ABOUT ECONOMICS

Taking Economics to Next Level

2011-10-24T08:32:00.000-07:00

In my last post we had discussed about the meaning of the economics. This post will take it up to its next level, where we make the readers introduce to the two broad divisions of economics. Microeconomics and Macroeconomics.

ICICI Banks net profit for current quarter increased by 40% , Production runs at Tata motors plant to get reduced in the coming year , Indian steel industry aims to boost investment in new plants in the current year. All these statements mentioned either talks about one company or one Industry in relation to company or industry product prices, cost, production or investment. Broadly Microeconomics is the study of individual behaviour of company, industries or consumers in terms of their interaction with each other in market. Micro conics is concerned with how decrease in price of Maggie or LG television discount sales will affect the buying behaviour of consumer and how competitors will react to this decrease in price of Maggie or LG television sets .

India Gross domestic product forecasted to be 8% for the next financial year. To tame the on-going inflation RBI has hiked the interest rate from 50 basis points, Aggregate production level has shown consistent decrease in the third quarter of 2010. All the above statements have one thing in common i.e aggregate level of prices , aggregate interest rates , aggregate production, which represents the economy as a whole rather than a consumer , company or industry. A study of aggregates is called as Macroeconomics. For eg. Comparison of GDP of GDP of emerging economies like China and India is macroeconomics.

In recent years the dimension between microeconomics and macroeconomics have reduced to great extent . For e.g taking the example of GDP comparison of China and India , before we can the compare the GDP of two countries, the prerequisites to these is understanding of firms , consumers , workers and investors of these countries. Macroeconomist are nowadays concerned with microeconomic foundation of aggregate macroeconomic phenomenon. Therefore a manger who needs to decide on the price of the new small car manufactured by his company needs into take consideration the study of his company , automobile industry , consumer behaviour , competitor pricing as well as aggregate income and income of the population of the country as a whole. Therefore both microeconomics and macroeconomics become essential to set up the pricing strategy of the company

Economics

2011-10-24T08:26:00.000-07:00

Introduction to Economics

In order make this initiative successful let us begin this journey by introducing what is economics.

Before economics help make this start let me assure you that, the blog will not define economics in bookish language but will try to give you an insight that how this economics is useful in our daily life.

Idea behind this learning is that after reading, reader is able to relate to this vision from a point of view of a household, a manager working in a company, a bank manager, CEO of an MNC or may be a Finance Minister of India.

Economics is usually associated with words like

E – Equal ,

C – Choice ,

O –opportunity ,

N – next best ,

O – optimum ,

M – monetary ,

I – insufficient

C – cost

S – Scarce

These are some words which everyone of us use in our daily life and that is what economics associated with OIKONOMOS ( in greek it means who manages a household). As a household we face many decision such as , how much and what to buy , what to cook and not to cook, how to utilize all ingredients efficiently .

Similarly a manager in a FMCG company working at an operational level has many such decisions to make , like how many bottles of shampoos to be produced , whether 200 ml or 500 ml , whether to produce more hair fall protection shampoos or dandruff protection shampoos .

A financial Manager might be trying hard to decide in the beginning of the month whether to put his client funds in stock market or debt market.

A marketing manager while deciding the allocation of salesmen in different territories is in a fix how many salesmen in a territory to get highest sales revenue.

A CEO of a hospital who needs to decide whether to build neonatal care facility or not.

Government needs to decide whether to invest more in agriculture or industry or services.

In all the above examples thing come out to be common is , making a choice between two or more alternatives. Why one has to make alternatives? The answer is Scarcity.

In order to implement all the above examples, one requires the use of various resources in term of material for cooking, raw materials to manufacture shampoos, funds or money to invest and government needs to check the availability of land and labour. All these resources used for different activities are limited in supply. Due to this scarcity of resources the decision maker resort to only left one method of making choices which in best terms utilizes all these resources.

Therefore economics is a study how society, household , government , a manager manages its scarce resources in making decisions.

Key Words : Resources , scarcity , choices

New : About Economics

2011-08-14T05:16:00.000-07:00

Hello to all

About Economics would like to thank all readers , to give it a good response to information shared by the blog.

