Could a desperate Govt. trigger an economic collapse? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Could a desperate Govt. trigger an economic collapse? 

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In this issue:
» A game changer for telecom
» India's worst spell of price rise under UPA
» Hiring could improve from Q1 of 2014
» Can the West avoid Japan's mistakes?
» ...and more!


00:00
 
With the Congress Party getting a drubbing in the four Assembly elections, the electorate of India has sent a strong message to political parties mired with corruption. Already policy paralysis and political uncertainty has taken a high toll on investment decisions. Now with the 4-0 verdict, which has made the UPA-2 government effectively a lame duck, matters will only get worse.

The setback faced by the Congress Party in state elections could potentially raise political pressure on the government's near-term fiscal goals. Although the Finance Minister has repeatedly maintained that the fiscal target of 4.8% will not be breached, we have serious doubts on the same.

Already the revenue growth is slower than normal - only 35% of the target was met in the first half as against the normal 40%. And the Government has gone on an overdrive on the expenditure front, exhausting 84% of the fiscal deficit target in the first half. Thus, the government will have to drastically cut down on expenditure in the second half to meet the fiscal deficit target, which by the way is very unlikely in an election year. With the swelling food, energy and fertiliser subsidies, fiscal consolidation seems like a far-fetched goal.

An evident anti-incumbency trend against the Congress could mean an increasing likelihood of political pressure to limit expenditure cut-backs. The Union government will come under considerable pressure to loosen its purse strings and spend more money on the welfare schemes of the UPA. It will also find it extremely difficult to cut subsidies and hike diesel prices. Simply because both are seen as anti-poor.

It is this prospect, of living for the next six long months in the shadow of a government that may be getting desperate to retain power which worries investors the most. This means the turnaround of the economy that everyone has been waiting for can only begin after the next elections.

A good and stable government is the need of the hour, as corporate earnings and new projects are not expected to pick up anytime soon. Even after the PM cleared various stalled projects, nothing has changed on the ground. Many projects are stuck due to lack of clearances and corruption in getting any clearances.

Thus, between now and election time, the government could take steps which could seriously jeopardize the economic health of the country. And this scenario is something that investors must be prepared for.

Do you think that desperate measures by the Congress to improve its electoral performance will seriously impact the Indian economy? Let us know your comments or post them on our Facebook page / Google+ page.

01:12  Chart of the day
 
As has been the case in FY14 till now, there was no respite for the auto industry in the month of November 2013 either. Volumes across segments in the auto space witnessed a decline. Domestic passenger car sales were down by 8% YoY during the month. The performance of commercial vehicles (CVs) was even worse as volumes declined by 29% YoY. Only 2 wheelers managed to record some growth as volumes were up 5.5% YoY. Slowdown in the economy and firm interest rates and fuel prices has been the primary reason for the dismal performance of the industry. There were considerable expectations from the festive season, but the latter turned to be quite average. The rest of the fiscal year is largely expected to remain tepid as well. But there are hopes that FY15 onwards, a recovery in the economy and consequently the auto industry will take place.

Passenger car sales over the past 5 months


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02:00
 
Both capital intensive industries as well as highly regulated ones can be difficult beasts to deal with on their own. So imagine what would happen if both of these attributes are present in the same industry? And this is exactly what the Indian telecom industry is all about. High fixed costs and flip-flops from the Government on a regular basis have tested the patience of even the most efficiently managed companies. Little wonder, the incumbent players have found the going extremely tough so far.

Recent developments though do provide some degree of comfort. The regulatory dust is beginning to settle. There's also the indication that the fiercest of rivals are also looking to bury their hatchets and come together. At least this is what the latest deal between Bharti and Mukesh Ambani owned Jio Infocomm points towards. As per reports, both the companies have announced a comprehensive telecom infrastructure sharing arrangement. Its purpose would be to share infrastructure created by both parties. This certainly seems a move in the right direction as it will help bring down fixed costs. Besides, it is also likely to reduce spectrum acquisition cost. However, the regulator will have to ensure that such agreements do not turn the industry into a monopoly or even a duopoly. Because this would defeat the entire purpose of having co-operation in the first place.

02:40
 
It is said that onion prices have often collapsed governments. How are the two interrelated? Onions are a staple food item for the masses. Therefore, any significant rises in onion prices tend to deliver a direct blow on a poor man's belly. Add hunger and unemployment and you have a recipe for socio-political disaster.

During the UPA II regime, we have witnessed one of the worst inflation levels since independence. As per an article in Economic Times, consumer prices have increased by 10% annually over the last 5 years. India's inflation rate is twice of what is prevailing in other emerging economies. India's ranking among 153 emerging markets by inflation rate has fallen sharply to 142. One of the major reasons for such a high inflation rate has been the UPA government's fiscally irresponsible populist measures.

Apart from the high inflation, public anger towards the government has been further exacerbated by unabated corruption and lack of reforms. The recent state polls have clearly shown the door to the Congress party. If these results are any indicator, the incumbent government is set to face a very tough battle in the upcoming general elections.

03:20
 
India has always taken pride in having the highest and rising young population in the world. However, the same can also become a huge liability in the absence of job opportunities. As per an article in a leading financial daily, this seems not to be the case for India, at least in the short term.

As per an employment outlook survey conducted by Manpower, the hiring is likely to gather pace in the first quarter of the New Year. A net 33% of 5,006 employers who have taken part in the survey expect to increase staffing levels in the coming quarter. However, before you cheer the news, there are some fine points to be noted. That is, the scenario looks optimistic only on a year on year basis. Sequentially; the hiring intentions have weakened in the key industry sectors. This is hardly surprising given the slowdown in the Indian economy. Again given the size of the survey and ongoing uncertainties in the domestic and global economy, we would take the outcome of the survey with a pinch of salt and wait to see how things pan out before we celebrate.

