Is India set to see a turn in fortunes of its poor? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is India set to see a turn in fortunes of its poor? 

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In this issue:
» Global economy in Q3, 2012 has slowed down
» Will Asia's regional banks become forces to reckon with?
» India Inc.'s M&A activities pick up pace
» Chinese power equipment makers look to set shop in India
» ...and more!

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Giving direct cash transfers to the poorest sections of the society is a reality which finally seems to be taking place in India. This will most likely begin from January 2013 and is expected reduce corruption that prevents subsidized goods and welfare benefits from reaching those who need them. The program will first cover 18 states by April 2013 and the whole country by December 2013.

These cash handouts would replace the money that the government currently spends on subsidies on goods such as fuel, fertilizers and food. The idea is that it is best for poor families to decide what they want to do with the money they receive rather than the government telling them what to do. This is also most likely to eliminate middlemen and other intermediate layers in the system which has become a breeding ground for corruption when it comes to doling out subsidies. Thus, the government expects to transfer up to Rs 40,000 (approx. US$ 720) a year to each poor household. The government's spending on welfare programs, however, will remain unchanged overall at around US$ 71.9 bn a year.

While there is no doubt that direct transfers have benefits, questions have been raised whether India is not rushing into the same. Are direct cash transfers the only solution to improve the fortunes of the poor? Certainly not. This is because the implementation of this scheme has to be backed by an able support system. This means that assuming the money reaches the poor, they still need to be given proper access to goods required to improve their situation. Transportation has to be ramped up and even banking systems need to be overhauled.

There is no doubt that the direct cash transfer system will play an important role in eliminating the disease of corruption and hazy practices of middlemen. But how effectively the government is able to put support systems in place remains to be seen.

Do you think the direct cash transfer system will be a success in the longer term? Share your comments with us or post your views on our Facebook page / Google+ page

01:36  Chart of the day
There is no doubt that the global economy has slowed down considerably in the September 2012 quarter. While the developed world (US, Europe and Japan) is still grappling with recession, growth in emerging economies (India, China, Russia and the like) has slowed down. Having said that, as today's chart of the day shows GDP growth in India and China in Q3, 2012 was still much better when compared to its developed peers. China, which had been enjoying 8% plus GDP growth in the past, saw growth falling below this level in the September 2012 quarter.

Data Source: The Economist

For many, the Indian capital market is almost synonymous with the Indian stock markets. But equity is just one form of capital. How about debt? Why is the Indian corporate bond market so miniscule? This has been a matter of great concern for several years. In fact, there have been so many expert committee reports on how India can develop a vibrant corporate bond market. But yet nothing concrete has materialised. What is the reason for this? The root cause is that there has been no strong will on the part of Indian policymakers to initiate any important reforms in the local bond markets. R H Patil, the man who helped develop the National Stock Exchange, had expressed his disappointment as back as 2005. And many experts have echoed the same views.

Many put the blame on the RBI for the muted growth of the bond market. While the government securities may have developed compared to a decade before, liquidity is restricted to just a few securities. How then can the corporate bond market be liquid? So, developing a functional corporate bond market will require a series of reforms. But above all, there is strong need for the will of policymakers. When this will happen is anybody's guess.

Western banks have had a tough going every since the financial crisis. They are dealing with falling revenues and low profits. However their Asian counterparts are rolling in business. According to Oliver Wyman a consulting firm, revenues in Asia have increased at an average annual rate of 9% over the past three years. Return on equity in some of the faster growing regions has reached 25%.

European bankers have been forced to retreat from Asia on account of problems back home. Their share of large Asian trade deals has slumped to 8%, from about 43% in 2010. The Japanese are however seeing this as an opportunity. They are venturing abroad once again after a two decade retreat. Banks from smaller economies like Australia, Singapore, New Zealand and Malaysia are also growing rapidly. These regional banks are buying operations of the retreating Europeans and are funding small and medium sized enterprises that are expanding their supply chains overseas. If Asia's regional banks sustain their current growth rates, some will soon become forces to be reckoned with.

India Inc. seems to be on a shopping spree. It was almost a decade back when India announced its arrival on the global stage with big domestic companies going for major overseas deals. And then followed the heady days between 2006 and 2008 marked by events such as Tata Steel buying Corus. But the momentum could not be maintained. The slowdown in domestic economy and tough global funding stifled global ambitions. However, a series of recent merger & acquisition (M&A) announcements by companies of the likes of ONGC, M&M and Hinduja suggests that Indian companies might be getting back into action.

A key point here will be the motivation behind the act. The move sure will give access to precious assets or foreign technology abroad. But it also signifies the frustration of corporations with the corruption and unfriendly investment environment back home. If things don't change for the better, we could witness further capital drain. And that could become the biggest crisis looming before the Indian economy.

