Has the budget already gone for a toss?

As reported by a leading daily, there are already whispers in the official circuit that the Finance Minister (FM) has got his subsidy math wrong. The FM had stated categorically during his budget speech that he was looking at restricting this year's subsidy bill to 2% of GDP. If we break down the values, the Budget has allocated Rs 750 bn towards food subsidy. But as per the Planning Commission, food subsidy would eat up at least Rs 1,000 bn if the Food Security Bill has to become a reality. And even this amount is an underestimate.

So the FM has two choices. One is to stick to his initial Budget target. If he does this, then he would need to raise the prices of things like diesel, kerosene and LPG gas to meet the needs of food subsidies. If he doesn't raise the prices of these goods then the food subsidy payout would fall short. If this happens, the Food Corporation will have to borrow more money from the government to buy food grains. This in turn would add to the fiscal burden in the form of higher interest costs.

Option two is to raise the subsidies. This again would throw the fiscal balance way off the target. Either ways the government looks set to miss the fiscal targets that it has set for itself in the Budget. The point is why come up with such targets and revise them throughout the year? It seems to have become a regular feature with the government. If one looks at the amount paid out as food subsidy last year, it was a good Rs 800 bn. The target was set at a level even below the actual payout. In light of higher food prices and fuel prices it was but natural that the FM was going to miss his targets. So why set them so low? The answer is simple. It makes the government look good. Albeit temporarily.

Drug pricing in India

Pricing of drugs and medicines in India continues to be a touchy topic. Way back in 2006, the government proposed bringing around 300+ drugs under price control. The rationale was that drugs need to be affordable to all sections of society. This was stiffly opposed by the pharmaceutical industry and has so far not seen the light of day. But the uncertainty over this issue continues. Following a Supreme Court directive to decide the pricing formula for 348 essential medicines, the Department of Pharmaceuticals came out with a proposal last year. It suggested regulating prices of these essential drugs and their combinations at the average price of three best-selling brands. The last part is now proving to be a bone of contention. For starters, several NGOs and the health ministry have rejected the model. This is on the grounds that the best-selling drugs are usually the costlier brands because they are most aggressively marketed. The department has further confused matters by stating that increasing competition does not necessarily lead to a reduction in prices. This statement contradicts the intention of the department to do away with the cost priced based mechanism of fixing prices of drugs. However, the other side of this argument cannot be ignored either. This being that drug prices in India are already one of the lowest in the world. Despite this, the government has not been able to ensure accessibility of medicines to all. Thus there is no guarantee that even if medicines become more affordable, all people will have access to them. Maybe this is one area where the government needs to give equal focus as well

What happens if rainfall is not normal this year?

With India's weather department predicting normal monsoons this year, the Indian government will surely be breathing a sigh of relief. With so much on its plate already, the last thing it would want is for monsoons to play truant. The rainfall during June-September this year will likely be 99% of the long-term average. This would make it a third straight season of normal rains. India's weather department defines normal monsoon as seasonal rainfall between 96% and 104% of the long-term (or 50-year) average.

Having said that, the weather department has also thrown in a googly. It has said that there is a 39% probability of the emergence of weak El Nino conditions during the latter part of the monsoon season and a 24% probability for below-normal rains. If El Nino does lead to reduced rains, it may prevent India from repeating the bumper harvests of summer-sown crops it recorded in 2010 and 2011. It must be noted that this condition was precisely what led to lower rains in 2009 and significantly impacted agricultural production thereby leading to higher food prices.

We believe that predictions made by the weather department should be taken with a pinch of salt. What matters is what the government has been doing to reduce the dependence on monsoons for bolstering agricultural production. Has it been making sufficient investments in ramping up irrigation techniques, water harvesting etc? Are there enough storage facilities for foodgrains? The latter point becomes important because adequate storage of foodgrains during bumper years can be used in years plagued by inadequate rainfall. This helps to keep prices of foodgrains in check to a certain extent.

So tied up it has been with sorting out corruption and party problems that the current government has hardly done much in the way of productive investments for India's long term growth. But agriculture and food is a tricky issue. The central bank has cut interest rates for the time being but is wary of more such cuts in the future as it continues to monitor inflation. If for some reason, monsoons fail to deliver, is the government well equipped to ensure food for all while ensuring that inflation does not shoot up? That remains the million dollar question.

Changing image of rural India

Let us start with a question. What is your image of rural India? Does it make you think of thatched roof houses and dirt roads? Does it draw images of farmers ever offering prayers to the rain god? If your answer is yes, then maybe you haven't visited rural India for a long time. Those who have will agree that rural India of today has gone through a massive transformation.

A study conducted by Credit Suisse throws some very interesting insights. Unlike traditional perceptions, rural India is no more solely dependent on agriculture. For instance, back in 1978, 81% rural males depended on agriculture as their main source of income. Fast forward to 2009-10, the proportion has dropped substantially to about 55%. The study suggests similar trends even in female rural employment.  

