Does the PM finally deserve a 'congrats'? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Does the PM finally deserve a 'congrats'? 

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In this issue:
» Consolidation not growth on India Inc's mind
» Power tariffs to ease off
» 'US economy in shambles'
» Is China really slowing down?
» ... and more!

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For quite some time the Indian government has been at the receiving end when it came to reforms. The government has been criticized by the people, industrialists, investors and everyone else for its inefficiency and resistance to reforms. Therefore it was a pleasant surprise when it announced the change in FDI policy for two key sectors earlier this year. But many wondered if this was just a one-off move to save its deteriorating image. For those who thought this, there is good news. The government seems to be continuing with its new found enthusiasm for reforms. It has announced the second wave of economic reforms to drive the country's future economic growth.

Just yesterday the union cabinet has announced its approval on some key reforms. These include setting up of a Cabinet Committee on Investments (CCI), the urea investment policy and the much awaited Land Acquisition Bill. These reforms are expected to instill confidence in the economy and the government. Something that has been deteriorating thanks to the slew of scams and scandals and government's laidback attitude towards the economy.

The CCI is an important part which will monitor and help expedite existing projects of investments of Rs 10 bn. The new urea policy is expected to help the fertilizer manufacturers in setting up new plants and expanding capacity. It aims to garner Rs 350 bn of fresh investments in the fertilizer sector. This translates to an increase in capacity to the tune of 8 m tonnes. This would help reduce India's import of urea which currently forms nearly 30% of the total requirement.

The Land Acquisition Bill was amongst the most awaited reforms. Several companies have suffered due to the lack of clarity on land acquisition laws in the country. The Bill passed by the cabinet clearly states the rules under which the land would be transferred for both private projects as well as for public-private partnership projects. It also gives the guidelines for the return of unutilized land, something which was not there in the previous Bill. What now remains on this front is the clearance and approval of the Parliament which can be an uphill task.

All in all the government appears to be moving on the right track. Though there is still some lack of clarity particularly in the case of CCI with regards to environment clearances of existing projects. But more or less things seem to be at least progressing on the reform front. Let us hope this momentum continues in the future as well. And this is not just a face saving exercise that the government has undertaken given the upcoming elections. For the time being let's just congratulate the government for finally getting its act together.

Do you think the government has turned reform friendly or do you think these are just one off instances to save its poor image? Share your views or you can also comment on our Facebook page / Google+ page

01:20  Chart of the day
For most Indians drinking a cup of tea is the ideal way to start the day. Therefore domestic consumption is important for the tea sector in India. But an important source of revenues for the sector is exports . Unfortunately for the tea sector revenues from this front have not been very encouraging till at least September this year. Export revenues from tea have remained more or less flat. This is despite the increase the 21% YoY in price per kg from Rs 152 in FY12 to Rs 184.2 in the current year (period from April to September for both the years). The increase in price was offset by a decline in volumes during the same period. Volumes declined by nearly 20% YoY during this period leading to almost flattish exports in terms of total value. Unless the volumes revive during the remained of the year, the sector is looking at a relatively flat and static FY13.

Source: Financial Express

No economy goes up in a straight line. Along the way, it does encounter a few hiccups. In fact, such hiccups are necessary we believe. For they do away with the excesses of the past and lay the ground for a fresh round of growth. India currently is going through one such phase we believe. Its economic growth has slowed down in recent quarters and spending by corporate sector has also taken a beating. But is trying doubly hard to grow revenues the best strategy out there? Or rather one should wait out the current slowdown by strengthening internal systems and processes so that the growth that lies ahead can be taken full advantage of.

Our vote will no doubt go for the second approach. If the overall mood is a bit gloomy, one cannot spend one's way to higher revenues. And even if it happens, it will come at a huge cost we believe. Rather, the better strategy would be to consolidate one's current position and be fully prepared for the next round of growth. Thankfully, there are a lot of firms out there that are adopting the same approach. They are strengthening their balance sheets and improving capacity utilisation. They are also trying to weed out inefficiencies to the best extent possible. There cannot be a better sign than these for investors we believe. For when growth will return, they will be rewarded a double whammy of high growth as well as more efficient operations.

