»5 Minute Wrap Up by Equitymaster

On This Day - 28 JANUARY 2013
Is the era of high inflation over?

In this issue:
» Will we see GST in 2014?
» SEBI attempts to boost investor confidence in IPOs
» Are we on the brink of a fertiliser crisis?
» US at risk of losing global leadership: Lagarde
» and more....

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A few weeks ago the data for inflation was released by the government. On the face of it things looked so much better than what they had been a year ago. The inflation measured by Wholesale Price Index (WPI) fell to its three year low to 7.18%. The core inflation fell to 4.2%. This has led many to believe that the Reserve Bank of India (RBI) will reverse its hawkish approach. This means they expect RBI to start rolling back the interest rates. But is inflation really down? Has the era of high inflation come to an end? Unfortunately no.

The WPI and core inflation have certainly come down in recent times. But the inflation measured by the Consumer Price Index (CPI) stubbornly continues to be high at 10.56%. This is the index that measures the incidence of inflation on the common man. More alarmingly, this rate has actually gone up in December 2012 as compared to the month ago figure of 9.9%.

As per a leading daily, the reason for this mismatch is that while bumper crops have helped ease the wholesale inflation, mismanagement on the distribution side has hurt the consumer inflation. The reason behind this is the bottleneck on the supply side. This curse still continues to keep inflation high. Unfortunately till something concrete is done to ease the situation on the supply side, inflation would continue to remain high. Much higher than the government's target limits of 4 to 5%.

Experts and government officials have been blaming the RBI for quite some time for causing the slowdown in the economy. They have said over and over again that RBI needs to cut down interest rates to boost investments. Only then will the supply side issues get sorted. But interestingly the CPI inflation has not come within the government's target range all the way since February 2006. This implies that the problem is not something that was triggered by the RBI's decision to turn hawkish. The problem is more structural in nature. Only way to solve this is to press the accelerator on policy reforms. Otherwise inflation is not really going to come down. Yes we may have some random readings of lower rates for some months. But the overall trend would remain high. It is high time that the government pays heed to this.

Do you think that inflation is finally easing off in India?Share your comments or post them on our Facebook page / Google+ page

 Chart of the day
Despite the sluggish global economy there is one commodity that has seen bumper production. The commodity is steel. As shown in the chart, after facing a lull in 2009, the world steel production has been on a rise since. In 2012 the worldwide crude steel production hit a record high with production hitting 1.55 bn tons. This is despite the tougher markets that steel producers all over the world have been complaining about. Steel prices remained depressed for most part of the year. Steel manufacturers were also hurt by the fall in steel demand as well as higher input prices.

Source: Financial Express

The Goods and Services Tax (GST) has been seen as a welcome move as it was a comprehensive levy of tax which would do away with various other taxes prevalent in India. But its implementation has been delayed. This is hardly surprising. Given the difference in taxes levied in different states, getting a consensus was always going to be a challenge. But now the Centre and the states are looking to reach a compromise. And if that happens, GST could be launched in April 2014. The main point of contention appears to be the compensation to be doled out to states for central sales tax. For the transition to the GST, the states had cut CST to 2% from 4% as part of a gradual phase-out of the tax. But since there was no further progress on implementation from the centre, no further payments were given out. And so the states were contemplating raising the CST again. Getting all the states to arrive at a solution may not be that simple. And there is the possibility that implementation first will take place in a handful of states with the rest of them following suit. Whatever the case, the government needs to iron out these differences soon. Especially if it is serious about setting in motion its reforms process.

How about investing in IPOs for 3 months? With zero downside, the lure of speculating in primary market is set to get irresistible. But is that what market regulator Securities and Exchange Board of India (SEBI) is looking for? It seems the regulator is taking rather harmful steps in its attempt to lure investors to primary markets. The so called solution of 'safety net' makes things no less risky for retail investors.