There are some solid facts that validate the changing trend. A decade ago, agriculture accounted for nearly 50% of the rural economy. Now, it has dropped to just about one-fourth. On the other hand, the share of manufacturing and services in the rural GDP (Gross Domestic Product) has ascended at a rapid pace. Between 1999 and 2009, manufacturing GDP in rural India has grown at 18% CAGR (compound annual growth rate). The same now contributes to about 55% of India's total manufacturing GDP. Increasingly, Indian villages are acquiring the characteristics of towns.

What does all of this mean to investors? This changing trend opens a sea of opportunities for rural consumption. A lot of urban consumption categories such as construction materials, two-wheelers, media, personal products, healthcare, etc. are set to make greater inroads into these high potential rural markets. Companies that manage to take advantage of this opportunity will find themselves on a strong growth trajectory. Even more, they will create significant wealth for their shareholders.

Indian healthcare relatively much cheaper

                                                                   Data source: Deutsche Bank
                                                            *For a basic policy for a local resident between 25-35 years. 


A recent report by Deutsche Bank compares prices of US goods and services to those of other economies across the globe. One interesting parameter, among other things, is health insurance costs. Today's chart of the day shows annual premium paid in US dollars for the most basic health insurance. As is evident from the chart, health insurance in the US is the most expensive in the world. Even Australia, which is the second most expensive country in terms of health insurance, has an annual premium which is less than half of that of the US. On the other extreme, emerging economies like India and China have relatively lower insurance costs. While it is certain that healthcare costs in India are quite cheaper in comparison to several other countries, poor healthcare infrastructure still remains a major hurdle.

Is S&P threat a jackpot for value investors?

The most popular opinion, it is said, is not always the correct opinion. Nowhere else is this truer than in finance we believe. In fact, you will do a lot better in investing if you develop a constant suspicion about the most popular opinions in the field. Take S&P's recent opinion on India for example. The ratings agency believes that India is off to hell in a hand basket. It has thus cut its outlook on India's long term debt and has also warned the emerging Asian giant of a possible downgrade.

We have reasons to believe why long term equity investors have very little to worry about the announcement. The biggest amongst these is the success of the simple strategy of betting against the S&P ratings. Studies have shown that over the long term, a portfolio of stocks rated lower by S&P tends to beat the higher rated portfolio. In other words, stocks with an A+ rating have tended to underperform those with B+ or even C rated stocks over a long term horizon. The outperformance of poorly rated stocks has to do with expectations perhaps. On account of their poor financials and profitability, they happen to be valued so low that even a small improvement tends to lead to a big jump in their prices.

There is no reason why the same analogy cannot be applied to India's ratings. Agreed that India's near term outlook is poor. But with certain degree of reforms, India could easily solve deficit problems and also take its growth significantly higher. Stocks in India though do not seem to be factoring this into their valuations currently. This thus puts the risk reward ratio firmly in favour of a patient long term investor. Any more correction from the current levels and that would be the added icing on the cake we believe.

Thus, a possible downgrade of India by S&P and the resultant reaction of short term investors could actually turn out to be a bonanza in the long term for patient investors.

India : Spam Capital of the world

                                                                                            Source: Sophos.com

India may lag most countries in internet penetration but it has still managed to earn the dubious distinction of being the spam capital of the world. A report from SophosLabs, a software security firm states that more than 9% of all spam messages transmitted in the first quarter of 2012 were relayed through India before coming into people's inboxes. The US was close on India's heels, accounting for more than 8% of all spam mails. Countries like South Korea, Indonesia and Russia helped round off the top five.

The right approach to deregulate diesel

The government has in principle agreed to deregulate diesel prices and make them more market linked. We just hope the decision is implemented in spirit and not just in letters. And we have valid grounds to doubt that. As we all know petrol despite being deregulated, continues to be sold below the international prices. The current pricing mechanism has been distorting markets, leading to dieselization of the economy.

While not much can be done regarding food subsidies, the central bank intends to target the fuel subsidies to contain the trade deficit. It is important to note here that petrol prices have been deregulated for more than a year now. However, diesel, which is consumed almost four times more than petrol (diesel forms 43% of the fuel basket while petrol comprises just 10%) is still sold at fixed prices. This makes the sale prices of diesel way off from the international prices. As fiscal deficit seems to be overshooting the target set at 4.6% for FY12 (expected to widen to US $160 bn) on account of rising food and fuel subsidies, the RBI is tightening the noose on government to deregulate diesel prices.

While some may frown on the suggestion as it may lead to inflation, the failure to do so will increase fiscal debt leading to rise in the price levels. However, this is a major policy change that can jeopardize the political interests. Hence to expect the Government to implement it at one go is unrealistic. A more feasible approach will be to segment the diesel consumption market according to the end user. 

For example, diesel can be subsidized for the farm sector but any such benefits to the private car segment should be cancelled. This will not only lay the right foundation, but also prevent the dieselization of the economy (on account of indiscriminate regulation of prices, the diesel consumption is witnessing growth of over 8%). Assuming no policy change, the petroleum subsidies by themselves are estimated to contribute to 0.8% increase in the fiscal deficit for current fiscal year. Thus the move to deregulate diesel prices will not just stabilize the fiscal balance; but also balance the markets in terms of rationalizing diesel demand.

