Petrol Prices highest in Hydrabad and lowest in Panjim

                                                                  Data source: Firstpost

The recent steep hike in petrol prices has drawn a lot of ire from Indian consumers. Not just that, but several political parties have also expressed their rage over the sudden price hike. We thought it would be worthwhile to see how much petrol would now cost in different parts of the country. As per data from Firstpost, per litre cost of petrol is highest in Hyderabad and Bangalore. However, Panjim has the lowest petrol price in the country. Why the difference? This is because petrol prices include a huge quantum of central and state government taxes. The Chief Minister of Goa, Manohar Parrikar, had effected 11% reduction in VAT (value added tax) on petrol from April 2012. This gave almost Rs 11 per litre relief to consumers. It remains to be seen if other states also follow Goa's model on petrol prices.   

Are you riding this stock bubble?

2011 was a year that most equity investors in India would want to erase from their memory. The BSE-Sensex had ended the year down by almost 25% from a year ago. Though the Indian share markets recovered somewhat in the new year, the benchmark index is still down about 10% on a year-on-year basis. But there is this particular segment of stocks that has been outperforming the broad market by a massive margin. In fact, if you consider the change in their share price over the last one year, most of these stocks have delivered hefty returns.

Can you guess which stocks we are referring to? The answer is stocks of multinational companies (MNCs). But why have these stocks gained so much? Do they have such strong fundamentals that they have been unaffected by all the issues and concerns weighing over the Indian economy? The answer is no.

If you may recall, the minimum public shareholding rule was announced back in 2010. As per this guideline, all listed public sector companies are expected to maintain a minimum public shareholding of 10%. On the other hand, for listed private sector entities the threshold is set higher at 25%. To put it in other words, private sector promoter are required to bring their shareholding down to below 75% of the total equity. The deadline for complying by these guidelines is June 2013.

But how does this relate to investors piling up MNC stocks? Let us explain. Many of the MNC stocks listed on the Indian share markets do not have the minimum shareholding requirement as per the mandate. The promoters of these companies have two options to deal with the situation. Either they can dilute their shareholding and raise the public shareholding. Or the promoters can raise their stake to over 90% and delist from the stock exchanges. In the case of MNCs, the likelihood of the second possibility is significant. They often prefer to delist than to dilute their stakes. Some argue that even paying a significant premium would not be difficult for MNCs given the financial muscle of their parent companies.

So the entire run up of MNC stocks has been in the anticipation of delisting gains. Agreed that most of the MNC stocks have good fundamentals and strong balance sheets. But do these qualities call for so much of a premium over their counterparts? We do not think so. As per our dictionary, this is nothing but mere speculation. Would you like to bet your hard-earned money on the shaky premise that a company may delist from the bourses? What if the company chooses not to? Then prepare yourself for a massive loss as the stocks crash.

Shouldn't life savings drugs be more affordable?

Shouldn't life saving drugs be more affordable?  The question is not just rhetorical. It is powerful enough to bring down governments and entail corporate policy changes. Economies in the West have been struggling to bring down healthcare costs. But to no avail. Their resistance to unbranded generic drugs from India and developing countries is a major hurdle. More than safety, it is the profitability of drug majors that is at stake. Unwilling to compromise on the profits of patented versions, pharma majors have refused to liaison with cheap drug makers. Result being that most patients have been able to ill afford life saving drugs. The debate has now been ranging for some months in India too. The government and corporate have locked horns on the pricing policy of drugs. What is certain is that drug makers cannot afford to lose money on life saving drugs. If nothing they need to be compensated for the losses through better pricing of other drugs. Else, there will be no incentive for conducting new drug research. It is time the government reviews such policies more proactively. The sector deserves at least a fraction of the attention that the government showers on sectors like telecom, we believe.

This could further slow down growth

The interest coverage ratio (EBIT/ Interest expense) is an important parameter in financial analysis. It is used to determine how comfortably a company is placed in terms of payment of interest on outstanding debt. The lower the ratio, the greater are the risks. If you apply this parameter to Indian companies, the result is quite dismal. About 241 Indian companies of the BSE-500 index that have announced their March quarter results so far. On an average, these companies were able to cover interest expenses just 4.9 times. This is the lowest level in the last five years. Slowing economic growth and high interest rates are the main reasons for this. There are fair chances that this will worsen even further. In fact, as per ratings agency Crisil, Indian lenders are likely to restructure a further Rs 1 trillion worth of loans in the current financial year. Even worse, poor interest coverage has a direct impact on capital spending. In other words, companies may postpone their projects and investment in order to maintain their financial health. This could further slow down growth of the Indian economy.  

