The hottest sector in this raging inflation scenario is.. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The hottest sector in this raging inflation scenario is.. 

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In this issue:
» Owning a car gets more expensive
» Is RBI killing India's growth?
» Govt. plans to puncture oil subsidy balloon
» Power sector-paying the penalty of populist policies
» ...and more!

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00:00
 
Last week's inflation data was disappointing. There was no respite as prices continued to spiral upwards. As a result, the Reserve Bank of India (RBI) decided to put its foot harder on the brake by increasing the interest rates. Little wonder that this move had nearly all the industries and economic sectors screaming in pain as they expect growth to slow down. But there is one sector that appears to be partying harder as inflation goes up. And this is the agriculture sector.

Rising food inflation has brought to light the increasing demand for food. As a result the agriculture sector faces the daunting task of feeding a larger base of population. And that too with limited resources (agriculture land cannot be increased at will). This in turn has brought about a major change in which agricultural activity is carried out. Use of new technologies, technologically enhanced seeds, use of fertilizers, etc has now become a common thing. And all this has led to an increase in demand for companies that engage in providing these services or that rely on agriculture for their growth.

But the Indian government has tried to do its bit here by imposing price controls on the agricultural inputs like seeds, fertilizers, etc. The reason - the government feels that higher prices would hurt the farmers. Considering the fact that this sector is the probably the only one that is doing well, this approach of the government may just be another populist approach. Such controls discourage companies from entering the sector. This in turn hampers the overall future growth of the sector. Therefore, it is important for the government to adopt liberalized policies that would be to the benefit of all - the farmers as well as the companies.

Do you think the government is right in imposing price controls in the agriculture sector? Share your comments with us or post your views on our Facebook page.

01:20  Chart of the day
 
A leading daily carried out an interesting study. It was to establish how expensive it is to own a car in the wake of increasing fuel prices as well as higher interest rates. For the purpose of the study, the daily studied the cost of owning a Maruti Alto that gives fuel efficiency of 14km /liter and is run for 5 years with 12,000 km each year. The study showed that cost of owning and driving such a vehicle has gone up by nearly 14.3% since May 2010, when the Reserve Bank of India aggressively started increasing interest rates. Combine this with higher fuel prices as well as increasing prices of the car itself, it is little wonder why demand for cars has seen a slowdown in recent times. In fact, the Automobile Association expects demand for cars to slowdown even during the otherwise robust festive season.

Data source: Economic times

02:00
 
Last week, the RBI managed to keep its image intact. Arguably, one of the most hawkish central banks in the world, it chose to raise rates on yet another occasion and took the inflation devil head on. This move though is not going down well with India Inc. And they are making no bones about letting their displeasure with the RBI known to the public. In fact, a few economists in the Government are also apparently miffed with the central bank's decision. With inflation failing to come down despite umpteen rate hikes, they are terming the RBI's policy as a failure.

Is that really the case? We certainly don't think so. Looking at it from a 'glass half full' point of view, one would realise that although inflation has not gone down, it would have run up even more had the central bank not intervened. Also, from a long term perspective what we need is low inflation and more equitable growth rather than have a strong growth that is fuelled by cheap money. As the US has found out, a growth fuelled by cheap money looks good while it lasts but wrecks tremendous damage when the bubble bursts. Thus, it is always better to grow relatively slower if that growth has a great deal of stability and low inflation. And this is exactly what the RBI is trying to accomplish and hence, should be fully supported in its endeavour we believe.

02:50
 
Oil prices have hardly been as much of a slippery issue for the government in the past. But years of callous subsidizing of oil prices seems to have finally landed the government in a quandary. Despite some recent bold moves like making petrol prices market driven, the under recoveries for oil marketing company look gargantuan! At Rs 1.2 trillion the under recoveries for the oil marketers in 2011-12 dwarf the budgetary support to meet the subsidy burden (Rs 200 bn). Hence the government is now looking at other ways to cut down the ballooning subsidy bill on oil. With a precarious fiscal deficit situation, the policymakers are left with little option. In fact even the rating agencies are keeping a close watch on India's fiscal situation and have warned of a downgrade if the scenario shows no signs of improvement.

Utilization of Rs 250 bn of government savings, cut down of expenditure on other welfare schemes and rollover of part of the burden to next year are some of the options being looked into. Cutting down outlay on rural development, healthcare and HRD schemes need to be handled with much care as this too can backfire. Rolling over subsidy burden to subsequent years is certainly not a wise or a long term solution as the high oil prices may prevail. Hence, we believe that the government should instead take a more sustainable approach and invest in building the country's own energy resources to make the economy more self sufficient.

03:35
 
The power sector has been dogged with problems, and reforms are long overdue in the space. According to a recent industry report, bank loans to the power sector for up to Rs 1.4 trillion could be at risk. The main reasons are non-revision of retail tariffs over long periods, non-availability of coal linkages and other delays. However, these risks are possible to mitigate with a few simple reforms. However, implementing these may be easier said than done.

