The crisis that could rock India more than US

Nov 13, 2010

In this issue:
» Yet another economy on the verge of bailout
» The ideal solution to global currency war
» MFIs seem to have their days numbered
» SUVs under environmental hammer
» ...and more!!

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When you read about unemployment rates close to 10% it is most likely that you have the US on your mind. After all the economy has been crying hoarse over joblessness. Also it has been accusing developing economies like India of taking away many of them. But what if we were to tell you that despite importing most of the developed world's outsourced jobs, India has a jobless rate close to that in the US?

The latest report by Indian Labour Bureau on household unemployment came in as much as a shock to us. It shows that 9.4% of India's labour force is unemployed. Here labour force comprises 35% of India's population. While the unemployment rate for males stood at 8% that for females stood at 14.6% in 2009. The numbers this time are a quantum jump from the meager 2.8% unemployment rate reported by the NSSO in 2008. Although the global economic recession is cited as the main reason, we suspect whether it is so. In fact the earlier numbers are vastly suspected to be inaccurate. As per the US based CIA (Central Intelligence Agency), India's unemployment number was double that of China in 2009.

Whatever be the reason, the fact remains that India is not creating enough jobs for its growing youth. And whether or not the outsourced jobs come to us, India will have to ensure that unemployment does not come as a huge opportunity cost to the economy. We believe the government and the private sector have a huge task ahead for themselves. That of providing employment to the huge masses of people that come out of India's educational institutions every year. In the event of failing to do so we may be calling for a crisis much bigger than that in the US.

 Chart of the day
Commodity prices have been moving to unchartered territories for quite a while now. While precious metals like gold and silver have been gaining ground given the uncertainty and currency devaluations, others have not been left very far behind. In fact non food agricultural produce as well as non precious metals that largely have industrial usage, led the tally in price rises over the past 12 months. As the rising demand from the developing world continues to outstrip the supply, commodity prices are expected to remain northbound.

Data source: Economist,

The Irish economy has been under the throes of a financial crisis for two years now. Experts blame it on the same malaise that has struck the rest of Europe and the US - too much debt and a housing bubble. Government finances are in tatters. Hundreds of businesses have closed down. And unemployment is on a rise there. Amidst all this, European policymakers are now urging the country's government to take an emergency aid to contain the crisis somehow. "The chances are rather big that at some point they need to ask for financial assistance just to calm down the situation," says an economist on the Irish crisis.

Economic theory predicts that normally a surplus country would enjoy an increase of wealth, so it would import more and its current account would end up being roughly balanced again. Economic theory also predicts that normally a deficit country would face high interest rates and would cut borrowings and rebalance its current account. But the reality is quite the opposite in the examples of China and the US respectively. However, the Indian PM had some interesting suggestions to offer at the G-20 summit in order to correct this anomaly. It referred to channelizing the surplus savings in economies like China to long term investment needs in the developing world. And this in turn could create export demand for deficit countries such as the US. Besides bringing an end to the artificial currency war, such a solution could also be in the interest of the progress of the global economy. However, we believe given the political compulsions, such economic wit is unlikely to be paid any heed.

An industry which was brimming in liquidity a few months back is now facing a cash crunch. It is running so dry that it has asked for emergency funds of Rs 10 bn from banks. Well, we are talking about none other than the controversial microfinance industry. Post the successful listing of SKS Microfinance, the industry has seen nothing but trouble. Long overdue regulations have hastily come from the Andhra Pradesh (AP) government. This was after news of farmer suicides, arm-twisting tactics and high lending rates of microfinance institutions (MFIs) hit headlines. AP is where over 40% of the microfinance business is based. Thus, any moves from the state hit the entire industry hard. These moves from the AP government included having MFIs cut lending rates and increase their collection periods from one week to one month. This was done with the intent to reduce pressure on the borrowers. However the fallouts have been disastrous.

Post the regulatory revisions, loan repayments for MFIs have fallen from 99% to 30%! Banks, PE and VC firms have also cut their funding to them. The crisis is still far from being over. With no collateral taken against the loans given to the poor, we can only see huge NPAs, reduced income, and losses on the horizon for the besieged industry.

Diesel is probably the lifeblood of the Indian economy. It powers trucks, tractors, pumps and is used for other agricultural and industrial purposes. No wonder the Indian government spends over Rs 500 bn on subsidising this fuel along with kerosene and LPG. However, diesel is also being used by the elite to run their sports utility vehicles (SUVs) and other big luxury cars. Mercedes Benz, BMW, Audi all have diesel variants and these clearly outsell the petrol versions. Why? Because, diesel cars are fuel efficient, the fuel is subsidised, and the engines come with new technologies.

However, Environment minister Jairam Ramesh has clamped down heavily on SUVs that use diesel. He calls driving these vehicles "criminal". He is now also calling for a revamp of the subsidy on diesel prices. Well, seeing the success that the Minister has been having in implementing environmental laws, we could be in for a whole new fuel policy regime. But, with the auto sector and SUV segment growing at over 32%, and 21% respectively in the first half of the year, this may be a very tough battle for him to fight.

Just like 'green shoots' a year ago, the term 'currency war' has been in the limelight over the past few weeks. And the two major contesting parties here are the US and China. So while the US is printing dollars in loads that will lead to devaluation of its currency, China is not letting the Yuan rise. Now the Group of 20 or G-20 has been assigned the task to tackle this US-China currency war. Here the question that arises is - does resolving such wars require attention by outsiders or intention by insiders? Only if China and the US can answer this!

Stock markets across the world had a lackluster week with most of the major indices closing the week in the red. This was a result of the debt problems plaguing European nations and the concerns over China resorting to another rate hike. The biggest loser of the week was China down 4.6% while Japan was the biggest gainer of the week up 1%. The benchmark BSE-Sensex too lost 4% during the week. In Europe, France was down by 2.2% followed by UK (down 1.3% and Germany (down (0.3%). In the Americas, Brazil was down by 3.1% while US was down by 2.2%. In Asia, other than Japan, Singapore (up 0.4%) closed the week in the green.

Data source: Yahoo Finance, Kitco

 Weekend investing mantra
"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond." - Warren Buffett

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12 Responses to "The crisis that could rock India more than US"

shreedhar iyer

Nov 13, 2010

Very intelligent write up. Logical and up to the point.
Keep it up. Thank you.


George Elavathingal

Nov 13, 2010

A Global show-down is imminent. Ration of Commodity products v/s Floating currency since approx. last 5 years, in reality, is far far alarming. No Government or Private bodies can measure how alarming its ratio. All are giving wrong statements in the media. If I'm living in this world for another 5 to 10 years, I can see taht this so called paper currency would eliminate totally from the globe.

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