Is India really an emerging superpower when... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is India really an emerging superpower when... 

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In this issue:
» Rural poor more than estimated earlier
» Bharti-MTN talks deferred by a month
» Stable or lower interest rates expected, time for a home loan?
» Floor price for rice and pulses hiked
» ...and more!!

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More people in India's rural areas are poor than thought earlier. So far it was believed that about 29% of the rural India is poor. Apparently, the revised number is around 42%. As per a leading business daily, this worrying fact has been reported by the expert group appointed by the Planning Commission and chaired by a former chairman of the National Statistical Commission.

The revision is due to the change in the outdated assumptions and benchmarks used to measure poverty. If the report is accepted by the government next month, it will put a greater strain on government finances than it already is. Moreover, the financial relationships between the centre and the states will change as states with a larger number of rural poor will have a larger claim to resources.

We believe, there is an important subtext to these findings. When the benchmarks for poverty were originally set in the 1970s, it was assumed that a poor person won't be able to break out from his poverty. The proper government response was to prevent starvation. That assumption now has been dropped. The government is expected to respond with healthcare and education to bring a person out of poverty. Rightly so, in our opinion. As a thriving democracy with economic ambitions to boot, it is high time India defined the basic standard of living of a citizen beyond mere food.

00:55  Chart of the day
Speaking of the need for education, today's chart gives a clear indication of what mars India's primary education. As the chart shows, primary school teachers in a city like Mumbai are paid peanuts as compared to their counterparts in other developing market cities like Rio de Janeiro and Beijing. What's even more glaring is that while call centre agents in these other cities are paid lesser than their teachers, it is opposite in India. Here, students who end up becoming call centre executives get better paid than their teachers who taught them in their initial stages!

Another drawback of poor pay is that educated people are not attracted to this noble profession of teaching, which requires an urgent overhaul if India is to really become an economic superpower in the years to come.

Source: Data Source: Prices and Earnings 2009, UBS

Mr. PRS Oberoi, the owner of East India Hotels is a dejected man. After all, not only were the Mumbai properties, The Oberoi and Trident under terror attacks in November 2008, but the global economic slowdown has also hit business. Add to that the eruption of swine flu and you have a deadly cocktail which has made the outlook for the hospitality industry pretty grim. Of course, it's not that this industry has not faced tough times before; the Gulf war, Kargil and 9/11 are ample proof. But Mr. Oberoi believes things have never been as bad before as they are now. Occupancy levels have dropped, room rates have plunged and the company is curbing its capex plans, giving more importance to the medium term instead of the long term. Renovating the properties, which were damaged by the terror attacks, will require an investment of Rs 3.5 bn over the next two years. On the brighter side, Mr. Oberoi believes that things will look better from the winter of FY11.

With telecom major Bharti Airtel extending its exclusivity period talks with the South African telecom company MTN by another month, it has left many puzzled about two aspects of the deal - what is the reason behind the extension and what would possibly be the outcome of these talks. This proposed merger aims at creating the third largest telecom company (by subscriber base) in the world with over 200 m subscribers and revenues of US$ 20 bn. Viewed from a pure business perspective, this merger could be a win-win situation for both the companies.

While it is obvious that Bharti would be in a position to capitalise on the huge opportunities in the African region, another strong advantage would be of it being able to benefit from MTN's experience in running a business that is not limited to one nation. Further, with both the parties looking at reviving the merger talks for the second time (first attempt failed last year on the back of differences in the proposed structure), it does give an indication that Bharti is looking at working on newer strategies to drive its revenues going forward, especially after considering the intensity of competition that has built up in the Indian telecom space in recent times.

Mr. Bhatt, the Chairman of India's largest bank, SBI, has some good news for people seeking to buy homes. Speaking to a leading daily, he observed that interest rates may stabilise or head even lower over the next six months as the liquidity in the system is pretty comfortable at the moment. However, he refused to comment anything on what would be the scenario six months later as he felt that the economy was still in a pretty dynamic state. Mr. Bhatt further added that he foresees SBI's own home loan book doubling this fiscal vis-a-vis last year.

Please bear in mind that perhaps these projections do not take into account the demand that will result if developers bring down their price meaningfully. As noted recently by our founder, Mr. Ajit Dayal, "Driven by their own frenzy to get rich quick, the real estate developers have started to build too much property. The projects under construction are probably 5x what the actual demand will be at the price points being currently quoted. Drop the price by 20%, and the demand could jump by 100%: still leaving an oversupply of 2.5x. But drop the price by 40%, and probably every square foot available will be sold out". Looks like there is ample room for the prices to come down and if they indeed do, the resultant growth in home loan disbursals could only be imagined.

The government has hiked the minimum support price (MSP) or floor price for paddy by Rs 100 per quintal and pulses by up to Rs 240 per quintal. This comes at time when India's annual monsoon rainfall so far has been 27% lower than the long term average. While the MSP does provide a support price to the farmers, the flip side to the issue is that it will put pressure on the common man as the prices will be raised artificially.

Gone are the days when ATM users didn't care about finding their bank's ATM, as they could withdraw money from the very next ATM they saw without paying any extra charge. The scheme of free usage of third-party ATMs was introduced only in April this year. RBI has now agreed to the demand of the Indian Banks' Association (IBA) to cap the free usage of third-party ATMs to Rs 10,000 per transaction and just 5 times per month. Banks claim that unrestricted usage results in overuse, leading to excess operating cost.

The Indian indices managed to move into the positive territory today after a dismal opening. At the time of writing, the BSE-Sensex was trading higher by 120 points (0.8%). Asia ended a mixed bag today, while Europe is trading in the green.

04:52  Today's investing mantra
"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom." - Benjamin Graham
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2 Responses to "Is India really an emerging superpower when..."


Aug 30, 2009

very informative and really well researched.



Aug 22, 2009

ATM's should be called RTM's Restricted Times Money or Restricted Transactions Money..........

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