Cash prizes for being early to work... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Cash prizes for being early to work... 

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In this issue:
» Asians still face shortage of staff
» Citigroup's 'favourable' bailout
» Buffett to disclose derivative exposures
» Cash prizes for reporting to work early
» ...and more!

If you thought that the slowing economy would automatically point to more layoffs, think again. Managers are actually saying that they are facing a shortage of staff! While in the US, the unemployment rate is rising as a direct fallout of the financial turmoil and the slowing economy, the shortage is being particularly faced in Asia. Yes, there have been job losses in this region as well. But these have largely been in industries such as toymaking, textiles and construction, which use migrant and unskilled workers. The shortage of staff is more imminent in the case of skilled labour, especially in the fields of finance, research and development and engineering. Further, many companies have chosen not to slash staff preferring instead to cut salaries and working hours. Infact, demand for workers is only likely to increase as most of Asia's domestic economies are expected to grow strongly in 2009. As per the Economist, the Asian division of Research International, a market-research firm, expects wage hikes of 14% in India and 9% in China next year, only marginally less than in 2008. So, while shortage of skilled labour will continue to afflict Asian economies, those who have the requisite skills have probably nothing to worry about!

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When the 'Big Three' automakers in the US subjected themselves to two days of Congressional grilling last week and begged for a US$ 25 bn loan, the government turned them down for want of a viable business plan.

When AIG, Bear Stearns and Washington Mutual were in a state of distress, the government did bail them out but not before sacrificing the interest of their shareholders. In case of Lehman Brothers, even the creditors were not bailed out.

However, Citigroup, which just a month ago received US$ 25 bn, had no trouble securing another US$ 20 bn Sunday night. The irony is that just a couple of months after the biggest rating agencies Fitch, Moody's and S&P had accredited superior ratings (A and above) to the bank's credit quality, the latter found itself in the midst of a catastrophe.

Source: Citigroup website

Whether or not American taxpayers wished to be partial to the shareholders of Citigroup for the loss of their investment value is not known. However, the US Treasury certainly has gone all out to use the tax payers' money to remove the immediate risk of a potentially catastrophic banking collapse that could derail the US economy. Also, there are allegations that the fact that Citigroup has high profile investors like Prince Alwaleed bin Talal of Saudi Arabia in its fold, acted in its favour.

Berkshire Hathaway, that bluest of the blue chip and an assortment of some of the finest businesses in the world has seen its value erode by nearly 40% in barely two months. Most of the erosion has to do with two types of derivatives contracts, an anathema to investors in recent times.

Warren Buffett, the company's owner is however unfazed. As per him and other experts, the blemish on the company's P&L is due to mark to market accounting norms and it is quite possible that by the time the contracts expire, the company might end up not paying a single penny. That has however not done enough to soothe investor nerves as the cost of buying a default protection on the company's debt by way of credit default swaps has virtually doubled in the last fifteen days and jumped up more than 15 times since Jan 1, 2008! This has prompted the regulatory body SEC to ask Buffett to provide more information on his company's derivatives contracts, which the master has promptly agreed to. The master's supporters though think that the current environment presents a once in a lifetime opportunity to profit from Buffett's investing acumen.

Although key Asian markets recovered most of their earlier losses and ended strongly in the positive today, the benchmark BSE-Sensex lost nearly 3% by the end of the day's trade. The Japanese and Australian indices (up by as much as 5% and 6% respectively) were the biggest gainers amongst Asian markets today. Most of the European markets have also opened in the positive today. The rupee closed at 50.0 to the US dollar.

India is among the most densely populated among the larger countries. One of the implications is the incredible traffic in major Indian cities. India's silicon valley, Bangalore is no exception. While some employees know the benefit of arriving early to work, now companies are also waking up to the same benefits. As per DNA, Infosys has instituted cash prizes for people showing up for work early. In a pilot study called 'Instant' by Stanford University's Precourt Institute for Energy Efficiency to observe the impact of incentives on work timings, the number of such early workers has grown by 3,000 at the Electronics City office of Infosys. The cash prize up for grabs is around Rs 12,000 per week per employee subject to an overall limit of Rs 96,000 per week. Now this is called a win-win situation! After all the company also saves near Rs 20,000 per day in fuel costs as vehicles can avoid peak traffic.

