Household savings reach a two decade low - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Household savings reach a two decade low 

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In this issue:
» India is ranked low on transparency
» Will the discom bailout plan work?
» FIIs still betting on India's growth story
» Investments are sorely needed in infrastructure
» ...and more!

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Are you feeling a pinch in your wallet? Are you left with next to nothing at the end of every month? Well, thanks to fewer salary hikes, lower job creation and stubborn inflation net household financial savings in India declined sharply during the financial year 2011-12 (FY12). Net financial savings include cash investments, deposits, investments in stocks, mutual funds, debentures, small savings, life insurance, provident and pension funds. This reached 7.8% of GDP (Gross Domestic Product) in FY12, down from 9.3% in FY11 and 12.2% in FY10. This level of 7.8% is the lowest since pre-reform 1990. This makes this an over two decade low.

The Reserve Bank of India (RBI) has been desperately trying to fight inflation over the past two years, with limited success. Persistently high inflation at a high average of around 9% in FY12 led to downward pressure on lifestyle. Wide fiscal and current account deficits and the central bank's aggressive monetary policy kept interest rates also high. Poor households have been especially affected and are unable to maintain their consumption levels at current prices and are worse off in an inflationary environment.

Stock market returns so far have been poor on account of adverse developments globally and a slump in corporate margins. Real interest rates (adjusted for inflation) on bank deposits and having bank accounts have also been underwhelming, again on account of high price levels. So, if you are lucky enough to have some spare money where should you park your funds? Or maybe you could you take a leaf out of the American economy and just spend for right now? Well, maybe not. One asset class that has seen significant returns over the past year has been gold. The RBI stated that India's gold import grew by an estimated 39% during FY12. According to the World Gold Council, India's gold imports accounted for 1/4th of the world demand last year. Well, with gold prices reaching an all time high of Rs 31,000 per 10 grams this week, this was a good call. Bullion prices have trebled in the last three years on global uncertainty, with room for further upside.

While investing in gold at an all time high may not be wise, the stock markets can actually throw up a few opportunities to invest at an all time low valuation. Plus, with expectations that inflation and thus interest rates will come down in FY13, we may soon see more investments in fixed income securities

Do you expect stock markets to rise and inflation to come off? Where are you planning to park your surplus funds over the next year or two? Let us know your views or you can also comment on Facebook page / Google+ page.

01:23  Chart of the day
Currently, Indian IT (Information Technology) companies are facing tough times due to the uncertain economic environment around the globe. And this seems to be getting reflected in their hiring pattern as well. Today's chart of the day shows the significantly lower net employee addition by the Indian IT majors during the first quarter of the current financial year (1QFY13). For the top two Indian software companies, Tata Consultancy Services (TCS) and Infosys, net employee addition were significantly lower as compared to the previous three quarters. However, it must be noted that the June quarter is typically not a peak hiring period. Also, the lower net addition was on account of higher attrition during the first quarter. Despite this, lower hiring does corroborate the fact the management of the IT companies are taking cautious steps in this unpredictable demand environment.

Data source: Business Line

One of the biggest roadblocks to India's growth is its poor infrastructure. It is said that if not for the poor infrastructure, India's GDP (Gross Domestic Product) would be higher by 2%. That is indeed quite a lot, considering we're talking about the income of the entire economy.

It goes without saying that a problem is nothing but an opportunity in disguise. The long term potential in the Indian infrastructure sector is immense. So shouldn't investors be making a bee-line to get a pie of this growth story? The unfortunate fact of the matter is that foreign investors are reluctant to put a lot of money in India's infrastructure. To its credit, the government has made some changes in the debt rules to make bonds appealing to foreign investors. Such measures are certainly welcome. But their impact is meager. There are certain major concerns that need to be addressed. For one, the infrastructure space is mired with project delays. This is thanks to red tape on land acquisitions and procedural approvals. Another problem is a lack of reliable Indian developers. These factors can send project costs escalating. Returns on investment may go for a toss. As such, we need to resolve some fundamental problems that will build confidence amongst foreign lenders.