The blog will again be coming up with lot of information for you all.

Blog will be upgraded with new terms and terminologies to share the applications of Global Economy and Financial world.

About Economics will now be starting to build a glossary of all possible words and week by week the blog will update you with new terms with simple language.

Apart from that blog will revive its latest economic news and other sections.

New thing which blog introducing is readers choice : Readers can ask questions related to economics , finance any aspect the blog will answer to all queries.

Looking Forward for your response

You can mail your queries at : bhumika4@gmail.com

Enjoy Reading

Protect from Protectionism

2009-04-24T01:09:00.000-07:00

Virus of global meltdown has made world to dance over its tunes. In amidst of all this, western countries are resorting to an antivirus called “protectionism” to fight this financial meltdown.

Before going into gist of this post, Lets have brief look on Protectionism:
According to Wikipedia : Protectionism is the economic policy of dampening trade between states through methods such as tariffs on imported goods , restrictive quotas and various other government restrictions aimed at discouraging imports and prevent foreign take over of local markets and companies. In short it is the opposite of free trade and globalization.

History
Being the” super power”, all good and bad things related to world economy are initiated by USA. In one of my earlier post “fight of words: R vs. D” I had mentioned about Hawley –Smoot Tariff, which came into forth during times of great depression of 1930’s. As business were slowing down in order to protect its own industries American government created “Hawley –Smoot Tariff in 1930’s , which meant to charge high import tariffs on imports , this led to deterioration in global trade leading to economic retaliation.

Present situation
Free movement of goods and services across nations was one common link on which all economists since World War II had agreed upon. Current crisis have hiited so hard that western nations: the leaders of globalization and free trade, are spreading a new wave of isolationism.
With Barrack Obama admistration coming with a stimulus package of $ 800 billion which contains a clause “Buy America” has led to agitation among other economies. This “buy American clause which has taken heap all over imposes restrictions on use of non- American material in all public work programmes that will be funded by stimulus package. Similar sort of protectionist policies are also be followed in Britain with government infusing funds in banks to keep them solvent and insisting that funds to be used nationally.

This sort of protectionism will have adverse impact on world trade. For short term countries mite benefit from such measures but in long run this would impede their global competitiveness. Protectionism will increase cost of production and will result in inefficient allocation of resources. End result of such a policy would be only benefit incompetent industries which can’t compete at international level, whereas efficient industries will loose the most out of them.
For instance it mite be the case that, that steel, cement manufacturers may benefit from the “buy American” clause but technology sector which consists of biggies like Microsoft, Intel, Apple, General Electric and so on will take a back seat if in retaliation countries like China, India and other emerging markets who have trade relation with America impose tariffs on goods produced by these companies.

In comparison to 1930’s protectionist policy, present day policy is more discerning. Though in current slowdown fewer tariffs have been raised, but modern protectionism comes with tighter licensing requirements, import bans and anti dumping measures. Rich countries have played clever by introducing discriminatory procurement provisions in their fiscal stimulus bills and offered subsidies to ailing national industries.

International trade has covered a long journey from 1930’s period to current day crisis. And we all believe that world has less to fear from protectionism in present times. Over the period a strong safeguard system in terms of international agreement has been built which maintain tariffs in limit. The global supply chains which have integrated national economies together tightly have made it difficult for government to raise tariffs without harming producers in their own country. However these safeguard systems may fail when there is intense use of anti dumping, use of domestic subsidies and other kinds of swarming protection. Most of the countries are in position to raise tariffs as their applied rates are below maximum allowed by WTO commitments. They may tend to do so on risk of disrupting the global supply chains.

U- Turn of Globalization

It’s a well known fact that slowdown in trade is result of ongoing global recession. Even in earlier slowdowns trade has fallen on account of slowdown in demand , but current downfall in trade is arbitrary i.e. that though trade has fallen in volume , the striking feature is that it has depressed on account of falling prices and stronger dollar.