As per an unwritten protocol, cabinet selections for a new US President usually start with the national security. However, with the country facing what its latest President calls 'an economic crisis of historic proportions', protocol can take a backseat for now. Little wonder, no eyebrows were raised when Obama chose to announce key members of its administration's economic team, much before he dealt with announcements on national security. The announcements too, left barely any room for speculation. Timothy Geithner, currently the New York Federal Reserve President is Obama's nominee for the post of Treasury Secretary, while Lawrence Summers, a former Treasury Secretary was named to head the White House Economic Council. While Geithner has been garnering a lot of praise for his efforts in the current credit crisis, Summers besides being a very well known economist, is also known to have his fair share of critics. He, the critics argue, is said to have supported positions that helped advance the current economic crisis. The next few months are not going to be easy for the new economic team and the most crucial job before them could be working on the fine prints of the economic recovery plan that would be central to creating nearly 2.5 m jobs over the next couple of years.

The human resources development ministry in India talks about setting up more IITs and IIMs from time to time. But has there been any significant increase in capacity over the years? If not, why are foreign universities not allowed to cater to higher education in India? These are the questions that were put forth by an expert in a leading Indian business daily today. He mentions that 94,500 Indian students joined US universities in FY08. Indians spend Rs 118 bn on a US education every year. Even if we take into account the scholarships students receive, around Rs 73 bn is spent by the Indian students from their own pockets. Wonder why it is okay for students to leave Indian shores in such large numbers but not okay for foreign universities to set shop in India?

A study conducted by PanIIT, an organisation formed out of all the 7 IITs in India, has come to some pleasantly startling conclusions. It has highlighted the fact that over the last 5 decades, IIT alumni have been involved in the creation of 20 m jobs. They hold senior positions across the private sector and the government with budgetary responsibilities of over $885 bn and have been said to be associated with incremental economic value creation of $450 bn. The study has brought to the fore the economic impact created by IITians in terms of wealth creation and social productivity.

As the world grows richer, more populous and more technologically advanced, it also gets more energy hungry. Rising fossil-fuel prices and supply concerns have prompted many countries (particularly the developed nations) to invest in other ways of meeting their energy needs, ranging from new nuclear power stations to wave and solar installations. As per Economist, in 2006, 18.3% of the world's electricity was produced using renewable sources. But International Energy Agency predicts that by 2030, this will rise to 23.3% as technology gets cheaper and fossil fuels remain pricey. Energy produced by hydro and wind power will double by 2030 accounting for most of the growth. But the share of electricity generated by renewables is still far behind that of dirty-but-cheap coal, which will rise to almost 44%.

Source: Economist

Faced with the prospect of a slowing economy, the Indian tourism industry is not finding the scenario particularly incredible in India. While the industry had logged in robust double digit growth rates in the past couple of years, the global financial turmoil, firm crude prices and terrorist attacks have taken a heavy toll on the growth of tourism in the country. The statistics paint a grim picture. As reported in a leading business daily, October saw an increase of just 1.8% in the number of foreign tourist arrivals as compared to the corresponding period last year. This is certainly not good news for an industry which contributes around 6% to India's GDP and employs more than 40 m people. Of course, global oil prices have considerably cooled off from the high reached in July. But higher domestic crude prices and airfares mean that demand will remain benign. Since a lot of tourist arrivals in 2007 were from the US and Britain, these two being among the hardest hit as a result of the crisis, the situation in the near future does not appear too rosy.

Under the Fiscal Responsibility and Budget Management (FRBM) Act, the central government was expected to eliminate the revenue deficit and limit the fiscal deficit to 3% of the GDP by March 2009. However, the opulent spending at the start of the fiscal and emergency spending to boost the economic growth in the second half has paralysed the government's agenda. Additional spending on account of the farm debt waiver scheme and implementation of the Sixth Pay Commission for central government employees has resulted in extra expenditure this fiscal. In the supplementary demand for grants, the government has projected an additional cash expenditure of Rs 1,056 bn, which works out to 2% of GDP. The country's fiscal discipline will thus have to wait until the economic and political needs are taken care of.

(%) GDP growth Fiscal deficit Revenue deficit
(% of GDP)
FY04 8.5 4.5 3.6
FY05 7.5 4.0 2.5
FY06 9.4 4.1 2.6
FY07 9.6 3.4 1.9
FY08BE* 8.9 2.8 1.2
FY09BE* 7.8 2.5 1.0
Source: Ministry of Finance * BE - Budgeted estimates

04:57 Today's investing mantra
"I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going." - Peter Lynch
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