Has India lost its magic?

In the dark 80s, India was considered as a land of snake charmers and red tape. The outside world viewed it as a mystic land where doing business was not just unprofitable but also impossible. The 90s saw a sea of change with the dawn of the liberalization era. By the year 2000, India was the new hot centre for investment capital. Its huge population base was no longer scary but presented an attractive opportunity. Global companies were setting up shop. The economy started to grow at a gung ho pace.

But the fear at the back of the mind of every investor was how long will this continue? Come 2011, the magic seems to have fizzled out. Growth is back at sub 7%. The country is fraught with problems related to corrupt politics, reform paralysis, high interest rates, fiery inflation, etc. And all this has combined to hurt the economic growth. Not to mention that the government's indecisive policy actions have sent investors scurrying to the bushes. Bowing to coalition demands the government has rolled back more than one policy that was to the benefit of the manufacturing sector.

It is not just policy inaction that has hurt India. The government's concentration on populist reforms can best be described in one word- overkill. As a result important issues like public services, road transport, power are being completely overlooked. Let us not forget that these together form the backbone of any economy. To say that these are underdeveloped in India is still saying too much.

But the point here is that hasn't this always been the case in India? Were politicians ever honest? Were they ever looking at anything beyond vote banks? The answer to this is no. But even then India has managed to grow at a decent pace. This was largely due to the after effects of the huge reforms undertaken in early 90s. However, like all good things the effect of that has slowed down. What India needs now is the right kind of leadership to lead it in the next phase of growth. A leadership that is proactive and committed to the country's long term growth.

The thing is that India still has a lot of 'magic' left in it. The country has a healthy middle class that is driving consumption growth. It has a huge 'demographic dividend' which is willing to work and add to the growth of the economy. With the right leadership it can get back on track.

Gold still safe bet

Gold prices have seen a spectacular rally over the past decade. But in recent months, prices of gold have come down. This is due to the positive economic data coming out of the United States, which showed that the country's economic recovery is gaining momentum. This combined with a buoyant equity market and receding fears of European debt crisis has prompted investors to take money out of the bullion.

So, is the gold's bull-run coming to an end? Not according to Barclays Capital who sees this most recent sell off as an opportunity to buy the precious metal. They believe gold will head towards USD $1,850 per ounce due to inflation concerns and currency debasement. They also believe that lower Russian exports will lead to supply deficit in the market, thus pushing the prices of gold further north. Also, there is a possibility of further quantitative easing (QE3) by Federal Reserve which could also provide boost to gold prices

BRICS

Later this month, New Delhi is expected to host the fourth annual summit of the leaders of BRICS nations. For the uninitiated, the S in BRICS stands for South Africa, the other four being already well known we suppose. Coming back to the summit, looks like the group means some serious business this time around. Amongst the many ideas doing the rounds, the one that sounds quite promising is the idea of the member nations trading with each other in their own currencies. Clearly, the advantages of such an arrangement are manifold. It will make forex reserves more diversified. Not to forget the reduced dependence on fundamentally weak currencies like the US dollar and Euro. Lastly, any flight to safety movement will not have as adverse an impact on currencies of BRICS as it does now.

Well, the idea is indeed a sound one. But how about going one step further and having a common currency? If problems in the Euro zone are any indication, a unified currency concept should not be touched even with a six-foot pole. A unified monetary policy is impossible with member nations having diverse political as well as fiscal policies. However, moving away from the dollar and Euro and trading in each other's currencies does indeed look like an option worth exploring we believe

India's Oil Marketing Companies bleeding with losses

The Indian government is under pressure from oil marketing companies (OMCs) to raise the prices of petrol. The government had decontrolled petrol prices in June 2010. However, this was done only on paper. OMCs like Oil India, Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) still need Government's approval before raising petrol prices. Due to the state assembly elections, the OMCs were not able to raise petrol prices since December 2011, during which oil prices have increased by 11%. As a result OMCs are losing around Rs.4.86 bn a day on account of selling petroleum products at government-mandated prices. This trend cannot continue for long. The government is however still unsure of raising petrol prices and ruled out decontrolling diesel prices. OMCs would have to raise petrol price by about Rs 7.72 a litre to compensate for their losses. The government will have to bite the bullet on petrol prices sooner or later, otherwise the OMCs will bleed to death.

Planning for retirement? Read this

If you want to start planning for a retirement, there are options galore we believe. Every financial firm worth its name will line up a whole range of products to cater to this particular need of yours. And more often than not, stocks find themselves at the bottom of this pecking order. Conventional wisdom has it that stocks are risky by nature. Therefore, they cannot be relied upon to offer a regular stream of income once a person quits work.

The conventional wisdom has it wrong we believe. Although stocks carry more risk, not all of them are risky. Besides, even regular stream of income can be assured if the stocks under consideration are bought for their dividend income. Thus, a portfolio of stocks that is not only fundamentally strong but also throws off a lot of dividends can be one of the most effective retirement options out there.