Most economists argue that tremendous growth in global supply chains is responsible for such fast dropdown in global trade. It means that countries not specialize in final products but in products used in process of production. For e.g. in earlier times truck made in America which had used American steel and parts would enter trade data only it was exported. But now if that truck uses Indian, and processed in other country then slowdown in demand in America would effects its counterparts also.

Therefore in this sense Buy America clause mite turn out to be bust for American economy. For instance if take a look at auto sector. The American government is working hard to provide big stimulus to save its auto industry. However most of these manufacturers have global businesses and to protecting an automobile company in one country would affect its operations in others as well. For e.g. if us government did not provide any rescue package for general motors its worldwide operations, including business that it outsources in India, would be affected.

Therefore the it mite be the case that in era of global supply chains in international trade , this rescue plan of America mite turn out to be another problem for them.

Curse of Indian SME’s

2009-03-28T00:55:00.000-07:00

Over the years Indian Small Scale Sector has been able to create a significant position for itself in the Indian industrial economy. By employing around 28.3 million people it becomes the second highest source of employment in India. Apart from this it accounts for 49% of overall exports.

SME’s in India are dominant in sectors like textiles, chemicals, auto components, leather and machine tools. With the current slowdown mounting, this sector scores high rank of coming into its grip. This is evident from the fact that despite of 2 fiscal packages announced by government and easing of interest rate by RBI to infuse much needed liquidity in this sector banks are still hesitant to lend them due to their low creditworthiness.

Let’s look at the better picture of it:

Leather Industry
For instance let’s look at the case of leather industry; this sector was registering growth of about 20% in second half of 2008 but got crumpled by global slowdown. The main reason is accounted as slowdown in orders from western markets like UK & USA. The European Union and US markets contributes to about 25% to 65% of Indian export revenue.
Apart from this competition from china is becoming tough as Chinese government helping them to follow aggressive export policy which in turn helping them to bag more orders. If such scenario continues it is estimated that about 2-3 lakhs of jobs will be lost out of 25 lakhs of total workers employed and number can further increase.

Small service industry
In this aspect there is one interesting example to watch out; we all know how radio cabs industry has gained momentum in past few years. Estimates show that chauffeurs use to earn around 15000 per month around few months back, but with downfall in business their incomes have scaled down to 3000-4000 per month. This drastic decline in incomes of these chauffeurs is due to decline in number of duties on daily basis and burden of daily subscription of Rs 700 which is mandatory for them to pay.
If we need to check out an example of particular industry this one I Found out in one of the newspapers was of Chakradhar Chemicals Pvt Ltd, a medium-sized 13,000-tonne capacity micronutrient fertilizer company based in Uttar Pradesh. Company employs around 70 people and has been hard hit by rising cost of raw material and transport while salary expenses have increased by 16% on year-on-year basis.

Textile Industry
If we go 2 years back i.e. around 2007 Indian textile industry was on brink of rapid growth. However in present day the industry is pleading for urgent help for its resurrection. India is the world’s second largest exporter and consumer of cotton. In past few months cotton prices have surged nearly by 30% which has wiped of the demand for cotton textiles and garments from international markets. This has resulted in workers of textile industries to go for forceful voluntary retirement.

As discussed above major demand for Indian textile comes from US and Europe, with these countries battling the slowdown demand has been completely wiped of, this is despite of rupee depreciation, which is beneficial for exporters.
Numerical estimates show that Indian exports declined from $3.9 billion to 3.8 billion from the month of January to August, which was before US meltdown in September. The overall drop in value terms was 1.6 percent, with the drop in exports of garments a much higher 4.8 percent. The situation has worsened; total output of the textile sector has dwindled down to 10%. Study conducted in November by the Federation of Indian Chambers of Commerce and Industry (FICCI) pointed out that investments in the textiles industry were falling and so was its profitability.

I figured out few examples which have been hardly hit by this recession. While traveling by train in state of Punjab , as soon as train arrives in city Ludhiana , the recorded voice says city’s textile industries contributes about 80% of the country’s wool production. However but present day situation is different , most of the garment companies in city have suffer losses more than 50% over the last year , which creates 4,00,000 jobs in Ludhiana itself.

