Will a new government change India's fortunes? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will a new government change India's fortunes? 

A  A  A
In this issue:
» No let up of consumer prices in India
» Corporate debt restructuring (CDR) is being misused
» Fed is boosting US economy through 'wealth effect'
» Buffett has outperformed all US stocks, mutual funds
» ...and more!

That the people in India are in a mood for change is palpable. The recently contested elections in 5 states were a testimony to the fact. The Congress was routed, the BJP was favoured and in the Delhi polls especially the Aam Aadmi Party proved that it can be a force to reckon with.

The general elections will take place in 2014. And whichever party gets the majority to form the government, it is quite obvious that the spotlight on it will be more intense than ever. Indeed, there are high expectations that the new government will not be as ineffective and complacent as the current government is. But instead it will be able to effectively address India's major economic issues.

There have been several reasons for the anti-UPA fervor that has swept the nation. For starters is the government's inability to bring consumer prices under control. Inflation has remained high for quite some time now. And this has compelled the RBI to keep interest rates firm even as growth has slowed. Corruption has been rampant. Scams and scandals were tumbling out of the closet with alarming regularity. There were no meaningful attempts made to ramp up infrastructure, which would have done away with some of the supply side bottlenecks. Some policies announced did not appear to have been properly thought through raising a big question mark on whether India is the right place to do business. And not to mention, the government's finances have gone completely astray.

So there is no doubt that the new government is going to have its hands full when it comes to resolving these issues. It will have no choice but to learn from previous mistakes. It is quite obvious, however, that it will no longer be able to take the average Indian for granted. The fact that the Aam Aadmi Party found so many takers in the Delhi polls was because of its anti-corruption stance and the desire to become a vehicle of change. This means that the new government cannot just enjoy its position of power. But will have to display much more serious attempts to drive the growth and development of the country.

It is quite clear that the current state of affairs cannot go on and it will be interesting to see how the new government takes on this challenge. All eyes will now be on the 2014 general elections.

Do you think that the new government will be able to bring about the much needed change for India as compared to the current UPA government? Let us know your comments or post them on our Facebook page / Google+ page.

01:36  Chart of the day
India continues to find no relief from high consumer prices. The RBI's attempts to tame this have not really been successful simply because the current government refuses to do its bit in addressing supply side shocks. Corruption and hoarding have been rampant as a result of which even a good year of monsoons has not yet eased the pressure. Indeed, when compared to its peers, consumer prices in India are too high. And this does not bode well at a time when economic growth has also slowed down.

Consumer prices in India stay high in October 2013

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We've known all along that the US economy lacked the necessary fundamentals to stage any meaningful comeback from the housing crisis of 2008. Simply because the need of the hour was to let bankrupt companies go bust. And utilise the freed-up resources in more productive activities. However, this did not happen. What the policymakers instead chose to do was throw good money after bad. And all this good money has ended up doing is taken stock prices and other asset values higher. And that too without any tangible improvement in the real economy.

If you need statistics, zerohedge.com reports how a total stimulus worth a mind numbing US$ 10 trillion has been provided by the US Government so far. However, it hasn't generated any real economic growth in the strict sense of the word. On the contrary, the US Fed's intention has simply been to boost the economy through 'wealth effect'. In other words, it wants the people to feel and spend like rich despite their incomes not improving in real terms. However, this isn't how allocation of resources and economic growth works. And we are truly scared that we could well be staring at another asset meltdown, possibly much bigger than the previous one.

The central bank is getting suggestions from all quarters in the run up to issuance of new banking licenses. The latest is a parliamentary panel that has expressed reservations against granting bank licenses to corporates. The panel is of the view that given the strong correlation of banking to the health of the economy, it would be wiser to keep banking and other businesses distinct. The experience of bailout of the too big to fail banks seems to have influenced the opinion of the panel. The RBI is certainly under no obligation to accept the views of the panel. However, given the risks involved, the central bank will have to certainly ensure that the new licenses do not land up in wrong hands. To put things in perspective, banks are already struggling with the problem of bad lending. And ironically it is big corporate houses that owe a bulk of non recoverable loans. Hence it will be quite a sticky situation if undeserving corporates are awarded banking licenses.

Here is yet another example of how a policy with a good motive can be misused in the absence of proper checks and regulations. The practice under question is Corporate Debt restructuring (CDR). The mechanism aimed to bring the lender and borrower together to restructure debts of viable firms and giver latter a chance to perform well. However, it has since long been grossly misused by the lenders and corporates. The banks have resorted to random use of CDR to change their non performing loans into healthy assets. However, with time, the mess has become too big to cover up. It is already reflecting in the performance of CDR cell.

As per an article in Business Standard, for the first time in five decades, the number of accounts that have slipped back to NPA category post restructuring have surpassed the number of successful restructuring cases. In order to bring things back into order, the central bank committee has recommended higher provisioning for restructuring assets. However, the realization has been too late. The practice has locked funds with inefficient firms and thus blocked the funds for viable projects that could have helped economy grow better. On the positive side, we hope the fall out will ensure better financial discipline in the future.

