What would happen if the Indian govt. shuts down? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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What would happen if the Indian govt. shuts down? 

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In this issue:
» ATM penetration remains low in India
» Now the road sector might get bailed out!
» Domestic investors should be encouraged to invest abroad
» Millionaires to rise substantially in India by 2017
» ...and more!


00:00
 
For the first time in 17 years, the US government has faced a shutdown. This has been on account of an impasse between the Democrats and the Republicans on the broader fiscal policy. The key issue of the funding bill has been the healthcare law otherwise known as Obamacare. Because of the government's relentless bailouts, overall government debt has risen to unsustainable levels. The healthcare law is expected to pile on the pressure on finances. This law in particular has largely been unpopular with the Republicans. The latter has been gunning for a cut in government spending and are pushing the Democrats to affect a cut. But they are in no mood to relent. And so the shutdown is expected to continue until such time an agreement between the two parties is reached.

As far as the impact goes, as per an article on Firstpost, as many as 1 m government employees could face unpaid leaves or missed paydays as part of the spending cuts. Overall, the credibility of the US government will be called into question. As reported in Bloomberg, a partial shutdown of the federal government would cost the U.S. at least US$ 300 m a day in lost economic output. The impact is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers. This does not bode well for an economy which is already reeling under recession and stagnant growth.

Now what would happen if a similar scenario was to play out in India? After all, a political impasse in India is nothing new. It is something which the country is witnessing even now. So what will happen if the Indian government shuts down? Considering the current sorry state of affairs, it may not be such a bad thing we believe. The government at present has failed to do anything concrete or meaningful for the economy. For most of its tenure, it failed to move on the reforms front. Later some measures were announced, but the implementation of the same remains largely hazy. Scams and large scale corruption, blatant bureaucracy, stained finances and perpetual bickering with the Opposition has rendered the government largely ineffective. So if it is not going to do anything, then maybe a shutdown is not such a bad idea. What is more, if this results in bureaucratic government staff going on unpaid leaves, it is actually a boon. It may do quite a bit in lowering the government's overall unproductive expenditure. On a more positive note, who knows, but such an experience might just kick it into action.

Do you think that the Indian government shutting down might be a good thing for India? Let us know your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
 
Offering adequate financial services to an economy like India is no mean task. One reason for this is high illiteracy. Then again, even amongst those literate, there is very little knowledge about financial services and products. It is the metros and Tier 1 cities which typically tend to have adequate financial services, with the rural regions lagging far behind. That is why Indian banks have no choice but to bear the burden of reaching out to the hinterlands. One of the parameters for gauging the development of financial services in the country is the number of automated teller machines (ATMs) set up. As today's chart of the day shows, these were quite poor in India in 2012 when compared to its peers in the BRIC region.

Penetration of ATMs in India remains low
Data Source: The Economist

02:11
 
What would happen when the US starts tapering off its Quantitative Easing (QE) program? The flood of money that has entered the emerging markets would start to pull back. And when that happens, prices of all asset classes are expected to fall. We have already seen this happening when the US Fed announced a possibility of a taper. Therefore it is indeed a scary thing to imagine what would happen when the actual tapering off starts. This is something that is worrying nearly all the emerging markets and India is no exception. To all these countries, the International Monetary Fund (IMF) has a simple advice. It is encouraging these countries to give the flexibility to domestic investors to invest abroad . The funds so invested could be repatriated when times take a turn for the worse. This would help support the country's currency and capital markets especially during events that lead to an exodus of foreign capital.

On the face of it, this sounds like a simple and easy to follow advice. But the technicalities are complicated. For India to do so, it would have to open up its capital account. This is something that has been discussed in the past but has not been implemented so far. The problem for India is the pitfall related to freeing the capital account. For although it allows for free inflow of funds, it also allows for a free outflow of funds. And it is the latter that has been more worrisome for India. With the economy in the condition that it is, and the investor confidence sinking on a daily basis, policy makers would be worried about an immediate outflow of funds if they open up the capital account. However, for long term stability, this is a pre-requisite. Therefore policy makers would do well to enact policy reforms and implementation to strengthen the economy from within.

02:56
 
Here's an interesting viewpoint from firstpost.com on India's current account deficit. It has argued how 60% of global trade is in just five categories, petroleum, food, automobiles, office equipment and electronics. Do you presently see India as a major exporting nation in any of these categories? Sadly, the answer is no as our share in these categories is a mere 0.4%. And this also explains why our share of world trade is just 1.7%.

Little wonder, our target of 4% share of global trade cannot be achieved with the current product portfolio. The same needs to be expanded. And one of the ways to achieve this is through creation of sufficient infrastructure. This will ensure that the supply side bottlenecks are taken care of and we become more efficient in our manufacturing. Unfortunately, this kind of vision is absent amongst policymakers. They are busy blaming things like high gold imports for our current account malaise. However, temporary measures like imposing restrictions on gold imports are not going to take us anywhere. It is high time the Government woke up. Or else we will continue to grapple with crisis like this on a regular basis and squander the enormous opportunity we still have to boost exports.

03:32
 
First it was aviation. And now it is the road sector. Seems the government feels that bail out is the only way to get these sectors out of the current mess. As far as the road sector concerned, a mega bailout plan is on the anvil. And this is happening by re-negotiating the premium amount bidders are supposed to pay to the NHAI. In a typical bidding process, road builders either ask for a viability gap funding (VGF) or pay premium for projects. VGF is an amount paid by government to developers where return expectations on projects are low. This makes the project feasible to the developers. However, certain projects where return expectations are quite high, developers pay a premium to NHAI to bag such projects.

