The sector that could do wonders with govt. spending

Apr 5, 2011

In this issue:
» Investors are savvier when it comes to MNCs delisting
» Disasters will trigger growth for Japanese economy
» Under recoveries for the oil & gas sector soar in FY12
» Jim Rogers makes new predictions
» ...and more!

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A lot is riding on India's demographic dividend. A growing young working population is expected to contribute to India's accelerated growth in GDP. But while the country produces millions of graduates every year, whether they will be able to find the right jobs is the impending question.

Although India boasts of a population of 1.2 bn, employers are finding it cumbersome to find the right applicants. Most of the ones that graduate are not able to communicate effectively in English. Most lack a grasp of educational basics and many lack the skills that many of the job profile necessitates. A large part of the problem lies in India's education system. The government has not done much to completely overhaul and improve the system so as to make India's young population employable. The education system has remained largely regulated and is hampered by considerable red tape. More focus is laid on learning by rote rather than understanding and grasping concepts and critical thinking. Teachers and professors are also not given the salaries that they deserve. True, the government is opening more schools and colleges across states and has kept tuition fees low to accommodate more students. This has improved 'literacy rates'. But by keeping the pay of teachers low, it is hard pressed to find quality educators. The education system has also been accused of keeping the curriculum outdated and disconnected from the issues of the real world.

The Indian government needs to get down to some serious business and come up with some solutions for improving the state of education in the country. For this, it needs to make sure that it has sufficient funds at its disposal. For the time being, this seems highly unlikely given the strain on its finances. But it cannot discount the fact that a large swathe of unemployed people in the future will only sow the seeds of discontent and disrupt growth in the longer term. Indeed, investors should not read too much into India's demographic dividend potential. For that may after all not fructify if government's spending on the sector is not commensurately enhanced.

Do you think that India's demographic dividend will play a major role in fuelling India's growth in the future? Share with us or post your comments on our facebook page.

 Chart of the day
The first three months of 2011 are behind us and the Indian stock market indices have hardly set the pulse racing. In fact, today's chart of the day shows that Indian indices were the worst performing among its developed and emerging peers in the first quarter of 2011. After a stupendous rally in 2009 and early 2010, fears of inflation and rising input costs toned growth expectations. This led to withdrawal of money from the markets. In fact, fears of overheating in the emerging markets was so strong that stocks of the developed markets saw a rise even though recovery there has yet to take off.

Data Source: The Economist

As a group, we believe the multinational companies in India have everything going for them. Most of them possess strong competitive advantages, come equipped with rock solid balance sheets and earn some fabulous return on their capital. However, despite all of these traits, quite a few of them fail to match the multiples that their Indian counterparts command. The main reason is the poor track record of some of their ilk in guarding the interest of minority shareholders in the past. There had been cases where MNCs opted for delisting on terms that did not quite turn out to be profitable for the smaller investors.

But not anymore. Minority shareholder friendly regulations have indeed come to the fore. Take the case of the most recent delisting of engineering major Atlas Copco. A leading daily talks of how the company has agreed to pay a 22% premium to the floor price to buy out minority shareholders. Furthermore, firms like Goodyear and AstraZeneca have been thwarted in their attempt to buy out minority shareholders as the investors felt that they were not getting a very good deal. These incidents have certainly injected a great deal of confidence in the minds of minority holders. They can now go ahead and buy shares in MNCs without the fear of getting short changed. What's more, the multiples that these MNCs command can also see a rise.

The multiple disasters in Japan have caused immense destruction of life and assets. In the aftermath of World War II, the country had displayed tremendous resilience. Will the Asian patriarch be able to pull it off this time as well?

Despite concerns there are chances that the disaster could trigger economic growth for the ailing Japanese economy. Let us consider a few facts. Firstly, industrial production in the four districts close to the disaster-affected region is about 7.5% of Japan's total. Secondly, the enterprises in this region are mostly small and medium-sized. There are no major firms in this relatively rural region. Also, the four districts have not closed down fully. So there are fair chances that the output will recover after a short period of adjustment.

On the other hand, the effects of the disaster will improve demand in the latter part of this year, as reconstruction gets under way. Alongside, a weakening of the yen should add to demand and raise the possibility of inflation. This could lead to a tightening of the domestic demand-supply balance. Plus, there would be some improvement in net exports demand. So all in all, there is a decent likelihood that that Japan's GDP would be higher in the latter part of 2011 and early 2012. If only could it strike a virtuous circle, Japan's economy could behold some silver lining.