04:00
 
The 'lost decades' for Japan should have been a meaningful lesson for the rest of the world. The artificial appreciation of the yen by bringing interest rates to record lows was the biggest undoing for the Japanese economy. Something that led to prosperity evading the land of rising sun for more than two decades. The debt funded investment boom, realty and stock market bubbles have all failed to help the economy undo the monetary policy blunders. The impact on public finances was also devastating. As per an article on Forbes, at the time of collapse of the bubble economy, Japan's budget was in surplus. Also the government gross debt was around 20% of GDP. However, subsequently, weak tax revenues and higher government spending created substantial budget deficits. The Japanese government gross debt currently stands at an unprecedented 240% of GDP. The economy is now stuck with excess manufacturing capacity and low domestic demand. Government-financed infrastructure investment has allowed politicians to channel funds to favoured but low return projects.

It now seems very apparent that even the US is staring at a Japanese future. The US Fed's notion of boosting investment and consumption by keeping borrowing rates low has already been proven wrong by Japan over several decades. One wonders what it will take for the US central bank to take some lessons home.

04:35
 
Indian markets traded well below the dotted line throughout the day. At the time of writing, the BSE-Sensex was down by about 159 points or 0.8%. Barring stocks from the FMCG space, losses were seen across the board with those from the engineering and capital goods spaces being the top losers. Mid and smallcap stocks were trading weak as well, with their respective indices down by 0.3% and 0.2% respectively. Stock markets in other parts of Asia ended the day on a weak note with China., Hong Kong and Japan closing lower by about 1.5%, 1.7% and 0.6% respectively.

04:56  Today's investing mantra
"Over the last seventy years the market has declined forty times, so an investor has to be willing to be in the market for the long term." - Peter Lynch
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7 Responses to "Could a desperate Govt. trigger an economic collapse?"

Madhukar Bhat

Dec 13, 2013

This is not only a lameduck government, but also spineless one. They are scared of taking any meaningful policy steps in fear of kicking off another scam. Because this Govt is incapable of doing anything right. Terefore they will only make motions of governance without doing anything concrete actions to lift the economy out of morass. Added to this is there vote-bank scemes which are draining out the treasury.Expecting anything positive till coming elections is foolish

Like 

Sundaravaradan

Dec 12, 2013

Hi,

Quote...
It is said that onion prices have often collapsed governments. How are the two interrelated? Onions are a staple food item for the masses. Therefore, any significant rises in onion prices tend to deliver a direct blow on a poor man's belly. Add hunger and unemployment and you have a recipe for socio-political disaster.

During the UPA II regime, we have witnessed one of the worst inflation levels since independence. As per an article in Economic Times, consumer prices have increased by 10% annually over the last 5 years. India's inflation rate is twice of what is prevailing in other emerging economies. India's ranking among 153 emerging markets by inflation rate has fallen sharply to 142. One of the major reasons for such a high inflation rate has been the UPA government's fiscally irresponsible populist measures.

Apart from the high inflation, public anger towards the government has been further exacerbated by unabated corruption and lack of reforms. The recent state polls have clearly shown the door to the Congress party. If these results are any indicator, the incumbent government is set to face a very tough battle in the upcoming general elections.
Unquote...
Familiar...Yes. Equity Master Article.
.
If UPA-2, INCREASES subsidies.., UPA-2 will loose MORE Votes !

Like 

Saravanan

Dec 11, 2013

yes. govt could unfold loose financial measures like 2009's 60000 crores waiver of farmers' loans that drove all PSU banks into red and loosening of norms for availing subsidy or other gimmicks like bringing up half-baked LokPal bill, etc.,

Like 

krishna Murthy

Dec 11, 2013

Govt had already cutting the expenditure where it does not have stake in electorol impact, such as LTC, telephone bills of govt dept,science, technology, dept of ministries. However if it had a vote stake it is keeping mum

Like 

JM

Dec 11, 2013

Have observed the machinations and the bankrupt and highly corrupt practices of the Congress party for the last over 50 years and doesn't surprise me if they drive India into the ground just to stay in power. Everyone from the Congress, starting with the top leaders to their shameless spokespersons to their workers need to be put on a hot air balloon which will never be able o come back to earth. Only rhen will India prosper and it's people live in a somewhat civilised manner.

Like (1)

Gurdeep Singh Bariana

Dec 11, 2013

Desperado government policies, all measures taken in haste, without curtailing wide spread corruption and looting, no central leadership, had caused grave burden, on infrastructure, industry. Foreign leaders of industries those who wanted to invest, went back with desperation, because of the web after web created for clearance of investments, Taking back hand by Mr Buffet further made, uncertinity in the minds of investors. As article says that, "could a desperate Govt, trigger an economic collapse " could not be ruled out, or ignored or shelved a smear hestrical thinking.

Like (1)

H K Prakash

Dec 11, 2013

Every ministry has a webpage, Pronob has a webpage. Write to them, expressing your anguish and despair at seeing our beautiful nation reduced to beggar status by the insane policies of the Pseculiar Party. Protest against the handing over of important ministries to 25-28-30 year old immature and untried children of former netas of the PP. Protest against the free import of coal, silver, rubbish from China, pasta/pizza from Empress's country, etc. Protest against the artificially high procurement price for wheat, rice, sugar when there is no space to store earlier purchases. If many write in, I am sure the message will percolate thru the granite skulls of the rulers!

Like (1)
  
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