India will grow, but can it become great? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India will grow, but can it become great? 

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In this issue:
» The reason diesel car demand has hit the roof
» Did Walmart violate India's FDI norms?
» Will India grow faster in 2013?
» US facing 3 bigger cliffs than the fiscal one
» ...and more!


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    00:00
     
    Gurcharan Das. This gentleman has a long list of credentials to his name. He has been a former CEO of Procter & Gamble. He has served as a columnist for several national and foreign journals. He has a few books to his credit too, including the renowned 'India Unbound'. In fact, India has been an important element in many of his books.

    We came across a very interesting interview where Mr Das shared some very insightful views about the Indian economy. In his view, the main reason why Manmohan Singh has been an ineffective leader is that he is too gentle and severely lacks will power. For the position of a Prime Minister, merely being intelligent and having a doctorate in economics from Oxford University is not enough. To run a country, determination and strong will are very crucial to bring about any meaningful changes.

    But as far as the country's economic growth is concerned, he believes that no one can really impede India's growth story for the next couple of decades. In other words, irrespective of the kind of governance, India will continue to grow. And given the divisive nature of Indian politics, reforms will tend to be slow and marginal.

    According to Mr Das, India will end up as a middle income economy. Let us elaborate what this means. It is easier to rise from a low-income to a middle-income economy. And this is what is happening in India. There is a burgeoning middle class. Mr Das expects per capita income to increase from US$ 1,500-1600 per year to US$ 5,000-6,000 per year over the next couple of decades. The tough part would be to scale up to the next level from a middle-come to a high-income economy. This is where India will hit a wall. The wall of bad governance. More than economic reforms, what India imperatively needs are governance reforms. Only then can India really emerge as a great country.

    Mr Das has indeed nailed India's problems very aptly. If the governance problems persist, it seems quite likely that India will hit the middle income trap like so many other countries across the globe. To avoid this, India will require a strong leadership that can overhaul the system and bring about the much needed reforms.

    Do you think the 2014 General Elections will give India the kind of leadership it desperately needs? Share your views or you can also comment on our Facebook page / Google+ page

    01:20  Chart of the day
     
    Despite the recent hike in diesel prices in India, it is still at the lower end of the global spectrum. In fact, the differential between diesel and petrol prices is the highest in India, with the former's price being just 69% of the price of petrol. Today's chart of the day shows that the diesel to petrol price ratio is the highest in the US, while it is lowest in India.

    This has had a strong impact on the distribution of auto sales. Two years ago, about one-third of the passenger vehicles sold were diesel models. Today, more than half (about 56%) of the vehicles sold are of this category. What is interesting is that with this stat, India's passenger vehicle segment is considered to be the most 'dieselised' in the world. The trend of higher demand for diesel vehicles witnessed a major shift in FY12, following the sharp increase in petrol prices. And with this development, the segment became a key focus area for all automobile companies. Not only have they been launching newer diesel vehicles and variants, but a handful of companies are believed to be setting up facilities to manufacture diesel engines just to meet the demand and cut down the waiting periods.

    Data source: DNA Money

    02:00
     
    The government achieved a huge victory recently. The Parliament voted in favour of FDI in retail. This has opened the doors to international supermarkets and retailers. We are likely to see several of the popular foreign retail brands open shop soon. A name that pops into all of our minds is Walmart which we think will set up shop too. But the company has actually been in India since December 2010. And it is this very shady deal that has brought it under the government scanner.

    Here's what happened. Walmart invested in an Indian consulting business called Cedar. Interestingly Cedar was earlier Bharti Retail Holdings. Now the FDI rules at that time permitted Walmart's investment into consulting, but not into retailing. However, Cedar eventually did go ahead and opened up retail stores under the name of Bharti-Walmart. Theoretically, this counts as a violation of the prevalent FDI rules as FDI in retail was allowed only recently. But the question here is was there a violation? Again, it all depends on how the deal was structured and financed. Apparently the fine print of law is murky here. If Walmart can prove that the deal was structured such that it was debt and not equity participation, then it goes scot-free. Else it has to pay a penalty up to 3 times the initial amount invested by it. There are repercussions of this on Cedar as well. The government has asked the Reserve Bank of India (RBI) to investigate the deal. The problem is that if proven wrong, this would be yet another blow to the government as it would highlight its inefficiency and negligence.

