Countries exposed to the Eurozone in 2012

                                                        Data Source: The Economist

Given that the Eurozone is down in the dumps on account of the severe debt crisis there, countries exposed to this region are bound to suffer as well. So it becomes important to note the level of exposure for each country. Today's chart of the day shows that Britain is most at risk since it has the highest exposure to Europe. In contrast, the BRIC countries fare better although they are not entirely immune from the events unfolding in that region. 

India's demand for gold makes US glitter

India's love for gold dates back thousands of years. The yellow metal has been the revered financial asset of the Indian people. And it continues to be so even today. The statistics say it all. 25% of the gold sold globally is purchased by India. As per a recent report, Indian households hold gold worth more than US$ 950 bn. The Indian government and the Reserve Bank of India (RBI) are not too happy about India's high  gold imports. This is because it adds further burden to India's already high current account deficit. But someone on the other side of the globe is all smiles. We are referring to the US and the other countries in the Americas. This region is set to become India's biggest gold supplier. There are several reasons why this is very likely to happen. Though China is the one of the biggest producers of gold, it uses a significant chunk of its production to build up its national reserves. Moreover, there are high entry barriers for private miners in the dragon nation. Ditto for Russia. Certain gold reserves in Europe are facing environmental hurdles. Other big producers such as South Africa and Australia are becoming unpopular due to high taxation and high cost of production respectively. That puts the Americas in an advantageous position. What favours this region even more is the fact that they hold the biggest share in the significant global gold discoveries between 1997 and 2011.

India lags BRICs in forex reserves

                                                                 Source: Financial Express

Forex or foreign exchange reserves are an important resource for the central bank of a country. It can be used by the central bank to help the domestic currency. When the domestic currency weakens in the international markets, the central bank could use its kitty of forex reserves to repurchase the domestic currency from the international markets. This can help in stabilizing the currency's value. Therefore, we thought of evaluating the position of India vis-a-vis its BRIC peers in terms of forex reserves. Interestingly, India lags behind all the other BRIC countries in this regards. It must be noted that large forex reserve balance can be used by a country to manipulate its exchange rates to provide itself a more favourable economic environment. Something that China has been accused of by other developed nations. And with a reserve in excess of US$ 3 trillion, it is quite understandable as to why it has come under the firepower of such accusations.

Govt targets skill building to reduce youth unemployment

While there are several macroeconomic issues plaguing the Indian economy, there is one very pressing concern that needs to be attended to with utmost urgency. Or else the long term ramifications would be disastrous for the country. We are referring to nothing but education and skill training. The statistics will tell you why we cannot afford to ignore this sector. Of India's 1.2 bn population, 65% is under the age of 35 years. And in fact, 54% of the population is under the age of 25 years. It must be noted that in both- absolute and percentage terms- these numbers are the highest. In other words, India is set to have the highest working population in the coming times. A huge work force bodes well for the economy. But only if it is educated and skilled!

Though India's enrolment rate is robust at 96% for entering primary schools, the story then on is not very encouraging. Only 20% of the population tends to complete primary education. The number for secondary and tertiary education dives down to 1.3% and 3.1%, respectively. The gross enrolment rate of 13.5% for higher education is among the lowest in the world. This means that a huge chunk of young populations enters the workforce with poor education and skill sets. How can such an unskilled workforce translate into a democratic dividend? It is because of these reasons that in recent years, policymakers have started laying great emphasis on education and skill development. The National Skill Development Mission (NSDC) has set a target of skilling 500 million people by 2022. This is indeed a mammoth task and will require public-private partnerships. Due to the large-scale poverty in the country the government has made education free, a constitutional right. Though the government spends about Rs 5,000-6,000 per student for 10 years or more, an additional amount needs be spent on skill development. This could help make many unemployed youth employable.

Real threat of a hyperinflation

If people start losing confidence in the future purchase power of money, they tend to switch to real assets. This causes increases in asset prices. In other words, the purchasing power of money declines. Noticing such a trend, other cash holders may also panic and flock towards real assets. When such a self-reinforcing cycle sets in, it leads to hyperinflation. It must be noted that hyperinflation is not really a very rare event. It has struck various economies in the last century. Some remarkable instances would be Germany in the 1920s, Hungary after World War II and more recently Zimbabwe in 2008.  

What are the usual conditions before an economy is hit by hyperinflation? As per an article in Zerohedge, one condition is government deficits in excess of 20% of government expenditures. Which are the countries that make it to this notorious list? The five countries that make it to this list are none other than India, the US, the UK, Japan and Spain. But Japan seems to be at relatively lesser risk given that it is a creditor nation and not a debtor nation. Even Spain, which is part of the Eurozone, cannot trigger a hyperinflation on its own because it doesn't have its own individual currency. So the only prospective hyperinflation candidates are India, the US and the UK. Where disaster strikes first is for everyone to wait and watch.

