Are these new reforms worth cheering so much? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are these new reforms worth cheering so much? 

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In this issue:
» Here's another shocker on unfair coal sourcing
» US Fed's policies could take gold prices off the roof
» Why buying a home in Mumbai remains a dream?
» Auto industry not worried about the diesel price hike
» ...and more!


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00:00
 
Prime Minister Manmohan Singh has taken everyone by surprise. Suddenly, he seems to have shifted from his perpetual 'silent mode' to 'animal spirits mode'. In a bid to end the policy logjam, a few policy initiatives were announced back to back over the last few days. First, a cut in diesel subsidies was announced. Next day, the door was opened up for foreign investment in multi-brand retail and aviation. The Finance Minister has proposed a National Investment Board to speed up clearances on large infrastructure projects.

The news media is abuzz with reports cheering the so-called 'bold' reforms. Even the stock markets have given a thumbs-up to the initiatives. The BSE-Sensex is at its one-year high already. With so much hoopla over the announcements, it is important to consider how big an impact they could have on the economy. And in doing so, to figure if the ongoing celebration is really worth it.

Let us start with the most basic question. Will the recent policy reforms revive investments in the economy? To a certain extent, investments will certainly get a boost. But these are certainly not the reforms that could be game-changers for India.

For instance, data from the Centre for Monitoring Indian Economy (CMIE) suggests that projects worth Rs 1.8 trillion were shelved during April-August 2012. This was in addition to projects worth Rs 4.5 trillion shelved in the fiscal year 2011-12. The reason for shelving of more than half of these projects was because of the inability of the promoters to acquire land. This is clear hint where the real big reforms ought to be happening.

Secondly, it will take a while before new investment proposals could match the boom years of 2004 to 2008. The main reason for the investment boom during this period was on account of cheap access to natural resources including land, coal, iron ore and bauxite. A similar scenario doesn't exist anymore.

In the opinion of Mr Mahesh Vyas (MD & CEO of CMIE), the Prime Minister's recent attempts to revive the investment climate in the country could take the proportion of investments in GDP to about 37% from the current 35.5% level.

If the impact of the new reforms is not going to be very significant, what is the reason for the sudden excitement? The answer is that the government has failed to initiate any meaningful policy reform in last several years. As such, the expectations have been abysmally low. It is only in contrast with the very poor expectations that the recent initiatives seem bold. The real game-changers for India would be progressive reforms related to land ownership and acquisition as well as labour laws. We would like to see if the Prime Minister takes up these issues with equal enthusiasm.

Do you think the recent policy initiatives are really going to have a big impact on the Indian economy? Do share your comments with us or post your views on our Facebook page / Google+ page

01:34  Chart of the day
 
Despite the ongoing slowdown in the economy, the advance tax collections from top 100 companies have increased by 10% year-on-year during the July-September quarter (2QFY13). Today's chart of the day shows advance tax payments of the top 5 firm. State Bank of India (SBI) was the highest tax payer during the quarter. Barring Reliance Industries Ltd (RIL), all other companies have witnessed a surge in the advance tax payment. It must be noted that the companies are supposed to pay 30% of the total advance tax for the fiscal during the current quarter.

Data source: Business Standard


01:52
 
There are more skeletons yet to tumble out from the coalgate scam. It is not just the government that is at fault for unscrupulously allocating precious mines to private sector players. It is not just the mining companies and Coal India that are at fault for under utilizing their resources. It seems even the beneficiaries of cheap coal inputs from Coal India (CIL) indulged in foul play!

In the past, power projects were directly awarded coal linkages. This meant that projects without captive coal blocks were assured of coal supplies from a mining company. CIL's produce were the most sought after, being the cheapest of the lot. However, as per an article on Mint, to take advantage of the discounted price offered by CIL for such assured supply, the developers of power plants allegedly made false claims. Pre-requisites regarding order of equipment, financial status, land acquisition and water supply to the power project were fabricated. As a result, companies which were new entrants in the power sector managed to secure the coal linkages. This was despite their not having requisite financial strength. And despite competition from some of the power sector biggies. We can therefore conclude that there were not one but several parties involved in accumulating India's huge revenue losses.

02:30
 
Marc Faber, author of the famous Gloom, Boom and Doom reports, has always been extremely vocal about the US Fed's policies. It is no wonder then that his criticism went to an entirely different level with the Fed's recent announcements. In an interview with Bloomberg, he has warned that thanks to US Fed's stupid policies, there will come a time when everything will collapse. And he does not see anything changing his forecasts. Not even the victory of Mitt Romney, as the new US Fed Chairman is quite likely to be a money printer as per him. Thus, we are well and truly on our way to a systemic collapse, he concluded.