Remedy for This!
According to estimates of ASSOCHAM (Associated Chambers of commerce and industry of India) the SME’s were becoming tender during its first quarter with both manufacturing and hiring dwindling down to 10% and 7% respectively.

Therefore need of the hour is to restructure loan repayment plans for textile companies. According to most of the experts the medicine which can heal this bruised industry is easier terms for bank credit and reduction in taxes for textiles.

Let’s hope the new government which will form after upcoming general elections provide some respite to this beated down sector

Perspective of Fiscal Multiplier

2009-03-20T04:44:00.000-07:00

Though we are in amidst of a severe financial turmoil, but this gives us opportunity to learn the working of various concepts of macroeconomics in reality , which we have always studied in books. One of such interesting concept which strikes my mind recently was how is fiscal multiplier working when governments of all countries are resorting to massive bailouts.

Let’s first have a brief look on concept of fiscal multipliers:
According to Wikipedia Fiscal Policy Multiplier refers to the idea that the initial amount of money spent by government leads to an even greater increase in national income. In other words an initial change in aggregate demand causes a change in aggregate output for the output that is multiple of the initial change.

In view of government bailouts, where government is trying hard to provide stimulus to their respective economies in order to increase aggregate demand, we need to analyze role of these fiscal multipliers.

As we know major fiscal policy instruments are government spending and taxation, which impact aggregate demand, resource allocation and income distribution. In current slowdown when worldwide governments are resorting to excessive government spending in order to raise demand, multiplier effects of spending on economic output turns out to be small.

First lets analyze the case where fiscal multiplier is 1, what does this imply- this simply means that an increase of one unit in government spending will lead to an increase by one unit in real gross domestic products (GDP) .Therefore , added public goods are provided free of cost to the society. This outcome is no magic but optimal utilization of resources like labor and capital, which add to production of more good and services.

If multiplier is greater than 1 , ( multipliers via government spending range usually between 1.5 to 2 ) in this gross domestic product rises more than government expenditure. Thus we have additional goods and services which give the room for to raise private consumption and investment.

Historic view
We all know about the great depression of 1930’s, it was the time when the Keynesian tonic was applied to the much damaged US economy. It is much evident from past experience that government spending is linked to overall business fluctuations in the economy. In times of World War II enormous fiscal expansion was done in terms of increased defense expenditure, which led to freedom of global economy from grip of great depression. This in turn proves the existence of large multipliers.

But going by studies of economists some flaws of Keynesian theory come to highlight. According to them the increase of US defense expenditure led to a large multiplier of 0.8.However if we analyze it the other way round, it gives us a very practical and real picture. Accordingly, the increase in war expenditure led to erosion in other components which comprises the GDP. There was massive down surge witnessed in private investment, nonmilitary government expenditure, and net exports. This resulted in a depressive effect rather than a multiplier effect. However in times of peace increase in government expenditure had led to large multipliers. All growth from 1941 to 1945 cannot be attributed to military outlays, many economists believe that multiplier during peace time was significantly different from zero.

Current scenario
The major question comes back to the current crisis, with global economy facing a severe downtrend; will government stimulus lead to large multipliers?

If we compare American economy of 2001 with today we will get a much clearer picture. In 2001 though economy was in recession but at that time there was room for households to use their tax cuts as down payment for car or cover their costs of mortgage refinance.

In current phase credit markets are bruised badly, therefore financial institutions won’t be able to take advantage of income generated by increased government spending to the same extent leading to much smaller multipliers.

Markets Free Fall: Despite of RBI rate cut & low Infaltion

2009-03-05T03:16:00.000-08:00

Tackling the global finacial meltdown , RBI yestrday came with the move of cutting repo rate and reverse repo rate by 50 bs points. Currently Repo Rate ( the rate at which RBI lends to commercial banks) stands at 5% and Reverse Repo rate ( the rate at which banks lend to RBI) stands at 3.5%.