Buffett's version of Aesop's fable

For centuries and centuries, fables by the famous Greek writer Aesop have been the bedtime favourites of many a children. Aesop's fables, you would probably know, are known for their wit and wisdom. For instance, one of the very famous stories is about a hawk and a nightingale wherein the moral of the story goes thus: 'A bird in hand is worth two in the bush.' In simple terms, it means that it is better to have a sure thing instead of gambling for something bigger.

If legendary investor Warren Buffett would have followed Aesop's advice, we would have probably not even known him. For all the enormous wealth that he has created over the last 6 decades as an investor, has been by doing exactly the opposite of what Aesop said. The business of investing is all about letting go of the bird in hand in search of two in the bush. Meaning, one defers consumption in the present and invests money into assets that will give back more money at a later date.

But there are certain caveats that cannot overlooked. If your investment goes for a toss, you not only lose the two in the bush but also the bird that you had in your hand. So what do you do? As Buffett puts it, make sure there are two in the bush, that is, make sure that the pay-off is certain.

That's easier said than done, especially because stocks can be so volatile and unpredictable. So how does one find certainty in pay-offs? Listen carefully to what Buffett has to say about this. The most important thing that an investor must do is find companies with a competitive advantage that have had a history of great earnings and returns. He elaborates his premise with the example of Coca Cola. The company has completed over 125 years. This shows that the company has endured numerous business cycles, two major world wars and all kinds of crises that have conspired during this long period. Will a company that has been successful for so long disappear in the next 10 years? That's highly unlikely. The company operates in about 200 countries and its business has been growing. This means that there is certainty in the business. Moreover, the company has pricing power because of its strong brand value. So, by investing in such solid businesses with a strong past track record you can be almost certain about having two birds from the one that you let go of.

Learning for Indian companies from JP Morgan's trading loss

'Scale and diversification' versus 'gigantic and complex'. This is a never ending debate for companies. It is good for them to scale up operations and diversify their businesses as it is taken as a sign of stability. But when does it put a brake on increasing its size? Is there an ideal size that does not let the company go into the category of being too complex? Unfortunately there are no answers to this except for experience. And the bitter experience of sub-prime crisis tells us that gigantic financial institutions can become too complex to regulate. The latest reminder of this is the huge trading loss borne by JP Morgan.

As per Federal policymaker, Mr Bullard, JP Morgan should be split into a smaller size. He states that rather than trying to change regulations as per the complexity of the business, it is best to make the business smaller. Hence making it easier to regulate. We could not agree more with Mr Bullard's view. Higher the complexity in a business, greater the possibility of something going wrong. It is easier to simplify the business structures and run them efficiently. That is the need of the hour. Not more regulations which can be bypassed through complicated structures. 

Governmentt needs to find balance between expenditures and revenues

The Indian government is facing tough situation. It is finding it difficult to bring the fiscal deficit under control. And now the planning commission of India has asked for a huge 132% rise in the gross budgetary support (GBS) for the 12th Five-Year Plan. The GBS is the amount of funds the centre is required to allocate to meet the plan expenditure. The responsibility of distributing GBS among ministries, departments and state governments rests with the Planning Commission. The plan panel has also sought a significantly higher allocation for the food ministry. This would enable it to prepare for implementing the food security law in the next fiscal. It could further inflate the subsidy bill. It has also sought higher allocation for education, tribal affairs and water sectors. However, the Finance Ministry is not willing to agree on such a hefty hike. This is due to their strained financial positions. The government and the planning commission need to find a balance between expenditures and revenues in order to ease the fiscal pressure. 

Rupee depreciates 47% in 20 years!

Since August 2011, one of the biggest concerns for the Indian economy has been the rapid decline in the value of the rupee. Moreover, there seems to be no end to this fall. With the rupee now touching an exchange rate of about Rs 54.8 per US dollar, the Indian currency continues to set newer records, albeit, on the lower side. In fact, this is not an anomaly but a long term trend. If you look at the rupee-dollar exchange rates over the past two decades, the rupee has continuously lost value against the dollar. In 1992, you could buy a dollar for just Rs 28.95. The same dollar would now cost you close to Rs 54.8. That means the rupee's value against the dollar has dropped by a strong 47% in the last 20 years.

India's not the worst when it comes to black money

A lot has been said about the black money menace prevailing in India. It is believed that the tax evasion resulting from black money transfers has virtually choked the economy. However, it is worthwhile to note that when compared to most of its BRICs peers India has fared relatively better in curbing the black money menace. A recent study by researchers from Bogazici University indicates that the size of the shadow economy in India is declining. A shadow economy is that part of the economy where transactions happen in cash. And such transactions circumvent tax.

