Why India imports a resource it has in plenty... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why India imports a resource it has in plenty... 

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In this issue:
» US scores well on innovation
» A default by the US seems more and more likely
» India Inc. wants RBI to cut rates
» Global house prices are on the rise
» ...and more!


00:00
 
It is a cruel irony that when it comes to this natural resource, although India ranks fourth in the world in terms of reserves, it has become the third biggest importer. Yes, we are talking about none other than coal.

Indeed, supply policies dating from the 1970s era are so restrictive that India ended up importing a record high of nearly 138 m tonnes of coal in the last fiscal year as reported in an article in the Mint. This hardly makes much sense. For a vast country such as India where power shortages have been all too frequent, it is belies logic that the coal industry is reduced to such a sorry state.

The pain to the government on this front exists both for the short term and the long term. For instance, India's current account balance is already in a precarious state and the rupee has been falling. Hence, a rise in coal imports could not have come at a worst time.

But more importantly, it is imperative that an energy deficient country such as India makes more efforts to become self reliant and not squander away resources that it is already blessed with.

It goes without saying that the archaic laws related to coal need a complete overhaul with the aim of enhancing domestic coal supplies. For instance, currently, coal mining is entirely the domain of Coal India. The company over the years has failed to tackle the issues of falling output and corruption and has not made much attempts to modernize. Although since then power companies are allowed to have captive coal mines, construction of the same is mired in red tape. And so there is no choice but to import coal from abroad.

As mentioned in the article, one solution being proposed is the concept of 'coal banking'. This means that power companies should be allowed to mine coal and park it with Coal India. Once the power plants come on stream, these can be taken back from the mining major. The idea is to build a bank of coal stocks which will ensure a steady supply of coal without having to buy this from abroad.

Whether this is the best solution out there or there are more in the offing remains to be seen. But it is quite obvious that the current state of affairs cannot be allowed to continue for long. It does not make sense for India to aspire to a consistent growth rate of 8% plus in the future, if the basic and urgent problem of fuel and power cannot be addressed. So, the sooner the government realises the importance of power and the role it plays in augmenting the GDP of the country, the better off the economy will be.

Do you think that the government will take the responsibility of addressing the problem of coal shortage any time soon? Let us know your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
 
US' economy may be down in the dumps, but when it comes to innovation the country clearly comes out on tops as today's chart shows. As reported in the Economist, one in 13 people in the US are entrepreneurs. In contrast, European countries such as Britain, France and Germany lag behind. Infact, innovation and entrepreneurship is one of the main reasons that catapulted the US to the status of a superpower in the past many decades. Companies such as Apple, Google and the like are testimonial to the fact. Sadly, the US government seems to be seriously lacking in innovation. Indeed, since the start of the crisis in 2008, all it has been able to come up with is money printing and more of it. And none of it has done much to pull the economy from the pit it has sunk into.

US has the most number of new entrepreneurs
Data Source: The Economist

02:11
 
The US government is still in shutdown after it failed to reach an agreement over budget nearly 2 weeks ago. But it has a bigger problem looming ahead. As per US Treasury Secretary, on 17th October, 2013, the US government will have only US$ 30 bn left with it. This amount will be insufficient to meet the government's daily expenses. The shortfall could be as high as US$ 60 bn. Therefore unless the US government can come up with a solution, the US will default on its payments on that day. The one and obviously the most popular solution that it has available is to raise the debt ceiling. Or in simple terms, it could just print more money. The question is will it?

The stock markets along with hedge fund managers, US government officials and some others seem to think the US government will do exactly this at the last moment. But there is a large faction of people who seem to think otherwise. They think that the US government will default. And are therefore hedging their portfolios against such a possibility. What will happen 2 days from now is something no one can tell with certainty. But the possibility of a US default is just increasing by the day. If money printing is the only way to save the US from a default, then one thing is for sure, US will definitely default one day. Whether it happens on October 17th or one year down the line or even two years down the line; no one can tell for sure.

