3 factors that could push India's recovery beyond FY14 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

3 factors that could push India's recovery beyond FY14 

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In this issue:
» Long term unemployed rise in US, Europe
»  RBI hikes repo rate yet again
»  Japanese markets gain 70% in 1 year
»  Indian mobile economy will contribute to growth
»  ...and more!

After the stupendous years of growth seen in FY10 and FY11, India's GDP growth has failed to keep up pace. In those years, although the global economy was far from a recovery, India logged in healthy growth rates on the back of strong domestic demand.

But this demand began to sputter as inflation remained persistently high, burning a hole in the pockets of consumers. Although the central bank has been raising rates to curb the same, the government has yet to get going in terms of ramping up infrastructure and eliminating supply side bottlenecks.

The figures give a telling story. As reported in the Economic Times, as of June this year, about 50% of central sector projects (of Rs 1.5 bn and above) were delayed. This is up from 44% in June 2008. Not just that, cost overruns have risen from 12% to 20% in the last five years. Delayed projects were more pronounced in the sectors such as roads, power, petroleum and railways. All of these sectors are critical in driving any country's GDP growth. The central bank has attributed these problems to the government's inability to come out with effective policies and inadequate appraisal mechanisms on the part of the financiers.

Other factors that are hindering economic recovery include large under-recoveries by oil marketing companies and a bloating food subsidy bill. The latter especially could be more of a problem as the food-for-all programme gets introduced. And because the government is under pressure to reduce its fiscal deficit, it would choose to do so by cutting down developmental expenditure rather than cut down subsidies. This hardly augurs well for the long term health of the economy.

While FY14 looks to be another difficult year, most of India Inc. at least expects the next fiscal to be a tad better. Whether that actually turns out to be the case remains to be seen. Many of India's problems are nothing new and have been pain points for the past many years. But as India harbours ambitions to make it big in the global arena, such apathy cannot be continued to go on for long. The extent of India's economic recovery will depend a lot on which way the government chooses to go. If projects for development are continued to put on the back burner, then an 8% plus consistent growth seems a distant dream at best.

Do you think that continuous project delays will hamper India's economic recovery? Let us know your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
Long term unemployment continues to be a serious problem for the US and most of Europe. As per the Economist, long term unemployed has been defined as those out of work for more than 12 months. The problem is a vicious one feeding onto itself. People who have been unemployed for long are more likely to see their skills deteriorate since these are not put to use. This coupled with the fact that they are out of touch with new developments means that employers are not too keen on hiring them. For the developed world, this is all the more a challenge because they also face the issue of the aged population rising. And so bleak job prospects and unemployment puts more pressure on the governments for dole outs. Given that most of the governments in these regions are burdened with too much debt, getting out of such a sticky situation remains a tall order.

US, Europe see a rise in long term unemployed

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The Reserve Bank of India (RBI) made another hike in the repo rate by 25 bps to 7.75% in its second quarter review of monetary policy for 2013-14. The repo rate is the rate at which the Central bank lends money to commercial banks. The Central bank also reduced the marginal standing facility (MSF) rate by 25 bps to 8.75%. The MSF rate is the rate at which the banks borrow funds overnight from the RBI against government securities. Further, it left the cash reserve ratio (CRR) unchanged at 4%.

The apex bank continues to maintain hawkish stance. The anticipated elevated levels of both wholesale and consumer price inflation in the months ahead prompted RBI to opt for a rate hike measure. But few things did bring respite. The initial signs of recovery and stability have been witnessed in the foreign exchange market. Steps towards curtailing current account deficit are gradually yielding results. This enabled RBI to roll back the tightening measures and enhance liquidity into the system. Hence, the MSF rate was cut down to 8.75%. With these measures, the MSF rate and the bank rate now stand recalibrated to 100 bps above the repo rate.

Going forward, the central bank continues to closely monitor inflation risks. At the same time, it remains cognizant of strengthening growth dynamics. However, curbing the rising inflationary spiral and containing the food price inflation will continue to pose challenges.

