»5 Minute Wrap Up by Equitymaster

On This Day - 29 JANUARY 2013
Why US will always be the innovation capital of the world

In this issue:
» Indian arms of MNCs see a rise in market cap
» RBI cuts both CRR and repo rate
» Auto industry welcomes hike in diesel prices
» Investment banks cut down bonuses
» ...and more!

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The US may be quite down in the dumps right now, but it may have got its strategy right in terms of attracting the best talent across the world. Indeed, a group of senators in the US have unveiled a plan, which promises to grant a green card to anyone who completes a postgraduate degree in science, technology, engineering or mathematics (STEM) from an American university.

The US in the past several years has received considerable flak. Not only did the roots of the global financial crisis begin there, but the country is also now grappling with massive debt and recession. It has become increasingly hard for the country to display any meaningful recovery. Moreover, the government and the US Fed has only made things worse by resorting to reckless money printing.

Perhaps this is what induced some of these senators to fall back upon what the US does best i.e. innovation. In the past, the US became a force to reckon with largely due to its pioneering spirit and the entrepreneurial skills of its people. That is why the Senate framework stresses on the fact that the US must do a better job of attracting and keeping the world's best and brightest. What is more, the idea is to make sure that this talent stays back and contributes to the growth of the economy. This plan if implemented should find a lot of takers and Indians stand to benefit considerably. The quality of education in US universities and institutions is quite unmatched anywhere in the world. Thus, reforms of this kind in US' immigration laws will certainly see a lot of talent from the emerging countries including India making a beeline there.

What does this mean for India? The country's demographic dividend has been highlighted as a major growth driver several times. But again the quality of its workforce is what matters. Thus, the increasing possibility of Indian students flocking to the US in droves cannot be entirely ruled out. Especially since the standard of institutions in the country (barring the IITs and the IIMs) leaves a lot to be desired. And it does not seem likely that much headway will be made in this regard in the near future. All of this means that the US will still retain its status as the innovation capital of the world.

Do you think that US' plan to attract the best talent from the world will work to India's disadvantage? Share your comments or post them on our Facebook page / Google+ page

 Chart of the day
India has been a mixed bag for foreign investors. Especially those looking to stay invested in the country for a long time notably foreign direct investment (FDI). Some have found the endless bureaucratic hurdles, land acquisition and environment issues a big detriment to their plans in the country. But there have been many success stories as well. Indeed, as today's chart of the day shows that there are quite a few Indian arms of MNCs that have made significant strides in India. This is evident from the fact that the market cap of these companies now account for a significant chunk of the global market value of these MNCs. Some MNCs have realised the potential in the country and accordingly raised their stakes in their Indian arms. Others have not been so lucky.

*As at January 23, 2013
Data Source: The Economist

With inflation slowing, the Reserve Bank of India (RBI) finally bit the bullet and turned its focus towards ebbing growth in the Indian economy. The central bank gave India Inc a bounty of New Year's gifts even as it cut the country's GDP growth forecast. The RBI revised GDP growth target for FY13 downwards for the second time, from 6.5% initially, to 5.5% now. Thus, in order to revive sentiment, the central bank cut both the cash reserve ratio (CRR) and the repo rate by 0.25%.

These rates now stand at 4% and 7.75% respectively. The CRR is currently at its lowest level since December 1974 and the cut will release an additional Rs 180 bn of liquidity into the system. In order to spur loan book growth towards the end of the fiscal, banks may now start cutting lending rates. But, further monetary policy movement will depend on the government's stance. Recent government reforms especially the diesel price deregulation has staved off near term risks on the fiscal front. However, sustained fiscal consolidation is needed in order to create room for further monetary easing. Well, all eyes should now be on the Annual Budget due at the end of Feb.

It is not just RBI that is fire fighting inflation. Rest assured central bankers across the world have the problem clearly etched in their minds. The only problem is that some like the US Fed refuse to acknowledge it. However, we completely agree with an article in Financial Times that elaborates on why inflation cannot be ignored by any central banker. The author in fact predicts that inflation may become the biggest challenge for policy makers across the globe in 2013. However that may be in very different ways. It goes without saying that cheap liquidity from developed nations will find its way to Asia and other emerging economies. Central bankers here will therefore need to take pre-emptive action to curb inflation. In contrast, central banks in the West cannot bow to political pressure and keep printing money. By doing so they do are entering into the vicious cycle of inflation.

No deals equal no pay. This seems to be the motto of investment banks around the world. When things are hunky dory, they pay bonuses that help bankers buy Ferraris and Lamborghinis. But when the deal flows dry up they take to firing, deferring bonus payouts or even no bonuses. Given the dry spell that most of them had to face in 2012, most major investment banks cut back on their bonuses. Some slashed the amount by nearly 40%.

The few that did decide to payout a good sum were those who were involved in the high profile deals during the year. This included Goldman Sachs and Citibank. Given the depressed macroeconomic conditions, companies that have cash are reluctant to spend this on acquisitions. Those who do go ahead with it appear to be restricting the deal size. As deals get smaller or start disappearing altogether, investment banks have been finding it harder to increase revenues. Therefore it makes sense to cut back on costs if they wish to protect their margins.

Another side of this is why incentivize so highly in the first place? Would higher incentives not create a conflict of interest for the bankers? This is a question that has been raised repeatedly by the lawmakers. Unfortunately no major laws have been passed to discourage this practice as of now.

What do you think is the lesser of the two evils, a special tax on diesel powered passenger vehicles or an increase in diesel prices? If you think it is the latter, well, the entire auto industry seems to be in total agreement with you. As per reports, manufacturers of diesel run vehicles have welcomed the Government's decision to allow oil marketing companies to raise diesel prices. This could well be a negative for cars run on diesel. However, the overall auto demand in the country is unlikely to get affected. Simply because buyers could start moving back to petrol. And with most manufacturers in the country having both petrol as well as diesel capacities, they would continue to benefit from India's car growth.

A special tax on diesel run cars however would further increase the price gap between petrol and diesel cars. And this poses great risk to the huge investments that diesel manufacturers have made in diesel engine capacities. Not to forget the uncertainty it puts in mind of auto companies keen to set up capacities in the country.

In a bid to tame the bulging fiscal deficit, the finance ministry had set an ambitious PSU divestment target of Rs 300 bn for the fiscal. But the gloom that persisted through most part of the year stalled many such plans. In the year so far, the government has managed to garner merely Rs 96 bn. Now, finally when the market sentiment has improved a bit, it is trying to hasten the stake sale in six companies before the end of the current fiscal. A fresh round of divestments is set to start off next week with the offer for sale of Oil India Ltd (OIL). The other five companies whose stake sale is slated to be done within the next couple of months are National Thermal Power Corporation (NTPC), Nalco, Steel Authority of India Ltd (SAIL), Minerals and Metals Trading Corporation (MMTC) and in Rashtriya Chemicals and Fertilizers (RCF).

In the meanwhile, the Indian equity markets lost all of their morning gains and moved into the red. At the time of writing, the BSE-Sensex was trading lower by 77 points. Losses were largely seen in oil & gas and IT stocks. Stock markets in Asian economies such as China and Japan were trading higher by about 1% and 0.4% respectively.

 Today's investing mantra
"Risk comes from not knowing what you're doing." - Warren Buffett

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