Should India be proud of its billionaires?

When it comes to number of billionaires, India holds its own in the global arena. Indeed, in 2000, no Indian figured on the list of the world's top 100 billionaires. But by 2011, there were 7 billionaires in that elite club. Only the US, Russia and Germany had more of their billionaires in that top 100 billionaires' list than India.

What this highlights is the strength of India's economic rise. Or does it? Although those aspiring to be rich would like to think that it is healthy capitalism that has contributed to this meteoric rise, it may very well not be the case. Infact, the manner in which these people have made it to the top actually reveals a troublesome trend. At least that is what Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, believes.

For instance, one of India's strengths has been the rise of technology entrepreneurs who have played an instrumental role in putting India on the global map. But this trend is gradually paving way for provincial tycoons who have cut deals with state governments to corner the market in industries like mining and real estate. In other words, rather than capitalist principles, it is government patronage which is the ticket to the billionaires club, a trend which does not bode well for the larger interest of the Indian economy.

There is also the matter of wealth concentration to consider. India's 48 billionaires account for a collective networth of US$ 195 bn. This is a little more than a tenth of India's economy. China fares better on this front. Its number of billionaires is more at 95, but collectively they account for less than 3% of the country's economy. How much churn there is in the billionaires list is also a factor worth noting. In the last 7 years at least, nearly the same people have found a place on the list with hardly any headroom for new entrants. In China, the turnover of billionaires comparatively is on the higher side.

It goes without saying that the government aiming for 9% plus growth on a sustained basis going forward is all very fine. But the impact of this has to be felt across sections of society. Growth in the Indian economy has to translate into improved standard of living for all. Otherwise, growing inequality will only sow the seeds for future unrest. History is a testimony to this fact.

India 5th most attractive emerging retail market

                                                                    Source: A T Kearney

India may be losing favour with the international investor community. But if today's chart of the day is any indication, it is certainly not as bleak as it sounds. As the chart highlights, India has emerged as the fifth most attractive emerging market for retail investment. Although it has slipped one place in the rankings as compared to 2011, it is still an encouraging sign for an economy looking to shore up its image. Also interesting to note is that the BRIC group of nations still continue to tempt retailers and are showing no signs of slowing down.

What causes hyperinflation?

Inflation has been gradually creeping around the world due to a variety of reasons. These range from loose government monetary policies to supply bottlenecks creating shortages. But what about hyperinflation? When does inflation get out of control and become hyperinflation? Hyperinflation is defined as an inflation rate of 50% or more in a single month. What differentiates it from inflation is the root cause. Hyperinflation is solely caused by excessive money supply. Debts and deficits reach unsustainable levels. And governments resort to cover expenses through more and more money printing. The value of the currency falls and people lose confidence in the currency. And for a currency to carry weight as well as purchasing power, confidence of people in it is the key.

The hyperinflation in Germany is a classic case in point. From January 1919 until November 1923, the average price level increased by a factor of 20 bn, doubling every 28 hours. The more troubling fact is that hyperinflation is not necessarily a rare event. Since Germany, there have been 29 additional hyperinflations around the world. This is where gold comes in. When confidence in a currency is lost, there is a scramble for hard assets having value. Gold fits the bill nicely. For instance, during the German hyperinflation, an ounce of gold traded for 170 marks in January 1919. That same ounce was worth 87 trillion marks by November 1923. Thus, it goes without saying that gold is a big hedge against inflation. And one must accumulate more of it in today's environment where governments in the developed world are resorting to excessive money printing.

Air India wants to go public for a shocking reason!

Why do companies get listed on stock exchanges? Generally, the purpose for raising money is to fund future expansion plans and to create liquidity by facilitating trading in the share market.

But what if a company issues an initial public offering (IPO) just so that it can facilitate employee stock options for its employees? And what if that company is none other than debt-ridden loss-making public sector firm Air India?

So far the government has been supporting this ailing national carrier with tax payers' money. But if the recommendations of the pay parity report, also known as Dharmadhikari report, are implemented Air India could soon be listed on the stock exchanges. The report recommends listing of the state-owned firm so as to facilitate employee stock options. That too, as part of voluntary retirement scheme (VRS) for probably 7,000 of its 'voluntary retirees'.