Mobile penetration:India's impressive jump

                                                                   Source: World Bank

Can you tell which invention has had the biggest impact on human population in the shortest period of time? As per World Bank, the invention is none other than mobile communication. In its latest report, the global institution has argued that the number of mobile phones in use has skyrocketed from less than 1 billion in 2000 to 6 billion in 2012. What more, the developing world today is more mobile than the developed world as it bypassed other communication devices to jump straight to mobiles. Today's chart of the day highlights the growth in mobile penetration of the BRIC nations, indeed showing how fast the growth has been. While India has amongst the lowest mobile penetration currently, it does boast of the fastest growth rate during the period.

Drought not the only threat to food prices

Rain Gods have been instrumental in stimulating India's GDP growth since ages. The economy is now no longer agrarian. However, India's inflation still gets squarely impacted by the rise in food prices. That in turn has a spillover effect on the economic buoyancy. But it seems the mercy of Rain Gods or the lack of it can no longer be indicative of rise in food prices. Forget India, not even in the US.

Like in several states of India, including Maharashtra, it seems a crippling drought has impacted farm produce in the US as well. It is said to be the worst since 1956. Crops like corn, wheat and soybean, that are widely consumed are the worst affected. Economists believe that some farms may have no produce at all. But with a sturdy irrigation system, the US may be able to tide over the drought problem in a much better manner than India. Having said that, drought alone is not the reason for spiraling food prices. And we completely agree with Jim Rogers when he says that there are plenty of factors that will make food crops dearer. Not just in India, but world over!  But what could be a bigger reason than drought?

Less farmlands and lesser farmers! Farmlands are increasingly being acquired for industrial and residential purposes. With farming no longer remaining an occupation of choice, the existing farmlands also remain uncultivated. Moreover, farmers prefer to cultivate cash crops that are more remunerative. In the bargain the supply of food grains is dwindling by the year.  Meanwhile higher demand and improved purchasing power does not help either. The rising demand supply gap in food crops is expected to stoke food prices higher, even if there is adequate rainfall. But we are not sure of Rogers' suggestion that investors should hoard agri commodity derivatives in their investment portfolio. For we believe that speculative trends could only worsen the problem of rising food prices.

Wheat topped commodity gainers year to date

                                                       Data source: Business Insider
                                                          Data as on 30th June 2012

While commodities have been a favourite investment bet over the past year, not many have yielded sizeable returns for investors. In fact as against popular perception, precious metals like gold and silver were not the top gainers. Nor were key industrial metals like copper and aluminum. On the contrary, food grains like wheat and corn saw the maximum year on year rise in prices. We will not be surprised if rising glob al demand for food products coupled with speculative interests, cause food commodities to move into unchartered territories.

Monsoon forecast has industry on tenterhooks

Typically during this time of the year, what do you think has always been the biggest worry for India Inc? It is certainly the rains. And this year too it has been no different. Thus, the whole of industry is on tenterhooks and is keenly watching the progress of the monsoon as it enters a crucial phase this week. Needless to say that different sectors are trying to deal with the situation in their own unique ways. Thus, while the white goods sector plans to come up with new schemes, FMCG companies are trying to put a lid on price increase. 


Then there is the automobile sector that is having a wait and watch approach. Banks too are in no mood to press the panic button and are of the view that it may be too early to take a call. Whatever may be the stance adopted by different sectors, one thing is clear that even after so many years, a prospect of poor monsoon still sent shivers down the spine of India Inc. We wonder whether this dependence will ever go away. 

India's trade deficit with China

Both China and India are low cost destinations for products. Both nations employ their billion strong workforces in order to produce goods at competitive rates. But, while India sources a number of goods from China, the dragon nation seems to mainly import raw materials from India. India's trade deficit with China increased to almost US$ 40 bn in FY12 from just US$ 9.1 bn in FY07. This deficit may even soar to US$ 60 bn, if India doesn't try to improve the situation. The Indian commerce and industry ministry is desperately sending delegations to China every month in order to peddle more value added products to the nation. However, it may not be very easy to enter the Chinese market. It will take some time before India can bridge the wide gap. Plus it is not the only nation trying to enhance exports to China. A number of nations are trying to penetrate the market and try and reduce China's upper hand with regards to world trade. This makes India's task all the more chal lenging. 

Such investors could make FIIs worthless!