The research shows that the size of the Indian shadow economy has fallen in the last 40-50 years. In fact, it has contracted from about 40% of the GDP in 1950 to about 23% in 2008. Most BRIC peers have also seen their shadow economy contracting. But the absolute size of their shadow economy is much higher than India. China is the only country that has fared better than India. However, we believe that a lot needs to be done from here on to curb black money trafficking. Aggressive tax planning devices can help. Measures like General Anti Avoidance Rules (GAAR) are also suitable.    

Beware, inflation could get much worse!

Indian economy really is in dire straits. Its currency is in a freefall. Its accounts are bent out of shape. And there no strong reforms worth their name anywhere close on the horizon. It is no surprise then that foreign investors are exiting in droves from the Indian market, leaving a huge wreckage of wealth destruction behind them.

After all this, one would certainly expect India's policymakers to wake up and smell the coffee. And to introspect as to what exactly is going wrong with the once fancied India growth story. Unfortunately though, this does not seem to be the case. If the latest rhetoric out of Delhi is any indication, we seem to going down the wrong path on yet another occasion. So, what exactly is the Government's plan to fix the economic muddle that we are in? Well, the solution answers to the name of austerity measures. In other words, there will either be a cut in spending and/or an attempt to raise revenues, more likely the latter than the former.

It certainly goes without saying that in the absence of reforms, the Government's efforts to boost its revenues could eventually mean higher taxes on goods and services and would thus lead to an increase in inflation. In fact, the other option of cutting the spending also has inflationary connotations to it. As we all know oil subsidies account for one of the biggest chunk for Government spending. And if the axe falls on the same, higher fuel prices will be the outcome, thus opening up another avenue for inflation to seep in. To make matters worse, we have not even considered another potentially inflationary outcome like increased prices of goods and services made largely from imported raw materials.

Thus, it appears as if the Government wants to do nothing more than rob Peter to pay Paul. Rather than expand the current economic pie by introducing meaningful reforms, the Government just wants to redistribute the existing pie through the stealth tax of inflation. Certainly not expected from the Government that held great pride in its reformist outlook.

Sectoral PE multiples touch their peaks

For years, Indian stock markets have always had a darling sector in which investors wanted to invest their money. This was evident during both the bull rally leading up to the financial crisis of 2008 or during the gloom days of 2009. However, this is the first time in many years that the market is divided over which sector will outperform. This is evident from the divergence in the price earning (P/E) multiples of various sector indices. Investors have long considered P/E a useful metric for evaluating the relative attractiveness of a company's stock price. P/E ratios of power, capital goods and banking sector are almost at lows of 2009. This indicates that valuations of these sectors have reached the level of the crisis time and cannot go much worse from here.

However P/E ratios of some sectors like healthcare have reached three year high. A correction is also possible in metals where the sector P/E is much higher than when demand for metals had declined. A similar situation applies to IT sector as well. This is because the Indian IT sector is facing tough challenges due to the global uncertainty. Thus, with such divergent P/E ratios, it will be difficult for investors for pick an outperforming sector to invest in.

Will Indonesia replace India in BRIC?

The Indian equity markets have borne the brunt of the weak macro-economic environment over the last year. The BSE Sensex was the worst performing global index registering a drop of 23% in 2011. According to Securities And Exchange Board Of India (SEBI), FII's pulled out US$ 4.9 bn from the Indian markets during the year which was much higher than the outflows from other BRIC nations. This benefitted smaller south-east Asian countries particularly Indonesia as reflected in the 3% gain recorded by the Jakarta Composite index in 2011. With Indonesia's GDP expected to grow by a robust 6-7% in future and on the back of its low current account deficit, both Fitch and Moody's upgraded Indonesia to investment grade recently. In contrast, India's credit rating was downgraded to negative by Standard and Poor's.

Even as Reserve Bank of India (RBI) has embarked on a softening interest regime in FY12, India's share of problems seems to be far from over. The continued paralysis of economic reforms and sharp rupee depreciation has further compounded problems. India's fiscal deficit is being projected to swell to 5.1% of GDP in FY13, much higher than the fiscal deficit of its other BRIC counterparts. But despite the headwinds, India can still boast of a services driven economy as compared to Indonesia where commodities rule the roost. Hence, we believe that it may be quite some time before Indonesia replaces India in the BRICs.

Who will bail out the rupee?

