A worrying fact about India that is being ignored - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A worrying fact about India that is being ignored 

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In this issue:
» SEBI to become a stronger watchdog
» Are mining firms benefitting from rising iron ore prices?
» The problem of project cost overruns
» India's Iranian dilemma
» ....and more!

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00:00  Chart of the day
More than two thousand years ago, a famous Greek orator by the name of Demosthenes had said, "What a man wishes, that also will he believe." In other words, we often only see what we want to see. We tend to ignore facts that do not boost our hopes and wishes.

To quite an extent, this seems to be the case with how India's economic growth has been projected. Popular media images portray India in a highly optimistic vein. India, the second fastest growing economy after China... The country with the highest and growing youth population... And so on... But how long can you keep cheering an economy based on these fancy facts?

The problem is that this overoptimistic perception tends to distort several harsh realities plaguing India. For instance, the humungous size of our country's population has been one of the biggest challenges for over two decades. Nothing concrete has been done to deal with this rising challenge. On the contrary, as an article in the Economic Times aptly points out, the problem has been disguised as an opportunity by mere use of terms such as 'demographic dividend'. While papers and books on the subject may have earned economists some reputation, India's demographics have been pretty unproductive so far. Policymakers have been talking about creating 250 million skilled jobs by 2025. But in the last one decade, we have merely achieved 5% of that target.

On several major parameters, India ranks poorly when compared to the other BRIC economies. It is worth noting that the population of Brazil and Russia is just 16% and 18% of India's population, respectively. Yet both these economies, in terms of GDP, are bigger by 36% and 20% respectively. On the other hand, China's population is 10% higher than India. But the GDP is four times the size of India's GDP. Effectively, all economies have a much higher per capita income relative to India.

Data source: The Economic Times

A part of India's growth is contributed by the growing population. This addition must be adjusted while considering long term growth prospects. Today's chart of the day shows that India's incremental per capita GDP is a paltry US$ 84. This highlights the problem of low productivity in our country. In fact, the article goes on to state that at current levels of productivity, for India to get where Brazil, Russia and China are today (in terms of per capita income), it will take 39, 43 and 24 years respectively.

The bottomline is that our policymakers really need to roll up their sleeves and focus on the big picture. There is a strong need for progressive reforms across all systems. Only then will India really be able to lay its claims on the so-called 'demographic dividend'.

Do you think India will be able to transforms its population problem into a demographic dividend? Share your views or you can also comment on our Facebook page / Google+ page

There are companies that will do everything possible to stay within the law. And then there are others whose very existence means constantly changing colours so that law enforcers can be kept at bay. It is this latter kind of companies that keep law makers busy. They have to ensure that the underlying laws are so watertight that no firm can think of misusing it. It is with this very intention that The New Companies Act has decided to give Securities and Exchange Board of India (SEBI), the capital market watchdog some more powers.

One of these is the undisputed jurisdiction given to SEBI over issuances of securities by firms to 50 or more persons. And this is irrespective of the name they are called by or any other condition attached to some offers. Earlier, there have been instances where some firms had slipped away from SEBI jurisdiction arguing that SEBI's powers are limited to only listed companies. But this new provision will take care of this anomaly we believe. Hopefully, it will also not let cases like the recent SEBI v/s Sahara Group to drag on for too long in the courts. Since this will open up all companies that intend to raise funds from 50 or more people to greater scrutiny, it is certainly a step in the right direction we believe

China sneezes and mining companies catch a long and damaging cold; this corruption of an old adage has never been more appropriate. The combination of a weak global economy and slowing Chinese demand for raw materials is punishing mining companies and forcing many to drastically revise future capex forecasts. However, over the last few months, the Chinese economy has shown signs of economic recovery. Along with the recovery of the Chinese steel market and price upturn of iron ore, leading mining firms have become upbeat about business outlook again.

Iron ore prices have moved up sharply. But this may not have much impact on Indian miners. They are hamstrung by a ban on mining in two large iron ore producing states of Karnataka and Goa. In Karnataka, some mines have been allowed to restart mining, though this accounts for a small amount compared with what the total used to be. Among the key domestic firms, National Mineral Development Corporation (NMDC) is in a relatively better position as it continues to mine, though on a limited basis, in Karnataka. And it does not have any mines in Goa. Rising prices will benefit the company, as it has now moved to a monthly pricing mechanism.

Cost overruns have been a regular phenomenon in infrastructure projects. In fact, during the 11th five year plan that ended on 31st March 2012, the total cost overrun in infrastructure projects totaled to Rs 521.5 bn. Main reasons for cost overruns are inflation, change of scope in the project, and changes in exchange rate.

Little can be done about cost inflation and exchange rate overruns. However, escalations due to change of scope in the project itself are slightly difficult to digest. True, that in large projects the project scope can change which may lead to overruns. However, it seems that the major factor for overruns in such projects is inaccurate planning. This leads to change in the scope of the project. You would be surprised to know that Delhi Metro Phase II project witnessed an overrun of Rs 102.1 bn in the last five years. An overrun of such amount is a gross miscalculation of the project cost itself! A proper planning at the development stage can avoid overruns.

