Ignore the US Fed. This is way more important for India - The 5 Minute WrapUp by Equitymaster
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Ignore the US Fed. This is way more important for India

Sep 19, 2015

In this issue:
» Another scary statistic coming out of China
» India's best business destinations
» Market round up
» ....and more!

'These are thousand times better than our neighbourhood grocery store,' my wife told me, as I was about to help myself with a snack of scrumptious khakhras, a traditional Gujarati preparation.

'And guess what, these are also 50% cheaper than what the grocer sells us. I bought them directly from the factory premise where they are mass produced and therefore saved up on the grocer margins,' she added.

That's not all she had to share with me.

She was a bit dejected with the scenes she saw at the factory. There were scores of poor women sitting in a long line. Each one of them working in tough conditions and going through the process of manually flattening balls of dough and then roasting them and creating the final product.

'Don't you think the system is a bit unfair? These and millions of other workers toil away day in and day out. Yet it is the owner of the factory or the middlemen like the grocer who walk away with most of the profits,' she said with a tinge of sadness in her voice.

It was easy for the emotional brain to fall prey to her story. The system does indeed appear to be loaded against people who toil but only walk away with a pittance.

However, just as my heart was about to fill up with sympathies for the women workers, I invited views from my rational brain. I was curious what defence it could come up with. It didn't take long for it to argue that my wife was taking a narrow view of things, however kind-hearted.

Agreed - the owner of the factory gets to walk away with maximum profits, but what if there's a loss? Wouldn't he have to bear the losses also if the venture is unsuccessful? Will the workers work for free if the business isn't making money? Of course not. As soon as the monthly paycheques stop coming in, they will pack up and look for another job.

It is the owner who will lose his hard earned capital, quite possibly his entire life savings. I reasoned with my wife that there could be many crony capitalists in the country who don't deserve their millions and billions. Also, the conditions the women were working under may not be ideal.

However, to assume every entrepreneur is cut from the same cloth is wrong. There's always this tendency to paint wealthy business owners as villains. It is as if the only way the rich could have become rich was by making the poor poorer. Nothing could be further from the truth. Entrepreneurs take on massive risk. If they fail, they can lose everything. But if they manage to bring to market an innovation that people value, they have rightfully earned their success.

Our country can definitely do with the right kind of entrepreneurs - those who can go about running a business honestly and create jobs in the process.

Painting each and every one of them as a villain and creating problems for them doesn't get us anywhere. Indeed, it only delays our march towards growth and prosperity.

The point we are trying to making is simple: Long-term sustainable growth does not come from keeping an eye on what the Fed is doing with interest rates in the US. Nor does it come from urging the RBI governor to reduce rates.

Rather, growth comes from the economy's driving force, its entrepreneurs. They are the ones who cooperate as well as compete with one another to create and distribute goods and services to consumers in the most efficient and profitable manner. The government's number one priority should therefore be to provide the best environment possible for entrepreneurship and economic growth. Let a thousand Narayana Murthys or Dilip Shanghavis flourish.

What do you think? Do you think most of our rich are rich because the poor are poor? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
As we have just noted, entrepreneurs face a lot of risks in setting up and running a business. However, the situation is not the same all over the country. The ease of doing business varies greatly across Indian states. Some states have favourable laws to encourage businesses. Many do not. The government is understandably concerned about this.

Recently, the Department of industrial Policy and Promotion (DIPP) complied a detailed ranking of all 29 states in India comparing them on this very issue. The criteria included procedures related to setting up a business, land allotment, obtaining permits, environmental clearances, labour laws, taxation, inspections, enforcing contracts etc.

Unsurprisingly, Gujarat came out on top. The idea behind this report seems to be to encourage the states with low ranking to get their act together. It will also help the higher ranking states to attract more foreign investment. The government seems to have concluded that 'Make in India' cannot succeed without the help of various state governments.

This is true up to an extent. However, it must be kept in mind a lot of the laws and regulations are made by the central government. The government has moved forward on issues regarding environmental clearances and labour laws. However, without more substantial reforms like GST and land acquisition, India's 'ease of doing business' ranking may not move up too much.

Are these states the most business friendly

The Chinese government wants its citizens and the world to believe that the Chinese economy is growing 7%. Close observers have long been skeptical about the macro numbers that get churned out of the government's number factory. But one development over the last year may prove to be the final straw.

This comes from probably one of the least glamorous and least talked about of commodities: Cement. The price of cement in China has collapsed. It has been falling consistently over the last 2 years, and is down by over a quarter. What is so strange about this? It is the most basic of facts that you cannot build anything permanent without cement.

This makes it a brilliant indicator of how the real economy is doing. It's almost like having x-ray vision on the underlying economy. So the price of cement in China doing so badly completely jars with the GDP growth numbers the Chinese authorities are dishing out. As a Business Insider news report reckons, unless you believe the Chinese have figured out a way to grow the economy without using any concrete, there is no way the real economy is growing anywhere close to the 7% figure.

Global stock markets remained volatile throughout the week but heaved a sigh of relief after the US Fed decided to play safe again and put rate hike on hold. The decision was on the back of concerns of a fragile global economic climate and low inflation rates in the US. The Fed has said that it wanted the US inflation to reach 2% before it starts the monetary tightening exercise. Fed Chair Janet Yellen signalled that US interest rates may still be raised this year. The Fed will meet again in October and December this year. Stock markets around the world ended mostly in red. India, Hong Kong and Brazil were the only gainers for the week.