We may have started doubting India's growth story, but it seems that foreign investors are in no mood to give up on us. Despite slowdown in country's GDP growth rate and policy inaction, the Indian stock markets are gaining favor from investors abroad. The Sensex has been pushed to a five months high, thanks to a strong influx of foreign funds. India now claims to be the best performing market within BRIC economies this year.

Perhaps what are working for us here are the cheap valuations that price in the negatives the Indian economy is facing. Not to mention some optimism that worst is over for Euro zone crisis. However, one should not forget that these are volatile times. As recently as quarter ending June, the country witnessed mass exodus of foreign funds. There has hardly been any action on the policy front to support the trend. The recovery stands on a very shaky ground and is hardly something to cheer about. I.

They are owned by almost bankrupt state governments. They are loaded with losses running into billions. They owe a staggering Rs 2 trillion to banks and financial institutions in the country. They are servicing the interest on existing loans through fresh borrowings. The bailout package that was designed exclusively for them now hangs in the air! Yes, the fate of state electricity distribution companies (discoms) in India seems to be more precarious now than ever before. Way back in 2003, the Electricity Act did manage to restructure these entities. It also laid down targets for reducing transmission and distribution losses. But huge rise in power costs and inability to raise tariffs for several years, bled the discoms back into ill health. The political compulsion to provide free power to farmers has also taken a heavy toll. So much so that they are now in dire need of bailout. Having already accumulated huge NPAs (non performing assets) by lending to them, banks are in no mood to lend more to the discoms. The only remedy was to transfer their short term loans to the state governments that own them. However, it now seems that the Fiscal Responsibility and Budget Management (FRBM) Act will stall the prospects of even that. Inability to breach the borrowing limits as per FRBM Act could prevent the state governments from being the final saviors for the discoms.

Transparency of information is a key feature that we all look at when it comes to good governance standards. After all if a company or even for that matter a country does not share information in a timely manner, how would we trust it? Therefore, it would come as a surprise to all that our country ranks low when it comes to transparency of information. In fact India is considered to be less transparent as compared to its BRICS peers Brazil, China and even South Africa. As reported by Hindu Business Line our country has ranked low in terms of transparency of information on economic, social, environmental and government issues. But interestingly though the country may not be transparent, but 80 Indian companies rank the highest in terms of disclosures. As reported by Global Reporting Initiative (GRI), the leading companies in terms of disclosures are Larsen & Toubro, JSW Steel and the Mahindra Group. Maybe these companies could teach the government how to become more transparent. But the point is whether the latter is willing to learn.

Except for India the world stock markets ended the week on a negative note. The US stock markets were down 0.9% during the week due to weak jobs data. As per the labor department, the number of people seeking unemployment assistance increased by about 4,000 to 372,000. This was the second straight week where the unemployment assistance figure increased. Further, ambiguity on whether Federal Reserve would introduce additional measures to boost economy dragged the benchmark indices.

The Indian equity markets closed the week with modest gains of 0.5%. This was the fourth consecutive weekly gain for the markets. However, it would be interesting to see whether markets can extend the current rally as investors have started feeling the heat due to delay in reforms amidst parliamentary logjam. Amongst the other markets, most ended the week on a negative note led by France (down by 1.6%), UK (down 1.3%) and Hong Kong (down 1.2%).

Data Source: Yahoo Finance

04:55  Weekend investing mantra
"Wall Street makes its money on activity...You make your money on inactivity." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Household savings reach a two decade low". Click here!

    2 Responses to "Household savings reach a two decade low"


    Aug 26, 2012

    What India needs is capital which can help small businesses to grow.Big cos should invest rising above the limitation of rent-seeking as Amway has done.

    Like (1)

    sunilkumar tejwani

    Aug 25, 2012

    sadly; the very name "infrastructure" leaves a bad taste in the mouth of millions of people in our country. Every project related to infra is looked with suspicion of kick backs, multi level corruption, structural defects and badly executed projects. Take the case of some listed infra structure companies, Unity Infra, I R B Infra, A R S S, Man Infra , G M R Infra, Lanco Infra, IVRCL etc. all products of corrupt practices and promoted by shady promoters, whose antecedents are nothing but criminal.
    Majority of these companies have thrived on political and bureaucratic corruption. If that be the case then GOD save the country.

    Like (1)
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