Electricity regulators keep tariffs unchanged for a number of years; despite rising power costs. They do not raise tariffs mainly due to political pressure. Recently Delhi was given the go ahead to raise tariffs, after almost a decade! An efficient mechanism is needed to make power regulators more accountable and tariff revision needs to take place on a regular basis. The Prime Minister has called for such reforms, however when this will fall in place is a different story altogether.

04:10
 
The Indian telecom sector has been at the receiving end in recent times what with the advent of stiff competition and various regulations propounded by the regulator. What is more, metros and urban areas also appear to have become highly saturated markets as a result of which focus has now been shifted towards providing more value added services. But there is still hope for telecom companies to increase subscriptions and revenues. And a large part is expected to come from the semi-urban and rural areas. Indeed, rising disposable income in the hands of consumers living in semi-urban and rural areas is expected to boost domestic consumerism and the telecom sector is likely to benefit quite a bit from the same. Thus, most of the leading wireless operators are striving to increase their presence in towns and rural India. If one looks at the number of net subscriber additions at the end of July 2011 over a year ago, Reliance Communications accounts for 19% of the total net additions of 194 m users in B and C circles. Bharti Airtel (15% share) and Vodafone (13%) follow close on its heels. That said, the worry in these areas is that subscribers would have lower inclination to spend on telecom services which would impact profitability of companies since the average per user revenue would decline. However, this problem could be mitigated with the availability of low-cost smart phones that can offer functionality beyond basic voice and text services increases.

04:40
 
In the meanwhile, the Indian stock markets have been trading weak today. At the time of writing, the benchmark BSE Sensex was trading lower by 185 points (1%). All the sectors were trading in the red with maximum loss witnessed in capital goods and banking sector. Barring Japan, the other Asian stock markets too were trading weak with Hong Kong losing the most. The European stocks markets have opened on a mixed note.

04:55  Today's investing mantra
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring." - George Soros
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9 Responses to "The hottest sector in this raging inflation scenario is.."

Rajesh P Shah

Nov 10, 2011

We are just paying taxes for every thing First Petrol Tax amount of both State & Center is upto 70% and the the Bunk operator Malpractice, Ministers bribery system petrol bunks owned by ministers or their allies same goes in fertilizers system also cut all taxes on these you will have petrol at 31.00 rs a liter.Actual Price of petrol is Rs 31…
May 30th, 2011 rachit


“Petrol price” is a scary word these days. With this word everyone got attentive to listen about the new hikes in petrol prices. Yes hikes, not even 1 out of 100 expected a fall in fuel prices. It is understood that petrol price discussion always put a bad impact on the pockets of common man who stay and live with petrol. Petrol is like blood in veins of any economy.

Everyone knows the average price of petrol in India is around Rs. 65 per litre and everyone always ready to criticize for fuel price hike. But no one knows that the actual price of petrol is around Rs. 31 per litre. Shocked na…..!! But it’s true. Here are the details about the fuel pricing.


The price of petroleum in international market is around $90 per barrel. With the simple arithmetic $90 equals to Rs. 4050 and one barrel contains 42 gallon or 158.76 litres. The crude oil cost to India Rs. 25 per litre. Add to it the cost of refining it to petrol or diesel. According to an oil company official, this would come to no more than 52 paisa a litre. Add another Rs 6 as capital cost for the refinery.

The total of all the above calculations gives the sum of Rs. 31 per litre. It is almost half the actual pricing of petrol. “SO HOW THE PRICE OF PETROL IS SO HIGH….?” yes this is an obvious question that comes to every bodies mind.

Ok!! It’s time to open the suspense. The actual price of petrol which government paid is Rs. 31 but the addition money is the TAX ….yes the IRRITATING TAX. The tax which put affects the adverse impact on the life of common man. Center Government & state government both charged around 52% tax on petrol.

Indian people pay more tax on petrol than a developed country. We pay approximately 52% TAX ON PETROL which includes duties, taxes like customs, excise, sales tax, VAT, dealer commission.

Following image show the tax rate in all other countries as well as in India.


publiched in economics times
Government of India increased 8 times in the petrol price in last 8 months. The below data shows the price of petrol in other developed and developing counties.



Petrol and Diesel Prices in rupees
Sri Lanka – Rs 39.38 per litre price in and Rs 24.36 per litre for diesel
Pakistan – Rs 39.01 for petrol and Rs 27.39 for diesel
Bangladesh – Rs 35.80 for petrol and Rs 21.10 for diesel
Nepal – Rs 42.02 for petrol and Rs 33.31 for diesel
Philippines – Rs 32.56 for petrol and Rs 28.92 for diesel
Thailand – Rs 30.57 for petrol and Rs 28.29 for diesel
Canada – Rs 33 for petrol and Rs 36.22 for diesel
USA – Rs 26.34 for petrol and Rs 29.16 for diesel
South Korea – Rs 65.99 for petrol
Japan Rs 48.80 for petrol and Rs 41.47 for diesel.

I found a unique page on the internet set up by someone called Kshitij where he has compiled prices of petrol across cities and also details of prices across the world. These are just a few that I picked to share here.



Petrol price rising affects the common man in several ways.