Is PPP model right for modernization of Airports in India?

Airline companies are in trouble in India is a fact well known. But that does not seem to have deterred passenger traffic. In fact, as more and more people look to enter Indian shores, modernization of airports, especially in non metros, has become important. That is why the civil aviation ministry may revert to the public-private partnership (PPP) model. This is to modernize 35 non-metro airports and a few large ones in cities. One of the reasons for this is the Airports Authority of India (AAI) lacking sufficient funds to undertake modernization on its own.

Having said that, it may have to get ready to face stiff opposition from airport employees. For instance, the AAI had to invest substantially on its own in the modernization of Chennai and Kolkata airports. This is because employees opposed the PPP route. However, the Delhi and Mumbai airports have been modernized through PPP. Not everything is hunky dory with PPP either. The main problem that the PPP model faces is execution delays and cost overruns. But with the AAI strapped for cash, allowing private players to enter this space seems to be the only option.

Should you buy more gold than stocks?

Indians do not need the excuse of Akshay Tritiya (considered auspicious for gold buying) to stock up the yellow metal. For generations, festivals, weddings and other auspicious occasions have warranted some gold purchase for us. The only novelty now being the availability of Gold ETFs and e-gold that one can buy through the demat account. The increased awareness about the inflation adjusted returns from gold has made it all the more alluring to retail and institutional investors of late. Top that with regular dose of opinions from commodity gurus like Jim Rogers, bankers and economists about the scope of outperformance of gold over other asset classes. The demand for gold from India has become so important that the same is now considered a key determinant of global gold prices.

Meanwhile, central banks in the US and Europe are not yet done with their money printing exercise. Hence, concerns over runaway inflation are far from being quashed. In such a scenario no asset class other than gold can offer the safe haven security for wealth conservation. There are even talks about some troubled countries moving back to the Gold standard due to the depreciation in their currency value. So is gold the best asset class to invest in?

As per statistics from a business daily, over the last 10 years, the annualized returns from gold has been 6 times that from US stocks (considering Dow Jones index). In fact the returns from gold outperformed stocks over a 50 year period as well. However, if one considers a 30 year period, the returns from stocks were much better than gold. Hence the returns purely depend upon the level of inflation, performance of the economy and corporate over a given time period. Companies in America may fail to keep up with the rise in the value of gold over the next decade. This is given the fact that currencies like the US dollar and the euro may lose value thanks to the excessive money printing.

However, for Indian investors the considerations could be very different altogether. For one, the central bank is extremely conservative about liquidity management. Plus despite relatively lower GDP growth, companies will continue to sustain good inflation adjusted profit growth. Hence the scope for returns from good stocks is much higher than in the US. No doubt the inflation adjusted returns from gold can add value to an Indian portfolio as well. But be in no doubt that there are several stocks that have the same virtue. Hence, take the stunning statistics about the outperformance of gold over stocks over a long period in the US with a pinch of salt. We believe Indian investors would be better off keeping their exposure to the yellow metal limited. In fact a larger proportion of good quality stocks than gold would do much more than keeping your portfolio inflation proof.

Current situation of PE funds in India

Rewind 5 to 7 years back when everything was hunky dory in the world of finance. At that time, the Indian stock markets were marching ahead in full optimism. That was also the time when private equity (PE) as an asset class gained a lot of ground. Typically, PE funds in Asia take equity stakes in unlisted companies. When later the companies go public, they tend to gain handsome returns. In other words, it's a high-risk high-return game. Unfortunately, so far, PE funds in India haven't been able to taste the kind of success they set out for. Why? As you know, Indian stock markets have slowed down over the last few years. The IPO markets are running dry. At the same time, many owners are reluctant to issue public shares.

But there is a more fundamental reason for the failure of PE funds. During the heydays of 2005 and 2007, they were carried away by greed. They made investments at expensive valuations. Even when they had opportunity to sell off when the markets were soaring, they did not, hoping for even better valuations. This is a very important lesson for retail investors. Greed has the power to make even highly qualified professionals behave in irrational ways. It is best to stick to the fundamentals of value investing and not get carried away by market swings.

Gold loans curbed due to risk concentration - RBI

The few banks that have posted their full year results so far did not offer any surprises. Besides the slowdown in loan growth, there was just the anxiety about restructured assets. However, so far at least there has not been any case of unusual spurt in NPAs. But trust our central bank to smell the rat before anyone else does. The Reserve Bank of India (RBI) has been worried with the spurt in lending against gold. NBFCs in particular have been very aggressive in this asset class, with gold prices becoming increasingly speculative in nature. In fact not just NBFC but also banks were offering much higher loans against the same amount of gold. This is thanks to the rise in prices of the yellow metal over the past year.

