Will a change of govt solve India's problems? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will a change of govt solve India's problems? 

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In this issue:
» Janet Yellen will continue Bernanke's money printing legacy
» Does this mean the end of sky-high CEO pay packages?
» MNCs to invest 185,000 cr in India
» Inflation is not at all a cure
» ...and more!


00:00
 
Foreign institutional investors (FII) are known to be market movers as far as Indian stock markets are concerned. In fact, it was on the back of strong inflows of FII money that the BSE-Sensex recently hit its all-time high.

But some of the most respected foreign investors have eluded the Indian markets. Take for instance legendary value investor Warren Buffett. After having kept away from the Indian economy for a long time, it was indeed a pleasant surprise when he did make a foray into India's insurance sector a couple of years ago. But he pulled out of India in July 2013. But Buffett has not been the only disgruntled investor to have given up on India. The list is long...

This is why we are not at all surprised when we hear another respected global investor and commodity expert Jim Rogers portraying an unflattering view of India.

If you recall we had interviewed Jim Rogers in July 2013 after a gap of five years. We had asked him whether his views had changed about India. And this is what the gentleman replied, "Well, the government has got worse, India has got worse, the debts got worse, inflation has got worse, the currency has got worse, everything has got worse in India and the politicians are blaming gold for the problems in India and now I think the situation in India is beginning to deteriorate."

Recently, some market commentators have opined that the worst is behind for India. Some large global financial banks such as Goldman Sachs have given a bullish outlook for India against the possibility of Narendra Modi-led BJP coming to power.

What does Jim Rogers make of this? As per an interview in Livemint, Rogers thinks that BJP coming to power alone cannot solve India's problems. Of course, it could lift sentiment. The stock markets would cheer the change of government. But a year later, the markets would realise that nothing has really changed. Rogers believes that neither the Congress nor the BJP have been or will be good for India. "The best run Indian state has not done as well as the worst run Chinese state since 1980," says Roger.

The new government would have to do a lot more than mere cosmetic changes to revamp the Indian economy. The most important thing according to Rogers is the need to open up the economy more. There is a strong need for an overhaul in the economic environment. Doing business in India should not be so difficult and dependent on political connections.

We very much concur with the views of Jim Rogers. A change of the ruling party would only lift sentiments and stock prices in the short term but would do nothing to solve India's long term problems. For that we need real, tough reforms.

What, according to you, will the new government have to do to put the Indian economy back on track? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
 
Among the biggest threats facing India's economy is the persistently high rate of inflation. As per an article in Business Standards, wholesale price index (WPI) hit an 8-month high in October 2013 at 7%. And this time, it was not onion prices alone that caused the inflation hike. While onion price inflation stood around 200% in October, tomato price inflation too shot up to 121.9% in October as against 86.9% in September.

The chart of the day shows WPI-based inflation as of April and October 2013. It is evident that barring manufactured items, all major heads witnessed a significant rise in inflation. Food inflation stood at 18.2% in October. The high food inflation comes despite bumper crop production due to the good monsoon. It is clear that India has severe supply side bottlenecks and leakages in distribution that are responsible for the sharp rise in food prices. Unless the government does something to bring in efficiencies in the food supply chain, India will have to bear the burden of high inflation.

India's undying monster of high inflation


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01:55
 
They say the more the things change, the more they remain the same. Nowhere else this sounds more apt than with regards to the US Fed we reckon. You'd be well aware that there will be a change of guard at the US central bank. Ben Bernanke, its current Chairman, will make way for Ms Janet Yellen. But will this also translate into a different policy stance. On the evidence so far, there's not even a 1% chance it will. Ms Yellen seems to be cut from the same cloth as her predecessor as far as economic beliefs are concerned. She's gone on record several times arguing that bond buying - a euphism the US Fed prefers to use for money printing - will have to continue unabated.

So, what this means for us investors? Well, it means potentially greater asset bubbles and a strong possibility of a much higher inflation down the road. Is it any wonder then that Ms Yellen's most recent comment led to a spike in the price of gold. But this is just the beginning we reckon. Gold has the potential to climb much higher in the long run in the backdrop of Fed's obsession with debasing the value of currency. And therefore, it is a must have in one's portfolio according to us.

02:25
 
Top management is entitled to healthy remuneration. CEOs being the ultimate decision makers, carry the entire burden of the company. They set goals and make plans. As CEOs/promoters are the torch bearers of an organization's fortune, they should be compensated fairly for that. However, when compensation turns from fair to unrealistic, minority shareholders' interests go for a toss. Matters turn worse when the company itself is loss making. Not having the veto power to overturn such decisions means that shareholders happen to be mere spectators. However, it seems that regulators have taken a note of this.

For instance, in Switzerland, a proposal is being made to limit the executive pay to a certain limit. If passed, this proposal will give more veto power to minority shareholders. They can voice their say in issues relating to over the top compensation and bonuses. Even SEBI is planning to introduce a proposal whereby it would become mandatory for companies to get the remuneration packages of their promoter directors approved.

We feel that this is a step in right direction. High executive compensation has always been a matter of debate in the past. In fact, in Switzerland, one executive was offered US$ 79 m as severance package. Later it was toned down due to shareholder activism. Fingers were also raised on packages of top executives in US banks that went bankrupt. Banks met their fate and CEOs made theirs! We feel that empowering minority shareholders will tighten the lid on unfair compensation practices of the management.

