Yet another setback for poverty eradication - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Yet another setback for poverty eradication 

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In this issue:
» Indian banks write off Rs 1 trillion in 13 years
» JP Morgan fined US$13 bn over toxic assets sale
» Obama falsifying unemployment figures
» OECD pegs India's growth at 3.4%
» ...and more!


00:00
 
One of the country's parliamentarians recently said that poverty is just a state of mind and self confidence is needed to overcome it. This was probably the most bizarre definition of poverty we have ever come across. It speaks volumes of what the government thinks of this social evil. It is probably deeming poor citizens to be just voters who can be flattered by promises. With no intent, nothing can be done to eradicate poverty in India. And now one of the means through which poverty can be eradicated has also been trimmed.

The World Bank has curtailed its window which offered concessional loans to India to fight poverty. These concessional loans are available to countries that are below a certain benchmark. The benchmark in this case is per capita GDP. With India surpassing that benchmark, it is now no longer eligible for such concessional loans.

This effectively indicates that India is no longer poor and the standard of living has improved. However, in reality more than half of the country's population can barely afford a reasonably decent standard of living. And with no hope of redressal, neither from the government nor by way of international aid, Indians may have to learn to live in poverty.

World banks' withdrawal has indeed come as a setback to India. But we believe this is because of the use of a flawed benchmark. Per capita GDP measure gives wrong picture of any nation's standard of living when there is a huge income divide. Increasing wealth amongst the rich can result in higher per capita GDP. And this is precisely what is happening in India. Rich are getting richer and poor are getting poorer. While this increases the per capita GDP, it does not reflect the true picture of India.

Now considering that support window from World Bank has been curtailed, it is yet another setback to poverty eradication in India.

We pity that even after 65 years of independence, there are no visible signs of large scale poverty reduction in India. As per one World Bank report nearly half of the Indians still do not have access to basic sanitation facilities. And this is a sorry sign for a country which is en route to conquering Mars!

The current state is a result of rampant corruption and lack of intent from the politicians. Money destined to be used for the poor is siphoned off. Then there are scams, subsidies and wasteful expenditures which swallow the balance money!

We feel that no government can change the face of India unless there is an intent to do so. And the intent can change only when people at the helm rise above their own personal self interests and work towards creating a more equitable society.

Do you think money alone can eradicate poverty in India? Let us know your comments or post them on our Facebook page / Google+ page

01:50  Chart of the day
 
Rural wage inflation has its pros and cons. Increase in rural wages results in better standard of living and eradicates poverty. However, at the same time, since rural labourers are mostly unskilled and are typically employed in manufacturing industry, rural wage inflation hurts the end user of the commodity in the form of increased prices. Overall, rural wage inflation is positive as it eradicates poverty and negative in one sense as it fuels inflation. Now, rural wages in India have increased by 16% between 2005 and 2012. Amongst all the states, Kerala has the highest rural wages at Rs 315 per person. Also, on a pan India basis, South India has highest wages compared to other parts of the country.

It is interesting to note that average wages in most states are higher than the one that are being paid under Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA). Since MNREGA sets base wage rate below which labourers do not work it has been blamed in the past for having inflated rural wages to a large extent. However, the fact that most rural wage rates are currently higher than prescribed by MNREGA suggests that there are other factors driving rural wage inflation. One factor could be infrastructure boom. This has led to significant demand in unskilled labourers thereby driving wage rates across states.

States with highest wage rates
*AP= Arunachal Pradesh

----------- India's growth story - from 9% down to 3.4%! -----------

It almost feels like yesterday...

India was comfortably growing at over 9% and hoping to cross 10% very soon. And everybody was just so optimistic about India.

Fast forward to the present, and the latest prediction for India says that the Indian economy will grow at just 3.4% in the current financial year.

This is lower than the 3.7% projection of the International Monetary Fund (IMF)... and in fact, the worst prediction so far!

