Blame the government for income inequity - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Blame the government for income inequity 

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In this issue:
» Are PSU banks still a good bet?
» Why India needs to dig deeper for coal
» Filing error lead to US$ 26 bn loss for Google investors
» QEIII boosts demand for gold and ETFs
» ... and more!

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Poverty is word that is common to Indian society. It is something that has gripped the nation tightly for as long as we can remember. But the thing that is more worrisome is the growing income inequality. The rich are getting richer while the poor are getting poorer. As per a leading daily, 5% of the people own two-fifths of the country's assets. And the divide is getting worse by the day. This comes as a shock to the people of the country. After all we hear our politicians and great leaders talk about benefits for the poor ad infinitum.

The government over the decades has always been talking about reducing poverty. No matter which politician or leader comes into power the agenda has always remained the same - Help eradicate poverty. All policies are always to help the poor. Their fuel is subsidized which has actually led the oil companies to face huge losses. Their food is subsidized which has led to higher taxes for the rest of the country. They have an employment guarantee scheme which is funded for through our tax money. Even our telecom rates are set to go up as the telecom spectrum is being sold at a higher rate just to fulfill the government's obligations to the weaker sections of the society.

With these things it is natural for the other sections of the society to have a feeling of animosity towards the poor. But when the income divide numbers are looked at, this animosity appears to be misplaced. So who is to be blamed? The answer is none other than the government.

Despite the policies that are devised for the weaker sections of the society, hardly any of them actually benefits from them. The money that has been set aside for the poor rarely ever reaches them. Food grains rot away. The part that is left is cleverly stolen by the politicians and their goons. The subsidized fuel is used by the trucks instead of the poor. In all this while the rich who control the assets keep getting more and more rich by using the loopholes in the system, they also get away with it owing to poor governance standards. And the poor get poorer. And to mask the numbers, the government takes to changing the way the people below poverty line are defined. But changing the definition does not solve the problem.

The income inequality is a shame on the faces of these leaders. The need is to improve the distribution system to ensure that what is earmarked for the poor actually reaches them. At the same time governance needs to be improved. People have to be made accountable for their misgivings. Only then will the distribution of assets be fair and equitable. What India needs is a better government system. But will it ever succeed?

Who or what do you think is responsible for the growing income divide in the country? Share your views or you can also comment on Facebook page / Google+ page

01:10  Chart of the day
That India's growth has slowed down is not news. Nearly every industry was hit by it. But despite the gloom there is reason to cheer. The ray of light is that employment in the country has picked up. As shown in the chart, after seeing a dip in December 2011, the monster employment index has seen a pickup in the subsequent quarters. Amongst the industries that have driven the growth in employment include retail, shipping and garments/textiles. It is interesting to note these industries driving employment. Earlier the credit used to invariably go to the high growth software sector and the banking sector. But in light of the global slowdown as well as tighter monetary conditions prevalent in the country, these sectors appear to have taken a backseat in recent times.

Source: Financial Express

PSU banks in the past have typically traded at much lower valuations as compared to private banks. This has been due to various factors such as higher NPA (non performing assets) ratios, lower employee productivity, strict norms with respect to priority lending and the like. This did not make much sense given that Indian PSU banks are classic cases of entities that have the ability to flourish despite the government. What is more, entities that control 70% of India's banking assets cannot lose value permanently.

Now, the last couple of months have seen a rally in these stocks. So the question is whether there is still any value left in PSU banking stocks? Has the recent rally brought the valuations of these stocks to the levels that they deserve? Or is there more steam left? There are various catalysts that will give a direction to the price movement of these stocks in the near term, notably the results for the September quarter and Reserve Bank of India (RBI)'s (RBI) monetary policy. If the economy also rallies, this will automatically get reflected too. But we believe that it makes sense to adopt a bottom up approach while investing in these stocks. Rather than invest into the theme of PSU banking stocks, it would make much more sense to study each bank individually and then invest in them based on how valuations pan out.

Let us start with the conclusion first. The bottomline is that Indian consumers need to be prepared for ever-increasing power tariffs in the years to come. What makes us say so? An article in Firstpost presents some tragic insights into the dynamics of the Indian coal mining industry.

Our country is richly endowed with 'black diamond'. Pegged at 286 bn tonnes, India has the fifth largest coal reserves in the world. But the good news ends there. Our heavy reliance on domestic coal (75% of total demand) for our energy needs is going to be a big challenge going forward. While demand for electricity is growing fast, the production of coal has been unable to keep pace. Let's delve a bit deeper into the real problem. Currently, 90% of Coal India's coal output comes from open cast mines. The reason for this is pure economics. The average cost of open cast coal is about US$ 13 per tonne. On the other hand, the average per tonne cost for underground mines is US$ 75. But we cannot afford to rely on open cast mines for too long. It is said that these low-cost mines are going to be exhausted within the next 10-12 years. The other problem is that open cast mines require vast tracts of land. Given the complications involved in acquiring land coupled with increasing land costs, the days of cheap coal are nearing their end. The other option, underground mining, though expensive, is the only option if we want to meet the rising coal demand in the coming decades. But we have to act with urgency. On average, it takes about 6 years from planning to production for an underground mine. But because of the high costs involved, coal India has no big future plans for underground mines so far. Whatever be the case, one thing is very clear. Power tariffs are set to keep rising.

