Drought not to impact India's growth - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Drought not to impact India's growth 

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In this issue:
» India lags other BRIC nations when it comes to eradicating poverty
» Crude oil may no longer be priced in US dollars
» The current stimulus will lead to further crisis
» FII inflows come back to haunt RBI
» ...and more!

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With the worst monsoons since 1972 plaguing India, the country's GDP growth has been pegged by many economists to be below 6%. However, the Indian government and the RBI have been more optimistic as they are of the opinion that India will be able to log in a growth of 6% plus for FY10. What is more, the Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia believes that the drought would not pull down India's GDP growth below the government target of 6.3% and the overall impact would not be as bad as expected earlier. He further added that inflation would ease in the coming months as the rise in food prices was largely due to an increase in speculative activities. This is because the weak monsoons sparked fears that food prices will soar.

Thus, Montek Singh appears confident that prices will stabilize and is hopeful that inflation will not exceed the 5% mark by the end of FY10 as envisaged by the RBI. Incidentally, food prices have soared by 14.8% since the start of the current fiscal. The RBI will be more than happy if inflation does not rise as it will then be able to focus on b0lstering India's GDP growth. Therefore, it will be interesting to see whether Montek Singh's predictions actually materialize. The central bank for one will be keeping its fingers crossed!

01:04  Chart of the day
India may have grown above 9% plus before the global crisis unraveled but have the people of India really benefitted from the same? As today's chart of the day shows, the percentage of population living below the national poverty line is the highest in India as compared to its BRIC peers. Poverty is a blight on any country's image and more so in the case of rapidly growing economies like India. Hence, eradication of the same should be the topmost priority of any government. In India's case, even if the government takes some serious measures in just ramping up the infrastructure in the country, it will go a long way in creating employment and improving the standard of life of its population.

Data Source: Human Development Report 2009

There is little doubt that the global financial meltdown has changed the world financial order. The latest development that supports this view is the attempt of gulf oil producers to move away from pricing crude oil in terms of the US dollar to a basket of currencies instead. This move also has the support of countries like China, Russia, Japan and France. As per The Independent, these countries have already held secret meetings to discuss the same. Apparently, Brazil and India also approve of this move.

In our view, given the importance of crude oil transactions in world trade, this will dent the US dollar's role as the world's reserve currency. Other currencies, including the Chinese Yuan and gold will jointly take up that space. It means that the demand for gold will also climb.

As for the Americans, they are not going to take this development lying down. After all, it prevented the UK from joining the Euro and invaded Iraq when it moved its crude oil prices away from the US dollar. We expect a lot of muscle flexing over this issue in the days ahead.

In yesterday's 5 Minute Wrapup, we had conducted a poll on CEO salaries wherein we had asked our readers whether the government should focus more on tackling corruption rather than monitor CEO salaries. The results so far have been rather interesting. A resounding 94% said that doing away with corruption should be the Indian government's first priority. And we second that view. After all, given that the Indian government is mired in corruption with big bribes being the order of the day, it only makes sense that the government sets its own house in order before it targets the pay packets of India Inc.'s top honchos.

Allow us to throw a few facts at you. As per Federal Reserve, the total debt for the US financial sector was US$ 16.5 trillion in the second quarter of 2009, roughly the same as the one prevalent a year ago. This implies that the de-leveraging that everyone is talking about has not come about because of reduced debt but by increasing equity. Secondly, the US financial institutions are operating as before and recording trading gains that may not be sustainable. And thirdly, the much talked about financial regulation that was supposed to come into play post the Lehman debacle has not happened at all and as a matter of fact, it has only gotten worse with some dumb new rules like suspension of mark-to-market accounting rules for assets of financial companies.

Well, these amazing insights have come to us courtesy Andy Xie, the famous economist who's spent a good part of his life studying and correctly predicting amongst the biggest asset bubbles in recent times. And what is Xie's conclusion? He argues that policymakers are under the impression that stimulus spending can bring back growth. But nothing could be further from the truth. The eventual consequences, according to Xie, are inflation and bubbles along the way and something similar lies in store for the current bubble as well. "When inflation becomes a political problem and policymakers are forced to respond, money supplies will be cut. After that, no more bubbles", is how the strategist par excellence chose to end his argument. Taking into account the man's track record, it will do us a great deal of good if we take him seriously.

