Will FDI help sinking airlines sector?

One look at the Indian stock market and you will know how relieved investors are with the government's baby steps in ushering reforms. Even ones like FDI in aviation, which is unlikely to bring in economic benefits for a very long time to come. For one, aviation turbine duel (ATF) in India is expensive. This means there is no cost advantage for even a well-funded global airline which might want to operate in the domestic sector. That apart, most Indian airline companies, particularly the listed ones, are in a bad shape financially. To top that, the sector faces numerous structural challenges. Not that every foreign airline is a welcome suitor. But ones that can compete effectively in Indian market have very few choices amongst incumbent players. So it will be quite a while before the FDI policy in aviation endows the sector with any riches. Meanwhile the ailments of the sector are yet to find some cure.   

Is India the next Greece?

Since the dawn of the financial crisis in Europe, there is one name that has been talked about over and over again. It is that of Greece. The Mediterranean country has become an example of how spending beyond your means can lead to just one thing. Financial disaster. A disaster that has sunk the entire Euro zone into recession. Unfortunately unless India mends its ways, it is headed in the same direction. The country has a ballooning fiscal deficit. In the absence of policy reforms, this is all  set to keep increasing. And eventually lead to India's downfall. 

This is the opinion of the head of HDFC Bank, Mr Aditya Puri. He opines that India's government inaction is going to lead it on the path of a financial disaster. In his opinion all that the government is doing is playing the blame game. Each political party is blaming the other for inaction and corruption. Unfortunately this has taken away their focus on the core issue of running the country. Mr Puri feels that if each and every government official just did his job, then India is well poised to be a shining star in Asia. 

And there seems to be quite a bit of logic in this statement. If we look at the other countries in the region things are not so bright. China is going through a slowdown. Korea is not doing too well either.  As a result, India has a great opportunity to emerge as a star. But the government inaction and lethargy is pulling it back. In Mr Puri's opinion there are some crucial areas that the government needs to work on. These are addressing the fiscal deficit, solving the coal issue, transparent and clear policies on land acquisition, mining and environment. And improving accountability and governance in government and public sector undertakings. Once action is taken in these areas, things are expected to improve in all likelihood. 

Though it is important to note that India's high domestic savings and consumption rate makes the economy far less vulnerable than Greece. Hence, investors should not be alarmed by Mr Puri's observations. However, there is no doubt that the government must act fast to respond to the economic crises. This means that they need to stop humiliating the nation by stalling parliament sessions and taking a jab at each other in the media. Instead doing their work like Mr Puri suggests would be a better idea. But are they willing to do this? We hope they do

Is this how the global debt problem will end?

A fundamental question to begin with. Is the concept of debt a good concept at all? Well, since it is in existence for thousands of years, it does sound like a concept that has stood the test of time. However, what has happened is that time and again, it has been carried too far. And any idea, no matter how good, can cause problems when carried too far.

Something similar seems to be happening to most developed nations around the world. Initially, most of them did use debt intelligently, thus enabling their economies to grow faster than what could have been possible without debt. But as Warren Buffett points out, leverage or the use of debt is highly addictive. And once someone profits from it, going back to more conservative practices becomes very difficult for that person.

As is often the case, Buffett was bang on. No sooner did the western Governments profit from the wonders of debt; it became extremely difficult for them to turn conservative. And the end result is for all of us to see. So mired is the developed world in debt that there has perhaps never been a more uncertain period in the history of the global economy than now.

However, a lady who answers to the name of Philippa Malmgren and who's also worked for the White House as an economist has made an attempt to lift the fog of uncertainty that has enveloped the global economy. Her prediction though is not for the faint hearted. She has argued that the vast majority of debt in today's world is almost impossible to be repaid. As per her, there seems no other choice than to default. However, what even she is unclear about is the manner in which the default will take place.

Will the Governments just wake up one day and say that we will not be able to pay back all our debts? Or will it say that we will pay you back but you may have to take a bit of a haircut? Then there is default by way of inflation which the Governments can deny all along until it becomes too obvious to be denied anymore.

Well, even if we don't know which of these routes the Governments will eventually take, a couple of things cannot be denied. First, the fact that until the debt problems are sorted out, Government bonds and currencies will be a bad place to park one's hard earned savings. And secondly, since fiat currencies will be in great risk of losing their value, it may not be a bad idea to make gold a decent part of one's portfolio. Agreed that it has had a strong run up, but as long as the policymakers continue to grapple with the problems of debt, gold may continue to inch steadily upwards.   

European Union (EU) is submerged in a severe debt crisis

The entire European Union (EU) is submerged in a severe debt crisis. Many steps, including the current unlimited bond buying program, have been taken by the European Central Bank (ECB) to come out of the debt trap. But the results are far from satisfactory. In such a scenario, where survival is difficult can EU attract new member nations to its territory and save the Euro? 

For that, first we need to understand the benefits of joining EU. Becoming EU member would attract investment from other member nations. It can also stabilise the banking industry as support from ECB is at hand. By joining euro zone the small economies would tend to become more stable and would be eligible for lower interest rates. However, becoming a EU member also has its drawbacks. Once a country enters Euro zone capital becomes cheap so there is a tendency to accumulate debt. And that's where the problem begins. Portugal and Spain are prime examples to that. However, some like Poland and Czech Republic which are part of EU but have flexible currencies are in a sweet spot. They get all the benefits of being a EU member but are saved from the massacre of Euro. Also, notable is their low debt compared to other member nations. Thus, curtailing debt and flexi currency is the mantra for survival in this environment. 

