The kind of shock that the Indian economy needs... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The kind of shock that the Indian economy needs... 

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In this issue:
» Consumer prices remain high in India
» 'MNC delisting' theme goes sour
» Another infra target missed
» Auto exports woes in Sri Lanka
» ...and more!


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00:00
 
The Reserve Bank of India (RBI) governor Mr Subbarao must consider himself stuck between the devil and the deep blue sea. Despite GDP growth having slowed down in the last two quarters, the central bank has not bitten the bullet and lowered rates. The culprit being inflation staying stubbornly high. As a result, everybody including the government is breathing down his neck to change his stance. Especially since his current policy of keeping rates status quo has not achieved the desired results.

An article on Firstpost has argued that the RBI governor needs to go in for a shock therapy. This should either be by cutting rates significantly or raise them by one or two percentage points immediately. The idea being that minor changes or status quo will not really help matters.

But it is not as simple as it seems. The RBI seems to be fighting a lonely battle with little or no help from the government in this regard. Monetary policy as a tool alone cannot spur growth unless there is support on the fiscal side as well. And the latter is sorely lacking. The government has not shown the urgency required to bring down its deficit and cut down wasteful expenditure such as subsidies. Nor has it done anything radically different in terms of ramping up infrastructure and supply chains so that bottlenecks on the supply side can be done away with. Supply side problems have been one of the root causes of high inflation and addressing these issues will go a long way in ensuring that inflation does not become a problem year after year.

Besides, conditions in the developed world more than amply demonstrate the fact that monetary policy alone cannot fuel growth. Indeed, the US for instance has seen near zero interest rates for quite some time now and there is hardly any meaningful recovery in its economy. Meanwhile, all it has done is accumulate massive debt which threatens to blow up in its face if not addressed soon.

Probably Mr. Subbarao will have to dig deep and come out with a policy that will jolt the economy. But we believe that it will still be quite meaningless from a longer term perspective unless the government also decides to take more radical and proactive approach.

Do you think that a shock therapy from the RBI alone will be enough to fuel India's GDP growth? Share your views or you can also comment on our Facebook page / Google+ page

01:36  Chart of the day
 
Indeed, consumer prices have refused to come down much despite the RBI keeping rates firm. As today's chart of the day, inflation in India was much higher than that of its peers both in the developed and developing world. Although GDP growth in China has also witnessed a slowdown, the dragon nation is not beset with the kind of inflation problems plaguing India. Inflation has been inching upwards slightly for the US while Japan, not surprisingly, continues to battle with deflation.

*in October 2012
Data Source: The Economist

02:06
 
Short term investing themes are the most risky and misguiding. Yet business media and brokers continue to influence gullible investors with these. Investing based on market speculation has rarely created wealth. Instead investors often end up losing their shirt when the so-called 'theme' goes for a toss. Take the case of 'MNC delisting' theme for instance. Not once or twice. But on several occasions, Equitymaster had warned readers to stay away from such a speculative bet.

As it turns out, our fears were true. But several investors have burnt their fingers in such stocks. The companies were expected to delist their shares ahead of the SEBI-mandated deadline of June 2013. This was in response to the mandate to bring down promoter shareholding below 75%. But, such bets have turned sour, with several MNCs having given up their delisting plans. Instead they want to raise additional capital. As a result, their stock prices that had zoomed on the hopes of delisting gains have come crashing down. As per Economic times, in November itself, the stock prices of MNCs have dipped by around 1% while the BSE Sensex rose 5%.

02:47
 
FDI in retail has been a hot topic of discussion for quite some time. Though the UPA has won the vote on retail FDI in both the houses of Parliament, the controversy surrounding the issue has not abated yet. There has been a huge political uproar after Walmart disclosed in the US that it had spent Rs 1,250 m in the last four years on lobbying for different agendas. This also included its ambition to venture into the Indian supermarket business.

In the midst of the ruckus, General V K Singh made an interesting point. Instead of going in for FDI in retail, he favoured the Amul model. According to him, the Amul co-operative model has the ability to empower farmers. The strength of the Amul model lies in the fact that it has helped farmers get rid of the iron grip of middlemen. This is unlikely to happen in corporate contract farming as it is not feasible for large companies to buy directly from farmers. Of course, the success of Amul has brought about its own problems. The Gujarat Co-operative Milk Marketing Federation (GCMMF), the owner of the Amul brand, has grown tremendously in its reach. So much so that its members account for about one-third voters in Gujarat! This has resulted in increasing political interference with the co-operative. So, it is true that the co-operative model has many advantages over large foreign retailers. But such initiatives should be protected from political opportunism.

03:26
 
Missing targets is common for corporates. And understandably so. Occurrence of any unforeseen event can turn the math on its head. Thus, misses of 10-20% are quite common. However, it seems that the government is in a race to set the new common norm for misses. The government recently stated that it has just awarded 11.5% of road projects out of 8,800 km that was planned for the fiscal. This is a miss of about 88.5%! In a sense, this figure should not be called a miss. It is effectively a gross misrepresentation of the planned target itself.

True, that there are three months left for the government to achieve its original target. But it is not premature to say that the target will be missed as delays in obtaining environmental clearances and land acquisition issues have considerably impacted the project award activity. While government has taken various steps like setting up high powered committees to get fast track clearances and establishing land acquisition units, none have borne any fruits as of now. Until these issues are resolved, the target will always appear unrealistic even if it is modest.

04:11
 
Recently, we all read about how an Indian infra company fell out of favour for a project in the tiny nation of Maldives. And while we are still analysing what went wrong, out comes another shocker. The central character this time is Sri Lanka, the tiny island nation to the south. A leading news portal has reported on how Sri Lanka has suddenly increased duties on SUVs and commercial vehicles coming out of India. This, after it doubled the same for cars earlier this year.