But deciding to build a portfolio of dividend producing stocks in order to achieve full financial freedom is only half the job done we believe. Nothing can be more damaging than ending up with dud stocks and this is where the investor really has to be on its toes. Thankfully though, there are a few pointers that can prove to be of immense help.

A blog by the name of dividend growth investor has argued that only those companies should be considered that have a long history of paying and raising dividends. Not to forget that such stocks have to be bought at attractive valuations. The blog believes that paying a P/E of more than 20 for such stocks can prove to be risky in the long run. Lastly, the prospective portfolio companies should have a sustainable and a well defined moat. This point cannot be emphasised enough. A company with an eroding moat will soon be forced to either fully stop its dividend payouts or lower dividends considerably. Hence, this aspect has to be thoroughly looked into.

We are of the view that a well diversified portfolio of dividend stocks with the above characteristics in mind can prove to be your best bet for financial freedom and it can help you achieve this goal much earlier than imagined.

Concept of Petro dollar under threat

Saudi Arabia, being the largest oil exporter in the Middle East is bound to be awash with funds given the steep rise in crude prices. But wait! Here is another nation, which is leaving no stone unturned to claim its super power status. In fact it is ensuring in more ways than one that the US loses its most powerful nation tag. You may have guessed it right that it is none other than China. The latter is not just piling up its forex reserves. It is also pressuring the IMF to award Yuan the reserve currency status. But there is more to China's super power ambitions. Something that even the US seems unaware of!

As per a blog on The Economic Collapse, the Mandarin economy has teamed up with Saudi Arabia to undertake the building of a mammoth oil refinery. This mammoth new refinery is scheduled to be fully operational by 2014. The development is not completely out of the blue. Over the past several years, China has aggressively expanded trade with Saudi Arabia. In fact, China now imports more oil from Saudi Arabia than the United States does.

So why is this important?  Well, back in 1973 the United States and Saudi Arabia agreed that all oil sold by Saudi Arabia would be denominated in US dollars. This 'petrodollar system' was later adopted by rest of the world. However, the biggest beneficiary was the US as it immensely strengthened the US dollar. If China were to replace US as the key  determinant of oil prices, will the 'petro dollar' last long?  Well, we certainly see petro-Yuan on its way.

India solving Pakistan's gas problems

India might have slipped in managing fiscal deficit. However, nothing beats it when it comes to bridging trust deficit. As the neighboring country Pakistan reels under a gas crisis, GAIL, the biggest domestic gas player has offered a helping hand. The latter has come up with a proposal to export LNG to Pakistan. In the past, Pakistan has declined the proposal of import of liquid fuels from India as it could get a better deal from Gulf nations. However, it may be a different case this time. This is because gas caters to 53% of Pakistan's energy needs. The ongoing gas crisis has led to factory shutdowns, the impact of which is evident from country's export statistics. What makes matters worse for Pakistan is the lack of its own imported gas terminal and a long time needed to come with a new one. Hence, accepting the proposal will make economic sense for it.

As far as GAIL is concerned, the extension of pipeline to Pakistan needs minimum investment and the proposal may spin money for the company.  While we appreciate such confidence building measures, exporting gas at times when India itself is gas starved raises slight skepticism.

Indo-Chinese trade deficit

India's own economic goal posts may be well beyond her reach. But bring up any topic that undermines China's super power potential. The latter will certainly gather more newsprint and catch more eyeballs in India. In the same tone, speculations about China cannibalizing on India growth story attracts as much concern from policy makers.

Take India's growing trade deficit with China for instance. At an estimated US$ 27 bn in 2011, the deficit between imports and exports to the oriental nation is seen as an economic peril. The government is alarmed by the fact that India's overall trade defict has soared over the past decade. It went up from US$ 13 bn in 2000 to US$ 150 bn in 2011. At more than 6% of GDP India's trade gap is undoubtedly huge. The deficit has soared even as India has been the fastest-growing exporter among the world's top 10 economies. India's exports have in fact grown at the same rate as China's all this while. However, all our worries seem to rest with our export focused neighbour.

But the fact is that the deficit with China accounts for less than 20% of India's total deficit. Hence even if the trade deficit with China were to drop drastically, it would do little to improve the situation. In the bargain stopping imports of critical electrical machinery, nuclear reactors, boilers etc may hurt India's infrastructure dreams. Import prices for the Chinese products are more than 30% lower than that from suppliers in the US, Europe and Japan. Hence, Chinese companies have been the natural beneficiaries of India's growing appetite for capital goods. But curtailing Chinese imports completely could deal a heavy blow to India infrastructure outlay. Instead, demanding Chinese suppliers to set up manufacturing bases in India could be a smart long term policy.

Imported oil, gas, and coal are the major culprits for India's fiscal problems. These do not come from China. But from countries such as Saudi Arabia, Iran, Australia, and Indonesia. Fuel imports accounts for more than 65% of India's trade deficit. With lack of indigenous fuel resources, India's deficit problem is therefore here to stay. Distancing itself from China as a trade partner could only hurt India's long term economic goals. The government would therefore do well to focus on economics rather than external affairs when it comes to fiscal policy making.