»5 Minute Wrap Up by Equitymaster

On This Day - 10 DECEMBER 2012
Are 90% Indians 'idiots'?

In this issue:
» India one of the fastest growing smartphone markets
» Will Air India really turn around?
» This could weaken RBI's control over the rupee
» Where is the IT sector headed?
» ...and more!

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"I say ninety percent of Indians are idiots. You people don't have brains in your heads. It is so easy to take you for a ride." These are the controversial statements made by Justice Markandey Katju, chairperson of the Press Council of India (PCI) at a recent seminar in New Delhi. Over the last couple of days, Mr Katju's scathing comments have triggered a huge uproar across the nation. In fact, two students have even sent a legal notice to the PCI chairperson and sought a public apology, threatening to move the court otherwise.

We choose not to take this opportunity to vent out spiteful rebuttals. Vehemently rejecting his remarks will only prove his point. If we really want to prove that we are a country of intelligent and rational people, we need to understand his '90% Indians idiots' comment in the context of his overall speech.

Firstly, the point he was actually trying to drive home was that Indians easily fall prey to malice perpetrated in the name of religion. We have a continuous history of communal riots that supports this claim. In fact, he points out that it would barely take Rs 2,000 to incite communal riot in the national capital. This exposes our vulnerability to menacing forces that aim to gain mileage by channelising communal hatred.

But this is not just about politics and religion. Take the world of investing. Very often small investors are taken for a ride by brokers and big banks that have their own secret axes to grind. Why is it that despite some major bull runs in the Indian equity markets over the last decade, a majority of small investors have not made much money? The worrying part is that even after burning their fingers so many times, retail investors continue to fall prey to dubious recommendations.

Even the 2008 financial crisis was a result of opportunistic behaviour by big private banks. In fact, if an ex-employee of Goldman Sachs is to be believed, several managing directors at the controversial firm privately referred to their clients as 'muppets', which means stupid.

Be it the case of Indians in the context of Mr Katju's comments, or be it the investor community, the real problem is that, more often than not, we are all treated and manipulated like 'idiots'. This is what should really outrage us.

Do you think Indians easily fall prey to malice perpetrated by vested interests? Share your views or you can also comment on our Facebook page / Google+ page

 Chart of the day
Today's chart of the day shows that with about 44 million subscribers, India has the 5th highest number of smartphone users in the world. China leads the pack with about 270 million users. India's growth in smartphones has been pegged at about 52%, which is higher than China and the US. It is worth noting that in India, smartphone users comprise 4% of the total mobile subscribers. In China, US, Japan and Brazil, smartphone users as a percentage of total mobile subscribers are 24%, 48, 65% and 20% respectively. As of fourth quarter of 2012, there are 1.1 billion smartphone subscribers globally, reporting a 42% growth.

Data source: DNA Money

After several rounds of financial bailouts, the national carrier is showing signs of getting airborne! At least the newspapers claim so. The government has offered not one or two but several rounds of funding to Air India. Banks too have restructured its loans several times. The airline company has finally started repaying some loans and cutting losses. As per Mint, the state-run carrier could cut net losses to Rs 42.7 bn this year from Rs 78.5 bn in FY12. This has been on the back of cost rationalisation. To cut staff costs, the airline restricted its hiring to pilots and engineers last year. It also did not fill vacancies created by the retirement of employees. These steps have effectively reduced the staff count to 28,500 from 35,000 in 2011. But do these effectively mean a tunaround for Air India? Apparently not! The carrier is still making losses on several routes. Also, a suitable turnaround plan would need good governance for a prolonged period. That too with minimal political interference. Meanwhile, at least the bankers to the airline are relieved.

Historically, whenever there's been extreme volatility in the rupee dollar rate, RBI's had little problems in reducing the same. Its intervention in the forex markets ensured some sort of stability whenever exchange rates went out of comfort zone. But come next year and India's central bank will find this whole exercise a lot more difficult than before. This is because as per a leading daily, few of the largest bourses across the globe are flirting with the idea of launching rupee-dollar futures. There is a strong chance that this product will become popular. And if it eventually does, then we are looking at a market that could eventually become 3-4 times the actual foreign currency market in India. Little wonder, talks are doing the rounds that RBI's influence over the exchange rates will wane. Or it will at least become much more expensive for the RBI to exercise some control over exchange rates.

There's another much cheaper option though. Active management of the country's twin deficits by the Government so that exchange rate volatility is nipped in the bud. Otherwise, be prepared for even more volatility in rupee dollar rates.

Is capex in India on an uptrend or not? Although the GDP growth in the second quarter of FY13 slowed down to 5.3%, there was an increase in gross fixed capital formation (GFCF). The latter grew by 4.06% in the second quarter of this financial year against 0.66% in the first quarter. But what does not make sense then is that capital good production continued to see a fall.

One of the reasons attributed to this is that there is a time lag between investment and capital goods production. Capital goods output is captured first and the investment gets recorded in the books only after the production takes place. Further, growth in investment appears to have mainly come from the construction sector. Overall, although capex plans of India Inc have not come to a halt, there has been a slowdown. And a pickup in GDP and investment climate will certainly have a favourable impact on capacity building as well.

Cognizant Technology Solutions and Hexaware Technologies raised questions over the IT sector's recovery in 2013. Cognizant's US regulatory filing indicated a 16% revenue growth rate for 2013 compared to the 20% growth rate in 2012. Hexaware cut its revenue growth guidance from 20% to 18% in 2013 as one of its top clients changed its business plans. Some other US-based players also issued profit warnings, blaming slower decision making by clients. The upcoming holiday season in the US and Europe will also extend the sector's woes as the American and European clients will postpone their decisions till mid of February.

Most large cap Indian IT companies share prices got pushed down on the Indian bourses during the last two trading sessions because of the near term negative sentiment. However, these sentiments in our opinion are merely short term in nature because of delays in discretionary IT spend. The need for IT services across the world and the cost advantage enjoyed by Indian IT vendors should keep the Indian IT growth story intact for the long term.

The mortgage crisis is still a monkey on the backs of some of America's largest banks. These banks are seeing a fresh storm of lawsuits stating that they sold dodgy mortgage securities that went bust during the crisis. Estimates of potential costs from these cases vary. But some in the banking industry fear that this could reach US$ 300 bn if the institutions lose all of the litigations. These costs could be a further blow to the economic recovery. It may weaken banks' ability to lend just as the housing market is showing signs of life and more jobs may be cut. The banks are currently battling on three sides. Prosecutors are accusing them of fraud. Regulators are claiming that they duped investors into buying bad securities. Investors are also seeking damages for being forced into buying back soured loans. It's been 4 years since the crisis and the after-shocks are still as strong as ever.

In the meanwhile, Indian equity markets were trading below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by 18 points (0.1%). Consumer durables and oil & gas stocks were leading the pack of losers while realty and healthcare stocks were trading firm. Asian stocks markets were trading mixed with China (up 1.1%) and Malaysia (0.8%) leading the gains, while Taiwan (down 0.4%) and Indonesia (down 0.1%) were facing selling pressure.

 Today's Investing Mantra
"Fortunately, the investment business is one where knowledge accumulates and builds into a knowledge base that's useful. There's a lot to absorb over time." - Warren Buffett

  • Warren Buffett - The Value Investor

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