In theory, this novel idea may seem to be a quick fix to Air India's ongoing financial constraints. But can the government allure investors to buy shares of Air India? For one, the sentiments in the IPO market are not too encouraging. Secondly, investors have already burned their fingers on other aviation stocks. And given Air India's abysmal financial health, inefficient operations and excessive government interference, the chances of a successful IPO are very bleak.

The reason why Bangalore is India's leading realty market

Property markets across India have tumbled in recent times. In the last quarter itself, Mumbai and National Capital Region (NCR) saw a drop in volumes by 58% and 57% respectively. However, one city has been an exception in the current turmoil. It's Bangalore. The city registered a volume drop of just 18% in the last quarter. Moreover, it also absorbed 49 million sq ft of residential space in the last year. This is highest by any city in India. Apart from this, it also registered highest absorption rate when it came to commercial real estate market.

So, what has been the reason for this outperformance? Presence across all price points is one of the reasons. For instance, in Bangalore one can buy a property ranging from Rs 20 lakhs to Rs 1 crore with ease. Stability in prices is another reason. It may be noted that during the bull run, prices in Mumbai and NCR went through the roof. But in Bangalore, the rise was gradual. Calibrated price increases resulted in high affordability. Also, it may be noted that Bangalore is an IT hub. Thus, the demand for commercial space is likely to remain buoyant there as compared to other cities. However, the situation might change soon as many pending project approvals in Mumbai have been recently given a green signal by the local municipal authority.  

This is the best commodity bet in emerging markets like India

So what do you think is the best commodity bet in the emerging markets in recent times? If you think it is gold or even oil, think again. It seems that opportunity lies in palm oil. Let us look at the demand side first. Emerging markets have grown at a stupendous rate in the past few years. With this, incomes have also swelled. This in turn has fuelled the demand for food rich in calories and saturated fats. This is where palm oil comes in. In fact, global demand for palm oil has risen by a CAGR of 7% for the past 10 years. Prices have tripled.

Further, palm oil is more than 10 times more efficient per acre than soybean oil and 7 to 8 times more efficient than rapeseed oil. Every acre of palm planted yields nearly 11 times the volume of soybean oil and 7 times the rapeseed oil. Total land under cultivation is somewhere around 15 m hectares. This is less than 2% of that which is dedicated to soybean production. On the supply front, Indonesia and Malaysia produce 87% of the world's palm oil followed by Thailand and Nigeria. Countries such as Kenya and Brazil are also ramping up production. Thus, in a world where there are still millions to be fed, palm oil could be one commodity that could achieve this simply because it yields more energy per acre. And hence, this is a commodity that should be on everyone's radar.

Which foreigners are buying US homes?

                                                   Data Source: The Economist

The US housing market has been down in the dumps ever since the global financial crisis escalated in 2008. However, US homes have not lost their flavour for foreign buyers. As today's chart of the day shows, buyers in Canada and China accounted for a larger chunk of home sales to foreigners in FY12. For both the countries, this was a rise from homes sold in FY07. Both benefited from strong increases in the purchasing power of their currencies over this period. For those, whose currencies depreciated against the dollar, the scenario was the reverse as was the case with Britain. India's position remained unchanged despite the rupee depreciating significantly against the dollar. 

Are rate cuts the only solution to India's growth?

When India's GDP growth came in at quite a low figure of 5.3% for the March quarter, expectations ran high that the central bank would surely cut rates. The Reserve Bank of India (RBI), however, thought differently and chose to keep the rates unchanged. The signal was clear. As long as inflation remained high, rate cuts were not on its agenda. Thus, the onus was clearly on the government to overcome its lethargy and get India on the high growth path.

The central bank's decision has had its share of supporters and detractors. And this has raised the question whether cheap money was the answer to problems of slowing growth? We believe not. One need look no further than the US and Europe to gauge the impact of a loose monetary policy. Indeed, the developed world has kept interest rates close to zero in an attempt to kick start growth. And this has majorly backfired. With unemployment reigning high and consumption not really taking off, low interest rates have hardly provided the stimulus that those countries had envisaged.