But it is not without valid reasons. We have discovered, from our own research, that things are indeed really bad and could get a LOT worse in the days to come.

To understand why we are saying this, and the direct impact these things could have on YOUR financial future, please read this letter.

Believe me, it will be the most important letter you've ever read!

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02:15
 
Earlier this year, the Supreme Court of India had come up with a laudable ruling. The ruling banned politicians who had outstanding criminal charges from holding their office. This was expected to bring around some level of governance in the government. Given the spate of scams and scandals that had come to light, this was certainly a welcome ruling for India. The politicians were obviously not happy with the ruling. The ruling put the futures for quite a few of them in danger. So much so that the ruling party had sought to pass a Bill that allowed certain concessions on this ruling. However, this was later retracted after public whiplash.

But now the politicians can breathe a sigh of relief for the Supreme Court too has decided to backtrack to some extent on its own ruling. In a recent amendment to its Representation of the Public Act, the apex Court has stated that politicians can contest the elections even when in police custody. While the ruling would certainly raise the hopes of fraudulent politicians but it comes as a slap in the face for the governance standards in the country. The question is what forced the Supreme Court to take a U-turn on its stance to clean up the political scenario in the country? Was it a conviction that its own ruling was wrong? Or was it political pressure?

02:35
 
A trillion rupees. An amount that could have funded the entire cost of 4 flagship government schemes put together. That too we are referring to the major ones like National Health Mission, NREGA, Mid day meal scheme and Rajeev Gandhi Grameen Vidyutikaran Yojana. Unfortunately the banks in our country have written off as much amount as non performing loans over the past 13 years. This revelation by RBI governor Dr Chakrabarty is no shocker. For PSU banks that account for 60% of the sector's share are still saddled with millions in bad loans. And are expected to write off more in coming quarters. What however, is a startling fact is that the agri loan waiver scheme is not to be blamed for such a mess. As per Dr Chakrabarty most of the NPAs emanated from loans given to large corporates. And hence it is the banks' inability to appraise credit and the poor debt repayment culture amongst Indian corporates that is to blame. Having said that, the government is yet to take a firm stance on companies like Kingfisher Airlines. And in the absence of any meaningful penalty we wonder how the bad credit culture in the country will be done away with!

03:05
 
In a historic deal, the largest bank of the United States - JP Morgan Chase, has agreed to a US$ 13 bn settlement with the US government for its notorious role in the subprime mortgage crisis. This is the biggest-ever civil settlement with a single firm. This is not a moment of glory. It just shows the scale of the fraud that the bank committed. The bank has admitted that its employees misled investors into buying dubious financial products that they knew were highly risky. Once the reality about the toxic loans began to surface, investors' confidence in the banking system shattered. And this how a housing crisis transformed into a widespread financial crisis.

Is a US$ 13 bn fine a fair retribution? Does it solve the real maladies plaguing the US banking system? We are doubtful. First of all, the damage to the American banking system and the economy at large, have been colossal. A fine cannot reverse the problems that the US economy is facing now. What is ironical is the way the US Fed responded to the crisis. The massive quantitative easing program is nothing but a backdoor bailout for the very institutions that were responsible for the crisis. A real solution would have been to allow the too-big-to-fail institutions to fail and shrink in size. But we have seen the exact opposite happen. While the economy is suffering, these large banks have gone totally unhurt.

03:45
 
That India's GDP growth this fiscal will be on the lower side seems almost certain. Opinions, however, on what this rate of growth might be vary a lot. For instance, as reported in the Economic Times, the International Monetary Fund (IMF) has pegged India's growth rate at 3.7%. But the Organisation for Economic Co-operation and Development (OECD) is of the view that India's growth will be even lower at 3.4%. These estimates are based on market prices. And in that sense are not comparable with official statistics which consider factor cost. Whatever the case, it is quite clear that a significant recovery in the Indian economy is not likely to take place this fiscal. Indeed, inflation has continued to remain high. Consequently, interest rates have been kept firm. Industrial activity remains sluggish. And overall demand in the economy has slowed down. Then festive season has also not taken off as was originally envisaged. Whether FY15 will see a considerable improvement in fortunes is something one will have to wait and see.