03:10
 
The depressed and tough macroeconomic conditions may have made India Inc give a thumbs-down to investing in India. Their reluctance in investing is evident in the slowdown and postponement of capex plans. But multinational corporations or MNCs still appear to be optimistic about the whole India growth story. As reported by Business Standard, MNCs have committed to investing nearly Rs 185,000 crores over the next few years. Most of this investment would be in the areas of capacity expansion; new product development; distribution networks and increasing management stakes in the Indian ventures. The sectors that are expected to see a large chunk of this investment are FMCG, consumer durables, auto, telecom, airlines, retail and pharma. The common theme linking all of these sectors is still the consumption story.

The thing is that the long term story for India is still intact. It has a huge demographic dividend capable of driving future growth. But the growth has hit a roadblock which can be removed by enacting and implementing reforms. Therefore giving up on India right now may not be the right thing to do. Maybe the domestic firms could share the same optimism that their MNC counterparts have and kick start their investment plans as well. Unfortunately for this to happen, the Indian government has to do its bit to restore their faith.

03:45
 
There is a misconception prevalent in the developed world. That low inflation rate is reason enough to resort to large scale quantitative easing. So that in the process jobs will be created. As reported in an article in the Financial Times, the average man is hardly going to complain if the prices are not rising. No doubt economic growth and jobs creation is on the agenda of most governments and policymakers in the developed world. But that cannot be achieved by aiming for a higher inflation rate. Indeed, there is nothing to suggest that low inflation is always a bad thing that signals recession. Unless the fall is too drastic.

Inflation, if anything, has to be looked upon as an unpleasant side effect and not a cure. So, if measures to bolster the economy lead to a higher inflation, then the latter is a by-product that needs to be dealt with. It does not make sense to make high inflation an objective that can lead to higher growth. The wrong notion that most policymakers in the US and Europe have about inflation is dangerous. At the rate they are printing money, the threat of hyperinflation in the future can hardly be ruled out. And one need look no further than Latin America and how hyperinflation wreaked havoc on their economies.

04:30
 
Indian share markets were closed today on account of Muharram. As for stock markets in other parts of Asia, they ended the day on a firm note with China, Hong Kong and Japan up by about 1.7%, 1.7% and 2% respectively.

04:50  Today's investing mantra
"Chains of habit are too light to be felt until they are too heavy to be broken" - Warren Buffett
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13 Responses to "Will a change of govt solve India's problems?"

Dr. Arun Draviam

Nov 16, 2013

We need real reforms, not populist measures nor counter-measures to undo any good done by the previous government.

Like 

asimc1941

Nov 16, 2013

All the politicans, all the political parties are blind to the basic problems. There's is competition to occupy power centre by blaming the opponents only because nobody know what to do, how to do with our vast resources of Natural & human resoueces. Some charity for vote bank, some metal roads, air/railways, big factories, palacial buildings are considered as the yard stick of development! Nobody is even aware that a large section of our population is dependent upon illegal/unethical profession for their livelihood. Our political system is entirely dependent upon this section of people.

Like 

B K Nandi

Nov 16, 2013

It is sad that true professional investors are leaving Indian stock market when the market depends on FII. I agree with Jim Rogers on Indian worse condition on everything. Cosmetic change will just fool people, nothing more. Even opening up economy will not be enough for such chaos, corrupt and scam prone India. So far whatever benefits India achieved from reform done to the economy are not inclusive. Structural reforms are required to bring some changes to Indian economy. History would say that the congress government totally failed. This government couldn't control corruption, scams. This government encourages criminal politics, anarchy administration. But the changes India needs are not impossible. For this a strong, independent and capable PM is required. At least instead of bringing a party who ruled India for more than six decades and failed in all respect, bring some new characters and hope for good. And NDA did some work during their last government.

Like 

Rao

Nov 16, 2013

What do Mr Rogers want finally?? He wants to make money. Does he really care that US today has become a place where manufacturing has moved out to china and other places and has cost americans loss of jobs?? Does he bother that cheap chinese good flood Wal-mart and other chains? If India opens up as he wants, we will have Chinese, Bangladeshi and even paki goods flooding the markets, even subsidized by the Govts. Can the country afford all this just to please Rogers or Buffet?? The US today is trying to limit Inidna IT companies so that jobs are not lost. India needs to learn from the mistakes US has made and by so called opening up US has not gained anything, in fact its Trade deficit has gone up. All these so called Rich Investors only want to make money and for that they give big sounding words.

Like (2)

s.g.chandiramani

Nov 15, 2013

not at all. as long as corruption and bureaucracy is allowed to exist from the ministers all the way down to the lowest paid emplyee; and there being no transparency, electing/installing a new government is not going to make any difference.

Like (2)

sripada vijaya

Nov 15, 2013

inflation caused by food may not be controlled through repo rate hikes or increased reserve requirements on banks.the blame for not doing enough to boost crop yields or reform antiquated agricultural marketing systems or provide adequate storage capacity .the problem is primarily rooted in supply side constraints.These are requried to be addressed

Like (2)

R N Gandhi

Nov 15, 2013

According to me opening up of economy has done more damage rather than gain to the country. We have exported essential commodities like food articles including fruit and vegetables more than we could import the same. And hence the tremendous rise in prices of eatables. Even on machinery sides our industries have suffered more at the hands foreign countries like China etc.. There is a general slowdown in the fields of production too. And I think this is due to free economy. We as a country are in the habits of behaving like subordinate nation to the advanced one. The end result is loss to our nation.

Like (2)

Ramesh Babu

Nov 15, 2013

unless there is a corruptionless government takess charge and stop all freebees there wont be any economic recovery in the near fruture

Like (2)

ajit potnis

Nov 15, 2013

i think comments of Buffets, rogers of the world r too pessimistic and somewhat motivated. They may not be investing but FIIs and othres r. So whats the big deal ?

Like (2)

johny

Nov 15, 2013

No,I don't think a change of government will solve the economic problem.
Any government with single absolute majority can some what solve problems

Like (2)
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