1. Put the direct impact on the pocket.

2. Rise in food prices

3. Rise in transport facilities

4. Rise in machine based products

5. Rise in electricity prices

6. Rise in Inflation rate

Well these are some of the very basic points which show the pressure on common man pocket.

The about data is gathered from different websites and news paper articles.

Like 

srinivasanp

Sep 20, 2011

Dont agree with the statement that the agricultre sector is doing well.
The subsidies are given to farmers who are the actual producers. How much of the money you pay in retail goes to the farmer. Nowadays it is around 35%.
The producer's share in the price rise is actually going down.

The people making money are the middlemen. Do they constitute the agriculture sector? They do not.

The only bunch of people who seem to be making money is marketmen.

If a case has to be made , some research and thinking has to be done before putting it down.

Srinivasan

Like 

PRVRAJAN

Sep 19, 2011

SUCH PRICE CONTROLS HAVE NEVER WORKED EARLIER. THEY HAVE PROVED COUNTER PRODUCTIVE. THE BEST THING IS TO FIRST ACHIEVE INTERNAL LIBERALISATION WHICH SHOULD HELP SMALL AND MEDIUM FARMERS. WITHDRAW TAXES DIRECT AND INDIRECT TAXES ON
ESSENTIAL AGRI PRODUCTS OF DAILY CONSUMNPTION REMOVE ALL
OCTROI AND OTHER LEVIES INCLUDING STATE LEVIES ON FARM PRODUCTS INCLUDING VEGETABLES AND FRUITS. ALLOW LOW COST MOVEMENT THROUGH RAIL WAGONS AND GREATER FREQUENCIES FOR AGRI AND FARM PRODUCTS. TO MEET THE DEFECIT LEVY A SURCHARGE OR INCREASE TAXES ON INCOME ABOVE Rs.10 LAKHS INCLUDING AGRI INCOME. PERHAPS THESE MEASURES WILL BRING DOWN AGRI / FARM PRODUCTS COST AND INFLATION THEREOF.
TILL POSITION STABILISES STATE GOVT CAN ADVISE HOTELS AND RESTURANTS TO INTRODUCE 'JANATHA MEANS' AT REASONABLE COST

Like 

Dr.Veeranna Doddipatla

Sep 19, 2011

Already farmers are not getting remunerative prices.Input costs are going up regularly. Unfavorable rains either spoil the crop due to heavy rains during harvesting season or no rains at when needed. If farmers is lucky to have favorable rains and good yield, there are no buyers to buy the product at support prices. Small farmers are to undersell to traders at much lower prices on credit. Only after small farmers under sell their product, Govt. intervenes to rise prices. The net result is that farmer suffers and trades benefits even without any investment.

This what exactly happened in AP. That is why several parts of AP declared crop holidays. If this situation continues, there will be drop in production leading to food shortage.

Govt. has to ensure reasonable return for farmers and keep food prices low. Please realize that India Inc is concerned about their FAT margins and not about country.

Like 

Mahesh Soni

Sep 19, 2011

In addition to boosting crop yield by appropriate technology, much more important is to offer millions of hectares of government land that is lying un-utilized (you can always see while travelling through train). Similarly millions of hectares of so called 'forest land' does not have shred of grass on them. They could be better utilized for forest or horticulture. Making a national water grid and conservation of water should be on top priority.

Like 

Suresh Kumar

Sep 19, 2011

The govt. needs to intervene and keep the prices of agriculture inputs such as fertizer and seeds steady, else it would be difficult for the farmer to do farming. However, repeating the subsidy concept by procuring at the minimum support price level, is not the right solution for the govt. Let, MSP be based on market mechanism, so that we dont have a situation where the stock can't be disposed off at market price as it was procured at a higher price. If needed, FCI policies must be changed.


Like 

Pradip Bhadgaonkar

Sep 19, 2011

RBI & interest rates: It seems again that interest rate is the only tool to control inflation. However, if the government could bring down corruption, prevalent in almost every sector but more so in respect of various subsidy schemes, I am sure government can reduce its expenses & with this taxes a bit & help to bring down inflation atleast by a few basis points. Further, if the government can plan to take few quick steps to improve supply chain & reduce wastage, it would help to bring down inflation. It seems now we have reached a stage where further increases in interest rates will only damage economy.

Like 

Kim Bhudia

Sep 19, 2011

Food production is not the problem. Storage and logistic is the main problem.

Like 

Ganapathy Sastri

Sep 19, 2011

India has been having over the last three years:
A. Massive inflation ( over 15% CAGR) { ASK the spouse of any RBI official or senior official in Finance Ministry}

B. Massive Trade Deficits. ( Over $ 150 B vs $ 6 B in 1991 which made us pledge gold)

C. Massive Consolidated Deficits. ( Add the deficits of Union, State Govts, OIL companies' UNDER RECOVERIES, losses of PSUs etc.

It is not surprising that prices of farm products have gone up. Earnings of urban dwellers have also gone up when their productivity has not gone up ( except when it comes to talking on cell phones). Nobody talks about that. Why grudge the poor farmers ( hundreds of whom still commit suicides for small loans)? Again compare that the MASSIVE defaults ( in trillions) that will occur from the hitherto richer nations of the western world.

Like 
  
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