With assets across the world falling like nine pins, how can our very own rupee be far behind? It was no surprise then it has hit a new all time low of 54.32 per US dollar, crossing its previous low of 54.30 achieved in December last year. Thus, the big question is whether anything can be done to stem the slide. Nothing meaningful we believe as far as the short term is concerned. And even the central bank seems to have given up on this. But not before spending a whopping US$ 20 bn between September and now.

Finally though the reality that they are trying to treat the symptoms and not the disease seems to have dawned upon them. The onus of improving rupee's position lies with the Government we believe. Their policy making or the lack of it and reckless spending are the key reasons behind the rupee's current plight. And unless some strong action is seen on these fronts, the Indian currency may continue to hit new lows with constant regularity.

US dollar is not a safe haven but still hold on to it: Jim Rogers

The US dollar is far from being a safe haven. The US economy is barely recovering, unemployment still reigns high and consumption is not picking pace at which the US Fed had assumed. Still, the latter insists of curing the economy's ills through reckless money printing. This then means that the value of the dollar is bound to decline. And yet, famed investor Jim Rogers owns the US dollar and believes that it is a good investment bet in the short term. He acknowledges the problems of owning the dollar. But is of the view that since Europe is deep in the doldrums, the US dollar has been gaining in relative terms. The question is how long these gains will sustain. As long as the US Fed continues to address issues in the same manner as it has been doing until now, the dollar is bound to lose value. In such a scenario, gold becomes the best safe haven against paper currencies. True, the precious metal has been witnessing declines in recent times. But that is only because it has been up for 11 years in a row. And so a correction is in due order.

Current situation of Indian IT sector

Major software companies reported sluggish growth in their recently declared quarterly results. What was more disappointing was the near term future outlook. Most heavyweights like Infosys and Wipro projected a bleaker outlook for growth. Considering all this, industry experts now doubt the growth projection of 11%-14%, estimated by the industry body Nasscom.

High dependence on the developed world seems to be hurting the Indian IT sector badly. So what should companies in the sector do to de-risk their business? The obvious answer is to look beyond the traditional markets. The companies also need to move beyond their traditional service offering. The demand environment as well as client needs are changing fast. Therefore, the companies need to focus more on services such as consulting, analytics, mobility and cloud computing. Shifting focus from traditional markets and service offerings seem to be way forward for the Indian IT companies.

Are stock market valuations attractive now?

After hitting a year to date high in February 2012, the BSE-Sensex has lost more than 12% value since. There are many reasons behind it. Global worries and weak macroeconomic indicators are some of them. Unfortunately, the signs on these indicators further down the road do not seem very encouraging either. As a result, investors have a big question in their minds. Is this the bottom of the markets can things get worse? Of course the reason they ask this question is to understand if they should invest in the markets now or not.

Morgan Stanley has tried to answer this question. As per a study of theirs that was also reported in a leading daily, the markets seem attractively valued at present. In their study, they have conducted a historic analysis of the price to book value (P/BV) of the Sensex and tried to correlate it to its returns.

As per the results, each time the P/BV of the Sensex dips below 3, the markets have delivered healthy returns in the next 12 months. They have cited 3 such incidents in the past.  And they feel that this time too, the Sensex would deliver over 30% returns if the P/BV dips down. The ratio currently stands at 2.98. But Morgan Stanley has stated that the returns would be even better if P/BV were to fall further.

The P/BV is a good valuation multiple to look at while investing. However, there are other things that are equally important to look at while investing. Like any other multiple, P/BV is just an indicator of whether the stock or the market in this case is cheap or not. The bigger question is will the stock deliver returns in the long term or not? The underlying fundamentals answer this question. If fundamentals are strong, then earnings would expand. Such a stock purchased at cheap valuations would help increase shareholders returns. But if fundamentals are poor then no matter what the valuations, things would continue downhill for the stock.

Inflation heats up in April'12

The inflation figures for the month of April were announced recently.  Inflation, based on monthly Wholesale Price Index (WPI), stood at 7.2% in April compared to 6.8% in the previous month. Food inflation was also stubborn and stood at 10.4% in April. With inflation showing no signs of cooling down, Reserve Bank of India (RBI) will be relatively cautious in easing the interest rates in the next monetary policy. It may be noted that in the last monetary policy, RBI had surprised the markets with a 50 bps (0.5%) rate cut. And with the industrial production declining in March, there was a consensus of further rate cuts. But considering inflationary pressures, that appears to be a remote possibility now.

