Is this another target the government is set to miss? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this another target the government is set to miss? 

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In this issue:
» Should US join the OPEC?
» FY13 has not been too good for Auto
» Europe's problems set to worsen
» Subbarao warns against 'casino banking'
» ...and more!

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India may be growing at a faster pace than the US (despite a slowdown in the economy for the former) but the two have one thing in common. Both are faced with huge fiscal deficits which the governments have not been able to bring down to manageable levels. Not just that, both are looking to resolve the issue by resorting to short term measures rather than undertake structural changes which require a longer term horizon.

In India's case it is by now a well known fact that the government has set itself a target of bringing the deficit down to around 5.3% of GDP by the end of the fiscal. This is expected to subsequently reduce in the coming years. So far, the results have been discouraging at best. To begin with, the 2G spectrum auction has been a disaster with the government meeting less than 30% of its target. On top of that, it has another target to meet of mopping up Rs 300 bn by way of the divestment programme. Infact, the spectrum fiasco has not prevented the Finance Minister from asserting that there is still time to meet the shortfall. His time frame being a paltry 4 months!

As tall an order as it seems, even if the government does manage to achieve the fiscal deficit target aimed for this year, its task does not end here. It has more such targets to meet for the coming years as well. That is why it makes more sense for it to focus on more long term measures and make some structural changes that does not put pressure on it year after year. This involves more investment into the country, cutting down subsidies, cutting down wasteful but stepping up productive expenditure and the like. Subsidies especially have been a thorny issue for the government and despite the slew of reforms announced lately no meaningful strategy has been announced to bring these down. Given that subsidies ensure vote banks and with elections just a few years away, it is quite unlikely that progress would be made on this front.

Indeed, at some point in time the government is bound to run out of steam if it keeps adopting a strategy of taking it one year at a time. The sooner it realises this, the better it will and the country be.

Do you think that the government will be able to meet its fiscal deficit target for the year? Let us know your comments or post them on our Facebook page / Google+ page

01:36  Chart of the day
As if FY12 was not tough enough, the Indian auto industry struggled in the first 7 months of FY13 as well as the slowdown in the Indian economy took its toll. As today's chart of the days shows, the passenger vehicles segment has been the best performing so far in FY13. This has largely been due to stupendous growth in utility vehicles (up 60% during this period). On the other hand, growth in CVs was tepid on account of volumes for medium & heavy CVs (M&HCVs) falling by by 14%. Rise in fuel prices, firm interest rates, sluggish industrial demand and slowdown in the economy have taken its toll on the industry. Although the festive season has seen pick up in sales (as evinced in October), it remains to be seen whether this trend can be sustained.

*PVs - Passenger vehicles
**CVs - Commercial vehicles
Data Source: SIAM

The Organization of Petroleum Exporting Countries (OPEC) is always talked about when it comes to international oil. The organization made up of 12 oil producing countries effectively controls a large part of the global supply of oil. As a result their actions pretty much determine international oil prices. But recently there is another country that has emerged as a major oil producing country. This country is none other than US. Owing to improved technology and techniques, US is set to become the largest oil producing nation by 2020. As per the International Energy Agency, it would surpass Saudi Arabia in terms of oil production. But unfortunately this glory is expected to last for only 5 years. After that it would take the second seat below Saudi Arabia. Nevertheless given the fact that it would be a major oil producing nation, the question now is should it join OPEC? After all the ability to pump 11.1 m barrels of oil per day by 2020 should earn it this status. Whether it will happen or not is something that remains to be seen.

Casinos are a place where you can win some, or lose a lot! You aim to hit the jackpot by making some risky bets. But you could also go home without your shirt. So why are supposedly safe banks indulging in 'casino banking', where the risks are much higher but the payoff is large? The conservative Reserve Bank of India (RBI) governor D Subbarao has warned against "casino banking" that has over-financialised the real economy. He calls for inclusive growth to help India progress and quell the public dissatisfaction with the status quo. Growth is only sustainable if it is inclusive. Other get-quick-rich schemes may benefit a few people for a while, but they do nothing for the progress of a country. According to Subbarao, inclusive growth is a process wherein "the poor contribute to growth and the poor benefit from growth". He believes that cooperative movements can become an effective instrument for growth and a platform for the poor to showcase their talent. With 6 lakh cooperatives, India already has the largest such movement in the world, but there is still scope for growth. Either way, we would definitely vote cooperatives versus casinos.

Europe's financial problems continue to worsen as the 17-member euro zone officially slipped back into recession. Official figures showed that the euro zone contracted by 0.1% in the July to September period from the quarter before. That follows a 0.2% decline in the second quarter. Those two quarters of falling output together mean that the euro zone is officially back in its second recession of the financial crisis. Europe's strongest economies continued to have modest growth but were dragged down by the sprawling debt crisis striking nations such as Spain and Greece. Even the formidable German industrial machine faltered, with growth slowing from 0.3% to 0.2%, the same figure as France. A rebound in Europe is still far off. The debt crisis that began in Greece in late 2009 is still reverberating around the globe and holding back a lasting recovery from the Great Recession of 2008-09 in much of the world.

After recording a poor performance in the last week the global stock markets continued its downward journey in this week as well. All the stock markets except for Japan were down during the week. The US stock markets were down 1.8% during the week. Fears of looming fiscal cliff continued to worry the investors. Also, the data for industrial production fell by 0.4% in October due to hurricane Sandy. This further fuelled negative sentiments in the markets. Escalating tensions in Middle East also sent jitters across the globe including US.

The Indian stock markets were down 2% during the week. Global economic fears and weak industrial output for the month of September took a toll on markets. The industrial output contracted by 0.4% in September due to poor performance of the manufacturing, consumer and capital goods sector.

Amongst the other markets, Brazil was down 3.4%, Germany was down 3% while UK was down 2.8%. However, Hong Kong stood its ground and was down by only 1.1%.

Data Source: Yahoo Finance

04:56  Weekend investing mantra
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher
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4 Responses to "Is this another target the government is set to miss?"


Nov 20, 2012

As we erred in voting to give majority to congress & UPA2, so is the government erring in killing the golden goose. Maybe the italian family plans to flee the country after filling their coffers??

It's time we Indians got serious. Unlike US, where Nixon was inducted and impeached, in India, we treat our netas like maharajas - despite their track records being such they would not be able to contest even gram panchayats if laws were enforced in time and with rigour.

The problem in a democracy. lies within us.



Nov 18, 2012

What we can understand that so far what demonstrated is only mental deficit not economic deficit.


B K Nandi

Nov 17, 2012

This dynasty congress government will not be able to meet the fiscal deficit target. This is dynasty congress government because this government has more loyalist to Sonia Gandhi than the competent person. This government are taking all short term political measure. Recent the 2G auction was a complete disaster, it was a revenge taking action against CAG and opposition and finally the government is in problem. For a long time the divestment programme of this government is not working. Now there is no Nabaratna, this government destroyed all Nabaratna industries. In past whenever this government went for disinvest some so called Nabaratna industries, SBI or LIC has to come up to rescue the government, and it was not disinvestment, it was reallocation of funds within government controlled industries and their financial institutions. So nothing significant is coming from outside. So it is unlikely that this government with the stale policies would be able to meet the fiscal target. Forcing RBI to reduce interest is also an erratic step by the manipulated FM Chidambaram.

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Nov 17, 2012


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