All the European markets ended the week on a slippery wicket. Among Asian indices, only Hong Kong and India ended the week in the positive zone. The Japanese index was down by 1.1% as exporters were hurt by a stronger yen. The uncertainty surrounding the Chinese markets weighed on its indices, which were down by 3.2% for the week.

Back home, the Indian markets were marred by volatility throughout the week. But the Fed's decision to keep rates unchanged helped perk up the markets towards the end and the index closed the week with a gain of 2.4%.

Among the sectoral indices, stocks from the banking and power sector were the top gainers, while consumer durables and capital goods stocks closed in the red.

Performance during the week ended 18 September, 2015

 Weekend investing mantra
"Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world." - Charlie Munger

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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7 Responses to "Ignore the US Fed. This is way more important for India"

Ragini Ghanekar

Sep 20, 2015

You are right. Entrepreneur deserve to be rewarded for taking risk and creating jobs,being innovative.But at the same time it should not come at the cost of inhuman conditions for labour, which is probably weakest of all factors of productions. same is the case for providers of capital. when people work hard and save for their future and deposit it in the banks, they need to get reasonable interest on which they will live when retired. Interest rates can not be zero or negative.All factors of production need to get just, at the same time humane reward.Problem is with selfish human tendencies. consumer wants cheap product. Shareholders want maximum profit. In all this humanity suffers.


Sanjeev Kumar Singh

Sep 20, 2015

Very simplistic analysis. It seems to be an analysis of a person who doesn't seem to understand how the business is being carried out in India , where owner never becomes poor . Only the company ,employees and banks only loose out.



Sep 20, 2015

Collapse of cement prices in China does indicate that construction related activities are under stress but should not be viewed alarmingly. Let us not forget that for almost 2 decades China invested heavily in its infrastructure and making of mammoth factories which led to a massive consumption of materials like cement. This pace of basic infrastructure will not continue for ever. Unless experts judge the amount of concrete jungle , even if not utilized/required, as an indicator of economic prosperity! The demand has to eventually taper off and the huge cement capacities built during that period will not be fully utilized, leading to depressed prices. It is the output and utilization of the factories (made for other products) which should be monitored to judge China's economic health and indirectly global economic health.



Sep 19, 2015

Rich & poor:

My Brother-in-law resigned his Job as Sr.Bank Manager and started a Chemical Factory. He lost Rs.70 Lakhs, as the very first lot of Paint went up as Chemical Vapor. He lost his pledged House! There are many such entrepreneurs; but we remember Mr.Narayana Murthy & Sanghvis..!
However, the Poor people need to be SUITABLY(?) rewarded like Drivers of Infosys. We can not increase the Minimum wages to Rs.300 per day, immediately! (This will cause socio-economic upheavals in those Villages.(poor-rich divide)
We need Mr.Subramaniam & co in Member Planning Committee etc. and introduce timely Labor reorms.


AB Pereira

Sep 19, 2015

If people are under the impression that the US Fed decision is positive, please think again, and read what the Fed chief said. Global economic situation is bad, she says and is scared to touch the rates! And rightly, the US and European markets fell on Thursday and Friday, and I suspect, that is going to continue in coming weeks. US Fed has been massively trapped by its own wrong policies since a very long time (very well highlighted by our superior RBI Governor RRR), In 2008, it bailed out the financial sector (in the excuse of saving 'too big to fail banks'!) adding artificial liquidity and keeping interest rates around zero (adversely impacting the older people saving their retirement money in bank deposits, and making them retire later). Even after 7 full years, they are unable to increase rates even by 0.25%! The Fed will never be able to come out of this fear of Return of the Devil!
If India thinks it is better placed, tough luck. Weaker global markets will make exporting tough for India, weaker monsoons and rural demand will make it difficult to increase consumption within the country - put together, will affect us too. Only saving grace is the price of oil which will keep our Current Account Deficit in control, but expecting a GDP growth above 7% will be too much I guess.


AB Pereira

Sep 19, 2015

The points made are very valid. Its about 24 years since we abolished the main controls law (CIC Act) and a little later, modified the FERA and MRTP etc, but the noose around the SME owner is still tight! Still there are numerous approvals to be taken for which he is at the mercy of different governments - Central, State, local authority and also the invisible, street-level anti-socials. Thereafter, they have to comply with a thousand laws, collect and remit around 25% in indirect taxes, and later if they still make money, pay around 30+% income tax, or a MAT. There are several countries (look around the Middle East) providing evidence of prosperity with ease of governance and without taxes.
Well of course, the numerous governments in the country support only the crony capitalists who bribe their way up - their mega billion rupee bad loans are waived, or top man (called PM) recommends more such loans or land allotment to the election-financing entrepreneurs, whereas a SME owner loses his personal wealth hypothecated to the bank on turning NPAs due to such regressive and restrictive business processes in our country.
About the plight of people stated by you - The street-cleaning old lady gets her salary, if at all, 3-6 months later, but the garbage cleaning contractors and their kids make merry in Mercs, BMWs and eat out in expensive bars and restaurants. Woes are unlimited, gaps in standards of living are awful. God too doesnt seem to be kind to come to their rescue.


Rakesh Chandra

Sep 19, 2015

Poors are not poor due to rich businessmen or entrepreneurs but they are poor due to government's policies and non implementing them efficiently.There are jobs and proper production and distribution of commodities only due private sector.Government has to create proper infrastructure to facilitate better working atmosphere for businessmen.

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