So what should you do if the US does default on its payments? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks.

02:56
 
Raghuram Rajan is an inflation hawk. He increased interest rates immediately on resuming office in order to curb inflationary pressures. And this move did not go well with the India Inc then. Increasing rates in a tight liquid environment has upset the already lagging capex cycle. As such, India Inc has asked RBI to cut the rates to revive the economy. Lower rates will ease liquidity and revive the capex cycle. Also, corporates believe that while inflation is high right now, arrival of kharif crops in October is likely to ease inflationary pressures in future. Hence, lowering rates is the way to go. However, that would mean that inflation can again raise its ugly head. Hence, RBI should take calibrated steps in this regard. The job of any central bank is to manage growth and inflation. And over the last 2 years both have been suffering. However, it would be wrong to blame RBI alone for lagging growth and hawkish measures. Growth has been suffering due to bureaucratic hassles and infrastructure bottlenecks. And government is responsible for these issues. So, unless both RBI and government work hand in hand, 8-9% will remain a thing of the past.

03:32
 
The Indian government's indifference to foreign direct investment proposals is legendary. In fact we are amongst the few countries where investors wanting to invest in steel, power and energy projects have withdrawn after years of wait. The result being that billions of dollars that would have stayed with the economy for a very long tenure have exited prematurely. The government itself is starved of capital to fund infrastructure projects. However, it has ensured that bureaucracy, corruption and red tape puts off even the most serious foreign investors. The proposal of FDI in retail was hailed as a game changer in the UPA regime. The government has failed to get across any meaningful economic reform in its latest stint. Hence, it hoped that the retail therapy would work. However, Walmart's untimely exit from the JV with Bharti has sealed those hopes as well. What has made matters worse is the Finance Minister's show of arrogance. In calling the retailing giant 'a speck in India's retail sector' FM Chidambaram has done just that. Wal-Mart's topline is equal to sales of India's entire retail sector and almost equal to one third of India's GDP. Notwithstanding its size and the importance of Walmart to Indian retail sector, we wonder if India can afford to fake self sufficiency in funding. Agreed Walmart or FDI in retail may or may not have made a huge difference to India. But by calling Walmart's exit a non event, Mr Chidambaram has certainly not sent the right message.

04:04
 
Have you been wondering about the next financial crisis? Like when there is an illness the doctor is the right person to give you a correct diagnosis, the financial world too has its doctors. One gentleman we like to listen to is Yale Professor Robert J Shiller. To give you a brief background, Shiller rose to fame with his book 'Irrational Exuberance' that aptly foretold the 1999 dot-com bubble burst. That's not all. This influential economist also correctly predicted the US housing meltdown. It is therefore no surprise that Shiller has been awarded the Nobel Prize for Economics along with two other economists.

What is Shiller's latest view? As per an article in Money News, he is worried about the alarming increase in global housing prices. Shiller blames the US Fed's ultra-easy monetary policy and market speculation for the property bubble. When asset prices are no longer connected with their fundamentals it is a sure sign of a bubble. Eventually when asset prices collapse, they have far-reaching effects on other markets and end up damaging the economy. This is what happened back in 2008. And given that markets seldom learn from past mistakes, we are on the verge of another global meltdown. Shiller sees signs of a new housing bubble in some of America's largest cities. Some other countries where he sees troubling rises in property prices include India, China, Brazil, Australia, Norway and Belgium, among others. So the next big financial crisis is clearly on the horizon. It's only a matter of time now. Be prepared!

04:46
 
The Indian equity markets hovered around the dotted line during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 10 points or 0.1%. Barring stocks from the metals, information technology and oil and gas spaces, losses were seen across the board. Banking and consumer durables stocks were among the top underperformers. Midcaps and smallcaps were trading weak with the BSE-Midcap and BSE-Smallcap indices down by about 0.8% and 0.7% respectively. Stock markets in other parts of Asia were trading positive with Hong Kong and Japan leading the pack with gains of about 0.5% and 0.3% respectively.