The RBI is in no mood to allow borrowers to speculate on the basis of rise in value of collateral. The rise in loan to value ratio of gold loans was mooted precisely to curb this. The subprime housing bubble of 2008 came handy to remind the central bank of the downsides of excessive leverage. We do not think the RBI has offered any hints of correction in gold prices with the precautionary mandate. That gold continues to remain a safe haven asset class is uncontested. However, overleveraging and speculative trends can be very painful for an economy in the long run. All credit to the RBI to nip the problem at its bud!

Foreign Investment in Indian bond market

                                                      Source: Economic Time (* Data till April 22, 2012)

To boost the investments in the bond market, the Finance Ministry has asked the Reserve Bank of India to open a US$ 10 bn window. This window is to allow foreign individuals to invest in the corporate bonds. As per the finance ministry, this would boost the foreign investments in the bond markets as the foreign investors would be able to earn higher returns on Indian debt as compared to what they earn in US or Europe. This does come as good news for the underdeveloped bond market in the country. However, foreign investors would prefer to wait and see the tax implications of such investments. For the scheme to be successful, the foreign individual investors should be taxed at the same rate as the foreign institutional investors (FIIs). Currently the FIIs can invest up to US$ 15 bn in government securities and US$ 20 bn in corporate bonds. However, FIIs have been pulling their money out of the Indian markets since the start of the global crisis.

Ease of doing business in India

India ranks among the world's worst countries at encouraging entrepreneurs. According to World Bank, for ease of starting a business, India is ranked 166th out of 183 countries, just ahead of Angola. And there are many factors at play that thwart the ambitions of those who want to make it on their own. For starters, doing business in India is tough. Reams of red tape and poor infrastructure are serious obstacles which are quite difficult to overcome with inadequate financial resources. Further, big companies have privileged access to land and government contracts, a benefit not enjoyed by their smaller peers. Then there is the question of corruption and bribery, ills that have simply refused to go away as governments over the year continue to remain tainted with it. Then there is the question of the mindset of Indians who are averse to risk taking and would rather settle for secure salary paying jobs. 


Of course, many of these problems are nothing new and there are companies which have managed to make a name for themselves despite these issues. But in an environment where the balance of power is gradually shifting towards the East and India is harbouring ambitions of becoming a global power to be reckoned with, these basic issues need to be addressed on an urgent basis. Entrepreneurship and innovation is an important way in which India can carve a name for itself in the global economy. And efforts by the government to encourage this will surely go a long way in changing the mindset of the Indians as well.

Changing trends in investing

Which sectors occupy the maximum newsprint and mindshare amongst analysts and investors? Rewind two to three decades back. The likes of ACC, Reliance, Century Textiles, Grasim and BILT fitted the bill in the 1980s. These manufacturers of commodities were amongst the first to cash in on India's industrial revolution. They were the first to bring in sophisticated technology used for manufacturing processes. However, as competition intensified and there was loss of pricing power, growth subsided. With that even their market caps mellowed down. Software developers and financial institutions led the phoenix- like rise of service sector firms in the 1990s. They not only made processes cheaper and faster but also ensured efficient use of capital. They were the next to be crowned as fastest growing blue chips.

Coming to present scenario, the focus of governments around the world is to correct what has gone wrong. Environment degradation, loss of jobs, poor quality education, expensive healthcare and monopolistic pricing are issues being addressed. The outcome being the popularity of green energy, educational ventures, generic drugs and online retailing amongst entrepreneurs. Not just the developed world, but even emerging economies have their eyes set on these potential sunrise sectors. Meanwhile it is time for growth in the software and financial behemoths to tread back to the mean. In fact as per an article in Ritholtz, sectors like print media, hardware manufacturing, apparel manufacturing etc have completely lost flavor in the US. Thus it will not be long before investors too look for more lucrative options in sectors that have far better growth prospects.

According to us, investors should always look for businesses that have a strong and sustainable economic moat. The same again depends on demographic and socio economic needs. Clean energy is a must have. Thus the earliest players in this segment can have huge advantages. Quality education has commanded the attention of not just President Obama but also policy makers in India. Investments in this sector are therefore bound to get government support. India already has an edge in low cost generic drug manufacturing. Strong tie ups with MNC pharma can ensure better R&D and exhaustive marketing in developed economies. The demand for affordable healthcare too is no longer restricted to the developing world. But austerity measures have forced government and pharma companies to look for low cost drugs. Finally, the manufacturing of commodities like apparels and hardware will keep shifting to the destinations offering cheapest labour. India and China are set to lose their status as back office and factories of the world respectively. Hence the focus will shift to value addition and online retailing. For this is where the margin upside would be higher. Companies effectively and profitably catering to these niche segments are ones to watch out for! They are likely to enjoy the biggest economic moats in the near future. Undoubtedly investors can hope to find some of their best performing stocks amongst these sectors.

Will machines replace humans in investing?

