'Corruption is a part and parcel of our system' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'Corruption is a part and parcel of our system' 

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In this issue:
» 'Trust deficit over 100% of GDP'
» The reason behind rising wages in India
» Who benefits from the CRR cut
» Jhunjhunwala: Mother of all bull markets ahead
» ... and more!


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00:00
 
Corruption. It is a word as old as India itself. In every walk of life we face some form of corruption or the other. Be it in bribing an official to get our work done faster. Or in agreeing to pay a taxi fare that is different from the meter. Corruption is everywhere. The recent spate of scams has just been a stark reminder of how big the problem really is. As a result the anti-corruption brigade started by Anna Hazare and carried on by his supporters appears to be the right step to take. After all someone needs to raise their voice and get things cleaned up in India. But there is one man who does not appear to agree with this anti-graft crusade. The gentleman is none other than head of HDFC Mr Deepak Parekh.

Mr Parekh has stated that corruption cannot be eradicated from our system. He also expressed his disapproval of both Mr Kejriwal as well as the media for giving undue coverage of his exposes. He feels that the former is just playing a 'name and blame game' while the media has blown this way out of proportion. Mr Parekh feels that such blame games would create an environment of distrust in the country. This could lead to a hung parliament in the 2014 elections. The subsequent result of this would be a 'messy' coalition which would harm the country's long term interests. Mr Parekh has been vocal about the how the policy paralysis has hurt the country. But he has also been known for saying the Prime Minister Dr Manmohan Singh is a blessing for this country.

While we do agree with Mr Parekh that the anti-graft brigade is just becoming a blame game. However, we do not agree with him that corruption should be left as it is just because it is a part of our system. Even Mahatma Gandhi had said 'Corruption ought not to be an inevitable product of democracy.' There is a cost attached to it and this has caused damage to the country. The scams and corruption scandals have taken a toll on the investor confidence both domestic and foreign. Without investment the country's long term growth would remain in danger. But unless something is done to gain back the trust of the investors, investment growth would continue to get hit. Simply saying that our system is this way is not good enough. Perpetrators have to be punished. The system has to be strengthened and loopholes need to be closed. That is the only way in which the country's future can be made secure.

Unfortunately, the quality of Indian polity seems to be deteriorating day by day. It is time for citizens to wake up and take a stance against this. If you feel this way too, then help create a 'snowball' effect to save India's democracy and growth story. Make your voice heard. Participate in our petition to the government.

Do you agree with Mr Parekh that corruption is a part of our system and hence cannot be eradicated? Share your views or you can also comment on our Facebook page / Google+ page

01:10  Chart of the day
 
The Reserve Bank of India (RBI) has cut the CRR rate in recent times. At the same time it has not hiked the interest rate any further. And to add to this the banks have been offering attractive schemes for housing loans. But despite all this housing loan growth has slumped to a 5 month low. As per the mortgage lenders, interest rates are not responsible for this slump. The reason is actually the higher property prices. Property prices have zoomed to touch new highs. And this has made homes more unaffordable to the public especially to the middle income households. As per the RBI and as reported by the Economic Times home prices rose by nearly 24.1% in the quarter ended September 2012. This is higher than the average of 20% seen during the previous 2 years. As a result most people have preferred to defer their home purchases till prices ease a bit. This has reflected in the slump in housing loan growth seen in recent times.

Source: Economic Times


01:50
 
Which is the worst kind of deficit plaguing the Indian economy? Is it fiscal deficit? Or the current account deficit? What is your guess? Though these are certainly important economic parameters, there is a much larger problem engulfing our country. It could be defined as a lack of mutual trust among various stakeholders in an economic system. An article in Firstpost rightly calls it the 'trust deficit'. Of course, this is just a figurative term and cannot be quantified. But the truth is that it exists. The trust deficit has widened substantially in recent years on account of the series of big ticket scandals, corporate frauds, etc. And all these factors have taken a toll on the economy. Investor confidence has weakened. Corporates have been cutting down on new investment plans. The general public is the worst hit. There is a growing mistrust against politicians, bureaucrats and corporates.

02:20
 
The Indian economy has continued to throw up one puzzle after another in recent years. Here's another one. RBI's recent reports have indicated that a strong reason why the inflation is high in India is because of the upsurge in both rural and urban wages. Now, this is interesting. The central bank seems to suggest that there is a labour shortage in India. But this certainly looks unlikely with the economy showing signs of slowdown and the general perception about employment also not being good. What then explains the rise in wages? We believe that the Government, with its employment guarantee schemes has set some kind of a floor on rural wages. And thus the urban industries such as construction need to pay significantly higher wages in order to lure rural people into urban areas. All this has led to wages rising without a commensurate increase in productivity. And this is a dangerous trend as per us. Unless compensated by higher productivity, the policy of offering a certain minimum wage will be yet another long term drag on the economy we reckon.