It is not easy to be greedy when others are fearful! Ones that manage to stick to their conviction certainly make a killing. Going against the opinions of Mr Market time and again is what it takes to be a truly successful value investor. But unfortunately, in stock markets like one in India, it takes more than fundamentals and valuations to score well. Particularly in the short term. For foreign investors playing the cheap money - high returns arbitrage control most of the market liquidity. And every time there is the slightest hint of short term uncertainty, they prefer to withdraw. It is therefore not uncommon for even the most astute investors to find their portfolio in the red in the short term. Stocks bought at unbelievable valuations head even lower. Ones sold at lofty prices often tease investors by going even higher. But those who can avoid a panic attack from these gyrations can truly savour the fruits of patience in the long term. That makes us wonder how wonderful would it be if Indian markets could rid themselves of the foreign institutional investors' (FII) whims and fancies altogether!

Some of our homegrown institutional investors have not always been at their best and most prudent behavior. Reason being many of them are government controlled. And the government's political interests are not always aligned with economic interests, as we all know. Hence every time we come across a shrewd move by any of the large domestic investors we are nothing but delighted! Take the case of Life Insurance Corporation of India's (LIC). The insurance giant has billions at its disposal for long term investment. But rarely does it show the astuteness that it did yesterday. LIC purchased Rs 20 bn worth of shares of software behemoth Infosys right after the stock crashed post a disappointing result announcement. Now buying a fundamentally robust and extremely well managed entity at a time when Mr Market is fearful is laudable. The fund managers at LIC managed to shut out all the noise with regard to Infosys' delayed hiring plans. Instead they focused on whether the company is capable of yielding safe and handsome returns over the long term.

We only wish that LIC acts more often like this whenever the FIIs play truant. Also having more entities like LIC (pension funds etc.) could make FIIs worthless to Indian markets altogether! We know that this is wishful thinking for the time being. But if the government is keen to make Indian capital markets more investor friendly, having strong domestic institutional investors is paramount. Not only will it bring in some resilience in the capital markets. But it will also give confidence to retail investors about their decisions in value investing.

Poor correlation of rainfall shortage to inflation

                                                               Source: Economic Times  

Inadequate and uneven rainfall is one of the biggest worries for the Indian government these days. For critics are already predicting spiraling inflation going forward. If the Rain Gods do not get generous soon, experts believe that supply shortage could take inflation to new highs. But as data from the past shows, there has not been a very strong correlation between rainfall deviation and inflation, against popular belief. In fact even in years of adequate rainfall, prices have risen due to unrelated factors. Thus instead of staring towards the skies, our policy makers would do well to undertake policy measures that would persistent inflation

Is this India's most undervalued firm?

Mention the word sovereign bonds and chances are that countries like Greece and Spain would shudder with fear. After all, it is these very instruments that played a pivotal role in their near-bankruptcy like experience.  That sovereign bonds held by foreign investors are the ultimate weapons of destruction is not something that has been brought to light recently. For as Ajit Dayal, our founder, explained in his latest web summit, nearly every country that has gone bankrupt over the past few decades had its downfall engineered mostly by sovereign bonds that were held by foreign investors. Clearly then, the flotation of a sovereign bond overseas does carry a great deal of risks.

This is not all. As Ajit rightly highlighted, the rampant speculation in these bonds has the potential to dislocate the entire cost of capital structure of an economy. And lead to wild fluctuations in currency as well as GDP growth. Is it any wonder that despite intense lobbying by banks and Wall Street firms, India's central bank has chosen not to issue sovereign bonds to foreign investors?

This is not the first time though that the Reserve Bank of India (RBI) has come to the rescue of Indian economy. Time and again, it has played the role of a responsible monetary authority to perfection. But does it get all the accolades it so richly deserves? We do not think so. Infact, at times, it is the subject of unnecessary criticism. Take the recent case of the central bank receiving flak from corporate India for not lowering the interest rates. We liked immensely the attitude of the RBI of not bowing down to corporate pressure and instead, going strictly by rule book. Clearly, if there is one truly undervalued and underappreciated firm in India out there, it has to be the RBI we believe.

Do the rich in your country deserve their wealth?

                                                                Source: The Economist

Do the wealthy people in your country deserve their wealth? Or have they acquired it through ill-gotten means? This is a question that The Economist posed to a group of respondents in each country and their answers form the subject of today's chart of the day. As per the survey, nearly 60% of the US respondents feel that the rich in their country do deserve their wealth. So much for the intense debate around the rich poor divide in the country. In India too, with 50% people voting in favour of the rich, the percentage is not bad either and with China is the highest amongst the BRIC group of nations. Reports of there being Oligarchy in Russia gets further affirmation in the form of merely 16% respondents there believing that the rich there do indeed deserve their wealth.