The move was taken in view to ease lending rates for corporate india and individiual borrowers in order to create demand in economy. however markets responded negatively to this move by plunging in red , falling by 261.14 points ending at 8185.35. lot of selling pressure came in from largecap stocks all making new 52 weeks low.

Even low inflation numbers couldnt turn up the market sentiments. Inflation came down to 3.03% for the week ended feburary 21.

Renewed FII selling is taking our markets down. However, next week a global rally can be expected as the US markets are in the highly oversold zone.

Gold Exchange Traded Funds

2009-02-26T03:41:00.000-08:00

Gold has remained one of the favorite avenues of investment for Indians. Around 23% of investment is done in gold by Indians.

Amid the current global turmoil and the bear run share-market scenario, people are going for the traditional and safer option of investment: gold. They are investing in the yellow metal in a significant volume. With the advantages of gold over any other form of investment — security being the most desired — people are buying gold in all forms, be it coins, biscuits or jewellery, besides exploring new options like Exchange Traded Fund (ETF).
I have seen many people are not familiar with gold ETF, which have become quite significant in past few years. So this post in brief will provide readers to explore this avenue of investment in this downturn.

What are ETF’s?
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

What is Gold ETF?
Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
Gold ETF provides return that before expenses closely corresponds to the returns provided by physical gold. Each unit is approximately equal to price of 1 gram gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.

Brief history
The first proposal of a gold exchange traded fund was originated by an Indian company called Benchmark Asset Management; a proposal was launched with the SEBI (Securities Exchange Board Of India) in 2002. This proposal was not approved at that time.
The Australia Stock Exchange was the first to launch a gold exchange traded fund in 2003 by Gold Bullion Securities under the symbol ‘GOLD’. This fund was fully backed, insured and deposited by gold bullion.

Difference between Gold Etf’s & Mutual Funds
Disparate Asset Classes
It is the nature of asset classes which differentiate gold etfs and mutual funds from each other. While former falls under the category of commodities, later comes under equity category. In Gold Etfs investor is vested with the opportunity, to invest in units of gold, which are traded on exchange as single stock. The units issued under the scheme represent the value of gold held in scheme. However in case of mutual funds, fund mangers invest in equity and equity related securities of gold mining companies. Since gold mining companies are not listed on Indian stock exchanges, the gold mutual funds invest in world gold funds that invest in gold mining companies across the world.

Returns attainable
Basic motive behind any investment is to gain high returns. The world gold fund has given absolute returns of 31.9% in the period since its inception in August 2007 to July 2008. Most financial advisors advise that investment in gold must be made for the purpose of diversification and at any point in time, about 10-15% of your assets must be invested in gold.

Nature of funds
Basic aim of both the funds is another important point which differentiates both the funds from each other. “The fund simply buys and holds gold on behalf of the investor without actively managing it. The aim is to give returns as close as possible, post-expenses, to that given for gold as a commodity,” however when investing in a mutual fund, the investor can rely on the expertise of a fund manager who indulges in active portfolio management and is able to make crucial decisions regarding selecting stocks of gold companies.

Benefits of trading in ETF’S
In ETf’s investors have the opportunity of buying as less as 1 unit on the exchange. Investors don’t have to pay entry or exit load and expenses on brokerage are less. Here gold etf’s score over mutual funds as in case of later investor has to bear defined load structure, entry and exit loads and other expenses.

There are five gold ETFs in the market today, namely Gold BeEs, Kotak Gold, Quantum Gold, Reliance Gold, and UTI Gold ETF. According to data published by Value research online, the returns from all the gold ETFs over the last one year have been practically identical.

IF you take a look at gold prices in the past few months, they have been moving in just one direction-- upwards. From Rs 10, 650 for 10 grams last January 2008, the price has moved to Rs 15,490 today. Gold price is at a seven month high and is up by 10% since January this year. The World Gold Council reports that global demand was up by 4 per cent in 2008.

Gold and stock markets have negative correlation, which can be witnessed in current scenario where volatility in stock markets have led to sky rocketing gold prices.

In 2009 itself Gold etf’s have outperformed gold mutual funds. ETFs have given 29 per cent returns in 2008 and over 8 per cent till now in 2009. In this current financial turmoil investing in shining yellow metal turns out to be the safest bet!!