There are other reasons too. One is that the key to growth are savings. If savers are at the receiving end with interest rates that are below inflation, they may be forced to chase risky assets in search of higher returns, thus putting their capital at risk. As mentioned earlier, since the RBI has decided to keep status quo, it is now upto the government to make tough decisions such as raising diesel prices and cutting wastage. Further, at a time when the rupee is falling, the only way to compensate savers abroad wanting to invest in India is by keeping rates high. As far as businesses are concerned, companies typically focus on the extent of returns generated. Thus, businesses may not have a problemwith high interest rates as long as the returns are also good. The key here is to create a business environment conducive to growth and low interest rates may not necessarily be the only solution. Cheaper capital can impact job growth too. This is because companies may substitute capital for labour creating less employment for every rupee invested.

What all this eventually means is that the government will have to focus on growth through reforms, cutting down deficit and deregulation. Laying the blame on the RBI and making it the scapegoat for India’s economic problems will not achieve much.

Inflation rears its ugly head again

                                                                Source: Economic Times

High inflation rates have been the root cause for higher interest rates. 2011 saw the RBI constantly increasing rates to reign in the monster of inflation. And for some time it did look like it was winning at the task. But since March 2012, inflation has started to rear its ugly head again. It has been steadily rising since then albeit at a slow pace. Unfortunately the reason for this is not higher demand but supply constraints. This in turn is the outcome of infrastructure bottlenecks which themselves are a result of the policy paralysis in the government. In short, the need of the hour is for the government to step up on its reforms. The RBI has done its job. It is time for the policy makers to do theirs'. 

Do bonds make more sense than equities?

For most part of 2012, the equity markets have been on a roller coaster ride. It has had its highs and its lows. And most of it seems to be difficult to predict. Investors have started to run helter skelter trying to make some sense of what is going on. Most importantly most of them are trying to figure out where to park their funds. How do they maximize returns? A leading daily has tried to answer this question. Their reply is invest in debt or bonds.

The underlying reason for this is that considering the dismal GDP growth numbers, the Reserve Bank of India (RBI) has little option but to cut interest rates. It is a known fact that bond prices are inversely related to interest rates. Therefore, if interest rates go down, bond prices go up. Thus helping investors earn more returns. However, in recent times, investors have side stepped bonds as an investment class. The reason for this was that given the high inflation levels, the RBI was forced to increase interest rates. The increase hurt the prices of the bonds. And most investors wanted to wait for rates to peak before parking their funds in debt. But most of these investors lost out as the RBI had cut down interest rates in its last policy meet. As a result, most of those who were waiting to call the peak of the cycle lost an opportunity to make money in the bonds.

The leading daily suggests that now is the right time for investors to pick up high quality bonds. And this would help them earn handsome returns over the next 12 to 24 months. This is earning high returns in the short term. But a question that we would beg to ask here is just like one cannot call the interest rate peak, how would one take a call on interest rate trough? What the daily has suggested for investors is to basically try and predict the interest rate cycle. And hope that in the short term the investor would get it right. This in itself is an extremely difficult task.

What investors need to do is to look at their long term returns. Short term blips should be treated as the name suggests. Short term. In the long term, equities have and will give the best returns. The volatile times that we are witnessing these days gives the rational investors the opportunities to pick up fundamentally strong stocks. That too, at good valuations. Investors would do well to pick up such stocks and maximize their long term returns. And leave the short term calls on complicated stuff like interest rate cycles to the economists and Central Banks. After all, it is their job.

India's GDP growth still better than a lot of its peers

India's GDP growth of 5.3% in the January-March 2012 quarter shocked many in the country. It reflected the progressive slowdown in the economy over the quarters and sent the government and economist alike scrambling to makes some sense of the numbers. That said, as today's chart of the day shows, India's GDP growth in Q1, 2012 was still better than a lot of its peers barring China. As Europe continues to be haunted by a never ending debt crisiemerging economies have also begun to face its repercussions. 

Should Subbarao now build warehouses?

He joined at a time when not just Indian but global financial system was at crossroads. The subprime crisis had just reared its ugly head. It threatened to sink even the most resilient financial systems. Since September 2008, Dr Subbarao has donned many hats. As chief of India's central bank, he has had to be a savior, facilitator and negotiator, all at the same time. First he was supposed to de-risk the domestic economy from subprime crisis. Then he was supposed to rein spiraling inflation. After that he was expected to support India's fledgling growth rate. And now it seems he could be expected to do the unthinkable! If the government has its way, the RBI governor may also need to find a solution for rotting grain produce. The same produce for which the government has fixed very high minimum support prices (MSP) to appease farmers. And in the bargain, once again stoked inflationary pressure.

