The one line answer to India's economic woes!

Aug 29, 2013

In this issue:
» Is the next big crisis only weeks away?
» Japan fast moving towards point of no return
» Will the crude oil hit US$ 150 on Syria?
» India has lost world's confidence, feels Ratan Tata
» ....and more!

Dream team turned nightmare. This is the headline on one of the leading news portals that screams right at you. The allusion is made to the quartet of Manmohan Singh, P Chidambaram, Montek Singh Ahluwalia and C Rangarajan. It was believed that this group, later christened as the dream team, pulled India out of the vicious cycle of state led socialism.

Twenty years into this event and this belief lies in tatters. So helpless have they looked in front of the current economic malaise that one can safely conclude that they are not generals devising and executing strategies. Instead, they are merely the foot soldiers implementing the plan their boss spells out.

And if the economic state of the country is any indication, the current plan of their boss is nothing short of a disaster we believe. We are indeed a country of millions of poor. And to improve their life should be our topmost priority. However, there is a huge difference between what we see and what we want to do and forces and laws that govern what is actually right in the long term. Therefore, is providing subsidies to the poor and transferring resources from the productive middle and upper class to the poor class the right thing to do?

We don't think so. Just ask multilateral agencies like World Bank. Over the years, these types of financial institutions would have given billions of dollars worth of aid to poor countries in Asia and Africa. However, it has done virtually nothing to lift these countries out of poverty. Positive outcomes, if any, have been marginal we believe.

The experience with India has been no different. Over the years, many socialist policies have been tried but with very little success. The policymakers should realise that the ill effects of policies are not immediately evident in a lot of cases. They only show up few years later. And this is exactly what seems to be happening with the Indian economy. Reforms that were not taken few years back are now coming back to haunt us.

Imagine rather than spending money on welfare schemes like NREGA, what would have happened if the same money would have gone into building factories and infrastructure. We could have possibly eased up quite a few supply bottlenecks and inflation would have come down. This would have then kept interest rates lower and promoted further investments. In short, it would have been a virtuous cycle rather than the vicious one we are being subjected to right now.

Therefore, the idea is to look not merely at the immediate implications of any policy action but at the longer effects of it. And this more than anything else would solve much of our problems we believe. However, this kind of ideology seems alien to the Government. Perhaps it's time for a new Government with a new ideology.

Do you think lack of long term foresight is the root cause of India's economic problems? Please share your comments or post them on our Facebook page / Google+ page

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 Chart of the day
High unemployment and high inflation. Either factor is in itself quite a miserable experience for an economy. However, what if both are high in a country relative to other nations. The misery index of such a nation would really be in a sorry state we believe. Unfortunately, India currently seems to be having this dubious distinction amongst all the BRIC countries. As the chart highlights, with both inflation as well as unemployment being the highest in India, its misery index is way above other BRIC countries. Clearly, the flow of bad news on the economic front seems endless as of now for India. Fortunately, the situation is not irreversible. All we need are few strong reforms oriented measures and we could be back on track.


As per an analyst at France based multinational bank Societe Generale , the brent crude price is likely to touch US$ 125 per barrel in case US unleashes military attack on Syria. This further comes with odds of crude going as high as US$ 150 per barrel in case other Middle East economies get involved. Interestingly, when it comes to oil, the negative speculations are as impactful as the event itself. That other OPEC member like Saudi Arabia could ease supplies if needed does not seem to be helping the oil prices. Already the Brent crude futures for October have hit six month high.

All this doesn't bode well for India. Rising crude prices along with falling rupee is likely to inflate the fuel subsidy bill. That too at a time when the Indian economy stands vulnerable and can't afford further burden on the fiscal front. The Government had announced diesel price reforms some time back that lent some hope to the bleeding oil and gas sector. However, all optimism has been watered down in the face of ongoing events. The recent reforms are rushed and an outcome of desperation. They are too little and too late to salvage the sector or the economy. Things might have been better if the Government had taken timely steps to make India more energy self sufficient.

We come across many investors who complain that they had put their life savings in one stock and now that the same is down, their investments are all gone. There are others who make the same statements but the asset class changes. For example some say I put all my money in bonds and therefore lost out on the returns in stock markets. So on and so forth. For such investors our founder Ajit Dayal has given a sound piece of advice in the recently held WebSummit. He says that investors should never invest all their money in one asset class or product. They need to diversify across different asset classes. An ideal portfolio should be a mix of gold, fixed income instruments, stocks, etc. And even within the asset class of equities, there is the ideal mix of large cap, mid cap and small cap stocks.