Shareholders of the popular tech giant Google were at the receiving end of a rather strange error recently. And that too, without any fault on their or the company's part we should say. Apparently, the company's quarterly results got posted a few hours early of schedule. Worse still, there was some important information missing in the result. This made investors nervous and led to a huge sell off in the stock, thus wiping off US$ 26 bn worth of market cap of the company.

The error origination was traced to one of the filing agents for the SEC, who files hundreds of thousands of similar documents every quarter for various companies across the globe. We are sure that sensitive information of such kind does go through lots of checks and balances and hence, must not have slipped through. Besides, the fact that it had to happen for a tech giant like Google and not any other run of the mill firm is another cruel irony. Sadly though, there is no way such events can be predicted in advance. And investors will have to live with such kind of risks to their portfolio we believe.

Gold is considered a currency that cannot be manipulated by interest rate policies of any one government. It has traditionally been an asset class used as a hedge against inflation. And therefore is considered to be a safe haven during times of uncertainty, such as the present. This simple logic is leading many investors to invest in gold mutual fund and ETFs according to an article on

With inflation pretty much on the cards - following the recently announced QE3 plan - and the uncertain global economic environment - with Asia slowing and developed regions being submerged in debt and facing fiscal issues - investors are turning to gold again.

In the meanwhile, after opening the day in the red, the Indian equity markets are now trading above the dotted line. At the time of writing, Sensex was up by 73 points (0.4%). Other major Asian stock markets have closed the day on a mixed note with Hong Kong and China closing in green while Taiwan and Korea closed in the

04:55  Today's Investing Mantra
"The secret to investing is to figure out the value of something - and then pay a lot less." - Joel Greenblatt
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9 Responses to "Blame the government for income inequity"


Oct 27, 2012

All major economies of the world are still grappling with unprecedented economic crises following the Global Financial Meltdown post 2008. One positive outcome of this is the seriousness with which leading economists and policy makers are challenging established economic thought. One aspect of this comes through clearly in a recent interview given to the Times of India by Joseph Stieglitz, Nobel Laureate in Economics. If I have understood him correctly, he says that the people at the bottom of the economic pyramid spend everything they earn while those in the higher strata save a major portion of what they earn and spend very little of it. This is because their earnings are immense. As a consequence money/wealth gets swept up the pyramid continuously from the poor to the rich. This is basically why the rich get richer and the poor get poorer. This is true both of the capitalist and the communist systems and also of the mixed economy model, or of any strange chimera of economic growth model that combines economic capitalism and political communism/authoritarianism to varying degrees. We have to look beyond economics, beyond both capitalist welfare economics or 'state-ist' economies to find answers to the malaise of the rich getting richer and the poor getting poorer. It is a malaise because it gives rise to human suffering and social unrest. It is beyond Economics as of now because all models of economic growth have failed to varying degrees in delivering basic economic justice which is actually the antidote to the malaise.
One of the fundamental reasons for economic injustice is our monomaniac pursuit of growth interpreted in terms of growth of GDP or GDP per capita for the country as a whole or the growth of the bottom lines of the balance sheets for all business activities. By calling it bottom line instead of profit we have become insensitive to profiteering. We have become insensitive to the zero sum game that profiteering really represents. That is, for every profiteering activity, there is inordinate loss for someone while there is inordinate gain for someone else. It can also be argued that for continuous growth of GDP growth in one country there is stagnation or impoverishment in other countries and/or degradation of environment and human exploitation. This insensitivity to the zero sum game of profiteering or continuous GDP growth has been sanitised and glorified quite often.
The Gini coefficient in the area of income/wealth distribution and other aspects of economic thought have of late focussed our awareness on the problems of economic equity or rather the lack of it. Faced as we are now with the consequences of unbridled speculative deals that masqueraded as healthy economic activity and brought whole economies down, it is to be hoped that we have learnt our lessons and will evolve to a more equitable species economically. The Center for the Advancement of the Steady State Economy (CASSE) is promoting some thoughts as counterpoints to established economic thought. See this link : More groundbreaking thought is needed.