He further added that there is this enormous misconception that money printing can improve employment levels in an economy. But nothing could be further from the truth. All that money printing ends up doing is that it creates inflation and makes an average guy on the street still poorer. He also continued to be bullish on gold, arguing that the yellow metal is on a steady upward trend and its eventual price will depend on how much more money the US Fed prints.

Clearly, this does not make for a good reading. The sad part being that much of what Faber has said has a strong chance of turning into a reality.

03:09
 
Food, clothing and shelter are the basic necessities of life. In Mumbai, while an average individual can somehow make his way for the first two, getting a shelter always seems to be out of his reach. But who is responsible for it? Is it the Government for not making conducive policies for affordable housing? Or is it the builder who wants to maximize profits (affordable housing has low margins)? Whom so ever do we blame but the fact is that buying a home in Mumbai is still a dream. It is not that government hasn't taken any steps to make housing affordable. It has come out with various schemes to launch affordable housing in the city. But it has also been lax in sanctioning new projects. And this escalated the project costs. It may be noted that for affordable housing to be affordable speedy execution is the key. If not, costs rise which eventually have to be passed on.

Also, government support is paramount for affordable housing as land is a key cost in any project. And we know government has control over land allotment. Now, knowing that there is land shortage in Mumbai, affordable projects rarely get any priority. Unless, politician-builder nexus gets uprooted the situation is not likely to improve either.

03:50
 
The auto industry in India has been facing quite a few headwinds in the form of higher interest rates, fuel prices and fall in demand. Thus, most companies have seen volume growth slowdown in the past several months. The silver lining in the cloud has been the furious demand for diesel vehicles, which has lent some form of a cushion to the companies. As petrol prices have been freed, the recent hikes had led to an increasing gap between the prices of the fuel and diesel. This saw car buyers make a beeline for diesel cars. Diesel vehicles accounted for 40% of car sales in FY12, twice their share in the previous year.

Now that the diesel price has also been hiked, is the car industry worried? Not really. In fact, the industry has heaved a sigh of relief. This is because the government earlier was contemplating taxing diesel cars, a proposition that the industry was totally against. Thus, as far as auto companies are concerned, this is the lesser of the two evils. Also, even though diesel prices have been hiked, there is still substantial difference between the prices of the two fuels. This means that there will not be much of an adverse impact on the demand side unless the gap narrows considerably sometime in the future.

04:30
 
In the meanwhile, the Indian equity markets traded almost flat today on weak global cues. At the time of writing, BSE Sensex was down by 19 points (0.1%). However, all sectoral indices were in the green except energy and metal stocks. Red marks were seen across Asian stock markets too.

04:50  Today's investment mantra
"The first question I ask is: "Does the owner love the business or does he/she love the money?" It's very easy to tell the difference." - Warren Buffett

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    9 Responses to "Are these new reforms worth cheering so much?"

    B K Nandi

    Sep 25, 2012

    FDI policy is a non issue to Indian. Only reason I see for this untimely movement is to divert attention of people from PM Coalgate scam, corruptions and other chain of scams. However UPA bad governance repeated 1991 situation and UPA government took some ineffective reform action "FDI". 1991 reform policy is barely executed, Foreign investors did not show much interest to make capital investment, UPA government also seriously did not do anything to attract them and now they are with FDI. These are just fooling people, situation is not going to improve. After 1991 reform Indian economy in real term deteriorated and FDI is not going to stop that downward trend of economy. Dynasty congress rule can not do that and we have seen in last 6 decades of dynasty rule performance.

    Like 

    ANIL K KOTHARI

    Sep 22, 2012

    PM yesterday announced that due to pro poor policies his govt has raised diesel price by only Rs 5 instead of Rs 17.
    Available data shows that 15% diesel isused in Agriculture and 15 % is used by commercial transportation. It means that 70% disel is used by corporates and car industry.I raise a important issuewhy are we subsidising corporates and commercial passengers carriers. Corporates are generating power by getting subsidy on disel and our SEB are starving. Similarly recent data shows that 40 % fourwheeler sold are running on disel why Govt is not increasing the tax on disel car because4 the corporate lobby gives funds to the politicians. We are being fooled by the PM inthe name of poor to protect the rich corporates. Every truck is getting a subsidy of Rs 3 per KM ( taking a average of 4 km per lt)If truck runs about 10,000 Km per month it is getting a subsidy of Rs 30000/-

    Like 

    parameshwarappa

    Sep 20, 2012

    FDI will only make all these big retailers bigger and more profitable. They want to be here only because of better margins in this economy. If they really have concerns for Indian farmers, let them bring new techniques in agriculture to improve productivity. Retailer will only promote consumerism, which is the root cause for all those scams/crisis in the west . Let us keep our faith in our culture of earning, saving and then spending. It may take time to grow, but comes without any side effects.