Every time the government goes wrong with its policy measures, it looks for quick fix solutions. More often than not the RBI is expected to use its monetary tools to set things right. Inflation, oil prices, rupee depreciation. The RBI is supposed to have solutions for each of these. Despite Dr Subbarao hardly mincing words with regard to the government's ineptness in handling inflation, his views have found no takers. Other governors with the Reserve Bank of India (RBI) have also cited marginal room for interest rate cuts. Quite understandably since the government's wasteful spending has gone to gargantuan proportions. But once again, all eyes are fixed on the upcoming policy review that could ease liquidity further. That would ease growth pressures, albeit temporarily.

But we will not be surprised if this time a prudent Dr Subbarao should propose building the warehouses too! After all, our government does not seem to realize that the best solution to tackle inflation is ensuring better storage of food grains. On one hand the government is allowing surplus produce to rot in the open during monsoons. There is also a proposal to offer wheat at dirt cheap prices to industries. On the other hand, high MSPs (Minimum Support Prices) are being doled out to appease farmers. All of this if tackled with better warehouses and logistics could solve the inflation problem for good. And that would leave the RBI with more time to look into crucial matters, rather than quarter on quarter inflation control. Well, if the government remains tongue tied and paralyzed, it would eventually be pertinent for the more hands-on regulators to take some radical steps.

Will gap between India and china's export competitiveness will narrow down in future?

China's export competitiveness is subject to multiple factors. Artificially pegged currency and economies of scale are a few of them. And when it comes to export of power plant equipments China enjoys a clear sustainable competitive advantage. This has placed the Indian equipment manufacturers at a disadvantage. Now, considering the way the Chinese are making inroads into the Indian market. It seems difficult that this competitive gap would ever narrow in the future.

We have been hearing a constant rant that the Chinese profligacy is attributed to currency advantage. But this ignores the other benefits that come along with China. Cost advantage is one of them. A Chinese manufacturer can provide power equipment at almost half a price than an Indian manufacturer. This is after accounting for the cost of transportation and import tariffs! It can also deliver that equipment in much shorter span of time. Access to cheaper loans from Chinese banks provides another advantage. Thus, if India has to overcome the China threat it will have to take multiple steps. Method to reduce marginal cost of production is one of them. A sound reform agenda with free market pricing is another.

A lesson for Southeast Asian economies

Asian economies are touted to grow at a faster rate than the US and Europe. Little wonder that these countries want a bigger say in global affairs. One idea being put forward is creating a more integrated regional economy. But given the problems that another integrated model is facing, notably the Eurozone, this may not be as easy as it seems. As of now South East Asian economies' plans include working towards lower trade barriers and streamlined customs procedures. Also on the anvil is closer integration of regional financial markets and freer flows of labor. The aim is to implement these and other steps by 2015. Some goals such as trade reforms have already been partially achieved. However, developing a common currency may not be such a good idea. And the Euro is a classic case in point. The Euro debt crisis, if anything, has proven how difficult it is to stick to a common currency. Especially, when different nations have different scale of problems. Further, when the Asian financial crisis struck in 1997, most Asian economies were able to get out of trouble simply because they allowed their currencies to devalue. This is proving to be a tough task for the Eurozone on account of a single currency. Not just that, there is wide ranging disparity across Asian countries as well. Thus, for the region to adopt a common currency would be too ambitious a goal in the current scenario.

Euro crisis to affect India's foreign trade

                                                           Data source: The Economic Times
                                                                                     *April to September 2011

Policy makers in India are worried about the impending adverse consequences of the ongoing Eurozone crisis. One of the biggest impacts would be on India's external trade. The European Union accounts for about one-sixth of India's exports. In the event of a full-blown crisis in the Eurozone, India's exports would be severely affected. However, there may also be a silver lining for exporters. The European countries have so far dominated export markets of Africa and Asia. But the current debt crisis has hampered their economic growth significantly. This puts Indian exporters in a favourable position to target these markets. The Indian government has doled out some special incentives in the form of focused market schemes to encourage diversification of exports to these markets. Today's chart of the day shows India's export and import trade with the European Union over the last six years. 