04:56  Today's investing mantra
"In the short run, the market is a voting machine but in the long run it is a weighing machine." - Benjamin Graham
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11 Responses to "Why India imports a resource it has in plenty..."

v.vijayamohan

Nov 10, 2013

Coal, Iron Ore, Onions - whatever you name - Mismanagement is the problem in India. These are in plenty. But, there is no one bothered about producing more of them - to meet the demand. In respect of Onions, there is no will to stop Hoarders and start importing - so that huge profiteering stops.

Like 

H K Prakash

Oct 19, 2013

1 It allows bureaucrats to go abroad, 2 It allows them to be wined, dined and "entertained", 3 It allows them to credit their illegal $ account in Switz and spend some
Case study: UP Govt sent 5 to buy "Vijay Scooter" plant from Italy around 1975. They spent 5 days in 5 star Rome hotel with "companions", Scotch etc. After 5 days they could barely see straight and signed anything kept in front of them. The "Vijay" plant was junk, no scooter was produced in Italy for 2 years before being handed over, and it stopped manufacture in India 5 years after it was commissioned. I believe even today 5000 people get salary every month for doing nothing!!

Like 

Chalapathi .K.V.

Oct 17, 2013

Beautiful article, and a real eye opener.RBI IS CRYING like anything with regarding deficit of Forex ,but this blind and corrupt govt: never cares for CAG's report and never made any minimum consideration to rectify their mistake at any time.Even APEX court is exhausted with the behavior of this govt: in particular statue of India .Easy way to pump out FOREX CURRENCY into the secret accounts, and rule the nation .

Like 

Anil

Oct 17, 2013

Its all about Games that people are playing. Governments should focus on improving its own credibility and stop playing into foreign hands (UK, USA etc)

Like 

R.Santhana Subramanian

Oct 17, 2013

Sir, It is now a well known secret that corruption combined with judicial activism promptly followed by policy paralysis the coal industry and in turn power sector is in very bad shape. It seems there is no coal policy well laid. It was at the whims and fancies of the Govt of the day especially UPA1 & 2. Further auctioned coal blocks still lie without production, wantonly delayed by the Block buyers. It naturally creates artificial scarcity. The CAG audit on M/s Reliance Co says production in KG D6 wells are deliberately is well below capacity only with the intention increasing profit margin for the co and inflation raising it's ugly head at the cost of National spirit and development. Who is accountable for such lapses? Hope some realization will dawn on all stake holders only when people elect a new Govt with more national spirit and development,which is long overdue. Finally clean Govt with Good Governance.

Like 

R GURURAJA RAO

Oct 16, 2013

There is a saying in Kannada "HITTALA GIDA MADDALLA". That is why, local resources are not in use, though available in abundance.

Like 

Punit Jain

Oct 16, 2013

The controls on Coal sector and monopoly of CIL are policies that have outlived their utility, and are counterproductive. The following steps need to be taken urgently 1) Set up a Coal Regulator on the lines of IRDA to ensure level playing field for Coal miners 2) Open up Coal mining to all players, private and public. 3) Split up CIL into 7-8 manageable size PSUs in a demerger/ split. 4) Allow baby CILs to pursue privatization in a caliberated manner thereafter. 5) Coal regulator to monitor sector and ensure level playing field and fair prices of Coal in India 6) Reduce dependency on imports through local production 7) Standardize coal quality and calorific value, and ensure proportional pricing.

Like 

t j ethiraj

Oct 16, 2013

the quality of coal in terms of calorific value is poor when compared to imported ones and that is the real reason.Kick backs,employment abroad and foreign trips may be another incentive
t j ethiraj

Like 

Raj Kumar

Oct 15, 2013

Monopoly of CIL to end as soon as possible

Like 

Rajagopalan

Oct 15, 2013

The present government may not take any step as they are used to this style of working. It is also unfortunate that the people have lost faith in the present government. It is also unfortunate that the next government would not have majority to take drastic decisions.

Like 
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