The exact mix of course depends on investors' investment needs and risk profiles. But having the right asset allocation in place is crucial. The reason for this is that not all asset classes perform the same way and in the same direction. So if there are times when equities are getting hammered, there is a very great possibility that gold would not be facing the same carnage at that time. So having gold would provide the much necessary cushion during such times. The key to safeguarding and increasing wealth over the long term is to have a mix of asset classes and to be logical about it.

Just being a puppet in the hands of the government will not work wonders for PM Manmohan Singh. And swaying with the vested interest has done more harm than good to his reputation. One of his keen admirers, Mr Ratan Tata, too seems to be disillusioned man. In a recent interview published by The Hindu, the ex -Tata group Chairman spelled out the sentiments of the world towards India. That India has lost confidence of the world has been amply evident over past few days.

From the flight of dollars to depreciation of rupee, every alarming statistic has been shoved aside by the government. All in pursuit of passing the ill conceived Food Security Bill. And this while our economist PM has had little to contest. We cannot agree more with Mr Tata's view that the PM has hardly displayed the leadership traits expected of him. And without any hope from India's politico, one wonders who will win back the confidence!

When is the next big financial crisis going to occur? Where will it occur? Or has it already started? We came across a very insightful article in Chris Martenson's Peak Prosperity. The gentleman offers some very interesting perspectives on how a crisis unfolds. And how we could use this framework to nail the next financial crisis.

As per him, the markets follow 'from the outside in' principle. In other words, a crisis first afflicts the weaker periphery before crawling towards the core. Take the US housing bubble burst. Sub-prime mortgages were the first to crumble. Prime loan defaults followed later on. In Europe too, the smaller and weaker economies such as Greece, Cyprus and Ireland have been the first ones to tumble.

There seem to be some new signs that the weaker periphery is giving away. Is that a sign that the world could be heading towards the next big financial crisis? Quite likely so... In fact, the root problems of the previous financial crisis were never addressed. So all this while policymakers and central bankers were pushing the problems to a future date. And making it all the more dangerous and bigger in the process! If Mr Martenson is to be believed the crisis could be just a few weeks away. We quite agree with his arguments. As far as India is concerned, we believe we're already engulfed in an economic crisis. And it will take a while before we tread back to the path of recovery.

The repercussions of excess debt are glaring. Take the example of West. Most countries are facing dire consequences of allowing excesses in their economies. In Asia, the situation of Japan is not good either. In fact, the finance minister of Japan has requested to set aside approximately US$257 bn towards funding interest payments for FY15. This is almost equivalent to GDP of Portugal which roughly stood at US$245 bn in 2012, as reported by IMF!

In the past, incessant spending to revive the sagging economy resulted in higher debt. Increasing welfare cost of the ageing population also added to the debt pile. In fact, right now, Japan's debt is almost two times the size of its economy. Increasing debt has raised concerns over how the country will finance its interest payments. If it increases tax rates then consumer spending will slowdown. This will further hurt economic growth. And if it plans to service the payments by printing additional money, yen would come under severe pressure. It seems like after the rupee debacle, another Asian currency is on the verge of a collapse.

Meanwhile, indices in the Indian equity markets had some kind of a breather today with the Sensex higher by around 280 points at the time of writing. Amongst sectoral indices, metals and capital goods were seen exhibiting the maximum strength. Asian indices also displayed strength and closed positive today. Europe too is trading in the green.

 Today's investing mantra
"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing" - Charlie Munger

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25 Responses to "The one line answer to India's economic woes!"


Sep 3, 2013

Govt lacks the courage to implement what is good for the country as a whole. Not that the Dream Team does not know what is sustainable and what is economically sound policy. They have made huge compromises to further their political interests.
There should be a cap on the amount the Govt of the day can spend from the coffers i.e only to the extent of the revenues realiased from taxes. There should also be a cap on revenue expenses as a % to Income. Without these discipline every country will fall into a debt trap. Managing a country is no different from managing your home finance. All the principles we follow to run our family ,living with our means, prudence, frugality in time of difficulty has to be followed.


Amit Sengupta

Aug 31, 2013

Its clear that the polity is at the root of all the economic problems today, wherein every day, every common man of the country is getting poorer. So much so that even ordinary citizens of the country are getting trapped in to corruption or coercion. The never got a great political class in last 3 or 4 decades. I think first of all, these oldies must be made to vacate the political arena. They are greedy, they are caught in a time wrap, many of them had their up-bringing thru turbulent times, most seem to be corrupt and many have criminal records. We need a reform at the root level- political reform. Some how I am no longer able to believe in "one man- one vote" principle, when we all know that votes can be and are being purchased- using money and/or muscle. With spread of electronics we might as well land up with a "Spot Exchange" and forward contracts.