02:50
 
The recent cut in cash reserve ratio (CRR) was clearly not appealing enough to Finance Ministry. For it wanted more. A cut in repo rate would have meant pressure on banks to cut lending rates. If not private sector at least the PSU ones. The lower rates could have in turn offered a feel good sentiment about GDP growth prospects. Alas, none of that materialized!

But worth noting that even the 0.25% CRR cut offered additional liquidity to the tune of Rs 175 bn to banking system. Just that very little may find its way into banks' loan books. At least the historical data suggests so. In 1HFY13, bank credit has grown just 4.3% YoY. During this period, deposits and SLR investments have grown by 8.5% and 14.8% YoY respectively. This shows that the allocation of funds is skewed towards investments in government bonds. One reason for this could be that banks are apprehensive of loans turning bad. Hence the reluctance to lend aggressively. The other may be that the demand for capex related credit itself has dried up. Whatever the cause may be, the government seems to be the biggest beneficiary of the RBI's policy of gradually easing. Whether or not its fiscal consolidation plan works or not, the government has plenty of takers for its bonds amongst Indian banks. We wonder then what Mr FM is complaining about?

03:45
 
The Indian equity markets have not exactly set the house on fire in recent many months. There have been various reasons for this. As far as global factors are concerned, weakness in the developed markets and the prolonged Europe debt crisis has dampened sentiments. In India, firm interest rates, slowdown in the economy and lack of meaningful reforms have their toll on the markets. But noted investor Mr Rakesh Jhunjhunwala is quite optimistic. He believes that the mother of all bull markets is ahead of us.

Mr Jhunjhunwala is not very enthused on the prospects of the developed world and believes that the scope for making new highs there is quite limited. He further opines that there is going to be a big fall in commodity prices. The commodity bull market started in 1997 or 1998. From there he thinks that it is either the end of the bull market or there could be a very severe correction. Thus, if commodity prices fall and the interest rate cycle reverses then earnings of India Inc. will also see growth. Besides despite various ills afflicting the economy, Mr Jhunjhunwala believes that there is faith in the Indian business model. And compared to China, data available here is more transparent. We for one are not in a position to comment whether there will be a big bull market going forward. But we do believe in investing in those companies which have strong business fundamentals, sound management and available at attractive valuations.

04:15
 
The festive season is just around the corner. Buying gold on Diwali is a well established tradition in India. Have you ever wondered how well you would have done if you had bought gold every Diwali day for the last 10 years Here are the stats. In the past 10 years, gold has doubtlessly been a great investment. In domestic Indian prices, if you had bought some gold each Diwali over the past 10 years, your compounded total gains would have been 670%. However, the question on whether gold will continue to shine is something that has come up every year. Historical data has indicated that those who buy in the run-up to the festival season have gained handsomely. With no visible sight of economic and geo-political stability, there are bound to be uncertainties surrounding currencies, crude price, equity markets and economies as a whole. In such a scenario, these conditions only augur well for the rise in price of gold. However investing in gold also has risks. Thus gold investment should be done only with an aim to provide stability, security and diversity to the portfolio and not with the aim to earn supernormal returns generated over the last few years.

04:45
 
In the meanwhile, after opening the day on a flat note, the share markets in India continued to trade close to the dotted line. At the time of writing, Sensex was down by 35 points (0.2%). Other major Asian stock markets have closed the day on a negative note with Korea and Hong Kong leading the losses in the region.

04:55  Today's Investing Mantra
It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns." - Joel Greenblatt
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71 Responses to "'Corruption is a part and parcel of our system'"

raghavan

Dec 19, 2013

This acceptance of corruption is the problem.Indira Gandhi notoriously stated "corruption is global phenomenon, can I sack a General who has won a war because he is corrupt?" & that became the philosophy/excuse of politicians.
This also shows every one refuses to learn the right lessons from the spectacular show of AAP.

Like (3)

Devshi Ramji Babaria

Jul 23, 2013

As a Baby child born from the day the Doctors, Nurses and the Daimaa should train the Baby that corruption is not good for health of self, family, community, nation and human being. But, We have to train such doctors, nurses and daimaa, who should take an oath that they are not corrupted by any means then only, our new generation wud born with non corrupt attitude, culture etc. Other thing all those who will agree to take an oath such members, committee, organisation etc. we have to form and should getherred in maas in Garden, Ground, Stadiums and raised our wishes and pray the almighty God that we all are in favour of clean life and also ask God 2 give us the strength against all bad elements..... will continue....

Like (2)

chandrasekaran

Jul 22, 2013

Mr. Parekh is a business man,can only concentrate on short time harvest of gain, because otherwise his survival will be at stake,so let him talk as he wish but that does not mean any thing to the nations`s development, which is common man`s (whole lot of majority) expectation. At least in the long run if our polity get cleaned up by some mission our youngsters would escape from all these evils of Scams & corruption.