Inflation slided to 3.92%

2009-02-19T21:17:00.000-08:00

Inflation eased to a 13-month low of 3.92% for the week ended February 7 on the back of a sharp fall in the prices of edible oils and
manufactured products. An ET poll had forecast that the inflation would fall to 3.91% for the week from 4.38% in the week before and 4.97% in the corresponding week last year. Inflation based on the wholesale price index has eased sharply from a 16-year peak of 12.91% in August 2008, due to a sharp fall in commodity prices
and a slowing demand. The drop in inflation has led to renewed calls for aggressive rate cuts to boost the flagging economy.

Fight of words: R Vs D

2009-02-13T00:06:00.000-08:00

We all are familiar with ongoing financial crisis, but most of us don’t know whether to call it a financial recession or depression. I have seen many articles, papers where there is confusion between with what to quote current crisis with “recession or depression”.

Before finding an answer to this, let’s find out difference between the two:
On searching on various search engines the basic difference which, I got is as follows:
Recession: an extended decline in general business activity, typically three consecutive quarters of falling real gross national product.
Depression: a decline in real GDP that exceeds 10%, or one that lasts more than three years.

Therefore the above definitions indicate that the basic criteria of indentifying depression or recession are to measure extent of economic decline. A depression is simply a magnified version of recession. The last two depressions in the U.S. were both in the 1930s. From August of 1929 to March 1933, real GDP declined by approximately 33%. There was a period of recovery following this depression, but in 1937-38 the economy dipped again in a less severe depression. All other economic downturns since that time have been recessions or just plain old tough time.

Transpose of Recession to Depression
Recessions gets transformed into depression, when government applies wrong measures in controlling it.
According to James Pethokoukis, "4 Ways to Turn a Recession into a Depression (U. S. News 11/4/08), there are ways that good and bad policy can effect an economic downturn.
· Bank closures
Although the American taxpayer may well have to provide what is being called, "the mother of all bailouts" the Federal Reserve has already committed $7 billion to prevent the collapse and run on the banks. It has also raised the federal deposit insurance (FDIC) from $100,000 to $250,000 to discourage shaking depositors from withdrawing their cash.
· Increasing of taxes
During the period of great depression, according to the revenue act tax rate was raised from 25% to 63%. Economists regard this as one of the most inaccurate steps taken.
· Hawley –Smoot Tariff
As businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation.

New distinction between Recession & Depression
However there are economists who differ from above definitions of recession and depression. in present times they believe that difference between a recession and a depression is more than simply one of size or duration. In making distinction between the 2, cause of the downturn should also be taken into account. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level.
If we go back in past, economic downturns that followed the collapse of the Soviet Union and those during the Asian crisis were not really depressions according to this criterion. Another significant aspect of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy and one tends fall into what is called as a “ liquidity trap”.
Present day situation
After all this discussion, the only question dwindle in our minds is “where we are today’? Well if we go by all definitions, America’s GDP may have fallen by an annualized 6% in the fourth quarter of 2008, and cause of this downturn is the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. So this means we are back to 1930’s?
Well many economists tend to deny this notion of 1930’s depression, because policymakers are unlikely to repeat the mistakes of the past. Though we are far off from situation of great depression, and policymakers won’t make same mistakes. But you never know they commit some new one’s as these are same policymakers who predicted that nationwide housing bubble burst is impossible, but today nothing is hidden, we all know the truth and truth is always bitter…..

Low Inflation Offset by Low IIP numbers

2009-02-12T00:31:00.000-08:00

The lower inflation numbers failed to boost sentiment in the markets, which were dragged by the negative industrial numbers. The Sensex remained in the negative territory amid weak Asian markets.
The Sensex was down 62 points at 9556 levels.
The rate sensitive sectors realty, auto and banking stocks were mostly in the green in anticipation of a rate cut by the RBI. On the other hand, metals, IT and oil & gas stocks dragged the benchmark index.
The industrial production for December contracted by 2 per cent, as compared to 8.6 per cent growth a year earlier. The fall was led by a led by a 2.5 per cent contraction in the manufacturing output. Inflation for the week ended January 31 was at 4.39 per cent as compared to 5.07 per cent a week earlier

Soruce : NDTV Profit

Unhealthy Report Card of Corporate India

2009-02-06T02:03:00.000-08:00

With the outburst of satyam saga, New Year also started with quarter 3 results of corporate India for FY 2008-09. With global meltdown riding on peaks, doleful results of major companies all over the world were predicted and result of Indian companies are no exception.