Investing genius Warren Buffett is not a legend without a reason. In fact, a recent study by National Bureau of Economic Research (NBER) has just validated that he has been the best investor in the United States of America. The Oracle of Omaha has outperformed all long-lived US stocks and mutual funds. It has been found that since 1976, Buffett's Sharpe ratio was twice that of the US stock markets and mutual funds. The Sharpe ratio is nothing but a measure that indicates risk-adjusted performance.

What do the findings tell us about Mr Buffett? Firstly, such a solid and enduring performance can only be the result of a strong process called value investing. Buffett's recipe has been simple- cheap, safe and quality stocks. The success formula sounds simple and imitable. The good news is that it is indeed simple and imitable. But that doesn't mean it's easy. Buffett's success has been a result of a highly disciplined approach to investing. By remaining disciplined and sticking to a time-tested method, you tend to avoid a lot of stupid mistakes. And most of times that is what makes all the difference.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 138 points. Banking and Capital Goods stocks were the biggest losers. All the Asian stocks were trading weak led by Japan and Hong Kong. The European markets opened on a positive note.

04:56  Today's investing mantra
"No wise pilot, no matter how great his talent and experience, fails to use his checklist." - Charlie Munger
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12 Responses to "Will a new government change India's fortunes?"

Sayed Md Naseem

Jan 12, 2014

Yes the New Government of AAP will certainly change India's fortune, but at present it is a hope only, because a party is a group of people and Mr Kejriwal should be very conscious in selecting Lok Sabha candidate, not like now free invitation to all in their web site. this is refrence to your coloumn "The Honest Truth, Kejriwal be ware of the enemy within" How can the internal mentality of a person can be judged. Is there any machine for it like lie detector etc. I will say no. but it can be judged by question and answers, some answers of yes and no comes out of our mouth within seconds is as per our thought and life. when brain gets time to think then only logic is formed and an intelligent person can give different reply.



Dec 11, 2013

I think so, I think it is better to be an optimist here than being a pessimist. In line with one of the reader's commentary, it is after all us who have to be blamed for all the mess. So, why blame self.



Dec 11, 2013

The position taken by AAP after election in the Delhi assembly is laudable.The mistake of UPA was in forming a government of many parties with the sole aim of coming to power .It is a government without effective machinery to monitor and control the actions of the ministers of those parties,whose main intentions were to make money for themselves and for the party coffers.The small regional parties have their own agenda and national interest is secondary .The new government has to keep this in mind if they have to survive and serve the interest of the people.Then only India's fortune will see a change.


Om Prakash Sharma

Dec 11, 2013

If AAP Party has the influence as seen in Delhi and people gravitate more towards it, there is no chance to get a good economic policy



Dec 11, 2013


Like (1)

Nerkuppai Thumbi

Dec 11, 2013

Perhaps, the question should be "can a new government change India's fortunes (from the present abysmal state)"? The answer is "Yes", but with several caveats. To start with, the government should be sincere in tackling any problem; we hope the new government will show a change in this respect at least. Then, the complex state that India is, sufficient moratorium is to be given to see results on the ground.

Like (1)


Dec 10, 2013

It primarily depends on (1) the party winning the elections getting a clear majority in the Parliament and (2) a genuine will and effort by the new government to remove systemic defects in the existing political & economic set-up. The message of the last few assembly elections is quite loud & clear -- people are impatient with politicking and expect good performance and governance with transparency and not mere grand-standing on matters relating to religion, caste or community or playing to the gallery to appease the minorities by doling out freebies and the like at the cost of the state exchequer. It's a wake-up call once again for nation building and the challenge is to productively engage India's youth power to keep the wheels of the Indian economy marching ahead of a slowing world economy.

Like (1)

avinash Amarpuri

Dec 10, 2013

I am sanguine the new Govt.,if honesty-based conversant with administrative and financial experience can pull the country of of quagmire in which UPA has thrown it.I remember once Sant Vinova Bhave had said that honesty has
such power that one honest person bear the load of one crore dishonest persons.Our Top man should be honest & the messaGE WILL PERCOLATE DOWN. This has been proved by Mahatma Gandhi in our nation.What we need is committed & honest leaders.

Like (1)

Aniruddha Joshi

Dec 10, 2013

Whichever govt comes the political goons you have to deal with remain the same. Thats true for parties of all colors and leanings. The electoral funding remains the same. The corrupt govt machinery remains the same. After all these so called goons, politicials or bureaucracy is all us. We are corrupt, why it should change with change in guard. We are the same then why the things would be different with different governments.

Like (1)


Dec 10, 2013

I think, we will not get a better governance even if the Government changes under the BJP or APP as it was seen in the past under one of them. Rampant corruption in the Govt. offices be it Delhi Municipal Corpn or Income Tax/ Sales Tax dept. has crept in to deep in operatives. Any democratic govt. finds it extremely difficult to root out such unwholesome things. Strong steps will lead to disruption of parliamentary pro- ceedings, disruption by labour unions etc.etc. However, let us hope that some economic changes will be there if the promise by BJP for unearthing and bringing the unaccounted money from concealed accounts is kept by them.
the Swiss banks

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