This Buffett test helps distinguish Coke from Kodak

'Moat' is a very popular term that legendary investor Warren Buffett uses to define a great business. Literally, 'moat' means a wide and deep pit dug around a castle for defence against attacks by enemies. In investing parlance, this translates into a business that has a strong competitive advantage.

But competitive advantage is not a measurable parameter. So how does one find stocks with a strong moat? There is this one acid test that you can use while evaluating a prospective stock. Ask this one simple question. If you were given billions of rupees, would it be possible for you to replicate the success of this business? Would you be able to put a significant dent to the company's business and profitability? If the answer is in the negative, then you have just found a great business with a very strong moat. Some of Buffett's greatest wealth creators such as Coca-Cola, Gillette, Geico and Wrigley (the list is long) had passed exactly this test. Each of these stocks had some robust in-built moat that gave them a substantial advantage over their competitors.

Moats can be in the form of various things. For instance, in the case of auto insurance firm, Geico, the moat was low cost. In other cases, the moat can come through superior product quality, strong brand image, better quality services, patents, real estate location and so on.

The next important question- Is the moat is durable enough? For one, do not confuse temporary advantages with moats. In some case, the companies may lose their competitive advantages with shifts in the industry. Think of Xerox and Eastman Kodak. What you should be looking for is a company like Coca Cola whose moat can widen over time.

Stalled projects in India hitting a new high

                                                                           Source: The Mint

A slew of policy issues and  government inaction has hurt infrastructure projects in the country. Problems related to land acquisition, getting environmental clearances have led to several projects being shelved or stalled. Unfortunately for the past few quarters, the number of stalled projects has just been going up. The Prime Minister in his speech with key economic ministries has cited the need to push infrastructure investment in the economy. Unfortunately till the roadblocks and hurdles are removed, the number of stalled and/or shelved projects will just keep going up. No matter what the Prime Minister or anyone else has to say about it.

18 years of gains in wealth for an avg US household wiped out

Are money and wealth the same thing? Those still confused may find solace in this write up on Bloomberg. It says how the financial crisis wiped out 18 years of gains in wealth for an average US household. In other words, the net worth of an average US household in 2010 was the lowest it had been since 1992. Now, that is some wealth destruction isn't it? Furthermore, if money and wealth are the same, was money also destroyed to the same extent? Certainly not. On the contrary, it was available by the truckloads, courtesy the Bernanke printing press.

Perhaps this more than anything else dispels the notion that wealth and money are not the same. Money, we believe is just a medium of exchange. And its unlimited creation, as is being attempted by the US Fed, should be discouraged right from the word go. This is because as the above example shows, it does not create wealth but only a false illusion of it. And people who come to believe in this illusion have to pay a very heavy price once it breaks.  Like the average household in the US is doing right now. Real wealth you see comes from increasing productivity and relying as little on debt as possible. Printing money and raking up debt is not wealth creation. It creates only bubbles, the breaking of which brings great hardships to the common man.

Widening gap in PSU, pvt sector banks employee cost

                                                                Data source: RBI

Public sector banks are no longer the biggest employers in Indian financial market. Despite that, as seen in today's chart, PSU banks' cost per employee expenses has far exceeded that of private sector banks in recent years. The staff strength of PSU banks has gone down dramatically between FY99 and FY11. Meanwhile that of their private sector peers has gone up. The cost per employee of PSU banks was nearly 1.3 times that of private entities in FY11. This is despite the fact that pension expenses of PSU Banks are not fully reflected in their staff expenses. This makes one thing amply clear. PSU banks have lost their competitive advantage in terms of staff costs to private sector peers.