Global financial markets from past few quarters have been posting unhealthy performance. Despite of various fiscal bailout packages announced by economies, there impact on combating this ongoing recession is yet to be seen.

Coming back to India, the 3 quarter earning season was gloomy for the economy, as all major companies showed losses in their balance sheets. On the basis of sectoral performance, the major hit sectors are the export oriented, gems and jewellery and textiles. Battling with low demand, slowdown hitted real estate and infrastructure have passed on their negative fortunes to also cement and steel industry. These two segments have shown dejected performance on account falls in prices of finished goods and low demand from key user segments.

Also interest rate sensitive sectors like automobile are facing bad times. A leading two-wheeler company has not only posted a decline of 17% in net sales but also a whopping 25% decline in net profit for the Q3 FY09. Major commercial vehicles players have also shown dismal performance for the quarter. Moreover, the numbers released Society of Indian Automobile Manufacturers , on production and sales gives a gloomy picture of this sector.

Though IT companies have posted good results in Q3 FY09, it can be partly attributed to the rupee depreciation. Going ahead, the weak guidance given by IT companies indicates a rough ride in global markets. Though banking sector have posted positive results but surging NPA’s can prove out to be trouble in coming quarters.

Oil marketing companies benefited through artificially propped up petro product prices, while pharma and FMCG companies continued with their standard 5%–15% growth pattern.
Despite of the measures taken via monetary and fiscal policy, slowdown is evident in all the sectors, and deteriorating job scenario in 2009 is painting a picture of slowdown in quarters to come.

Inflation at 5.07% on Jan 24

2009-02-04T22:55:00.000-08:00

IInflation for the week ended Jan 24 slipped to 5.07% from 5.64% as prices of food items eased after rising for two consecutive weeks.

This was lower than a forecast 5.21 per cent in the wholesale price index in the 12 months to Jan. 24, compared with 5.64 per cent in the previous week. It would be the slowest annual rise since Feb 9 last year when inflation was at 4.98 per cent. Inflation had fallen to an 11-month low of 5.24 per cent on Jan. 3, but it rose in the next two weeks following an eight-day nationwide truckers' strike that pushed up food prices.

source: Economic Times

The classical school

2009-02-01T23:03:00.000-08:00

Classical economics is a school of economic thought whose major developers were William Petty, Adam Smith, David Ricardo and John Stuart Mill. Classical economists attempted to explain growth and development. During the time when capitalism was emerging from past feudal society these great economists came with their theories which marked the era of industrial revolution and bringing about major changes in society. Classical economists reoriented economics away from an analysis of the ruler's personal interests to a class-based interest.

Publishing of book wealth of nations by Adam Smith gave birth to modern economics in 1776. The book identified land, labor and capital as three factors of production and major contributors to nation’s wealth. Smith for e.g. identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labor applied to land and capital equipment. Once land and capital equipment are appropriated by individuals, the national income is divided up between laborers, landlords, and capitalists in the form of wages, rent, and profits. Wealth of nations highlighted a disproportionate number of ideas about the organizations and markets that survive today –nearly 300 years later, and an economic revolution or two after publications. Adam Smith was regarded as “Father of Modern Economics”.