Study of human evolution tells us that machines, even the humble bullock cart, has played a pivotal role in our progress. They have increased manifold, the productivity of mankind. This is not just by aiding them but also replacing them in a great number of operations. In fact in modern age, the debate on whether computers can eventually replace the human mind is still valid. Increasingly, the cost and efficiency of using machines has also made manpower dispensable in several industries.

Interestingly, even the area that was believed to be the forte of human mind is being captured by machines. The former was believed to be proficient at 'thinking' rather than the latter's efficiency in 'processing' information. This made the presence of human inevitable in areas like research. However, machines are multiplying the speed of thinking. A report quoted by Business Insider hints at just this. The findings of the report underlie the fact that machines may have been the cause of financial Black Swans. The term used to denote a highly improbable event seems to have been the result of ultra quick algorithms run by machines. Further these machines are expected to soon replace humans for ensuring profitable trades in complex environment.

We are not sure if nano-second thinking by machines can ensure profitable trades. But if that were true in all situations, every entity investing in high tech machines would have been a profitable one. The likes of Lehman Brothers and Goldman Sachs would have topped the list. And the investors who have spent years trying to refine the techniques of investing would have left the job to their machines. Hence, we certainly appreciate the importance of machines and quick thinking. They may be instrumental for success in complex investing. But unfortunately machines have never and will never decipher human behavior. And that we believe is a necessary cue that no smart investor would want to miss out on.

Scared of market volatility? Read this

Legendary investor Warren Buffett is known to pay little heed to movements in the stock markets. He often urges investors to focus solely on buying great businesses. For him, stock prices are nothing more than entry and exit points. But the kind of wild swings that stock markets often witness can give shudders to many loyal adherents.

Why are stocks markets so insanely volatile? Do the underlying fundamentals of a business, or an economy at large, change every few seconds? Why do investment managers engage in excessive trading that often sends markets in a tizzy? Wouldn't following Buffett's wisdom help them create wealth for their clients?

Jeremy Grantham of GMO, a global investment management firm, has an interesting perspective to present. He cites 'career risk' as one of the most important factors driving investment behaviour. As per him, professionals who manage other people's money are primarily driven by the imperative to protect their own careers than to make money for their clients. If an investment manager were to make a mistake of his own, there would be a good chance of him losing his job. But what if he made a mistake that everyone was making? Most likely, he would be pardoned. This incentivises them to pay close attention to what other investors are doing. And very often, they merrily follow the herd. But this act of aping other investors gives enormous momentum to stock prices, driving them either too expensive, or too cheap.

Individual investors who invest their own money have a tremendous advantage over investment managers. Unlike the latter, investors have no compulsions that would force them to make hasty decisions. They can afford to make their own mistakes without the threat of losing their jobs. So do not be perplexed by the volatility in stock markets. Instead use it to your own advantage. Buffett comes in handy yet again when he says, "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Monetary Easing in BRIC nations

Monetary easing seems to be the new trend among the BRIC (Brazil, Russia, India, China) nations. Brazil cut interest rates by 0.75% to 9% and signaled more rate cuts in the future. In a surprise move this week, the Reserve Bank of India (RBI) also cut rates by a 0.5%. The move was far more generous than what the market expected. China has also been in an easing mode, with media reports indicating a cut in bank's reserve requirements.

But, on the other hand, developed economies are being relatively tight fisted. The Bank of England took a hawkish stance and the European Central Bank (ECB) is in a monetary mess. Bank of Canada and the US Fed are also hawkish in their stance. Seeing a global slowdown, emerging markets are doing their best to try and revive their economies. On the other hand, developed countries are being more cautious. So is this a change in the world order? Or have the BRICs acted too soon?

Inflation still hurting Indian consumers

                                          Data source: Ministry of Statistics & Programme Implementation
                                                                                     *with 2010 as base year

Indian corporates may have something to cheer about after the Reserve Bank of India (RBI) cut key policy rates earlier during the week. But it will be a big mistake if Indian consumers take that as an indication of easing inflation. Unfortunately, the monster of inflation has again raised its ugly head. As today's chart of the day shows, the latest consumer price index (CPI) data for both urban and rural consumers has rise steadily over the last three months.

Broadband subscribers in India on rise

                                                              Source: Telecom Regulatory Authority of India (TRAI)

In today's world, internet is virtually the lifeline of every nation. In India too internet has become a household word. But it has not really picked up at the pace that it has in the developed countries. Nevertheless, the number of broadband subscribers in India has steadily been on the rise. From merely 5.5 m subscribers in December 2008, the number has grown at a compounded annual growth rate of 34% to reach 13.35 m by the end of December 2011. 

Will interest rates come down?

In the coming week, the Reserve Bank Of India (RBI) is scheduled to meet in order to announce the monetary policy. This is the annual monetary policy for the year 2012-2013 (FY13). This announcement is something that everyone is eagerly awaiting. The reason - they expect the central bank to cut the interest rates.

Rising food prices and subsequently high inflation rates had led the RBI to adopt a tight monetary policy since 2010. Consequently it increased interest rates by nearly 13 times in the period between March 2010 and October 2011. The result is that the benchmark interest rates in the country stand at 8.5% currently.

