This is critical if India has to take the next big leap... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

This is critical if India has to take the next big leap... 

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In this issue:
» India needs to improve its ease of doing business
» Process of selecting PSU bank chiefs set to change
» World Bank expects India's GDP to accelerate
» Why deflation in Eurozone is a big problem...
» ...and more!

For most developed countries, there have been defining events in their history that has taken them to the next level in terms of growth and development. For some, these events were so huge that they went on to become superpowers. Britain, US and Japan are some of the most notable examples.

For India that year was 1991. India still has a long way to go before it can boast of being an economic superpower. But 1991 was still a landmark year because of some very bold reforms undertaken. This opened up the Indian economy, allowed the entry of multinationals and fostered healthy competition; all of which are necessary ingredients for growth and development.

And this is something that even Mr Narayana Murthy, founder of the revered Infosys, agrees with. In an interesting article in the Business Standard, Mr Murthy has highlighted the difficulties of doing business pre-1991 when the government ruled the economy with an iron fist. Indeed, it was all the more tough in the 1970s when the License Raj ruled supreme.

1991 changed all that. Some of the areas where the country has grown by leaps and bounds since then are in IT and communication. Manufacturing also took a giant leap forward as licensing was removed in several industries in the economy. This led to world class companies such as Infosys, Dr. Reddy's, Maruti Suzuki among many others to spring up.

But we cannot afford to rest on the success of 1991 alone. In a very dynamic and changing world, India's growth has to take the next jump forward. In that sense, the Modi government has shown promise as it has begun to introduce some much needed reforms in the energy and infra space.

But Mr Murthy believes that the other growth trigger for the Indian economy will be the quality of its talent. This is one area where the country is sorely lacking. While there may be enough institutions imparting higher education, many of them are not equipped enough to impart the requisite skills that match the needs of the industry. And unless this is addressed satisfactorily, it will continue to remain a cog in the wheel of India's growth.

It is not all bleak though. India today boasts of some world class companies started by people with an entrepreneurial spirit. Indeed, we believe that an entrepreneurial wave in young India will be one of the 7 key signals of the Megatrend that will only grow stronger in the coming decade. Which is why quality of education will become very critical. And the sooner the Modi government addresses this, the greater will India's chances be of taking that next leap forward.

Do you think that quality of education is important if India's growth has to take the next leap forward? Let us know your comments or share your views in the Equitymaster Club.

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Bureaucratic impediments created by the erstwhile UPA government pushed India to the bottom of the table when it comes to ease of doing business. However, ever since the Modi government came to power steps have been taken to improve India's ranking here. In fact, the PM himself has made his intent clear to bring India's rank in top 50. In order to do that, the first step which needs to be taken is to eliminate delays that happen in business registration. The government knows that and is already taking steps to overcome this hurdle. For instance, it is planning to reduce the timeline of business registration from 27 days to a single day! While such baby steps go a long way what matters the most is co-ordination between the states and the Centre. Remember, Centre rolls out the policy. But it has to be implemented by States. Imagine implementing a policy in a state like UP where Samajwadi Party is in power. Or for that matter any other state which has a different ruling party than the one prevailing at the Centre. Obviously in such cases implementation may take a backseat and politics would come into forefront. However, if India indeed needs to improve its ease of doing business the execution of policies has to be nationwide. If not, the dream to come in the top 50 will remain just on paper.

Even when we make investments, an ideal time horizon should be 3-5 years. How is it then when it comes to appointing PSU bank chiefs, they are appointed only for a duration of 18-24 months? Defies logic, isn't it? Little wonder a committee that's been tasked to review change in management structure of banks has suggested longer tenures for PSU bank chiefs. Readers would be well aware that after recent scandals, reputation of PSU banks has certainly been tarnished. And therefore the Government has swung into action trying to repair some of the damage. Amongst the first steps it has taken is to cancel the current selection process. While a new process is yet to be finalised, it is most likely to allow RBI to have a stronger say in it. While this alone is not enough, it is certainly a step in the right direction we believe. Going by the RBI's reputation, we are of the view that there's a greater possibility candidates will be selected more on merit and there will be less lobbying involved. The decision to review tenures is also a welcome move according to us. At a time when the Indian economy is trying to break new grounds, the need for a well-functioning banking sector cannot be emphasised enough.

03:13  Chart of the day
If the World Bank's views prediction is anything to go by, India's growth is going to accelerate at a fast pace next year. As per the bank, GDP growth in the current year is expected to be 5.6%. And is likely to rise to 6.4% by FY16 and 7% by FY17. What is likely to drive this growth will be the full impact of the reforms. Also, the implementation of the Good and Service Tax (GST) would give a boost to manufacturing. As you would be aware, for a while now, the Indian manufacturing industry has been marred by supply chain delays and uncertainty. Regulatory barriers to the movement of goods across state borders have put such units at a significant disadvantage with international competitors. And as the transit times increases, this impacts the overall transit cycle; thereby, reducing the overall competitiveness. In our view, the implementation of the GST could turbo-charge India's economic growth and help in improving competitiveness of India's manufacturing sector. We only hope this time around, this particular reform does indeed see the light of the day as planned.

World Bank expects India's growth to pick up...

Deflation... Not a widely known term. But it wouldn't be too difficult to guess that it probably means the opposition of inflation. So deflation is nothing but a decline in the general price level. For Indians, such a thing may be unheard of, given that they are used to fast rising consumer prices. But the rich world seems to the fighting the battle against declining prices. It may seem counterintuitive that deflation is seen as a bad thing. After all, wouldn't you like if price levels of goods and services declined?

But there's another side to it. Say you have taken a huge loan. The way you would retire this loan would be through monthly EMI payments after you receive your monthly salary. Now let's say the economy sets into deflation. Let us tell you that deflation is a symptom of underlying weakness in the economy. What it means is that consumers aren't spending enough. There's oversupply of goods and services. Now this is quite likely to impact your job. Given the grim scenario, your employers would ask you to take a pay cut.

This is where the problems start. Your monthly income declines. But your borrowings remained unchanged. You have to pay back what your borrowed. So effectively, deflation takes money away from borrowers to savers.

Now just stand back and look at the state of the developed economies. They are overburdened with debt. The logic that we just discussed above applies perfectly here. For borrowers, a deflationary scenario is the worst nightmare.

It is no wonder why The Economist has dubbed the looming deflation threats in the Euro zone as the "world's biggest economic problem" .

In the meanwhile, the Indian stock markets remained buoyant in the post noon trading session. At the time of writing, BSE-Sensex was trading up by 39 points. Sectoral indices were trading mixed with oil and gas and metal being the biggest losers. Stocks from consumer durable and pharma were among the leading gainers. Majority of the Asian stock markets were trading in the green led by China and Taiwan. But the Japanese index was trading negative. European markets have opened the day on a firm footing.

04:55  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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2 Responses to "This is critical if India has to take the next big leap..."

abhay dixit

Oct 29, 2014

There is a lot of talk about getting permission to start your business in a day, ease of doing business. It is equally important to make closing of business easy. Labour, bank loans etc. People close not because it has failed but they want to retire, no one to take over or raw material, labour shortages.

Let us keep talking about that too.


Rajeev Arora

Oct 28, 2014

Quality of Education and skills in the fast developing science and technologies are a very urgent need of the hour. The current state of affairs are a big worry for our future. Things have to drastically change by 2020. We are on the near vertical part of the exponential curve of change and science and technology are key drivers for the same.

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