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Let's Prove Bill Bonner Wrong about India...

Sep 12, 2016

In this issue:
» A warning that India can't afford to ignore anymore
» Indian equities: Looking beyond high valuation worries
» Is RBI autonomy under threat from its owner?
» ...and more
00:00
Ankit Shah, Research analyst

In a recent entry to the Diary, Bill Bonner posed a potent question: Does India prove 'service' economies can't create wealth?

Here's an excerpt of what he wrote:

  • Just look at India...

    It has over half a billion people willing to do just about anything for peanuts.

    Services? You can get all you want. But that doesn't make India a wealthy country.

    Services are better thought of as a drain on wealth, not a way of building it.

Strong words indeed. Doubtlessly, he ruffled quite a few feathers.

Haven't services made a significant contribution to India's economic growth?

Yes, they have. But it's important to understand the context and the essence of what Bill is saying.

  • You can make money by offering services, but only if there is someone who can pay for them. And you can only pay for services if you are doing something that generates real wealth.

I'm sure Bill didn't mean to say that services create no wealth at all. Just that they are ancillary to agriculture and manufacturing (in order of importance, I would put agriculture at the top...then manufacturing, and then services), which are the building blocks of an economic system. Real goods come first. You need farmers to plough the fields. If he has a headache, you can give him a head massage (service), which helps him get back to work. But everyone would starve if we only gave each other massages. Here's Bill...

  • Let's say you want to go out to the movies. Instead of watching your children yourself, you hire a teenager from the neighbourhood.

    You pay, say, $20 for the evening. This results in an increase to the nation's service industry income of $20. And you had the benefit of the service.

    You had $20. Now, someone else has the 20 bucks. Where's the additional wealth?

    Manufacturing, on the other hand, creates wealth. You take $20,000 worth of labour and materials. You put together an automobile and sell it for $25,000. The automobile is worth $5,000 more than what it cost to build it. You are $5,000 richer.

    But wait... You will say that someone must be out $5,000. But that isn't true. He had $25,000 worth of cash. Now, he has $25,000 worth of automobile. He's even; the world is $5,000 richer.

What about the IT industry? Doesn't it provide an important service that also creates wealth for India?

To answer this question, let me offer you a hypothetical situation. Let's say we are a closed economy. In other words, we engage in neither the import nor export of goods and services. Can we sustain on an economic model that is predominantly service-based? Can this model work?

No.

How would we get the goods that we need in our day-to-day life? Somebody has to produce them, right? And this is what Bill was hinting at.

We can argue: We are in a globalised world; India doesn't have to manufacture locally and produce its own wealth to pay for the services. What if India could become the service engine of the world? Wouldn't that make India wealthy? The IT industry is one example.

Yes, it would. But again, someone in some other part of the world has to be producing goods and creating wealth (or printing money and offering easy money) to be able to pay for those services.

We might prove Bill wrong if we became extremely competitive in services and established India as the global backyard of services.

The question is - can we? We have the right demographics...the world's largest youth population. But do we have the necessary skill sets, intellectual capital, and infrastructure to support that?

The answer is worrying. But it is more than just worrying.

Almost forty years of financial and economic research have led to the development of a warning.

A warning that concerns you, your family, your financial wellbeing...and the future of the entire nation.

Here's your chance to claim your free hardbound copy of Hormegeddon (you just pay Rs 199 for shipping and handling) to learn all about this economic warning and how to protect yourself.

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Bill Bonner and Vivek Kaul, two of the world's most independent thinkers and truth seekers have come together to warn you about a financial crisis.

A crisis that could be as big as the dot-com bust...

And it is headed straight for India!

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------------------------------

02:50 Chart of the day

These are interesting times for Indian equity markets. The reforms have picked up pace, macro economic factors like crude oil remain benign and corporate earnings are likely to improve and revert to the mean.

But what about the valuations?

India Underperforms MSCI Emerging Markets Index


BSE Mid-Cap and Small-Cap indices touched lifetime highs this month. Sensex too has recovered from the lows in Feb 16 and is close to lifetime high. As an article in Economic Times suggests, in terms of price to earnings ratio, Nifty is expensive as compared to MSCI Emerging Market index (MSCIEM index).