The higher interest rates have certainly helped in cooling down inflation to some extent. The inflation reported for February 2012 was 6.95%. Though it is higher than the 6.55% seen in January 2012, it is still lower than the 9.54% seen during the same period a year ago. Even though the news on the inflation front has started to turn positive, the monetary tightening has had a side effect. And that is in the form of slowing economic growth.

With cost of funds being so high, manufacturing companies have either postponed or cancelled their investment plans. This in turn has hurt the economic growth which has come down to below 7% levels. And this is a cause of worry for the RBI. Therefore, it has two choices in front of it. The first is to do nothing. This means it would leave the interest rates unchanged. This in turn would mean that investment plans would continue being pulled back and economic growth would continue to come down. Alternatively, it could bring down the interest rates and infuse the much needed liquidity in the system.

Taking a cue from the RBI's actions since January 2012, it seems to be adopting the second approach. It has already cut down the cash reserve ratio (CRR) and has infused nearly Rs 800 bn in the economy. But this has not been enough. As a result, unless inflation concerns surface again, we feel that the RBI would loosen the noose in its upcoming meeting and cut the benchmark interest rates. But will it actually do so? We'll have to wait and watch.

Changing face of Indian car industry

For a long time India was predominantly a small car market. Low disposable incomes as compared to other countries meant that consumers restricted their car purchases to smaller models. So you had Maruti 800s dotting Indian roads enabling the company to emerge as a market leader in this space. But the past few years have seen a considerable change in the Indian auto landscape. For one, competition in the passenger car segment has intensified. This is because more and more foreign players have entered with newer models. This has led to a drop in the average price of cars. Further, disposable income of the average Indian has also risen. As a result, consumers are now opting for bigger vehicles. This was very much evident last fiscal when sales of big cars also known as sedans jumped 24%. On the other hand, smaller cars or hatchbacks saw a 7% decline in sales.

The surge in demand has not only been attributed to a younger population having higher incomes but also to existing small car owners looking for an upgrade. Auto companies in the meanwhile have been grappling to meet this demand. This can be evinced from the longer waiting periods for various models. Furthermore, petrol prices have been rising. Thus, the differential between petrol and diesel has widened and so consumers have begun to prefer the latter. Since diesel engines options are available in almost 80% of the sedans as compared to over just 52% in small cars it is hardly a wonder that sedans sales are increasing. Thus, preference for larger cars as compared to smaller models certainly seems a scenario that will sustain for years to come.

Consumption of petroleum products in India

                                        Source: Business Standard  (* For the period from April to February)

Petroleum products are a perennial headache for the government. Some times because of the price swings in international crude oil prices. Some times because of rise in domestic consumption of these finite resources. This is because petroleum products gulp down a significant chunk of subsidies. So their prices and consumption have a strong binding on government finances. The latest news is that diesel consumption for the financial year 2011-12 (FY12) is estimated to have grown by a whopping 11.9% year-on-year (YoY). This is likely to have caused growth in consumption of petroleum products by 4.9% YoY. It is noteworthy that this is the highest growth in the last four years. High subsidy makes diesel cheaper in comparison to its competing fuels. Between FY07 and FY12, the share of diesel in the petroleum products basket has grown from 35.5% to more than 43%. It goes without saying that such growth in consumption is giving jitters to the government.  

Do you wish to donate to BSNL etc....the Air India way?

We all work very hard to earn a living in this country. After all each of us have numerous responsibilities that we need to discharge. Taking care of our daily expenses, food, clothing, housing, education, etc. But there is one more thing that we seem to be working hard for.  This is to bailout the government owned enterprises.

That's right. This is being done by using our tax money to bailout those companies that are going under thanks to the government's own ridiculous policies. The way this works is that first the government will come up with policies and regulations to milk the cash out of its rich companies. Over time these eventually lead the company to the point of bankruptcy. The government will then create a hue and cry to make it look like the entire country would be in doldrums if the PSU goes under and is not bailed out. This way it lays a foundation to ensure that a huge corpus of cash is allocated to bail the company out. Now naturally the huge corpus of cash comes out of the cash that has been collected through taxes. That is your and our hard earned money.

This is exactly what has happened in the case of Air India. The government has decided to bail out the ailing national carrier with an infusion of Rs 300 bn through equity and cash. It has also approved the restructuring of the Rs 180 bn of the company's debt. The company has been going through bad times due to increasing operating costs which it was unable to pass through due to increasing competition in the sector. And when the company was already in a bad shape, the aviation minister decided to go ahead and order expensive aircrafts, all funded by debt naturally. The additional interest burden sent the company deep in red. But obviously it had nothing to worry about. The government has decided to rescue it with our tax money

And this has just paved the path for more bailouts. There are several PSUs that are bleeding. The list is long and illustrious. For example, the national wireless companies Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) have been in the red for quite some time.

