has reduced its forecast for India's GDP growth from 6.6% to 5.8% for the current year. We second that view and believe that the drought that India is facing will certainly have a negative bearing on economic growth this year.

00:57  Chart of the day
Today's chart highlights the change in consumer prices in June 2009 over a year ago. The global financial crisis has obviously taken its toll as demand has waned and this has been amply demonstrated in the countries' consumer prices which have dipped in June 2009 compared to what they were a year ago.

However, India and Brazil seem to be an exception to this trend. In fact, India's consumer prices have refused to retreat even though the economic slowdown pushed the wholesale price index (WPI) into the red. What is more, the deficient monsoon and the resultant hindrance to crop production mean that consumer prices are not likely to abate anytime soon.

Data source: The Economist

Bad news just does not seem to be ending when it comes to monsoons. While economists are wary of downgrading India's growth as yet, with time running out on the summer sowing season, some believe that the possibility of GDP growth being lower by as much as 2% in the current fiscal year if rains don't improve soon cannot be entirely ruled out. And this, they expect, is likely to have a bearing on the RBI's monetary policy as well. The RBI is therefore expected to keep interest rates low, given the possible hit to rural demand resulting from a bad monsoon.

Data source: CMIE; E-CMIE's estimates

Remember the government's plan of bringing the public shareholding in all listed companies to a minimum of 25%? Well, as per Bloomberg, this could lead to as much as Rs 1.9 trillion (US$ 39 bn) in stock sales by controlling shareholders, almost five times more than the average amount companies in India have raised through IPOs over the past few years. Obviously, the selling will have to be done in a phased manner since the markets may not able to absorb the sale of such a magnitude over a short period of time.

As per reports, the average public float in Indian listed companies is less than 15% currently, making them vulnerable to manipulation, scams and abuse by majority shareholders. Hence, raising the limit to 25% will not only reduce the odds of an abuse considerably it will also bring Indian regulations at par with markets like the US, UK and Hong Kong. Incidentally, the top 10 companies that may have to sell stakes are the PSUs accounting for a significant 80% of the total value to be offloaded. Currently, the proposal is in the process of seeking public comment on a government website with the Government planning to take up the issue after completing 100 days in office.

It appears that Indian companies are paying the price of ignoring the most basic marketing mantra - "Customer is King" and are losing as much as Rs 116 bn in revenues every year on account of abandoned transactions due to poor customer service. According to a survey conducted by Genesys Telcom Labs (a part of Alcatel-Lucent), Indian companies lose huge sums of money as customers fail to reach through to the company over the web, in the contact center or through mobile devices.

India together with Australia and New Zealand, the other two countries being surveyed, stand to lose a total of Rs 280 bn in abandoned transactions and customer churning. Having to repeat information again and again, long waits, random call transfers and poorly-trained customer service executives do no good to appease the annoyed customer. We believe it is high time that companies start investing in high-end technology to improve Indian customer service which is nowhere close to its developed counterparts.

The US' GDP may have contracted by 1% in the second quarter of 2009 but that has not deterred a growing number of economists led by James Glassman of JP Morgan from having a very optimistic outlook on the economy. As reported on Bloomberg, Glassman is of the opinion that the worst recession since the 1930s has created a reservoir of demand that will buoy the US economy and believes that forecasts of 3% to 4% growth in the coming quarters may be 'too low'. Well, this is in sharp contrast to some others who believe that the persistent unemployment and record wealth destruction will actually shave some points off the GDP keeping growth at 2% or less for years. We for one believe that as long as unemployment in the US stays at these high levels, the buoyant growth that some economists in the US have envisaged will be hard to come by.

And while we are on the topic of the US economy, the economic advisor to President Barack Obama, Laura D'Andrea Tyson, does not share the optimism of Glassman. She believes that while the jobs data released recently painted a much better picture than in the past, one months' data can hardly be labeled as a valid indicator. She has further highlighted that the employment market in the US continues to remain weak and rising unemployment is a downside risk to consumption growth, a leading driver of any country's GDP.

She has a point. After all, given the kind of shock that US consumers have received since the eruption of the crisis on their wealth and job prospects, one can hardly expect them to revert back to their binging days so that the US economy logs in a robust GDP growth!

Though volatility reigned on the bourses, the BSE-Sensex largely languished in the red today at the time of writing. The forays that the index managed to make into the positive proved to be short-lived as selling pressure took toll. While losses were seen in IT and FMCG indices, energy stocks managed to buck the trend. On the global front, while key Asian indices closed mixed, European indices are trading firm currently.

04:55  Today's investing mantra
"Diversification may preserve wealth, but concentration builds wealth" - Warren Buffett
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2 Responses to "It's official: India is in a drought"


Aug 15, 2009

Talking of "abandoned transactions due to poor customer service", it is hightime the indian companies realize its importance. It is a very sad state of affairs currently. Once a company sells any products or services, it is extremely difficult to find their "customer service". They just don't seem to care because they know that they will get enough "first time" customers. They can get away with this attitude because of lack of any meaningful consumer movement or consumer awareness campaigns. But in a country where judiciary is so sluggish and lethargic, consumers prefer tolerating inconvinience to seeking justice.



Aug 14, 2009

Please refer to he chart of the day. While China has been reporting an improvement in the economy due to the Govt. stimuli, How is it possible that the consumer prices are much lower now than in June 08 esp. if you look at the Chinese Share Market?

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