Oct 24, 2012

The policies are made to reflect help to the poor with loop holes for the executors to enjoy by draining the money or product with out fear of monitoring or effective investigations followed by timely justice. Who will be benefited by the policy? The policy makers, executors and the contractors and the deals are perfectly covered. Thus to lecture, it is enough to seek votes and in reality it minting of notes. India is importing thousand tonne of gold every year the one-fourth production of the world. Hence, we are already a golden sparrow. The lockers are full. The owning of house is running beyond the earning means of hard working and honest citizens. The honest citizen opting to establish a micro, small or medium industry is made to submit a project report with arithmetically calculations to seek financial assistance. FDI in retail is approved with out convincing arithmetically prepared model for the benefits to the country. In spite of protests, the authorities are making mere statements and not bringing the arithmetical model before the public. This shows authorities are enforcing due to hidden benefits to the concerned. Thus, the approach is to make rich more rich and the poor will suffer under their authority. Let the authorities disclose the arithmetical model as to how the decision is in the interest of the country. Please project to the authorities to disclose the arithmetical model through media and web site to convince the public that it is in the interest of the country.


Prem Sharma

Oct 23, 2012

Who will bell the cat? Unless policies are implemented strictly with corresponding accountability and warranted punishment for noncompliance, there is hardly any chance to narrow the gap between rich and poor. Unfortunately our political structure is such that we have to choose between many thieves. All of them are bound to resist any change and honest politician, if any, finds himself in spectators' row. Also rich people do hardly bother about the poor and the poor has hardly any time to think otherwise than meeting his basic needs. The middle class 'Na Ghar ka na Ghat ka'.



Oct 23, 2012

Yes the divide between the rich and poor is growing. There is a class in between this two which is actually rotting. They are neither rich nor poor and have to bear the burden of all anomalies done by the rich and politicians who siphon out all that is available and then ask this class to pay for everything. Any number of Anna Hazare or Kejriwal will not help. Now I have lost faith in these guys too.


RL Mathur

Oct 22, 2012

dear sir
it has been mentioned that "the subsidized fuel is used by trucks".it seems you have forgotten to mention that the subsidized fuel- diesel- is also used by car owned by the large corporate houses/taxis/rich/well to do persons and not by the poor.



Oct 22, 2012

With abundant ignorance and utmost humility,I am prompted to observe as under:

I append an extract from the article hereunder:)

""Despite the policies that are devised for the weaker sections of the society, hardly any of them actually benefits from them. The money that has been set aside for the poor rarely ever reaches them. Food grains rot away. The part that is left is cleverly stolen by the politicians and their goons. The subsidized fuel is used by the trucks instead of the poor.""

The above observation (totally valid ) prompts me to cite what is known as CDMA ( not to be mistaken for the generally known in telecom parlance as ""CODE DIVISION MULTIPLE ACCESS"") but totally different but wholly relevant to the attitude of the great leaders who profess great TRANSPARENCY in their actions ?? :
CDMA = CAT DRINKING MILK ATTITUDE ??(I explain to elucidate: The CAT when it drinks milk shuts its eyes in the profound belief that ""NO ONE IS OBSERVING OR SEEING ITS ACTIONS/DEEDS BECAUSE ITS OWN EYES ARE CLOSED ""




Oct 22, 2012

I have written on this topic three times earlier.Unless Public Distribution System is proper ( Without any loop holes) the situation will never improve.Now our resp. Prime Minister is shifting to Aadhar identification, Let us only hope that some improvement will be visible !
Our rulers should have thought for Underground mines much earlier.Unfortunately starting digging the well when you feel thirsty type approach will not help.
South African mines are 6 to 8 Kilometers down from ground level & they are producing High quality Coal which is low in Sulpher content.It's an effort of decades- not few years.Our ministers are busy in only their survival in power, they blame resp. officers in charge in their ministries for delay in implementation of all projects.


Suresh Kumar

Oct 22, 2012

Media follows GDP growth numbers very closely, but not gini coefficient. While we have grown rapidly in last 2 decades, gini coefficient has also gone up. The main reasons for growing inequality is part of the business model of rent seeking and crony capitalism due to the nexus between businessman, politician, bureucrat and mafia particularly related to land and other natural resources. The other reasons are lack of skill development, old laws on labour, land acquisition and economic offences, slow bureaucracy, lack of leadership and finally changing value system in society where money is important but not its colour. Greed has taken over as the prime mover for business relegating ethics to background. Unfortunately world's largest democracy has no answer to these problems.



Oct 22, 2012

With all humility fortified with abundant ignorance I may observe as under
I append a relevant extract hereunder :
“” The government over the decades has always been talking about reducing poverty. No matter which politician or leader comes into power the agenda has always remained the same - Help eradicate poverty. All policies are always to help the poor. “”
This prompts me to fortify it further that “” We have a diaorrhea of words and constipation of IDEAS”
Further I also cite a veryt telling example to bring the core essence of what I WISH TO SAY ::
There was a wise person who wanted to test the IQ of the people gathered around him.
He drew a straight line and asked those around to Make it short and long without using anything to erase the line drawn by him.
HOWEVER, a very clever one drew a LONGER line (above the line drawn BY THE WISE MAN)WHEN IT APPEARED SHORTER; AND ANOTHER shorter LINE(below the one drawn by the wise man)to make it appear longer??
Our Governments(their professed policies and actions (proposed )exemplify the aintelligenc e exhibited by the Clever one as in the cited example!!\
I hasten to conclude !!

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