But is this what we pay tax for? The answer is no. The money collected through tax is meant to fund public services for the benefit of the citizens of the country. This includes roads, water works, electric utilities, health services, etc. Not to bailout ailing companies

Growth in Asia widens Rich-Poor gap

  It is all very well for to hope that India's GDP grows at 9% plus on a consistent basis. But it does not make sense if the benefits of this growth are not felt by all sections of population. And that is one big problem that Asian countries including India and China face. Developing Asia's rapid growth in recent years has given rise to a widening rich-poor divide. The Asian Development Bank has stated that if inequality in the Asian region had remained stable over the past two decades, growth over the years would have lifted 240 m people more out of poverty. This would be the equivalent of 6.5% of developing Asia's population in         2010. But instead, inequality widened even as Asia's economic growth took off. The share of income going to the richest households has increased in the past decade. Close to 20% of total income has now been cornered by the wealthiest 5% in most countries in the region.

Income inequality brings with it considerable perils. For one it can be a harbinger of social unrest of the kind we have been witnessing in the Arab world. It also leads to more pressure on the government to kowtow to populist polices many of which tend to be ineffective. All these then serve to malign growth itself. That is why Asian governments need to focus more on productive areas. These include education, healthcare, infrastructure and creation of quality jobs if growth has to be all encompassing.  However, with Indian government finances in a state of disarray we wonder when the government will get its act together in this regard.

Can 'land banks' solve India's agri problems?

   In its most basic form, what do you think is the function of a bank? Well, we believe its job is to take capital from those who do not need the same at the moment and give it to those who are in need of it. An arrangement of this kind has worked wonderfully well since time immemorial, isn't it? So, how about using the same approach in the area of agricultural land? In other words, taking uncultivated land from people who neither want to lease nor sell it but are willing to give it to those who are in need of it. Well, an idea of exactly the same nature has been put before India's planning commission and is believed to be under its active consideration. The ET reports that the proposal will kill two major issues associated with India's agriculture at one go. On the supply side, it would address the concerns of landowners and thus bring under cultivation large tracts of underused or fallow land. And on the demand side, it would provide the needy sections of society an access to land, which they have not been able to compete for in the open land market. The implementation though is not as easy as it seems. Owners of land are likely to put up their land in the land bank only if there are strong land records and guarantee that land grabbing will not happen. Thus, it could be a long time before any such proposal sees the light of the day. India does not have such innovative systems though to realise its full potential.

Government vs PSUs

Every few months the chief auditor of government accounts (CAG) has been unraveling cases of preposterous wealth destruction. Over the months, the 2G telecom scam, the mining scam and now the coal block scam have conveyed one message clearly. That vested interest has destroyed sovereign wealth. In some cases the corrupt ministers benefited. In others private companies raked in profits with cheaply acquired government assets. However, that public wealth was destroyed stands uncontested.

In recent days, the government's actions against profitable PSUs have redefined wealth destruction altogether! True that the threat from rising oil prices has never impacted the Indian economy as sharply as it is now. Right from currency deprecation to inflation to high interest rates to retarded GDP growth to fiscal deficit. Every economic variable has been adversely hit. Hence the government has turned to the few cash cows in its stable to bail itself out from distress. The profitable or cash rich public sector companies were initially supposed to raise funds for the government through public offerings. However, volatile markets led to the debacle of the disinvestment plans. This forced the government to milk the PSU assets indirectly. Getting Coal India to pay for imported coal or Indraprastha Gas to supply fuel at rock bottom rates are part of the tactics.

No doubt better supplies of coal and natural gas can sort out India's energy needs to a great extent. That can also ease inflation and boost growth rates. But draining PSUs of their cash and other resources is certainly not the ideal mode to achieve this goal. Such random policies also show the lacuna in policy making. The government has realized the importance of investments in discovery of energy resources very late. It is a pity that more wealth destruction in profitable PSUs will cover the government's ineptitude.

Are financial theories useless & dangerous?

We are living in times when formal education has almost become a basic necessity. Much of what goes on in the world of business and finance is a result of what is taught inside classrooms. So when there is a problem outside, one needs to pay careful attention to what the professors are teaching.

Take for instance the ongoing economic and financial crises that kicked off with the bursting of the US housing bubble in 2007. It was more than just a consequence of the greed and ignorance of investment bankers and policymakers. It was a blatant expose of the several flaws in the theories of modern finance. Who would be a better person to point this out other than Mr Nassim Taleb, himself a professor of risk engineering and author of the highly acclaimed book Black Swan?

According to him, highly sophisticated and complex financial models are useless in predicting rare but highly impactful events. In fact, they are extremely dangerous. He gives a very interesting analogy to explain his point. Say you are a passenger on an airplane. The pilot comes up to you and says that his map is a bit faulty. But that is the best map available. Would you still want to take a ride on such an airplane? Certainly not! Unfortunately, the financial world often rides on half-cooked theories.