The Indian oil and gas sector is on its way to set another record. With FY12 under recoveries expected to the tune of Rs 1,741 bn (at current crude prices), the public oil and marketing companies will take the highest ever hit to their topline. Interestingly, this figure surpasses the under recoveries in 2008 when crude prices touched an all time high. Worse, this is a hit that comes post the petrol prices being freed. But that's logical too. As diesel serves almost four times the domestic energy needs, unless that gets deregulated, nothing will serve the purpose. But the Government does not seem inclined to use other measures as well. Else, why were the custom and excise duties on crude not scraped in the budget? To make things worse, cash oil subsidy estimate was reduced by 38.4% in FY12. If it sticks to the same, the subsidy burden will spill over to the upstream sector as well. And that certainly doesn't bode well for disinvestment plans of some of the major players in the sector.

Legendary investor Jim Rogers has made new predictions for the world. They are in two extremes. The first one is that water resources would be the next big investment. Water shortages in the Red Sea area, Northern parts of India and China would make water the most desired thing. As a result, anything and everything to do with water would see its prices shooting up. Providing, transferring or cleaning water would soon be the best investment avenues.

The second prediction is a tad bit grimmer. The way things are going in the world, Rogers predicts that the next social and political unrest would be in none other than the US. He opines that the US is nearly bankrupt but does not wish to cut back on its spending. As of now, things look good but only on paper. Once the reality starts to hit, US would witness social and political unrest not unlike the one we are seeing currently in the Middle East. For the sake of the US, we hope that Rogers is wrong. But looks like the doomsayers could say all they want. The US does not wish to wake up and smell the coffee.

In the meanwhile, the Indian markets are deep in the negative zone on profit booking. IT and banking stocks led the decline, with most other indices also trading at lower levels. Consumer durables stocks were among the only gainers. At the time of writing, India's benchmark index, the BSE-Sensex was trading lower by about 136 points or 0.7%. Most major Asian markets were trading positive today with Hong Kong trading higher by 0.6%.

 Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham

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6 Responses to "The sector that could do wonders with govt. spending"


Apr 6, 2011

Education, Qualifications, skill sets and Personality refinement are extremely essential attributes most essentially required, given the situation demanding.
Ironically, most of our educators lack these skills themselves. They are Blissfully unaware about current Market trends, economic scenario, world market conditions and focus of learning and education, in relation to the existing trends.
I overlook the operations of an Engineering college, and what better place than this to realize, where these students are headed in life.
It's indeed ironic, when I meet Parents, who have a dream for their children, little realizing that, these dreams will never be accomplished by their children.


Manoj Kumar

Apr 5, 2011

India's demographic profile i.e. the fact that most of its population is young and in productive age and that this going to continue to a long time would definitely play its role fuelling the country's economic growth. The people in this age-group would themselves find a way around this problem of education or being trained in a particular way that is required by the companies to employ them.
This situation can be compared with the situation of erratic power supply in the country which gave rise to a new industry viz. the industry that supplies the UPSs and the generators etc. Similarly, companies need to invest in the man-power and all companies needs to have their in-house training teams for making employees suitable for the job. Or may be some imaginative entrepreneur would jump in to grab the opportunity and there would be birth of a new industry.



Apr 5, 2011

Excellent thought provoking issue .It needs to be dealt at earliest and first priority if we wish to be HUGE.Industrialist ,Business tycoons along with government can think as it would in turn give them excellent returns .It [quality education] is a Horse of long Race.



Apr 5, 2011

Very very pertinent point for all those hoping to harvest a demofrphic dividend the easy way. Based on our present school/college system we will graduate only a small percentage with the required skills. Even though the importance of education is now well known even by the lower income classes in cities/towns many may not have the financial capability or knowledge to gain the necessary skills & the ciuntry will pay for it. We need good private sector participation but the Govt. should provide a strong competition like PSU banks & let the students get the best out of it. There is a high probability that we ruin the dividend potential - hopefully the people take this into their hands like every other thing in India & overcome the incompetency of the Govt.



Apr 5, 2011

Dear sir, its not only the teacher`s salary and also politicians and their greedy officials corruption which never ever let any rightful person to acquire the appropriate job. But now all the private schools become as business centers, they need only low paid teachers, even their also govt`s corruption plays Big role. all together until our whole nation wake up from immoral standards, very less improvement can only be achieved. Its absolutely not the fate but the greedy and lazy minded social setting.



Apr 5, 2011

Respected Equitymaster Team,
I am not an economist or a equity expert !!

But one thing that agitates my simple mind is that whenever the question of some programmes or projects that eventually benefit the millions of ordinary AAM JANATA is raised ,our powers-that-be are always /more often proffering the often-familiar "FUNDS / RESOURCES CRUNCH !!
When elephants go down the drain no one bothers or cares !!
But when mustards (of minisucle quantity : I mean FUNDS for beneficial programmes/schemes are to be spent for the allotted purpose)the usual "Funds Cruch problem " immediately springs out with vehemence !!
One simple question I ask most humbly : What is the percentage(as a fraction of the nation's GDP) that is spent on Education ? (Not that for higher technical/ elite management educaion )

I would be most grateful if the great Equity Master Team could provide even a rough guesstimate of that figure !!
Thanks you EQ Team !!

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