It may be noted that food inflation is the main culprit for the rise in overall inflation. And with minimum support prices of crops set to rise further, food inflation may remain in high double digits. Thus, in order to rein in inflation, the problem of food inflation needs to be tackled. And that can be done by improving the back end infrastructure (avoids wastages). Monetary policy tools are ineffective in that regards.

Source: Hindu Business Line

* WPI (Wholesale Price Indiex)

Is your stock suffering from 'Shoe Button Complex'? In this issue:

Back in 1997, an Indian entrepreneur drew inspiration from Sam Walton's retail giant Wal-Mart and went on to build India's largest retail empire. Who is this man who laid the genesis of the retail revolution in India? It is none other than Mr Kishore Biyani, the Founder and Group CEO of Future Group. In fact, investors who were able to recognise the potential and invested early in the stock of Pantaloon Retail (India) Ltd saw their fortunes multiply several times.

The prospects of the retail chain seemed quite bright until Mr Biyani decided to plunge into several other businesses. Those ranging from launching an insurance company to selling mobile phone connections. As it turned out, not everything that he touched turned into gold. Moreover, in its haste to grow fast, Future Group accumulated a huge quantum of debt that became a drag on the core business. So much so that Mr Biyani recently agreed to sell out a controlling stake in his highly lucrative clothing business, Pantaloons, to the Aditya Birla Group. There are also rumours doing the rounds that he might even sell stake in Big Bazaar and another listed subsidiary Future Capital Holdings. Whether that happens or not is a different matter altogether. But the way things have unfolded certainly cannot be ignored.

Let us ask you. What is the root cause behind all this mess? In our view, the answer is the 'Shoe Button Complex'. In simple terms, the 'Shoe Button Complex' means that success in one area can give a person an illusion that he can be successful in other fields as well. Businesses often fall prey to this complex and end up burning their fingers. Do you now understand why Warren Buffett lays so much emphasis on staying within one's circle of competence? It is worth recalling that while the world rode the tech bubble of the 1990s with stocks soaring to incredible heights, Buffett stuck to his discipline. He did not invest a single penny into tech stocks. The result is that while he missed some big investment opportunities, he saved himself from the extreme losses that many suffered when the bubble burst. Even Wal-Mart, whom Mr Biyani mimicked so well always stuck to its core competency and did not enter unrelated businesses.

We believe investors have a very crucial lesson to take home. For one, stick to investing in businesses that you know and understand best. If you're putting your hard-earned money into something that you do not understand, you're simply speculating. We certainly don't think relying on chance luck is a good investment strategy. Secondly, invest in companies that operate within their circle of competence. If you sense that the management is pursuing diverse businesses purely for the sake of growth, be wary of such stocks.

Chinese steelmakers to enter India

India has abundant reserves of low grade iron ore, which cannot be used for making steel. The country has only 10% of high grade iron ore which is used in steel making. As a result there is a pressing need for steel makers to adopt the pelletisaton technology. Pelletisation is the process of converting low grade iron ore into high grade ore. In order to promote this technology the Indian government has removed export duty on pellet exports. The government has not tinkered with 30% export tax on iron ore announced in December last year. It has now also brought down customs duty to 2.5% from 7.5% on capital equipment. This will spur India's steelmakers to go for pelletisation of iron ore mines in a big way. India has also invited Chinese steel makers to invest in this technology. At present low grade iron ore is exported out of India to the world's largest steel consumer China. This is because very few steel manufacturers and iron ore miners in India have the technology to use it. It is a win-win deal for Chinese steel industry to set up pelletisation plants in India. This would make up for the extra expenditure being incurred by them in view of 30% duty on iron ore exports from India. 

Basel III could trigger a recession

Economic buoyancy, credit growth, savings and investments. Each of these seems to have forsaken the Indian economy over the past year. The last two in particular have been the biggest shockers. True, there is some amount of cyclicality in economy and credit demand. However, at least the savings and investment rates in India had been healthy until 2011. But of late, these two have dipped steadily lower as a percentage of GDP. To begin with high inflation and negative real interest rates dissuaded retail investors from bank deposits. Stocks, debentures and mutual funds too gave jitters. Investors chose to stay away from mutual funds as a result of regulatory flux. All in all, gold and real estate emerged as the only inflation hedging asset classes. Going forward, however, the proposed changes in banking regulations could nearly nail the future of Indian financial sector. Basel III, if implemented in a hurry, could have telling effects on Indian banking. No doubt prudential capital adequacy norms are necessary. They can keep Indian banks free from the liquidity crisis in global markets. However, a hasty implementation could mean choking banks and the economy of necessary capital. This would not only impact GDP growth. But it would also take away investors from financial markets. 

Will the falling rupee hurt your investments?

