»5 Minute Wrap Up by Equitymaster

On This Day - 21 APRIL 2011
If India's GDP is galloping, why are people worse off?

In this issue:
» Developed world faces 'wall of maturing debt'
» Has silver risen too much, too soon?
» SBI finally brings curtains on teaser home loans
» India should start agri exports again, feels Pawar
» ...and more!

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A leading daily pointed out how India has ranked a poor 71st in a well-being index. Furthermore, as per the same survey, 64% of its denizens were still believed to be struggling.

Now, isn't it ironic that a country whose economic growth has been a toast of the world, still has so many of its citizens struggling. Agreed that a survey made up of a small sample size shouldn't be taken so seriously. But one look around us and we will be forced to believe that the survey's conclusion could perhaps be valid. If India is indeed growing, it is certainly not fully showing up in the quality of life most of its people are leading.

We have managed to zero in on two major culprits responsible for this apparent dichotomy. One goes by the name of the rich-poor divide and second moves around as inflation in the price of basic necessities. Let us tackle the second one first. It bothers us immensely that while mobile phones have gone on to become cheap year after year; a basic necessity such as food has seen its prices shoot through the roof. And this is one of the major reasons for growing discontent we believe.

A second or a third mobile phone may have limited utility but a little bit of extra food on the table goes a long way towards making people feel more satisfied. So while the country brags about how it unleashed the mobile revolution bringing about tremendous boost to productivity and growth, majority of the country's citizens are struggling to come to speed with rising food prices.

As for the rich poor divide, the less said the better. Issues like land grabs and corruption at all levels are making only a select few rich at the expense of the vast majority. And with speculation in areas like real estate rampant, we may be veering towards creating an asset based economy rather than the one that is based on real economic activities. The US is a prime example of what happens when one creates an asset based economy. The rich poor divide increases sharply and we get violent booms and busts.

Thus, unless the Government takes drastic measures to tackle these issues, GDP growth in even double digits may not be able to make most of its citizens well-off!

Do you feel your wellbeing has increased in line with country's GDP growth? Share your views with us or comment on our facebook page.

 Chart of the day
We talked about the growing disparity between rich and poor in India. However, when it comes to the same, even the land of opportunity and the biggest economy in the world does not quite cover itself with glory. We are indeed talking about the US. As today's chart of the day shows, the rich and poor divide in the country has never been as wide as it has been recently. The wealth of the wealthiest 1% in the US was a whopping 225 times more than a typical US household as recently as 2009. Little wonder, the average American is struggling to make ends meet while the richie rich continue to roll in wealth and enjoy the Government's patronage.

Source: EPI analysis of survey of consumer finances and flow of funds data

The IMF has compiled some really upsetting numbers. It has added up the sovereign debt requirements of the developed economies over the next year. The number stands at a staggering 25% of the total combined GDP. To put it simply, if you add up the maturing and new sovereign debt issuances of developed economies, it is going to be about a quarter of their expected combined GDP.

And mind you, this is just the sovereign debt that we are talking about. There's a lot more. As per a leading news agency, the world's banks are going to face a US$ 3.6 trillion "wall of maturing debt" in the next two years.

This will lead to a situation where banks and governments will be scrambling for funding resources. But who is going to fund these western economies? Japan is not at all in a position to do that, especially after the recent disasters. China is facing serious issues at home and is beginning to show signs of a slowdown. So the funds seem to be quite scarce.

Given such circumstances, we'll witness many bank and sovereign bankruptcies in the coming times. So forget all the noise about 'global economic recovery'. The global crisis is still very much here and about to intensify.

With the exit of ex-SBI Chief Mr O.P. Bhatt, the discounted home loan scheme pioneered by him is also on its way out. The popular product changed the landscape of home loans in India. Some of the largest players in this retail product lost plenty of their market share to the PSU behemoth. And pricing on this below PLR- loan even determined the pricing of some other retail products like car loans. The regulator (RBI), however, had not minced words from the beginning with its disapproval on the product. The fact that the loan was priced below the minimum lending rate (PLR) for the initial few years irked the central bank. It believed that the scheme could lead to huge NPA problems for the sector if the rate sensitive borrowers are not able to service the loans at a later stage. However, with competition heating up, other banks and FIs including HDFC Ltd had no option but to emulate SBI.

Interestingly, the incumbent SBI chief Mr Chaudhuri calls the special 'teaser' loan scheme non compliant with the RBI guidelines. These accounted for more than 40% of total outstanding home loans in the bank's books at the end of December 2010. With SBI's exit from the 'teaser loan' pricing, the home loan rates in the Indian banking sector are clearly expected to remain firm.

Agriculture minister, Mr. Sharad Pawar, feels that it is about time for India to open up the export markets for food grains. He opines that in light of the positive expectations on the monsoon front and reserves of food grains built up from last year, it would be beneficial to export these grains in the international markets.

It is a good idea to export the 'excess' food grains. It would definitely help to add to the government's coffers. At the same time, it would probably not make that much sense to Mr. Pawar to just distribute the so called excess grain to the starving poor. Also, it would not make sense to actually wait and see how the monsoons pan out. After all, we are all only too aware of what happened to the cotton prices thanks to faulty forecasts and assumptions of the government. We really wonder if Mr. Pawar thought of these issues before making his suggestions.

Gold has caught the fancy of investors across the world ever since the global crisis unraveled, but silver has been on an absolute tear. As a result concerns have started emanating whether this run up is likely to turn into a bubble going forward. Silver's dream run has been justified uptil now in an environment where governments in the West have been printing money at the drop of a hat thereby undermining the value of their respective currencies. But the question here is whether silver reaching triple digits is a matter of concern or not. And according to Jim Rogers, it all depends on when it is likely to reach that mark. If silver, gold and all commodities will continue to go up in an orderly way for another ten years or so, then eventually, the prices will be very, very high. One is then likely to see silver reaching triple digits. But if this was to happen this year itself, then one would have to start thinking about selling this precious metal. After all, even though the worth of currencies is being questioned at present, the dollar has not yet collapsed and so a steep rise in silver in a short period is bound to have all the makings of a bubble, we believe.

Meanwhile, the Indian stock market built on its gains recorded yesterday and is currently trading strongly in the positive. Sensex was ruling higher by around 160 points at the time of writing this. Most other Asian markets also showed a positive trend today whereas European markets too have opened on a positive note.

 Today's investing mantra
"Economists make predictions because they're asked, not because they know." - John K. Galbraith

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