Defence to be a lucrative opportunity

There is this one industry which seldom witnesseses a recession. In the last one decade, this industry has grown threefold in India. But private Indian companies couldn't make much dough out of it because this space was highly restricted. Can you guess which industry this is? If you haven't guessed yet, we are referring to the defence industry. Did you know India is the world's largest importer of weapons? Of our US$ 35 bn defence budget, about 70% is spent on imports. India is also the 7th largest spender on defence in the world. Last year, the Indian government revised its military procurement policy. This opened up the defence industry to the private sector. Currently, the private sector companies account for just 10% of the defence budget. However, this is set to rise significantly as the government has further revised the rules to the advantage of local players. Several major Indian business houses are vying to grab a pie of this lucrative market. This new opportunity certainly comes as a big relief for Indian companies that are battling a slowdown in the domestic economy.  

Foreign companies are slowly leaving India

Foreign investment is something nearly every government aims to increase. It helps drive the investment driven growth of the country. But boosting this kind of investment is tough. The government has to instill the confidence in foreign companies that their investment interests would be safe. Unfortunately in recent times India seems to be doing exactly the opposite. The government is doing everything in its power to kill foreign investor confidence rather than boosting it. Therefore, it would not come as a surprise that foreign companies are actually exiting India.  The latest to join the list is Germany's Fraport, the world's second largest airport operator. Earlier telecom carriers Etisalat and Bahrain Telecommunications had decided to exit their businesses in India. The reasons for their negative sentiment are the government's policy paralysis and regulatory uncertainty. Add to this the spate of scams and slowing economic growth and the foreign companies are seeing little reason to stick around.  The government needs to do something about this. And do something soon. Otherwise the much needed foreign capital is going to leave India and find its way in to other developing markets. 

Will the Euro die this week?

An election in faraway Greece is hardly something to keep policymakers across the globe awake at night. After all, the tiny nation forms just about 2% of the  Euro zone's economy. But this time it's definitely different. With the second Greek elections in as many months only a week away, not just Europe but the whole world is on tenterhooks. This is because the elections will decide not just the fate of the new Government but whether the country continues to remain a part of the Euro Zone.

Surely, shock waves would be sent across the world if Greece decides to sever its ties with the European Union. In fact, the aftermath of such a possibility is so complex that no one has been able to get a firm grip on the same. What is almost assured though is a big setback for the Euro currency. Besides, borrowing costs for other peripheral nations like Spain and Italy could go soaring into the stratosphere, bringing them to the brink as well. As for India, it will not be spared either as the reverberations are bound to be felt here as well. All in all, brace yourself for some really rough ride. The weather is about to get extremely turbulent.

Is India heading to pre-2003 level of growth?

About a fortnight ago, India shocked the investor community with a GDP growth number of 5.3%. Though everyone was expecting a slowdown, no one was prepared for a nine year low in the growth numbers. Therefore, it was not very surprising that nearly every major research house started to revisit their estimates for the economy. And they all started coming with their own 'new normal' numbers which ranged between 5 to 6%. The latest to join the bandwagon is Morgan Stanley. In fact its head of emerging markets, Mr Ruchir Sharma, has gone two steps ahead and has stated that the stellar rates seen in the recent past was a fluke.

In an interview to a leading daily, Mr Sharma has stated that the 8-9% GDP growth rates seen between 2003 to 2008 were nothing but a fluke. They were a function of global factors. The most important of these was higher liquidity. As most developed countries were printing money, a large part of this money had flowed freely into the emerging markets including India. This had led to an increase in the prices of all the asset classes leading to the kind of economic growth that we had grown used to seeing. However, in his opinion, this growth was not driven by the internal factors. Which is why, as liquidity has started to dry up, these emerging market countries are seeing their growths slow down. And therefore, India's growth would pretty much mirror its pre-2003 levels in the times to come. In his opinion, the only way to get out of this mess is for the government to introduce reforms at a fast rate.

We do agree with Mr Sharma on the need for speedy reforms. However, we do believe that the view being taken of India's above 8% growth rates being a fluke is a bit too pessimistic. It is true that government inaction and policy paralysis has hurt the economy. But stating that the growth rates were just a fluke is unfair. The companies have witnessed stellar growth in their revenues and profitability during the same period. India did see demand for its goods and services, both domestic as well as export, surge up during the same time. The thing is that India was on the path of growth. The reforms made earlier could drive the growth thus far. What is needed now is a boost for the next leg. And that would come only through proactive action and decision making by the government. Once that happens, we would go back to the above 8% growth rates that we saw in the past few years. The glitch is only for short to medium term. The long term story for our country still remains intact.