    Like 

    Pawan

    Sep 19, 2012

    I am actually happy to see that the peasants of India are rising up against the robber barons of India Inc and not giving away their lands for cheap. Fact is that most so called great businessmen have made their fortunes in India by usurping land from the peasants and selling it, in collusion with politicians and officialdom, at insanely high prices to the common people.

    Like 

    THIRUMURTHY.R

    Sep 19, 2012

    It is common knowledge that monetary policy measures take anywhere from six to eighteen months to affect inflation and related factors in the economy. Fiscal initiatives take even longer quite often to impact growth. Policy initiatives will take certainly more time to yield higher growth. In addition, all policies have to be followed up by laying out transparent and quick clearance procedures. India has a lot to catch up here. As always the devil is in the details.
    These are early days yet to say how the foreign investors are going to react to the recent policy initiatives in FDI etc. Chances are they will wait for follow up measures like land and labour reforms as you had rightly indicated.
    Some may think that from policy paralysis the government may slip into political paralysis. This is a distinct possibility.
    However there maybe savvy players ready to take calculated risks and start investing under the 'early bird gets the worm' maxim.
    Mr.Vyas could be right. It may be a mere 1.5% increase in GDP. But we should remember that though increase in investments per se as a percentage of GDP may be small, they are akin to a force multiplier in that they can work in synergy with other growth factors across sectors. This will impact growth considerably in the medium to long term. Secondly, this is probably a beginning that will likely be followed by accelerating investments, engendered by market sentiment, which should never be underestimated.
    In the midst of the hullabaloo about black money stashed abroad, which I personally think is certainly well founded, there could be 'white' money as well which may come back via FDI. In fact all shades of money from off-white to dark gray may find the FDI route. Who knows? This may be good for the tax man ( oh, I am only saying tax receipts will go up !) and the economy as whole !

    Like 

    anil

    Sep 19, 2012

    NO current economic reforms will not have any signficant impact- as already shared by you in 5 minutes wrap up, this reforms could, at best improve GDP to investment ratio from 35.5 to 37%- a marginal impact. However most importnat issue is most of these reforms will be rolled backw within 5-7 days as Govt does not want to risk power for sake of well being of economy. Already congress has partially withdrawn reforms in Cooking gas by declaring that all Congress led state govts would bear subsidy on 3 cylinders and thus reform in this subject is already rolled back. Same thing will happend to Diesel Price adn FDI in retail. As a matter of fact, this govt is power hungry and economy and well being of citizens is its last priority

    Like 

    Nagaraja

    Sep 18, 2012

    The 'so- called' reforms mean nothing , have only cosmatic value.UPA Govt. and the Congress with their head- in- the- sand approach will do more harm in the remaining duration of their power.We can ill- afford jokers like Mamtha,Mulayam singh Yadav,Karunanidhi 's group and Jayalalitha ;And their ilk.they know the language of suppression and one-man ship.Country's interest is not in their interest to protect or even consider it as an issue.

    Like 

    Radheshyam Sharma

    Sep 18, 2012

    The only solution as I see it is to have a differential pricing system for Diesel used for private cars and that used for commercial vehicles used for public purposes.
    We are already having this differential pricing system for LPG cylinders.Commercially used LPG cylinders are available at around Rs 1400.00 whiles the domestically used ones cost about Rs 400.00 and the government is proposing to increase the price of these to around Rs 750/-.
    But first of all, is the price increase necessary?
    Over 60% of the cost is because of different taxes and duties imposed on these items from the time they are imported to the time they reach your house.
    Besides excise duty, sales tax, service tax, customs duty, addl customs duty, cess, Edu cess, income tax, dividend tax and a myriad of other taxes we are asked to pay as they are charged on the companies, importers, transporters.
    Of course, there is the inefficiency tax which we pay for wrong decisions or delayed decisions of the company and the government, like a ship coming to the port and lying there for days on end as the cargo cannot be unloaded.
    Taxing Diesel cars is not a solution.
    It gives the government windfall gains which it eats up in its corrupt ways.
    Having a differential pricing system is much better.
    Each diesel using vehicle should be given a unique number, according to its category.
    All Diesel/Petrol pumps should be asked to keep computerized records which should be connected through net with central marketing who would keep a record of the lifting of diesel by each type of vehicle with kilometers covered to check there is no leakage by selling the diesel to unauthorized vehicles.
    I know setting up this infrastructure would be expensive but it would be worth it. This would be a one time expense unlike the subsidy which the government claims is a perpetual drain. Of course, I don't believe them.
    Diesel would be available to the required group cheap and would be expensive for private cars who are jumping on the bandwagon.
    I know that car companies would not like it but they have to swallow it.

    Like 

    sharad sharda

    Sep 18, 2012

    These reforms can be worth cheering provided these are further enlarged to related and other spheres of economy and the Govt. remains in office, chances of which are so much bleak hence it will hardly add cheers to last long.

    Like (1)
      
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