Keeping a hawk eye on the inflationary situation seems to be getting tougher for the Indian central bank. At a time when the drought condition has already pushed up food prices, the incessant capital inflows into the country are not going well with the RBI. As per the RBI, FII investments in the Indian equity market amounted to US$ 13.6 bn in 1HFY10 as against outflows of US$ 5.2 bn in the corresponding period of FY09, reflecting a turnaround of almost US$ 19 bn. The short term nature of these investments and their impact on currency markets are particularly of concern. Meanwhile, the RBI is already dealing with the dilemma of whether or not to withdraw its accommodative monetary policy and thereby hurt growth rates. Further, sterilising the FII inflows would add to the already burgeoning fiscal deficit. The RBI governor has therefore sent a stern message to the government to cut costs and restrain borrowing so as to not add to the monetary turmoil. The government's austerity drive needs to deliver for real.

Americans are an anxious lot these days. Recent data showed that the unemployment rate in the US hit a disquieting 26-year high in September. There are now six Americans competing for every open job, and 5 m Americans who have now been unemployed for six months or longer. Former Federal Reserve Chairman Alan Greenspan expressed in a recent interview that being unemployed for long is particularly an area of concern for the US. This is because people who are out of work for very protracted periods of time lose their skills eventually. What, according to Mr. Greenspan, makes an economy great is a combination of its capital assets and the people who run it. And if there is an erosion in the human skills, there can be a real and irretrievable loss for the US.

Though the Indian markets languished in the red for the larger part of today's trading session, the BSE-Sensex was inching towards the dotted line at the time of writing. While auto and IT stocks were out of favour, gains were seen in FMCG and banking stocks. At the time of writing, the Asian markets were trading firm. Europe too began the day on a positive note.

04:58  Today's investing mantra
"The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." - Warren Buffett
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7 Responses to "Drought not to impact India's growth"


Apr 27, 2015

six years over but no more comments within this period.


Harish Nayak

Oct 8, 2009

The market driven by greed, speculation by big sharks. How can you expect tdrought affetc the market. Look at gold price!if 25% of the buyer asks for delivery the the whole amount of gold which available fortrading is not enough, so let us not confuse with your catchy slogan. Same reality applies to stock market


Ashvin Purecha

Oct 7, 2009

With regard to the corporate executives salary I fully agree with Mr. S N Gupta's view. As a share holders of some companies in India, whenver, I see their annual report, I am surprised to see the salaries and other benefits taken by the top management. The list of perquisites beside salary is one full page. I rememer the period before some 25 to 30 years, where most of the companies were shareholder friendly and were paying the dividend/Bonus etc uninterruptedly. Now the mindset of the people have change. Everyone wants to extract more and more from the company so at the last company becomes dry and useless, like the water level near our coast area.Let us see how far this will continue as this practice of greed is not at all desirable for whole country. May god give insight to the corporate world so no more exploitation is practiced. At the same time eradication of corruption is also very important.

Like (1)

Gurudas S

Oct 6, 2009

What should worry us is the amount of salary,commission and perks given to the directors of Companies. The CEOs at least work for only one Company. But these directors are atleast on 6to8 cos and with such huge benefits at each of these cos. Do they really deserve so much??? When I raised this issue last year in an AGM of a very big company, the Chairman simply replied that they are paid as per present norms. How can we minority share holders correct these money guzzling practices?

Like (1)


Oct 6, 2009

1. Reg government move on CEO salaries, it is equally important to pay adequate attention to curb corruption at all levels. Having said that, some voluntary check by CEOs on their compensation will do a lot of good, especially in a country where poverty is still a major issue/problem to tackle. According to newspaper reports, some of the salaries of CEOs running into several crores look abnormally out of sync with the stark realities. Rather than the government mandating a limit, it will be more appropriate for the current recipients to voluntarily give up a part of the excess. Added to that will be a voluntary curb on ostentatious living. This is more applicable to second generation CEOs, some of whose parents were epitomes of frugal living and social responsibility.

Like (1)

Blue Indian

Oct 6, 2009

According to Bloomberg,Saudi Arabia's Central Bank Governor Muhammad al-Jasser has denied that they were in talks to replace Dollar as the currency for pricing oil . Some economists have termed the development of replacing the dollar as unlikely at least in the short term!!!

Like (1)


Oct 6, 2009

Regarding curbing the salaries of the corporate executives one thing you have to agree that irrespective of the company's groth CEO's are enjoying the high salaries and all benefits and company may go in loss let share holders go to hell who cares and same thing is with the present government let all politicians enjoy the fruits of being a leader who cares for the coman man the looting by crores,leaders spend crores for their birthdays or their kins marriages no income tax raids no question asked because govt is of thieves.Politics has become a big business.

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