We thought things had just started to look up for the power sector. The government had pulled up Coal India to ensure regular and adequate coal supplies. Payments from State Electricity Boards (SEBs) were expected to be sorted out. The long pending demand for tariff hikes was also gradually getting approval. But a recent order from Kolkata High Court has once again put things in the backburner. It says that regulators cannot fix provisional tariffs for new units, which consumers say are abnormally high. Now provisional tariffs can be high because of overloading of costs. That is, when only one unit of a new power plant starts operations, the tariff is calculated to account for the fixed cost of the entire plant. However with economies of scale the tariffs can be normalized. Instead of taking ad hoc decision based on such preliminary data, we believe the courts should look at the long term prospects. Only then will a sector as critical as power be able to support the economy's GDP growth.

Does the latest round of monetary stimulus by the US Fed signal a sign of confidence in the economy? Not really. Besides bolstering its bond buying program, the Fed has stated its intention of keeping interest rates close to zero. This is as long as unemployment rates remain above 6.5% and inflation does not rise above 2.5%. However, Fox News contributor Charles Payne opines that the latest measure only means that the US economy is in shambles and US Fed is just buying time. It must be noted that the Fed has kept interest rates close to zero for almost 4 years now. Unemployment during this time has remained stubbornly high and growth has hardly picked up. The stimulus measures have only piled on to the debt which threatens to blow out of proportion unless the government takes some meaningful steps to bring this down. S far the US has banked on its legacy to push forward, but it can hold on to it for only so long. And reckless rounds of money printing will only make the threat of hyperinflation more real in the years ahead.

There has been a paradigm shift in the world economic system over the last decade. Asia has increasingly become the new hub of economic activity. And this shift has been marked by none other than the dragon nation called China. The economy has grown at a rapid pace of about 10% over the last three decades. And now, the country ranks second after the US in terms of GDP. This explains the global obsession with what's going to happen in China.

Following the debt crisis in Europe and the economic slowdown in the US, it was being said that the export-oriented dragon would have to prepare itself for a 'hard landing'. The economy did slow down. In the most recent GDP report, growth slowed down to 7.4%. But are hardly any indications of a slowdown. In fact, the manufacturing sector, on which the economy is heavily dependent, has shown signs of improvement. The Chinese purchasing managers' index (PMI) reported a 14-month high in December 2012.

Of course, this is a short term indicator and should not be taken too seriously. Secondly, Chinese data is often unreliable. So, though positive signs from China maybe good news for the global economy, we would like to keep our fingers crossed.

In the meanwhile Indian equity markets are currently trading on a positive note. At the time of writing, the Sensex was up by 59 points (0.3%). Among the stocks leading the gains were State Bank of India and Tata Motors Ltd. Other major Asian stock markets have closed the day on a mixed note. On one hand Chinese markets closed on a high note due to improved numbers on the manufacturing side. However, markets in Indonesia and Taiwan closed in the red.

04:55  Today's Investing Mantra
"While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology." -Seth Klarman
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4 Responses to "Does the PM finally deserve a 'congrats'?"


Dec 24, 2012

Not at all. Our great PM does not take any initiative can not rise to solve any problems cropping up, provides no leadrership.


rajeev sinnarkar

Dec 18, 2012

This surely qualifies for the joke of the year 2012.


ananthakrishnan nair

Dec 15, 2012

well done hoping you will do further and improve the markets and image of our country too and win the comming elections too.Best of luck.


Abhay Dixit

Dec 14, 2012

NO , No, No. The real reforms required are

1)Quick dispensation of justice 2) labour laws 3) Agricultural Commodity market regulations 4) Not go slow after corrupt politicians for LS/RS support

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