The Indian Rupee has been tumbling down in recent times. There are plenty of reasons being cited for it. Politicians and the government insist that it is due to the weak macroeconomic signals in the broader global economy. The economists say that this is a result of weakening economic conditions in India. Whatever it is, the bottom line remains the same. Indian rupee has weakened. So should you as an investor be worried about it?

The answer is yes. A falling rupee has a direct impact on your investments. Allow us to explain how this happens. When the value of rupee falls, there are two things that happen. First is that the exports from the country become more attractive to global consumers. This means that the exports should go up. When this happens, it is good because the income of the country and hence its GDP goes up. But what happens if the global demand itself is depressed? Well this is exactly what happened with India. The demand from the developed world especially from US and Europe, which are the biggest markets for Indian goods, was depressed during the whole of last year. And it still continues to be depressed. As a result exports remained tepid.

The second impact of the falling rupee is on the imports. Companies that import their raw materials and key items, end up seeing their costs go up. Now during happier times, these companies are able to pass on the increase in costs to their customers. But in times like the ones we are living in right now, domestic demand too continues to be depressed. High inflation as well as high interest rates are some reasons for the same. So when domestic demand is low, these companies find it difficult if not impossible to pass on the increase in costs to the customers. As a result they end up taking a hit on their margins.

The same concept applies to inflation as well. If the rupee devalues, then the country's import bill, particularly its oil bill, goes up. That means that the very dear fuel costs spiral upwards and end up fuelling the inflation in the country. This inflation has its own adverse impact on the investments by depressing the companies' profit margins as well as leading to monetary tightening. If inflation does remain stubbornly high then the Reserve Bank Of India (RBI) may find it difficult to rollback the interest rates which in turn would mean that liquidity remains tight. And capital investments get deferred.

All in all, the falling rupee would have an adverse impact on the investments. Now the question that would come to your mind is what should an investor do? The investors need to do their homework before investing. Identifying companies that have a resilient business model is the need of the hour. And the company has to have pricing power for its goods or services. To add to this if it has fully integrated manufacturing facilities then it would remain insulated from high import related costs to a large extent. Investing in such companies at the right valuations is the key to long term investment gains.

More subsidies on petrol may be in the offing

If the current demand of oil marketing companies is anything to go by, the Indian government would again find itself at the same old crossroads. They would be facing the perennial dilemma of choosing between inflations and fiscal deficit. Actually, as per the government-owned oil companies, they are losing over Rs 7 per litre on sale of petrol. And they want the government to compensate for the same. True, petrol price is already de-controlled. However, petrol price hardly moved in tandem with the crude price. With the increase of crude price in the last five months, no revision in the petrol price has added losses to the oil marketing companies.

There are many options in front of the Indian government. Keeping inflation in mind, for the time being, the government can declare petrol as a regulated product. And compensate the companies for their losses. This would add to the expenditure of the government. Else, it can reduce the excise duty on petrol to compensate for the losses. In this case, the government would be losing on its revenue collection. Hence, both ways, fiscal deficit would come under pressure. And if, the government decides to go with the hike in petrol prices, inflation may again go out of the roof. What path will the government choose? We have to wait and find out. However, more financial pain seems to be in the offing.

Real interest rates on 1 year bank deposits

                                                                      Data source - RBI

After staying in the negative for most of 2010 and 2011, the real interest rates (adjusted for inflation) on one year bank deposits have of late moved back to the positive. However, banks are hoping to soon cut interest rates on deposits in line with the RBI's monetary policy. Hence, it now depends upon whether inflation remains tame enough for investors to make positive return on their money.  

Are stocks and MFs bearing the brunt of gold?

Even the rich today cannot deny that every penny saved is equal to every penny earned. Especially when liquidity is tight and high returns are hard to come by. But Indians have shown sufficient foresight with their savings. Since the time the Indian economy bore the merits of liberalization, our savings and investments reflected that. In fact that ratio of domestic savings to GDP (Gross Domestic Product) has been the highlight of the economy's growing fortitude. Having nearly doubled from 22% of GDP in 1991 to 40% in 2007, the rise in savings offered a major boost to investments as well. The domestic investments comprised nothing less than 36% of GDP in 2007. This was up from 26% in 1991. The healthy trend not just ensured that our GDP growth rates were enviable to the rest of the world. But the debt burden in the hands of Western households seemed unrelated in the Indian context. What is more, financial assets like stocks, mutual funds and debentures gradually became more acceptable to retail investors.