Aug 31, 2013

I disagree with your views.To my mind the if all 1.20 billion people of this country are fed properly they would be more productive as their bodily and mental energies would then be channelized more towards working constructively to create some more rather than be limited to earning to feed themselves and their families.Factories don't produce wealth by themselves,it is the creative minds which do it by running these factories.More creative people,more competition and more wealth creation.Eventually the country and the society is the winner.


Prafulla Ranjan

Aug 31, 2013

Dirty politics of cast/religious line followed in India is basic reason for all problems. On one hand politicians are presenting themselves as savior of country on the other side they are on PLUNDER SPREE. Our biggest problem is over population and shrinking resources. The World does not value the spiritual dialogue(s)only, it sees the output in terms of tangible product and services. We need to implement population control method irrespective of Cast/religion no matter what impact on vote bank.

Our politicians are following a socialism which has been buried in Pacific ocean bed by their originators and smartly the originators are following Capitalism without any shame. Sad our politicians divide the society in the name religion/Cast.

Even our learned Prime Minister seems to have lost all wisdom of financial management in front of political pressure from few person(s), who does not have any stake in this country and they shall not feel ashamed even to sell the country for personal gain.

Decisions are taken by Government keeping in mind the benefit of few industry house, who are generating money and stashing in bank outside the country.

Mr. Prime Minister/President of India (Who is a well known economist too) request you to please stand up above dirty populist politics and SAVE THE COUNTRY. THE COUNTRY IS SUPREME AND EVERY THING COMES LATTER.

Time is not far off when economic crisis shall pose the problem for integrity of the country, SIR PLEASE SAVE THE COUNTRY, EVEN IF YOU HAVE TO BURY CONGRESS PARTY,PLEASE DO IT.

Like (1)

Suman Gadhok

Aug 30, 2013

There is no other course but to increase the size of Pie for all to have a fair share.India's GDP, per capita income, and consumption of calories puts it at the lowest ladder among the emerging nations.The Government has to totally focus on growth. No obstacle to improving productivity should be accepted and this should be the goal of every member of the government in legislation, administration, management and implementation.
A strong leadership can provide a growth oriented vision and can carry the nation with it.
After all, you can only distribute the Pie if you have it. The distribution may be skewed but still it is better than not delivering the Pie.

Like (1)


Aug 30, 2013

Congress is known only for its fire fighting which is reacting to an incident. I have not seem their foresight, planning etc skills so far. All their schemes are oriented towards vote bank. Congress is cancer for the nation.

Like (2)

Radheshyam Swami

Aug 30, 2013

In the wake of the Indian Rupee depleting to it's lowest levels, the Govt. should take measures to support exports. In stead the PM today encouraging the FIIs to chip in. To further add to the nervous sentiments of the Indian Investor, the Govt. is adopting unfriendly measures. Oil prices will keep zooming and Rupee falling, how will they address the CAD.

Like (2)


Aug 29, 2013

Calling early elections is not the answer.Why do you want to burden country with early elections? What is the guarantee that the new government will be stable? What is the guarantee that the new government will not introduce more populist schemes? The new government will never reverse these schemes. Moreover the food bill was in election manifesto of the government, so it was known since 2009 that government would get this bill passed in parliament some day. Why make such a big issue now ? All parties supported food bill including the BJP. In our country all parties are leftist when in opposition.So they oppose petrol, diesel hikes,FDI in retail, anything and everything that is economic reform.Moreover let us face it, people also want subsidies.Forget poor,even middle class want subsidies on LPG, Petrol, Diesel. So reforms will always be slow and cannot happen at rapid pace especially when government does not have absolute majority in parliament.I expected more scholarly approach from Equitymaster.

Like (1)

joe prakadan

Aug 29, 2013

India is a democratic country first and a socialist country thereafter. No country in the world has succeeded by following pure socialism. All Communist countries have become wiser and now believe in Capitalism. Yes , we should look after our poor. Remember , there is NO FREE LUNCH. People have to earn what the Government gives. Without work , how can there be production,

We cannot steal Peter to pay Paul. The 'haves' cannot feed the 'have nots'. People cannot live on charity for ever. The entire Food Bill and the like will bring India to the level of the poorest countries in the world.

We need to make people earn their daily bread. Political bosses need to make well thought out economically viable and feasible plans.

Like (3)

Anil D. Wanaskar

Aug 29, 2013

Third class politicians, they only are worried of their VOTE BANK. On one side they want to reduce Subsidies and other side launching new schemes which provide more subsidies only for VOTE BANK of NEXT YEARS ELECTIONS.

Like (2)
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