The decision would have perhaps been acceptable if it were applicable to imports from all countries. However, the Sri Lankan Government simultaneously reduced duties for vehicles coming from other Asian countries such as Japan. Little wonder, automobile exports to Sri Lanka have suffered badly in recent months. It will be interesting to see whether the Indian Government finally takes some steps to deal with this kind of favouritism? Or it remains a mute spectator. Like how it chose to during the Maldives episode.

04:45
 
In the meanwhile, the Indian equity markets traded in the positive throughout today. At the time of writing, BSE Sensex was up by 43 points (0.2%). All sectoral indices traded firm with exceptions of IT, FMCG and healthcare stocks. Asian stock markets traded mixed with China as top loser and Malaysia as top gainer.

04:56  Today's Investing Mantra
"Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company's owners are slim at best" - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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5 Responses to "The kind of shock that the Indian economy needs..."

N.G.Sreenivasa Rao

Dec 15, 2012

Personally i think that RBI alone cannot do anything at this juncture as to Inflation. It is only a limb or part to play its game. Who are the others in the field, to support or augment the thinking of RBI. Interest alone cannot play the role of containing the INFLATION. Other Issues: India is a vast country with states administered by different political parties of different ideas and ideals. Most of the states are troubled with severe cut ranging from 10 to 14 hrs. How can industrial activity go on. Without production, the fixed expenditure has to be met. To gain popular votes and having an eye on 2014 election or in the near future, state Govts., are enlarging the freebees,, which in turn reflects on Deficit financing. To augment the Govt. is increasing the rates of taxes. Because of free bees on power, the unit cost is increased. Infrastucre-roads are not in good condition but on the other hand the vehicle population is increasing day in and day out. The pressure on road leads to slow movement of vehicles, which consumes highter volume of fuel. Due to power cut, many have gone in for Generators, warranting fuel. It adds to the cost and also on import bill. Failure of monsoon due merciless cutting of trees. Severe polution. All leads to hazards of life, so on & and so forth. For anything & everything bundh, strike etc. Power plants are not commissioned to augment the power supply. BOrder water disputes. For a moment we forget, that the people of one state is residing in another state alone, who are none other than our own. Each state thinks that the other state is a foreigner or an alien. Legislatures are not allowing the assemblies or parliament to function properly/regularly due to disturbances by parties.(as seen over TV or read thro news papers. I personally do not think that unless and until there is a united effort alround from each and every state, the issue of inflation may still remain a distant demand. As true Born Indian I have expressed my views. I have no hatred or dislike to any party in India or elsewhere. India is Bharat. In whichever part of the country we live, it should be our endevour to look for the safety and integrity of the Country. Let personal interest be set aside and look or work for better future of the next generation.

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V.Jagannathan

Dec 12, 2012

The comments by persons earlier above have stated well what is wrong. I would hence like to add that RBI alone can not help the Economy unless the Govt. takes serious steps without bothering about vote bank politics and having national good as prime interest. Even if the Govt. is changed the new Govt. will be faced wih the same problem and may have to take hard decisions. So the Govt. has to disscuss the alternatives with all parties, eminent Economies and take dcisions and explain to the people the need for the same and make them aware of the rality.First they should find ways to put a stop to promise of freebies at election time like free gas, laptop, grinders as though the life of BPL families depended on them!The govt, must curtail expenditure ban wasteful expenditure on advertisements banners etc.,for every Govt. function, curtail some parliamentarian's privilages (which were misused like gas cylinders!).

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Umesh Sharma

Dec 11, 2012

cheap money meaning lower interest rates brings growth is a fallacy.It can make borrowers careless and spend more without any regard to the repayment of the loan.The huge agricultural loans given at concessional rates of interest show very poor recovery mainly because the borrower thinks it more beneficial to use the low interest loan to meet his other requirements and not to repay when his crops are harvested.Interest on loans is the premium borrower has to pay for getting funds to start and run his project.If the Government feels that a particular set needs support it must offer incentives in other forms rather than ask the banks to lower the interest rates.The interest rates can be lowered at the cost of the saving class which has to bear the burden of inflation for offering his hard earned savings for the growth of economy.by lowering the interest rates we are adding insult to agony.And interest should be considered as any other factor of production for determining the overall feasibility of any project.The industry does not lower its life style or spending on advertisements etc.Then why clamor for lower interest rates

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Balakrishnan

Dec 11, 2012

RBI cannot fight a nuclear war with its bows, arrows and guns. Fiscal profligacy is the root of the rot caused to the economy and unless it is clipped, control of corruption and loot by the powerful will only be a day dream. RBI governor is helpless but no one can fault his judgement of the mess that we are in and his courage to speak out. Wish we have some more Subba Raos!

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Manoj

Dec 11, 2012

The government still wants to be in the drivers seat in the economy, and has successfully shoved it's failure on RBI - thats all we have seen in 3 years. Interest rates are nothing but cost of money - if rates are kept below inflation levels (a)households are massively disincentivized to save (b)banks unable to make up for losses from NPA's collpase (c)people switch deposits from banks to institutions (LIC, PO, NSS)

It is not in the interest of the economy to have banking systems collapse, hurting millions of small depositors. But the present FM who believes everything he learnt at Harvard, and that US does is good for India will only push towards that.

US history- Exxon, Edison, Microsoft, Medicare - is replete with examples of corporate lobbies trod over US citizens and today US companies are filthy rich, while US citizens are massively indebted and in bad health (US health is at the bottom of all OECD countries, while it is the top spender/capita on healthcare).
That is why an unlikely Obama gets re-elected to tilt the balance back. Maybe that's what will happen in India too.

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