Like (2)

Chander Sharma

Nov 8, 2012

The present ruling party is in power virtually since independence. They have large base of their cronies in Press,Corporate industries, bearucracy. They have interest in nurturing this Govt. Otherwise what can be the reason for Mr. Parekh to say what he has said. He is the one who is not affected by the corruption. It is only us the hardworking middle class and poor who are.

Like (2)

himbhatta

Nov 8, 2012

mr parekh is a very respected personality for his contribution. however,loke all mortals,he has also slipped. it is really ridiculous to say that corruption is in our system and to speak against it will harm the nation. and MMS is the boon to the nation ? ha! ha !!.
this gentleman ( ? ) has turned a blind eye to all corruption and hence is equally guilty.he staked his PMship for nuclear agreement with US ( which has so far not helped the country to generate even 1 mw power ) but did not raise a finger against corruption.

Like (2)

Arun Draviam

Nov 7, 2012

If one reads the address of Lord McCaulay to the British Parliament on February 2, 1835, one will get a clear picture of what Indian culture and value system were before the British entrenched their rule in India. Corruption, a chief engineer during the twilight era of the British regime in India has argued, as originating in the tipping practice of the British. Tip is something voluntarily given, not demanded just as the typical auto-drivers do or solicited as the typical beggars do. Demanding money by public servant is bribe or rent seeking and it affects the ordinary citizen; leave aside the big guns Kejriwal is trying to target for political ends. The worst form of corruption that is prevailing now is the rent seeking by the employees of the private sector. So it is time that something is done, I am not going in to the merits or otherwise of what Kejriwal does. Perhaps, people like Kejriwal are the need of the hour in India.

Like (2)

Chandar Shekhar Gupta

Nov 7, 2012

Language which Mr Parekh is speakin is typical that of Investment Banker.

If Mr Parekh has to earn his living the way a average Indian earn, then only he can inderstand how much if feels to pay goverment officals for small work.

Mr Parekh has got ESOP of HDFC bank / HDFc to encash, but an avegae indian has got only his salary to fall back upon.

It is high time that media shun people like Mr Parekh, who are blot on the country.

HDFC as an insitution was built by his uncle Mr HT Parekh not by the current chairman.

Like (3)

B K Nandi

Nov 6, 2012

I fully disagree with Mr. Deepak Parekh. Corruption may be there but one has to see the level of it. Corruption is at very dangerous level in India. Some Indian think development is not possible without corruption. This is very very wrong thought and the people like Mr. Parekh is encouraging this thought by giving such dangerous statement. Coruption is increasing day by day at very alarming rate. Under the dynasty congress there is no personalities to talk seriously on corruption, taking corruption as a way of life in India. Mr. Monmohan Singh is the worst PM of India to tackle this problem. He may be the most ideal son of India, but he is the worst PM. India need a leader, not a person like Monmohan Singh who can work under a boss. Mr. Monmohan could work under P. V. Narasimha Rao. Now he is working under Sonia Gandhi who is also not a leader and having very poor personalities. Mr. Deepak's statement just to appease the dynasty congress and save his present position.

Like (3)

Manoj

Nov 6, 2012

Mr Parekh should be shamed publically, if his intent was to state as it has been published. Has'nt he seen during his extensive globe travels that corruption is very low in Scandinavian countries, Germany, Australia, Singapore etc?

Corruption is neither endemic, nor an essential part of our system. It has become a great impediment to the development, integrity and security of our nation.

In my opinion, it is arising mainly from 3 sources -
a. Over-enthusiastic turf protection by legislators and regulators so taxes and other charges for government services have risen to dangerous levels
a. inefficient and ineffective administration of already poorly thought out policies by executive and judiciary are leading to bribery
c. subversion of national interest before personal interest by the politicians, who feel above they are above the law

That is why citizens and businesses are forced to pay to escape retribution from an exploitative government. Others reach out to (and in turn pay to) extra-legal groups e.g. naxalites and violent political groups, who then "deal" with the government agencies on their behalf.

There is a simple cure - most of us refuse to play the game being set up for us by the corrupt leaders.

I am very grateful to Hazare, Kejriwal, Singh and so many others who have come forward to fight this, and very disappointed that people like Parekh, MMS and others feel it is better to accept continuing inefficiency and corruption.

Like (4)

michaelraj

Nov 6, 2012

It is painful that we feel proud to institutionalize corruption. Mega scandals and scams have visibly let our spiritual land into place where poverty induced suicides , criminal activities and extremism are rampant and corrupt elements roam around with glory.Unless we wake up and address these inequalities ,our dream of world leadership may remain a distant day dream.

Like (3)
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