»5 Minute Wrap Up by Equitymaster

On This Day - 21 SEPTEMBER 2012
How vote bank politics will drown India?

In this issue:
» Why is Brazil opposing QE3?
» Fed to remain dovish for years to come
» How can kirana stores compete with the likes of Wal-Mart?
» Signs of prolonged Chinese slowdown
» ...and more!


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Reforms. It is the word that has eluded India for quite some time. But finally when it arrived, stiff resistance came along. And it was Mamata Banerjee who pulled the shots this time around. Recently, United Progressive Alliance (UPA), in a bid to curb fiscal deficit, increased diesel prices. It also opened the doors for Foreign Direct Investment (FDI) in retail. Both these moves were widely criticized by Mamata Banerjee, a key ally. In fact, she has also decided to withdraw her support from the government deeming the moves as anti-people.

But we believe that her step to oppose the price hike will particularly make oil costlier than before! And this will hurt the people even more. Let us explain how. We know that oil is bought and sold in dollars. Before the reforms Indian rupee was lingering at 55 odd levels to the US dollar. However, once they were announced Foreign Institutional Investors (FIIs) started pouring money into India. As a result, rupee appreciated. And appreciating rupee effectively reduces the import bill of India. That's because the oil marketing companies would now have to shell less in rupee terms to buy the oil.

But the rally in the rupee was short lived as stiff resistance came in from the key ally. Thus, market lost faith in the reform process. And rupee settled at earlier levels. In fact, it might depreciate even more from here amidst capital flight. Thus, Mamata's steps will not only bloat the oil bill but will also impact the rupee. This will widen the trade deficit. Not to mention that the fiscal deficit will expand further. Opposing FDI in retail will also deprive India, of much needed foreign capital. This will hurt the investment climate in India.

We believe that opposing reforms under the garb that they are anti-people will do no good to the nation. Tough steps have to be taken to bring economy back on track. But India's coalition politics is making things difficult for the government.

Do you think reforms will attract capital and improve growth prospects of India? Share your views you can also comment on Facebook page / Google+ page

 Chart of the day
Labor is expensive in the western countries compared to the Asia. But wage payments are also linked to location and skill sets. For instance, hourly wages in Mumbai are higher than in Patna. Also, a skilled labor gets paid more than an unskilled labor. Thus, higher wage paying cities indicate the abundance of skilled labor that is being employed there. The chart of the day reflects the prominence of cities in Switzerland, known to have one of the highest standards of living, that offer higher wages compared to their European counterparts. In building the index, effective hourly wages of 15 professions are used to derive the aggregate wage level across cities. And New York City is used as the base with index level of 100. Thus, the figures 131 and 124 for Zurich and Geneva respectively indicate that the wage levels here are 1.3 times and 1.2 times that of New York.

Data source: Rediff

He may not see eye to eye with the Indian Finance Minister. However, our RBI governor Dr Subbarao has finally found a like-minded contemporary in Brazil's Finance Minister. Guido Mantega, The Brazilian Minister has expressed his disapproval of the US Fed's money printing policy. He believes that the QE3 method will reignite currency wars. Ones that could potentially have drastic consequences for the rest of the world. This is not the first time Mr Mantega has opposed the Fed's loose monetary policies. He even cited Japan's attempt to print cheap money, calling it a currency war. However, there are obviously few takers for Mr Mantega's conservative views. Brazil itself has cut interest rates by 5% over the past year to foster economic recovery. Trying to catch up with the US' methods of reckless money printing is a tough task for any sane central bank. Nevertheless, as our founder Ajit Dayal had written in The Honest Truth "The man with the addiction to alcohol is as addicted as the man who serves up the alcohol." Thus it remains to be seen to what extent the conservative central banks can ward off such peer pressure.

If you thought that we've had enough of the Fed largesse, you may well be wrong. Some of the Fed officials have now gone public with their views on when exactly should the Fed reverse its policy of low interest rates. And for some of them, the timeline extends well beyond FY15. Infact, they are now arguing that low interest rates should continue till the time unemployment levels in US do not come down to a specific level. An announcement of this kind will also give financial markets an idea of what policies lie ahead. Well, targeting a specific unemployment rate is fine, but what if inflation rears its head much before the target is reached? Not a chance believes one of the Fed officials. Given the past history of inflation, it is unlikely to kick in before unemployment drops significantly as per him.

Well, it's amazing how the US Fed and its bunch of officials live under the belief that the economy is a well oiled machine that responds to the pulling and pushing of certain levers. Nothing could be further from the truth though. This whole monetary experiment that the Fed is conducting is fraught with risks. And thus could easily go out of hand without giving the policymakers enough time to react. Sooner they come face to face with this reality; the better it will be we believe.

Yesterday, traders across the country observed Bharat Bandh over the controversial FDI in multi-brand retail. The question is, will this new reform adversely affect traditional Indian kirana stores?

Kirana stores typically enjoy location advantage and customer loyalty. However, they cannot compete effectively with big retailers on some fronts. For one, big retailers buy goods from suppliers in such huge quantities that they are able to negotiate better pricing terms. This, in turn, can be passed on to the final consumers. Big retailers provide ease of shopping and have a wide variety of goods and brands on offer. Given the limited space, this is difficult for kirana stores to replicate.

On the positive side, FDI in retail would bring in the much needed investments in logistics. It is mandated for foreign retailers to invest at least 50% of the FDI component in back-end infrastructure. This will certainly help reduce wastage and bring in efficiency into the system. On the negative side, big foreign retailers would affect the business of kirana stores as the latter would not be able to compete on the cost front.

Stimulus packages can give a onetime booster shot to an economy. But they cannot sustain long term growth. This is a cruel realization that has hit nearly every economy which had undertaken the strategy during the 2008 crisis. And the latest entrant to this category is none other than China. China had faced a slowdown when the crisis hit the global economy. But the country had rolled out an economic stimulus which helped it to dole out a fantastic performance till recently. However, now the country is gripped with slowing growth. And unfortunately it is expected to last longer this time around. The reason behind this is worsening external demand. With the entire world witnessing a slowdown, the demand has naturally seen a decline. This is bad for a country that relies majorly on exports to stimulate its own economy.

At the same time, policy paralysis, lower lending to smaller firms, etc have hurt domestic growth. Squeezed from both the side, the red nation is facing tough times. The need of the hour for them is reforms. Hopefully their government would realize this and enact the same. Otherwise they would be looking at bad times for quite a while. Unless they decide to give another booster shot in the form of a stimulus package. That would help things in the short term but long term problems would continue to prevail.

We are all well aware that Indian growth story is cooling down since some time now. And here is another harsh reminder for the country's shadowed prospects. The rich class in India has shrunk by 18% in 2011. In comparison; last two years witnessed India as a major growth leader. No one can deny the role of a global slowdown in the fall of investible surplus. However, with India, the problem is more internal than external. Policy paralysis in the past and high debt and inflation has shook investor's confidence leading to sagging equity market and erosion of investible wealth. This is further reflected from the fact that in contrast, Asia Pacific has surpassed any other region with regards to number of high net worth individuals (with investible wealth of USD 1 bn or more) in 2011. All we hope is that with the new package of reforms, things will change for better. But for that, the Government needs to ensure that economic logic doesn't lose in favor of political interests.

In the meanwhile, the Indian equity markets rallied through the day on hopes of further reforms by the Union government. At the time of writing, BSE Sensex was up by 343 points (1.9%). Barring IT stocks, all sectoral indices traded in the green. Asian stock markets too displayed positive investor sentiments.

 Today's investment mantra
I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.' - Peter Lynch

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