    02:55
     
    Will 2013 be better? That is the question on everyone's mind now. Particularly those tracking financial markets, GDP growth rate, inflation and asset prices. An improvement in the domestic investment climate is also expected to boost job creation. Consumer sentiment will get a boost from higher disposable income. Thus a better economic scenario is on every Indian's wish list for 2013.

    Probably it is also time to say 'Amen'! For as per Economic Times, experts believe that India's GDP growth is bottoming out. What that means is recovery will pick up pace 2013 onwards. Having said that, the chances of returning to an 8% plus growth trajectory are still remote. That would necessitate far greater boost to investment, wide-ranging fiscal reforms, and greater policy efficacy. Nevertheless, looking at the brighter side of things, we believe investors looking at a long term growth story; will not repent investing in Indian stocks.

    03:27
     
    If you thought that the fiscal cliff was the biggest problem that the US is facing currently, think again. The problem posed by the fiscal cliff has been dominating headlines in recent times. A combination of tax hikes and spending cuts is tipped to push the US economy back into recession unless the Republicans and Democrats agree to a common solution. But will a solution to this end America's problems? Not really. Because as per an article on Business Insider, the US has to deal with 3 perils or 3 so-called cliffs which are bigger issues than the fiscal one at present.

    For starters, there is the child poverty cliff. While the focus in recent times has been on the rich and the middle class, between 2007 and 2011, the percentage of American school-age children living in poor households grew from 17% to 21%. If this is allowed to go unchecked, then in a few years time, America will have a significant population of under-educated and desperate adults with poor job prospects. This could lead to uprisings of the kind we have seen in the Middle East. The second is the baby boomer healthcare cliff. As America's ageing population increases, the cost of providing healthcare will also go up significantly and will only put added pressure on an already deteriorating federal budget. Last but not the least, is the environmental cliff, wherein there is set to be a rise in the global emission of carbon dioxide. These are longer term problems which the government cannot allow to go unnoticed.

    04:20
     
    In the meanwhile, Indian equity markets were trading below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by 55 points (0.3%). realty and IT stocks were leading the pack of losers while consumer durables and auto stocks were trading firm. Asian stocks markets were trading mixed with China (up 1.6%) and Singapore (1%) leading the gains, while Japan (down 0.2%) and Indonesia (down 0.1%) were facing selling pressure.

    04:40  Today's Investing Mantra
    "The best way to think about investments is to be in a room with no one else and just think. And if that doesn't work, nothing else is going to work. The disadvantage of being in any type of market environment like Wall Street in the extreme is that you get over-stimulated. You think you have to do something every day." - Warren Buffett

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    8 Responses to "India will grow, but can it become great?"

    Adi daruwalla

    Dec 10, 2012

    Waht Mr. Das is trying to tell us is that when we were kids we often heard the story of the strong animals fighting over food e.g. the Lion and the Tiger and while they sweated it out the crows came and ate away more than half the food. The analogy with the givt is is that our own tigers and lions are fighting and the crows from inside the country are anyways eating up the food and slowly the crows from outside will also eat away the food. Mr. Das is from an affluent background and needs to realize that the our politics needs to very very inclusive of people, provide remuneration, education and food. We have not even attained core banking in the Metro cities, whats with the Coop banks they cannot even check an inter Mumbai branch account between Bandra and Fort Mumbai?? Then how are we going to include people in the villages in subsidy schemes when Metros are not ready for core banking. Again sham jobs and someone else will eat away the food !!!