10%. That's how much the Sensex has gone up in the last one year. If you consider this decent enough, how about a 70% gain over one year? Impressive, isn't it? As per zerohedge.com, this is the gain that the Japanese market has seen in the last 12 months. Of course, almost all of it is attributed to Abenomics, a term used to denote the aggressive monetary policy of the Japanese premier. Thus, on this yardstick alone, Abenomics can be considered a huge success in its one year of existence. But is this the right yardstick to measure? We don't think so. At times, stock markets can go up merely on the basis of excess liquidity. Pump in more money and higher stock prices will follow. Consequently, the real success of a policy measure is in the employment it creates and the productivity it unleashes. On these counts however, Abenomics fails to show hardly any improvement at all.

The Japanese economy has failed to show real growth of a respectable magnitude. Of course, higher stock prices have made people feel rich. But this is not the way to higher prosperity. Higher prosperity occurs when there are profitable enterprises and where there is a sizeable return on capital employed across the economy. Japan simply cannot expect to keep the economy rolling by letting sick enterprises flourish and making up for it by printing more money. Such a policy is a recipe for disaster we reckon. Sooner or later, Japan will have to pay the price for it.

'The mobile economy will contribute US$ 400 bn to India's GDP by 2020.' As reported by the Economic Times, these are the findings of a study carried out by global mobile industry body, GSMA. It states that the Indian mobile economy will contribute significantly towards the GDP and create about 4.1 m jobs in the country as well. All this is based on two assumptions. The first is that the fast pace and innovation of the Indian mobile industry continues. And the second is that the regulatory environment becomes more conducive. It is the second assumption that needs to come true if the findings are to become a reality. The regulatory environment for the telecom companies has been tough. There is quite a bit of uncertainty related to the spectrum which can be called the raw material for the companies. The regulator has had two rounds of auctions which were shunned by operators due to the high reserve prices. Even now, the rates have not been finalized. In addition to this, there is a huge amount of uncertainty related to license fees, charges, etc. This has led operators to adopt a cautious view with regards to their expansion and rollout plans. The only way for this to revive in a significant way is if the regulatory environment would become a bite more benign. If it happens then the mobile economy would very well run up the way GSMA expects it to. For all we know, it could even beat everyone's estimates.

Efficient market theory. Unfortunately this is one theory every student of finance is introduced to in business school. After all, it is one of the few financial theories that have won the Nobel Prize. Nevertheless the biggest supporters of this theory were the Wall Street traders who had to eat humble pie when proven wrong in 2008. As stocks markets came crashing down beyond expectations, the futility of the efficient market theory played out.

As per Moneynews, Nobel Laureate economist Robert Shiller believes that the very basis of this theory is wrong. It assumes that markets reflect the understanding and wisdom of the most knowledgeable minds. Therefore, the price discovery mechanism in the markets cannot be challenged by ordinary investors. However, the burst of the housing bubble in 2008 showed that even an asset like realty can correct.

In fact Shiller blames the efficient market theory for the US Federal Reserve's wrong assumptions about debt and asset mispricing. Something that has led to instability in the global financial system. We wonder if the theory will be banned from academics. More importantly, if the endorsers of this theory will ever be brought to book?

Buying activity intensified during the pre-noon trading session, following the announcement of the monetary policy. At the time of writing, the BSE-Sensex was trading higher by about 320 points. Stocks across the board were trading firm led by those from the banking, metal and realty spaces. Midcaps and smallcaps were trading firm as well with the BSE-Midcap and BSE-Smallcap indices up by about 1.1% and 0.4% respectively. Stock markets in other parts of Asia ended the day on a mixed note with China and Japan down by about 0.2% and 0.5% respectively, while Hong Kong was up by 0.2%.

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1 Responses to "3 factors that could push India's recovery beyond FY14"

Kirtiraj Mohite

Oct 29, 2013

Obvious continuous delays will affect the Indian recovery ,
as the delays occurs it will hamper on the markets and the pupils who invest in it will be helpless as an on the markets will down fall due to it late start and out date the product. in this competitive markets launching has got tremendous weight on the shoulder of the enterprenuers manufactures and one factor is common if you get late others will take opportunity to enter.

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