But a lot of water seems to have flowed under the bridge over the past 5 years. To begin with high inflation and negative real interest rates on bank deposits dissuaded retail investors. Stocks, debentures and mutual funds too gave jitters after the stock market crash of 2008. Moreover, lack of clarity on policy issues made investors sit on the edge. The insurance and mutual fund industries in particular saw a lot of regulatory flux. As a result some investors chose to completely stay away from them. Stock markets too failed to retain confidence of those having been cheated by unscrupulous brokers. In the meanwhile, gold as an alternative asset class got prominence. That its inflation hedging quality is vital to every investor's portfolio became well known. Hence steadily investments started shifting from financial instruments to assets like gold.

Not that stocks and mutual funds were an overwhelming proportion of Indian household investments earlier. Together they were less than 15% of GDP in 2007. Unfortunately, lack of confidence in their safety and returns has reduced the proportion further by 2012. As per HDFC, mutual fund assets under management (AUMs) have dropped from 12% of GDP in 2010 to 8% by 2012.  Clearly, the decline in savings in financial assets is not just to do with favoritism towards gold.Also, the shiny metal, though necessary, cannot serve all investment needs. Therefore to boost the flow of savings to financial assets, the need of the hour is better regulation and more incentives. This in turn will ensure more economic stability to India's prospering middle class. At the same time it will save Reserve Bank Of India (RBI) the trouble of managing forex volatility due to excessive gold imports.

Will India ever get this kind of leadership?

Iceland, a tiny European island country of just 3 lakh people seldom appears on the map of the world economy. Back in 2008, the country was embroiled in a deep financial crisis along with the rest of the world. But it did something very radical then. The outcome is that nearly four years after the crisis, the economy is in a much better shape. Compared to the rest of the developed world, its unemployment level is sound at just 6.1%. Moreover, its economy grew at a steady rate of 2.4% last year.

What did it do so differently? What lessons does Iceland have for the rest of the world? We thought the best person to answer these questions would be none other than Mr Olafur Ragnar Grimsson, President of Iceland since 1996. This is what he has to say. As per him, most other developed countries viewed the collapse of banks as just a financial and economic crisis. Iceland looked more broadly and deeply into the matter. It saw that the crisis would have political, social and judicial consequences.

Iceland found itself facing a crucial dilemma. On one side were the interests of the financial market. On the other side was the democratic will of the people. It is obvious now that it chose the latter. It did not pump money into the failed banks with taxpayers' money, the way the US and other European economies did. It treated banks like any private manufacturing or commercial companies that had gone bust. At the same time, it initiated measures on the judicial and economic front to address several aspects of the crisis. Some measures pertained to protecting the lowest income sectors such as elementary social and health services.

As we all know, the US and most economies of Europe have done mostly the opposite of what Iceland did. They salvaged the same big banks and institutions that were the culprits of the crisis. In the process, they have made their debt problem even worse. These economies are now witnessing sluggish economic activity, high unemployment levels and widening income gaps. All this means that even more severe crises are in the offing.

Iceland's model is not very complex and difficult to replicate. It decided to face some short term pain in the larger long term interests of the economy. Why, you may ask, the other countries did not take inspiration from Iceland's model? Were they fools or were they crooks? Unfortunately, our hunch is slanting more towards the latter.

Mauritius leads FDI inflows into India

                                                    Data source: Ministry of Commerce and Industry
                                                                                      *April 2000 to February 2012

Ratings agency Standard and Poor's (S&P) has recently cut India's outlook to negative from stable and issued a threat of potential downgrade, citing high fiscal deficit. As a result, Indian government is facing tremendous pressure to reduce its fiscal deficit. In order to increase revenues for the government, India is planning to review the double-taxation avoidance agreement (DTAA) with Mauritius. The reason behind the review is to prevent misuse of the treaty and track illicit money allegedly stashed in the African island nation. The country was losing more than USD $600 m every year in revenue because of the tax treaty, besides incurring the risk of militant groups using it to route money into India. This announcement had sent a panic wave in the Indian stock markets. It must be noted that Mauritius has the biggest share (39%) of foreign direct investment (FDI) inflows in India.

The world is a tangled web

Everything is interconnected. Even stuff that may appear to be insignificant may actually turn out to be the most relevant thing to look at. Look at the South Korean trade data for instance. You may wonder how the trade of a small Asian country affects the world's economics. For such skeptical thinkers, it is time to be shocked. As per Goldman Sachs, it is one of the key indicators of global economic health.


How? Well, South Korea is one of the largest exporters of capital goods to China. And we all know that the capital investment in China is what has been driving the demand for commodities and industrials. So if South Korean trade shows a slowdown, like it has in recent times, then it indicates that capital investment in China has slowed down.