Whether risk managers, investment bankers and finance professors will learn their lessons is a different thing. But any such crisis is a great opportunity for investors to learn some very important lessons. One, it is always best to keep things simple. Using complex tools to understand complex phenomena is often not the right way to take. That is why we strongly believe in the value investing approach propagated by Warren Buffett, Benjamin Graham, Peter Lynch and the likes. Because of its simplicity yet firm adherence to solid principles, it eliminates several risks that a complex approach would fail to account for.

Advice of Goldman Sachs

   When asked about the saturation of 20 ml glass containing 10 ml water, it is rather difficult for anyone to be wrong. Some would say that the glass is half full. Others would say that it is half empty. But can those who pocket millions for their opinions on financial markets get as lucky? Well it seems that Goldman Sachs has been using such tactics. The result being that few opinions of the financial behemoth always prove themselves to be right! An article in Business insider quotes some of Goldman Sachs most reputed investment advisors. Ironically their opinions are way too divided on the trend foreseen in financial markets. In fact if a client of Goldman Sachs is to follow all these advices, it would be far easier to toss a coin for making decisions. Since the opinions range from being bearish to uber bullish, there is hardly any chance of going wrong. Thus little wonder that Goldman Sachs has hardly ever been wrong despite the erratic market movements. Its clients though are not too impressed even with its track record.  

The risk that these 480 Indian companies face...

Hostile takeovers have dotted the US landscape since the 1950s. But in India these have only recently begun to gain momentum. According to Wikipedia, a hostile takeover allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. A takeover is considered hostile if the target company's board rejects the offer, but the bidder continues to pursue it.

In India, one such example in recent times has been that of the hotel chain East Indian Hotels (EIH) wherein ITC had been gradually buying more shares of the former in order to launch a takeover bid. And there is the possibility of more such companies becoming vulnerable in light of the new takeover code. This code allows acquirers to make an open offer for an additional 26% on purchase of 25% stake of the target company. 480 companies as listed by the Economic Times, have promoter shareholding less than 25% of total equity. Thus, they are susceptible to the risks of hostile takeovers. However, it is not that simple. Most companies in India are managed by promoters. Hence, the latter is bound to protect its interest and will not relinquish control without a fight.

This means that the company launching such an attack needs to be very clear as to why it wants to go down this route. In mergers and acquisitions, in general, the acquiring company has to make sure that it pays a reasonable price for the target company. It needs to gauge the synergies that are likely to flow in on making the acquisition such that the payback period is not too long. Many a time, when competition for a particular target heats up, valuations soar. As a result, the company which has finally made the acquisition ends up paying a very high price.

This applies to hostile takeovers as well. Since these are bound to be fought tooth and nail by promoters, the acquiring company at the end of the day needs to evaluate whether the price paid and the potential benefits are all worth it.

Is fear of higher prices driving auto car sales in India?

Car companies have seen stellar sales in March as demand for new models and diesel variants drove purchases. Fear of a price hike post the Union Budget also drove sales. Companies like Tata Motors, Mahindra & Mahindra and Honda Siel saw their highest ever monthly sales in March 2012. Well, customers seem to have made the right call. They prefer not to defer their purchases due to the fear of higher car prices in the coming months.

The Union Budget has proposed an increase in excise duty, registration tax and value-added tax. These would add to the cost of the cars. As a result, higher prices are expected to deter auto demand in coming months. Most auto makers have expressed their discontent over the government's decision as they know that it will impact sales going forward. But to no avail. However, they may see some relief when interest rates finally cool off.

Aviation Sector in India and coming Summer Holiday season

Starting this April, airfares are set to rise considerably. Rising demand has propelled airlines to increase fares. This is especially so since the  troubled airline Kingfisher has cut flights and lowered its capacity. To top it all, increase in service tax by the government means that this will be passed on to passengers. It must be noted that Indian carriers are likely to post a combined loss of US$ 2.5 bn FY12. Hence, they need to raise fares to return to profitability and cut debt. The gradual exit of Kingfisher will also play a role in bolstering the fortunes of other carriers. For instance, before Kingfisher ran into financial trouble, about 230,000 airline seats were available daily in the local market and about 175,000 passengers were flying. However, Kingfisher reduced its fleet to 16 from 66 in November. So, at least 30,000 airline seats have disappeared from the inventory. This improves the occupancy level, giving airlines the leverage to raise fares. That said, over a period of time if fares sustain at higher levels, demand is bound to come down. In such a scenario, whether airlines will be able to improve profitability remains to be seen.

Facebook Valuation

                                                                               Data source - Wall Street Journal

 Facebook isn't even public yet, but its highly anticipated initial public offering (IPO) has created a lot of buzz. Is the company a worthy investment though? Today's chart of the day shows that, according to a few productivity metrics, Facebook has convincingly blown past many other companies in the US$ 100 bn club. Each of this social networking site's 3,200 employees generates Rs 1.2 million in revenues and over US$ 300,000 in profits. This compares very favourably versus other players which have a similar market cap, but lower productivity. But, while financial metrics look rosy, at the current inflated valuations, the  Facebook IPO may not have much left on the table for investors.