The Western World's standoff with Iran over the nuclear issue has put India in a very awkward position. With over 80% reliance on crude oil imports, the country is walking a fine line. And the choice is between energy security and strategic partnership with the Western world. Iran has been second highest oil supplier to India in the past. However, on account of US sanctions aimed to stifle Iranian economy, India has drastically cut down its imports from Iran. Still, the crisis is on. Because of the sanctions, the domestic refiners have to borrow at higher domestic rates and are being denied short-term dollar credit to finance oil purchased from Iran. Going forward, the country may go for 10%-15% further import cut if Iran does not lower oil prices.

Unfortunately, India has little option but to be a forceful stakeholder in this complex issue. That said it can use the situation to its advantage by pushing Iran to offer cheaper prices. Iran is already facing the heat and can hardly afford to lose more clients for its oil supplies. Hence, India can put some pressure on it to get better terms for annual oil purchases. At the same time, the Government should wake up to the need of being self-reliant for energy needs. It's high time to bring reforms and correct policies in the domestic oil and gas sector to promote investment in domestic oil fields. Else in the long run we will end up fighting someone else's war at the cost of the country's energy security.

In the meanwhile, Indian equity markets were trading below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by 133 points (0.7%). Realty and healthcare stocks were leading the pack of losers. All major Asian stocks markets were also facing selling pressure.

04:45  Today's Investing Mantra
"The more basic knowledge you have the less new knowledge you have to get. The guy who plays chess blindfolded [a chess master comes to Omaha during Berkshire's annual meeting weekend and, in an exhibition, plays multiple players blindfolded] - he has a knowledge of the board, which allows him to do this." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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7 Responses to "A worrying fact about India that is being ignored"


Jan 1, 2013

Thanks to people electing leaders on the basis of caste/religion or freebies, disregarding their corrupt and criminal actions, coupled with a byzantine justice system that rarely delivers, India is teetering on the brink of social disaster.

Recently, Delhi earning the dubious fame of being the rape capital is not an aberration, but an early indicator. Those who are trying to fight this battle face an uphill task, against the products of the warped public values we have created.

In this situation, to talk of India becoming a world power in any sector - social, economic or military - is only a pipedream. Let us try to make a change, or when we look back in 2050, we'll find we are still 'developiiing' while Africa and Central Asia are also in the category of developed nations.



Dec 29, 2012

If wishes were horses, pigs would fly. Labor market is the most difficult of the 3 markets in economics (monetary, goods and labor). Globally, only a few countries - scandinavians, AU, Germany, Singapore - have been able to get it right, because it requires long range planning at the cost of quick hits. US, much touted for modern economics has completely failed in this since 1940's, leading to their several busts since 1970. For India to get it right would require extraordinary leaders and change in our own mindset. We are so overjoyed at power of electing leaders that we have forgotton about need for capable leaders and long-range decisions. A whole generation of China sacrificed a lot to get where they are today. Are we (netas and public) willing to swallow such bitter pills? I think not. Without being cohesive and ethical, India CANNOT be an economic giant, as the world history shows repeatedly.

Like (1)


Dec 23, 2012

Literacy is needed. Increase in literacy will lead to the improvement of an individual’s life and the development of societies.

Like (1)


Dec 22, 2012


Like (1)


Dec 22, 2012

Finally it's taking the media this long to highlight what we have may not be a demographic dividend.
My belief is that we will be having a "demographic bane" in the long run. In a world, where we are constantly increasing our productivity, and where we are slowly but definitely seeing the pressure of non-sustainable development, where's the scope for productively engaging an ever increasing population?
The sooner our population is under check, the better it will be for us in the long run. We will have lesser number of mouths to feed; all improvements will start to be shared by a stable (or hopefully reducing population). Also our ability to be sustainable as a community will increase - since the pressure of additional population will not be there.
What we are currently thinking is a "myopic" short term growth in GDP, where our progeny will pay the price...
Let's hope for the sake of our future generations - we start bothering about the "demographic bane"...

Like (2)

Gopal Kalpathi

Dec 21, 2012

Yes, it is true that we have a huge population and the demographics, as projected by most, is not that rosy to bloat about.

One of the main factor for all our ills is the justice delivery system. It is more often than not, that this lacuna is exploited to the hilt by all powerful politicians and the rich. Unless the justice delivery system is fixed and made to function in a timely and just manner, we will not be able to progress much.

Like (1)

r v iyengar

Dec 21, 2012

The high population has been the bane of India for quite a while now. Most of these are in lowest strata of the society. They can neither take care of their own self , nor do they have the sense enough to realize that they should try not to increase their numbers as they can't provide for their large families.
Most live in abject penury and have no skill sets or education to better their lives.
For our politicians they merely form a vote bank which can be purchased with a paltry amount, or can be intimidated with muscle power.
Given the level of corruption in politics I don't think that the politicians will do anything to better their lot,and the status quo will continue. All this sloganeering of India Shining and so on is mere eyewash. Strictly speaking we cannot be better than any of the BRIC countries even after the suggested time periods.
We are a third world country and will remain in the same category for a long time to come.

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