This in turn translates to a lower demand for commodities from the dragon nation. So for all those countries that have been depending on demand from China for their intermediate goods, they are most likely to see a slowdown in coming months. Therefore, the trade data of South Korea is actually a very important indicator of global economic health.

Illiteracy costing India a bomb

                                                                  Data source: Firstpost

How much does an economy lose out because of illiteracy? A recent report by World Literacy Foundation titled Economic and Social Cost of Illiteracy answers to that question. Among the BRIC countries, China and India lead the losses owing to illiteracy with estimated yearly losses of US$ 135.6 bn and US$ 53.56 bn, respectively. The provisional data of the 2011 census suggests that about 74% of India's population aged 7 years and above is literate. As per the same report, illiteracy costs the global economy over US$ 1.19 trillion every year.

India's highest ever trade deficit in FY 12

                                                                   Source: Business Standard

Above chart highlights how India's trade deficit has reached the highest ever level in FY12. While our imports have exceeded imports most of the time, the difference in FY12 has come as high as US$ 185 bn. Combine this with weak capital inflows and one gets an idea on why rupee seems to be under immense pressure. Unless petro prices cool off, we do not think a big respite is in the offing any time soon. Of course, imports of precious metals such as gold have also caused the problem to exacerbate a bit. 

Is this the best investment during lean times?

To the naked eye, the difference between an investment returning say 15% per annum and the one returning 17% per annum may not look like much in the near term. But as the time horizon increases, the difference keeps getting bigger. For instance, after 10 years, the investment yielding 17% per annum will have accumulated nearly 20% more money than the one with 15%. And after 20 years, the difference would have gone up by as much as 40%.

Thus, when it comes to investing, even a couple of percentage points of extra returns matter. However, we routinely encounter cases where investors turn a blind eye to the same. Nowhere is this more evident than in the case of dividends we believe. Ask most investors and they will say that they invest in stocks only because of the capital appreciation potential of the same. Dividends are seldom the decision drivers. However, as the example just given shows, such investors are likely to end up paying a significant price for their dividend negligence over the long term.

This is not all. As a leading daily points out, dividend payouts are also likely to be an investor's best friends during lean times. In other words, when markets keep going up and down in a narrow range, it is the dividends that come to an investor's rescue. Take for example the period between March 2008 and 2012. During this time, the Sensex has returned a total of 17.9% out of which more than 1/3rd was accounted for by dividends. And for the BSE Mid cap index, the share of dividends in the total returns was as high as 134%. In fact, had it not been for the dividends here, the total returns would clearly have been in the negative territory.

Thus, as we have seen, dividends not only help propel investment returns over the long term, they also help generate sizeable returns during periods when the stock markets go through lean times. Little wonder, dividend paying stocks should be a must have in one's portfolio.

Current Economic crisis in Western World and learning for India

A striking feature of the 21st century economic and financial crises is the sheer pace at which financial disasters fly uninhibitedly across continents. Another unique trait of the current era is the utter magnitude of the ongoing turmoil. The debt crisis that the developed world is facing is not just pertaining to a particular sector of the economy. The malaise is a lot deeper and bigger, engulfing finances of entire economies. But the problems haven't just appeared suddenly out of the blue. They are the result of years of recklessness and petty politics. The US and the Eurozone have no choice but to suffer the consequences. These economies are dying under the weight of poor economic growth and high indebtedness. A slew of austerity measures are further killing all possibilities of economic revival.

Just last week, credit ratings agency Standard & Poor's cut India's rating outlook to negative from stable. The main reason for this is our large fiscal deficit and the slow reform engine, which is facing several political roadblocks. Well, this is India's wake up call. Unlike the developed economies, India is not facing any immediate systemic crisis. Moreover, India has favourable long term growth prospects. With some discipline, the country's finances can be made leaner. By learning from the mistakes of developed economies, India can leapfrog into a better future. But unfortunately, our political establishment does not have the vision, will and courage to take bold steps. Unless we reach the brink of a major crisis, no major changes or reforms are likely to happen. We hope the government proves us wrong.

Rise in demand for generic drugs in India

                                                                                            Data source: Mint


The quarterly results of Indian pharma majors may not be accurately indicative of their long term future. But data regarding the demand for generic drugs clearly puts all speculations to rest. Notwithstanding regulatory hurdles in the West, Indian drug makers have a lot to benefit from the rising share of generic drugs in India too. The increasing spend on generic drugs can by itself bring in healthy revenue stream to domestic pharma majors.