Now it is true that over 60% of the IPO issuances between 2008 and 2011 performed badly. In many cases it was due to steep pricing of the issue. In others it was due to disappointing fundamental performance of the listed companies. But since investing is about buying fundamentally sound businesses at reasonable valuations, the concept of 'buying back shares in the event of a fall' is meaningless. It defeats the very principle of price discovery. Hence SEBI's proposal that issuers should compulsorily offer safety net to IPO investors seems ridiculous. That too if the share price falls more than 20% of the issue price within 3 months of listing! We believe market speculators will hardly miss an opportunity to speculate on such IPOs. If promoters fail to compensate investors in the event of heightened volatility, confidence of retail investors in capital markets will be quashed for good. Instead of making such absurd promises, we believe that the SEBI could do with some initiatives to ensure better corporate governance amongst companies.

What is corruption? Essentially, it means using unlawful and unethical means to attain ends. Is corruption a peculiar attribute of any particular culture, race or economy? The answer is no. Corruption is universal. In this sense, Union Minister Mr Anand Sharma was right when he was addressing global investors at the World Economic Forum. It is indeed wrong to single out India and other developing countries in matters relating to fraud and corruption. But while the tendency of corruption is universal, it is imperative to build strong institutions that deter such unlawful acts. And this is what differentiates India from many developed countries. And this is the point that we think Mr Sharma needs to worry about. It is worth noting that global investors indeed find India a great potential investment destination. But why is the money not pouring in with flourish? Reasons such as slow reforms, policy paralysis and corruption are often cited as the main hindrance to attracting foreign investments. Though the government announcement some reform measures in the latter half of 2012, we believe a lot more needs to be done to make India investor-friendly.

Under budgeting for various subsidies has always been amongst the Government's favourite activities. Thus, subsidies on fertilisers are no different. It is believe that the actual subsidy may overshoot the budgeted one by a whopping Rs 40,000 crores. And to make matters worse, the country is staring at a huge stockpile of unsold fertilisers. Just to put things in perspective, we started the current financial year with unsold fertiliser inventory to the tune of 3 m tonnes. However, we could start the next financial year with record high stocks of close to 8 m tonnes! Of course, erratic monsoon was one of the reasons the unsold inventory shot up. But the Government's move to cut nutrient-based subsidy rates has also played a big role in bringing about this state of affairs. Sadly, nobody was prepared for this and people have no idea of what to do about it. Clearly, disposal of such a huge stock may eventually result into a further burden on the exchequer.

The Indian economy is in bad shape. The economic growth has slowed down considerably. Investments have dried up. Thus in-order to step up investments and kick start the growth process, Commerce and Industry minister Anand Sharma is trying to woo investors by hard-selling the National Manufacturing Policy (NMP). If implemented properly, NMP would take the share of manufacturing up from 16% to 25% of GDP and would create 100 m skilled jobs in one decade in India. Under the NMP, the government has proposed to set up National Investment and Manufacturing Zones (NIZM). These will be mega industrial zones with world class supporting infrastructure. The government is offering a host of incentives like exemption from capital gains tax and a liberalised labour and environment norms to promote these zones. 12 of these NIZM had already been notified, which would not only be transformative but is an investment in the future of the country.

India is not the only country facing a deficit problem. The US has been facing this problem for years, with no real signs of resolution. The entire nation runs not on money, but on debt. Plus, rather than facing the music, the US government seems to just be postponing the inevitable. At the beginning of January, it narrowly avoided falling over the fiscal cliff. Just this week, the Congress voted to suspend the nation's USD 16.4 trillion borrowing limit until May 19, 2013. According to Christine Lagarde, managing director of the International Monetary Fund, the US should focus on settling the issues, rather than kicking the can down the road any longer. US policy makers should create a long-term plan to handle the deficit. Else they will risk their position as the world's economic leader. Confidence in the economy is already fraying. And, if the uncertainty persists, faith in the US economy could really be compromised.

In the meanwhile after opening the day on a positive note, Indian equity markets are now trading in the negative zone. At the time of writing, the Sensex was down by 19 points (0.1%). The major Asian markets closed on the day on a mixed note.

 Today's investing mantra
"The single greatest edge an investor can have is a long-term orientation." - Seth Klarman

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