Will the regulator bend rules for this ailing airline?

Financial health of a company is important when it comes to stock investing. But it is equally important when it comes to doing business with a company as well. However the question here is that is the financial health of a company important when it comes to using its services? And what if the services being offered are flying you to your destination? In our opinion, it is of utmost importance. Because if a company's financials are terrible or it is down in the dumps, then how would they ensure the safety standards? Well as per a leading daily, the regulators do not seem to think so. The airlines regulator is of the opinion that there is no reason to suspend the license ofKingfisher Airlines. The company is deep in red. It has reportedly not paid its pilots. Its problems are printed in every other newspaper. But as per the regulator the company is maintaining the minimum number of flights and is adhering to the safety standards as well. The thing is that there is a set of standards called civil aviation requirement or CAR. And financial health of the airlines is an important part of this. However, either the regulator is ignorant of this standard. Or it is bending the rules for Kingfisher Airlines. Why? Well only the regulator can answer this question. 

Poor governance costs India its competitiveness

"India shining". This used to be the title of most presentations made by business houses and financial institutions. Everyone used the phrase to showcase the positives of investing and doing business in India. And we are not referring to something that is ancient history. This phrase signified India just a few years ago. In the year 2009, India was ranked at 49th place by the World Economic Forum in its Global Competitiveness Report. 

But just 3 years on, things have changed. India has now slipped to the 59th position. The reason - poor governance and policy paralysis. The hoards of scams and negative reports have hurt the global picture of the country. At the same time the policy paralysis that seems to have a firm hold on the economy, has hurt the business sentiments. To add to this is the 'business cost of terrorism' due to the security risk. The only thing that seems to have come to India's saving is its sophisticated financial markets. If not for that, India's ranking would have been even lower. 

Ignore economists. Ignore the central bank. Ignore rating agencies. But how long will the Indian government manage to ignore every finger being pointed at the messy state of affairs? Steep inflation, current account deficit, fiscal deficit are just a few of the macro economic factors haunting India for long. But there are some grave ones like the debt to GDP ratio in India exceeding 90%. 

Undoubtedly with policy logjam and shortage of critical resources, it is rather difficult to buy into 'India story'. Especially if someone is hoping for a quick turnaround in the situation. We are therefore least surprised by the comments of Jim Rogers. In an interview to Business Standard, the well known investor has said that he is no longer "a fan of India". In fact that he is also short on India. 

We do not blame him for the pessimistic view as anyone looking for short term gains from India is bound to be disappointed. All that we hope for is that the government should not spoil India's long term prospects completely. 

Are you betting on the end of the China's growth miracle?

Are you betting on the end of the China's growth miracle? If you are, then an article in Business Week advises you against it. And it offers the age old argument to support its case. The productive capacity of a nation does not lie within its natural resources. Nor does it depend on the nation's location on the map. At its core, it is a function of nothing else but the skills and size of the workforce and also the country's accumulated intellectual and physical capital. 

And Business Week takes the support of these very arguments to present its case. It opines that the shift of Chinese labour from agriculture and into manufacturing and services could alone account for 30% of the country's continued growth. And then there are the considerable opportunities to increase labour productivity through education. Thus, by 2025, the dragon nation will have to reach levels of university enrolment similar to those of Western European nations. And this might alone add more than 6% to growth rates. 

Well, there's no arguing that the route suggested by the business magazine is certainly the right one. But theChina of today appears ill equipped to go down this path we believe. Its growth up to this point has come about mainly due to infrastructure spending and thrust on exports. But to move into a still higher orbit, it may have to completely overhaul its present way of functioning. And how the dragon nation solves this problem will ultimately decide its fate over the next few decades. 

Indian auto as well as the auto ancillary industry

Things are not looking particularly rosy for the Indian auto as well as the auto ancillary industry. As inflation has stayed firm, the central bank has not been enthused about cutting interest rates. Thus a combination of high interest rates and steep rise in fuel prices has played a hand in dampening demand. Companies have also been facing pressure on the margin front. This is due to rising raw material costs and steep rupee depreciation. Plus, the market leader Maruti Suzuki's troubles at the manufacturing plant at Manesar have only piled on the woes. 

But despite these near term headwinds, auto companies have not really cut back. They have been investing to keep up the pace of new product launches. These developments will be mirrored in the performance of auto ancillaries as well. The sector is cyclical. So, despite some near term hiccups, the long term story remains intact as the government lays emphasis on ramping up infrastructure (especially roads). What is more, the Heavy Industries Minister Praful Patel also holds a favourable view on the sector. He expects the auto as well as the auto parts industry to touch US$ 145 bn by 2016. 

ILO believes youth unemployment getting worse

As the global economy continues to slowdown, things are getting worse for nearly everyone. Irrespective of their age, religion or nationality. But the generation that seems to be bearing the maximum brunt of it is the youth. As per the International Labor Organisation (ILO), the unemployment in the age group of 15 to 24 years is getting worse. It is set to increase to 12.9% by 2017 from its current level of 12.7%. 

The problem is that even if the global economy accelerates, these youth may not find a job soon enough. As a result, unemployment rate would continue to be high. Considering that this is the generation that will spearhead future economic growth, the unemployment rise is a serious concern for all countries. As per ILO, the only way to resolve the situation is through global policy reforms. Reforms that would drive growth in every economy. That is the foundation for long term sustainability.