Overall, the risk reward ratio is becoming unfavorable.

But interestingly, as the Chart of the Day suggests, India still lags behind some of its emerging market peers with regards to foreign inflows. Sensex with 11% gains in 2016 has underperformed the MSCIEM index, which is up 19%. While global uncertainties could lead to volatility back home, India relatively seems attractive with reforms and earnings' mean reversion supporting India's growth story.

But not all the stocks will ride this growth story. Some blue chips may in fact not even remain a part of Sensex.

Tanushree and the StockSelect team are looking at some interesting factors that would differentiate winning blue chips from the fading ones. In the last few months, the team has come up with multiple recommendations on the stocks that seem well placed to ride the Indian economy's growth story. Click here to know more about these opportunities.

04:12

The central bank's autonomy in a country is a controversial subject. Whatever is wrong with the global economy today, central banks around the world have a fair share of blame to take.

Reserve Bank of India, so far, has maintained reputation of being a sensible entity. A lot of credit goes to the people heading it who have refused to bow to the populist demands and have kept stability in the economy their top most priority.

In short, it is the autonomy of RBI that has helped India maintain its ground amid the global turmoil.

But will this autonomy remain intact going forward?

An article in Livemint shares an interesting perspective in this regard.

RBI makes money by printing currency and deposits from banks on which it does not pay interest (free money). It also earns interest from foreign currency assets and government bonds that it buys using this money.

Over last three years, RBI's profit has grown at a compound annual growth rate of 7.73%. It accounts for a quarter of government's non-tax revenue and 2% of the domestic GDP.

There is a problem with this performance. As per the Economic Survey, there are some entities seeking more dividends from RBI, proposing that this 'easy money' for RBI should be used to recapitalize troubled national banks.

This could lead to printing of more money. High money printing could raise inflation which has to be offset by selling government bonds. This in turn could lead to high interest rates, which will not go down well with the government or public.

In short, the owner (government) seeking higher dividends from RBI would lead to either high inflation or high interest rates... And could lead to a situation where RBI faces pressure from the Government which could jeopardize its autonomy.

Mr Rajan has dealt with such pressures well during his tenure. As he steps down, the new Governor Mr Urjit Patel will have a handful of challenges to deal with. To know more about what challenges lie ahead, I strongly recommend you to read Vivek Kaul's article - The Biggest Challenge for the New RBI Governor Urjit Patel is...

04:45

In the meanwhile, after opening the day deep in the red, the Indian indices witnessed selling activity in the noon session on weak global markets and renewed talk of a possible rate hike by the Federal Reserve as early as this month. Barring IT sector, all the sectoral indices are trading in the red. Losses are largely seen in realty and metal sectors.

The BSE Sensex is trading down 411 points (down 1.4%) and the NSE Nifty is trading down 134 points (down 1.5%). The BSE Mid Cap index is trading down by 2.2%, while the BSE Small Cap index is trading down 1.6%.

04:56 Today's investment mantra

"Predicting rain doesn't count. Building arks does." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Richa Agarwal (Research Analyst).

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Equitymaster requests your view! Post a comment on "Let's Prove Bill Bonner Wrong about India...". Click here!

3 Responses to "Let's Prove Bill Bonner Wrong about India..."

Akash

Feb 3, 2017

You guys are doing yourself no credit by peddling doom porn. Bill Bonner and Vivek Kaul - independent thinkers, yeah right. Ninety nine percent of what they are writing is randomly strung together. And that Rs 199 deal? Guys do read the fine print, how it charges you Rs 2950 yearly for an auto subscription to Vivek Kaul's diary and other outstandinly useless piece of investment advice. So you dont just get the book. You get ripped off.

Like (1)

Varun Kumar Kataria

Sep 12, 2016

I agree to what's written in the post , but the question remains the same, the bigger the ship or train , the longer the time It will take to turn ...and the question is " how long will it take ? " . Anyways good work keep it up dear......

Like (1)

Amar

Sep 12, 2016

I would like to know what one can do as a salaried pvt sector employee !!

How to avoid Hormegeddon in India ??

Like (1)
  
Equitymaster requests your view! Post a comment on "Let's Prove Bill Bonner Wrong about India...". Click here!
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