India has long been facing a chronic shortage of electrical power. Its peak electricity demand has on average exceeded supply by nearly 10%. To remedy this, the government has encouraged the development of large-scale power plants that generate power in the range of 1,000 to 4,000 MW. But India's domestic power equipment manufacturers have been unable to produce enough equipment to meet the demand for these new plants. This has led to a dependence on imports of power equipment, mostly from Chinese firms. In-order to protect the local suppliers, India imposed a 21% duty on imported power equipment. Because of this China's top power equipment makers want to set up manufacturing facilities in India. They are now seeking easier visa and import rules. But Indian suppliers like BHEL are resisting such moves of their Chinese counterparts. This is because they are worried that they may face unfair competition from China, which restricts access to its own market and helps its suppliers. The Indian suppliers believe that the Chinese have an advantage as they started manufacturing equipment at least two decades ahead of Indian companies.

In the meanwhile, the Indian equity markets remained closed today on account of Guru Nanak Jayanti. Most Asian stock markets traded in the red today with Japan, Indonesia and China emerging as the top losers.

04:56  Today's Investing Mantra
"An investment in knowledge pays the best interest." - Benjamin Franklin
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10 Responses to "Is India set to see a turn in fortunes of its poor?"


Nov 29, 2012

No doubt the system is to be overhauled, alas whether the babu who carryout these will they adhere to the principles? There are innumerable eprojects of govt to reduce the bureaucracy and red tape, but unless the system is oiled properly before the due date of such services queries and hurdles are hurled at such people who will not fall in line.
The same fate will happen unless it is totally edriven without interventions of persons in power and babus.
The agencies monitoring these are also responsible cos some of the cadres are from erstwhile babudom.
One has to wait and watch for the results after implementation.



Nov 29, 2012

Dear Sir,
Its only an ideology that this direct cash transfer can reduce the middle man interference in to poor man`s assistance by the government, but who is going to evaluate the status of an individual, there comes all the trouble, again those who are already corrupt can influence the political net work & officials & the honest & real poor will continue to be the same for ever.Change should start from our political mind set, otherwise we will continue to be a person for ever as we are in the present position.


Suresh Kumar

Nov 28, 2012

There are several bottlenecks in the scheme, which need to be plugged immediately, although intentions are noble. The first and foremost issue is the most likely misuse of the money, about Rs. 3,300/- by the head of the family, particularly in the states without prohibition. Will this money be used majorly for buying liquor ? Will this produce more alcoholics just sitting at home ? Second is the last mile issue for bank and logistics ? Will banking correspondents charge more money from illiterate villagers for cash withdrawals ? Food, Fertilizer and education subsidy should not be given in cash. Third, how would the govt. check if the family splitted and the subsidy amount doubled due to splitting of the family just for this purpose. It is best that the government does a thorough review of leaks from this scheme and launches an education programme for educating the villagers.



Nov 28, 2012

No...I don't believe that direct cash transfers will benefit the poor or illiterate in the long term. Basic reason is the same reason the current subsidy or PDS systems have failed to deliver intended benefits. And it is human nature of greed.

How to simply bypass the restrictions imposed by the so called direct cash transfers? Simple, extract direct cash in turn from the poor and illiterate for getting the money into their account. For example, a person having aadhar card trying to get Rs. 150/- into his account would have to pay a nominal fee of Rs. 25/- to the disbursing official. If he doesn't pay, too bad...he won't get the Rs. 150/- intended for him.

Alternately, inflation will anyway drive up the prices of whatever goods the poor need causing the current amount to become useless over the long term. So...bottomline, let the poor enjoy the direct transfer benefits for a few years, enough to maybe re-elect UPA3.



Nov 28, 2012

I think, cash transfers to poor is a bad idea. It will probably reduce corruption but shall not improve the conditions for the poor. In fact this may worsen their situation I feel. Reason being, once cash is their hands, the menfolks will abuse their womenfolks and take the money away for drinking, gambling and other such activities. So whatever little food they were getting, will also not be available. We shall see and increase in deaths due to hunger in this country due to this policy. We are illiterate, uncivilized society. We cannot give cash and expect people to know how to spend it properly.



Nov 28, 2012

Though the intentions are good, we will NOT see any change in the prices of fuel, food or fertilizer. The dole will ultimately add to the already burdened system. Thats all.


Sanjay Goel

Nov 28, 2012

Whether it turn in the fortunes of India's poor or not, it will certainly turn off the fortunes of the corrpution in politics .It will also provide much needed liquidity to the poor household in India's remotest of the remote village.
I expect banking to leapfrog due to this action and when you serve bottom of the pyramid , you create an unbelievably large market for basic consumables which till date might have been out of their reach.
Think of this as early 60s of India ( if you leave the 30 crore middle & high income group ) .
Sounds fantastic for the equity market in coming decade !



Nov 28, 2012

Direct cash transfers is better than subsidies adjusted in the prices. However, our corrupt POLITICIANS and PUBLIC will find some new loop holes and encash it.



Nov 28, 2012

Besides cash transfer improve facilities like free school, hospital, transportation. Fuel and power should be rationed through Aadhaar Card at subsidized rates. Reduce reservations.


Sane Guy

Nov 28, 2012

No. Direct cash transfer is not the best way of doling out subsidies to the poor. It is likely to be misused at the receiver's end for buying liquor and other unhealthy substances particularly by the male members of the poor families. Food coupons for buying specific items would be better.

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