04:15
 
What do you do if you can't make the numbers? Well, in that case, try and make them up. As much as this famous Buffett quote is attributable to the CEO of a firm, it will not be too out of place for politicians too. And recently a bizarre case confirming the same has surfaced. It turns out that the unemployment data that US President Obama used so extensively to highlight the success of his government during his re-election bid was in fact a forged one. The story came to light with the sacking of two employees of the US census bureau, reports a leading financial portal. Well, we are really not surprised. We are well aware of how politicians manipulate data time and again to further their own self interests. And this is as rampant in India as it is in developed nations like the US. It is a shame that so-called democratic set ups like India and USA have reduced to this. Rather than engaging in a debate on how best to improve the challenges facing an economy, policymakers find it convenient to manipulate the public by spinning lies. And this attitude needs to change. Or else sooner or later we could land ourselves in big trouble.

04:35
 
Although trading in the red, the Indian markets did reduce their losses during the post noon trading session. At the time of writing, the BSE-Sensex was trading lower by about 47 points or 0.23%. Stocks from the healthcare and banking spaces were amongst the top losers, while those from the realty and metal sectors were in favour today. As for stock markets in other parts of Asia, they ended the day largely on a weak note. China and Hong Kong, however, ended with gains of about 0.6% and 0.2% respectively.

04:50  Today's investing mantra
"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing" - Warren Buffett
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4 Responses to "Yet another setback for poverty eradication"

Raghuveer Singh Rathore

Feb 11, 2014

You have well said that in India the Rich are becoming richer & the poor more poor. This gap is widening day by day. Unless siphoned off money destined to be used for the poor is well checked by the good governance, India would remain a poor country, but if the citizens of India forgo their self interest and come out volunteerly to work for creating a equitable society, India would turn into a country whose per capita income would not be less than any developed nation in the world and politicians will not succeed in befooling the masses educated. Besides, linking of renowned rivers with rainy season rivers of all States will prove a booster dose to agriculture. Barren lands will turn fertile & economy will definitely take U-turn.

Like (1)

Krishna Kanth

Dec 1, 2013

NOthing could ve been more farther from truth than your statement that "Rural Wage hike is hurting manufacturing the most" & "rural labourers are mostly unskilled and are typically employed in manufacturing industry" - Was this a inadvertent error or you really meant it ! Any student reading Economics 1st year will tell you that its Agriculture & not manufacturing.

You dont seem to be aware of what these so-called 'Employment' schemes have done to agriculture. Or, are perhaps not interested.

Labour is a key input in agriculture & its costs have rocketed over the years.

These column writers ! I'm sure there's none among them who has ever practised agriculture, or atleast studied it theoretically. All seem to be employees or ex-employees of industry & services.

To bring a very mundane fact to your notice - It become impossible to get farm labour in villages, at least in my part of Andhra Pradesh, even if we r paying the Employment Guarantee wages or even more. The reason being that people are flocking to these schemes as they are getting more money for lesser work. LESSER WORK, YES, I mean it. Its an open secret that people hardly work for few hrs in these schemes.

Like (1)

Rishabh Jain

Nov 21, 2013

Neither money nor any government can change the society. It can be changed only by changing attitude of individual to change.

Like (1)

SHEKHAR SHIRALI

Nov 20, 2013

A recent Bollywood Hindi film had the song 'Birla ho yaa Tata Ambani ho yaa Bata sab ne apne chakkar me desh ko hai kata.' This is true. Most Indian Industrialists have become rich due to crony capitalism. They are all equally Bad and have become rich due to corrupt Indian Politicians.

Like (1)
  
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