    Like (1)

    R.S. Mani

    Dec 10, 2012

    Unless the Money power and Muscle are checked, there is no hope of getting any party absolute majority. Again there is a chaos. we unfit for democracy and we need a leader like Indhra Gandhi.

    Like (1)

    Manoj

    Dec 8, 2012

    I'm sorry this may sound rude, but Mr Das is just saying nice things because he is an Indian. Lest we forget, for every country that grew, 5 failed and some collapsed. With it's oil money, do you call Kazakhstan, Syria or Turkey developed economies? There are 3 markets in economics - money, goods and people. Economic growth happens when these grow together. A short analogy -

    A family with 2 brothers and 4 depdendants - the 2 able brothers don't work or make anything. They pawn family gold, and borrow 3x from investors showing business plans. But they put away 50% as cash abroad secretly. They educate children only till they can write their names, do not eat healthy but the cheapest, especially for wives and daughter. 20% of the money goes to buy flat TV and a mercedes car. Remaining is spent in the business. How do you think the business will do in 2,5 and 10 years? How well will this family fare in 25 years?

    I think we must realize that our governance is leading us to become like Bihar, which was insanely rich, 60% of the money was with 5% people, and the rest live a tribal life. Do you call that a developed economy? I think not. The danger is real and coming closer.

    Like (2)

    Chandrasekaran

    Dec 8, 2012

    We have been experiencing our political system & our tolerance to any kind of cheating by them from the past, because of our past historically suppressed ruling & factorial social setting with numeral territoriality & community,so psychologically We accepted the slavery as our basic living , hence we become clones to our rulers. They never let us to realize the reality,this will continue until some big disaster we experience in the future

    Like (1)

    B S MURTHY

    Dec 8, 2012

    As long as the present generation of politicians of all parties vacate their present positions, good governance may be a dream to aam aadmi. Unless we get a dedicated leader like PANDIT NEHRU, or INDIRA GANDHI who were conscious of National welfare rather than their personal comforts, it would be difficult to stabilise our economy and rebuild moral standards in the country.
    Individuals who have got adequate intelligence and motivation to become entrepreneurs are confined to some jobs, because of our unstable economic and political policies, unstable interest rate structure (which is changed by RBI as if it is quarterly ceremony) besides the unavoidable GHOST of CORRUPTION at every seat. Nobody is conscious of doing JUSTICE to his POSITION; he is more concentrating as to how to ENCASH his position.

    Like (1)

    kirti agrawal

    Dec 7, 2012

    dear all, i agree we need good governance to make country great.we do not need corrupt party .

    Like (1)

    Amit Sengupta

    Dec 7, 2012

    If we get a right thinking, well-meaning Government in any election in next 25 years, I have to believe that miracles do happen in reality and is no longer a matter of myth. Check out the politicians. They have not only demonstrated their vested interest in remaining afloat in politics, they have ring-fenced themselves in various ways so that no young man with an intention of serving the people of India can ever enter the world of politics. It's a irony that we the citizens of India have all the faith in democracy but have very little faith in the Indian politicians. Ask any thinker, any social worker, the intellectual society. No, we are not destined to see any change in fate post 2014 election.

    Like (3)

    Rajaram

    Dec 7, 2012

    Good assessment. I think India will remain a middle income country. One, because we are a risk averse, xenophobic population. We'd rather struggle at a lower quality of life, than take risks. Two, we are tuned for survival, and not for excellence. Besides, most Indians are tuned to be employees seeking comfort zones and job security, rather than entrepreneurs. Entrepreneurs are looked down upon, until they become successful. Which means a difficult social setting for entrepreneurs and risk takers. Any pressure to achieve faster growth will push Indians into further insecurity and create negative pouring of emotions like the Singur episode, the Aam Aadmi protests, the Maruti episode etc. I think India will be lucky if it achieves middle income levels as a nation, and is able to keep reasonable peace within its population. A population that is at peace (if not proud), and having the basic middle class amenities would in itself be a great achievement for a nation and society such as ours.

    Like (4)
      
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