During the good times when the economy was humming, most developers went overboard and paid large premiums for certain projects. However, as execution issues arose and their traffic estimates went for a toss, developers are now re-negotiating with NHAI to lower these premium payments. Lowering premium payments is a loss to NHAI and a bail out in some sense.

Now, the question is should the bailout be granted? It is true that the government is partially responsible for the current mess in road sector. Hence, it is willing to extend some help and revive the sector. However, due to this move, the developers are benefited unduly despite getting their arithmetic wrong over traffic estimates. Also, aggressive bidding by them to get the project then meant that other players missed out. These players may have quoted sensible premiums but still lost out to insane bidding. In a nut shell, in this case, insane aggression got rewarded while genuine business operators lost out. What further adds to insanity is government bailing them out knowing that loss of premium may add to its fiscal burden.

04:04
 
What an irony! The global uncertainties have impacted the emerging economies the most. But the number of millionaires here is expected to jump substantially in the next 4 years. Interestingly, India has sparked much attention. For India is expected to see almost 53% rise in the number of millionaires by 2017. This followed by China that would see the number doubling by 2017.

There are few reasons to believe the same. The wealth in these emerging nations has witnessed healthy rise. Also, the growing middle class have been greatly contributing to this wealth. However, there's also a dark side to this story. Majority of the Indian population has wealth below US$ 10,000. Also, mere 0.3% of the total population has a net worth over US$ 10,000. Even the household wealth fell sharply during 2011-12 compared to other Asian economies. The subdued economic growth and the repercussions of the euro zone crisis have been largely responsible for the same. Not just India, even the global household wealth has taken a toll. It fell by almost 5.2% during 2011-12.

Despite these setbacks, the recent statistics have some respite to offer. In the decade gone by, the aggregate global wealth has almost doubled. Similar trend was observed even in the home country. India's aggregate wealth more than tripled during the period 2000-2011. Also, going ahead, the numbers look all the more encouraging. The global household wealth is expected to accelerate by almost 50% by 2017. Consequently, the number of millionaires is expected to surge to 46 m. And as many as 84,000 Indians are expected to become millionaires by 2017. But at the same time, whether the income inequality gap widens in the country, remains to be seen.

04:46
 
In the meanwhile, after the sell off yesterday, Indian equity markets traded well above the dotted line for most of today's session. At the time of writing the BSE-Sensex was trading higher by about 133 points. Barring stocks from the FMCG, metal and oil and gas spaces, gains were seen across the board. Mid and smallcap stocks were trading higher with the BSE-Midcap and BSE-Smallcap indices up by about 1% each. Markets in Asia were trading mixed overall while gains were seen in Europe.

04:56  Today's investing mantra
"If you can't find any companies that you think are attractive, put your money in the bank until you discover some."- Peter Lynch
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30 Responses to "What would happen if the Indian govt. shuts down?"

ADITHYA GUDURU

Dec 27, 2014

Who is the responsible for scams? ....People or Private sector? In equity master intention was reason behind scams were PEOPLE. Why not strengthen PSU ? 236 PSU's paying 43% of Direct tax and 5,987 Private companies paying only 12.3 % of Tax. In 1940-50 with out PSU ,private sector would not survive. In 1946 private sector invested only 17 Crores ,where as Govt 436 Crores.So for the Recession who is the reason People or Private sector ? .I strongly oppose Privatization .....

Like 

M Jose Jeyakumar

Oct 10, 2013

This Is a good idea.We should try that atleast for one week
in INDIA.If the results are good we should continue But this
elected representatives will not allow this for this will

cut their salaries also

Like (1)

M Jose Jeyakumar

Oct 10, 2013

This Is a good idea.We should try that atleast for one week
in INDIA.If the results are good we should continue But this
elected representatives will not allow this for this will

cut their salaries also

Like (1)

fram

Oct 5, 2013

we are already shut down i.e policy paralasis.
but we still spend on govt machinary therefore its a worse situation than the U.S shutdown !

If one sends govt staff on unpaid holiday, they will get their pay from the middle class anyway by extortion that is already rampant,for services that are expected by a decent society, e.g cut municipal water supply & promote "tanker -raj", stop collectinng garbage, etc etc no point in giving the looters ideas.

Like (1)

Debi Prasad Mohanty

Oct 5, 2013

we need not complete shut down rather stop salaries of bureaucrats on policy of no work no pay.
if India govt shutdown lower & Middle class people will affected a lot .
GDP growth will a affected .

Like (1)

buntyn

Oct 3, 2013

This is an excellent idea...Let the tax payers' money be used for the good cause instead of entering in corrupted officials' pockets...the amount thus saved could be spent in improving the poor Infrastructure and for the welfare of real needy population.
Let's work on this at the earliest.

Like (1)

Vijayavanitha

Oct 3, 2013

What little work goes on now in Govt would come to Stand Still, it would not affect the Indian economy as their contribution to Indian GDP is meager . In fact the savings would be more than production loss due to shut down

Like (1)

G.P.SANGAL

Oct 3, 2013

We may be earnestly praying for such a shut down but it is just not possible. Just like U.K. if a finance bill gets voted down the Govt. falls. The may withdraw such a bill before it fails to pass and thus continue its misrule. Alternatively, another Govt or some sort of coilation may replace it until the things improve or go to dogs.

Like (1)

Shiv Shankar Ranganathan

Oct 3, 2013

I don't know,but Iam curious to find out.

Like (1)

raju

Oct 3, 2013

do shutdown india. and then have look at issues that are arising with the situation.

Like (1)
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