The centeral thesis of welath of nations is that capital is best employed for the production and distribution of wealth under conditions of governmental non-interference , or laissez-faire, and free trade. In Smith's view, the production and exchange of goods can be stimulated, and a consequent rise in the general standard of living attained, only through the efficient operations of private industrial and commercial entrepreneurs acting with a minimum of regulation and control by the governments.in order to prove this ,he came out with a theory of invisible hand, which highlighted that market system appears to organize itself and even after an unexpected economic crash returning to pre-disastrous state with no intervention by greater body or so.
In today’s time book can be a difficult read for modern economists. Much of what is discussed in the book makes very little sense in a modern context - but still, the concept of an equilibrium market, where various negative forces may be applied, generally from interventionism and negative economic situations, holds strong to this day.

Evolution of Economics

2009-02-01T22:58:00.000-08:00

The word “economics” is derived from oikonomikos, which means skilled in household management. As the western world began its transition from agrarian to industrial economy, modern economic thought came into being. Before modern economics which came into being around 1th century there existed number of economic thought particularly European Mercantilism, and French Physiocraticism. Of which, neither fall in to the classification of formal economics, and both lack the structural and systematic processes required for formal knowledge creation.

Mercantilists’
This was the economic philosophy adopted by merchants and statesman during the pre-classical era started after 1500. Mercantilists’ believed that nation wealth came primarily from accumulating gold and silver. Their philosophy can be summed up in following manner:
1. All available land should be employed for agriculture, manufacturing and mining.
2.Exports of monetary items such as gold and silver should be banned, such that mechanisms of trade stay within the country.
3. Imports should be grossly frowned up and when need arises should be traded in exchange for other goods.
Mercantilism introduced the concept of double entry accounting, which is a primary form of bookkeeping in today’s time. This system represented the pinnacle of commercial interest to level of national policy.

Physiocrats
Idea of economy as a circular flow of income and output was developed by group of French philosophers in 18th century known as physiocrats. They believed that only process that yield net result is agriculture. According to them agriculture is sole source of wealth in an economy. In an opposition against mercantilist trade theory, the physiocrats propounded a policy of laissez-faire, which meant minimal government interference in the economy.

Introduction

2009-02-01T22:55:00.000-08:00

We have always known economics as a subject which exists in our school or college syllabus. Definitely for me it is one of the very interesting subject and one of my passions to explore the subject from start to finish.
A thought recently clicked my mind that we all know economics as a subject that exist as part of our course in schools and college , but we hardly know how this subject came into being. As a matter of fact the origin of this subject lies in western world where it came into existence around 17th & 18th centuries.
Therefore in this part of my blog I’ll be sharing with you how economics came into being and ill share with you works of various economists whose names are somehow being forgotten by us:
This part of my blog is for those, who really have liking and passion for this subject. Hope you guys like this part of blog also.

Gold Prices shot up to Rs 14, 175

2009-01-30T21:57:00.000-08:00

Gold prices shot up by Rs 435 per 10 grams to a new peak of Rs 14,175 on the bullion market in Mumbai on Thursday following renewed buying from stockists and investors on the back of firm trend in global markets.
Silver also moved up in line with gold prices as well as renewed industrial inquiries.
Volatility in other assets that forced investors to park their funds in precious metals as a safe investment also boosted the prices of these metals.
Gold strengthened more than two per cent in Europe to a three-month high, as investors preferred to invest in the metal from the current uncertain scenario.
According to market perception, China taking an interest in gold as an alternative to U S Treasuries, and of a European fund buying bullion, also influenced the prices. Spot gold climbed to a high of $926.10 an ounce and was quoted at $918.50/920.50 an ounce up from $906.75 in New York late on Thursday.
Gold futures rebounced in New York after two sessions to above $900 an ounce as gloomy economic news in the US triggered safe-haven buying.
Gold for February delivery ended up by $16.90 an ounce to $905.10 on the Comex division of the New York Mercantile Exchange. March silver also rose to $12.145 an ounce. Gold was rising as "economic malaise continues to batter the world", a dealer said.
Turning to the domestic market, standard gold (99.5 purity) shot up by Rs 435 per ten grams to Rs 14,175 from Thursday’s closing level of Rs 13,740. Pure gold (99.9 purity) also rose to Rs 14,240 from Rs 13,805.
Silver ready (.999 fineness) jumped by Rs 575 per kilo to Rs 19,795 from Rs 19,220 on Thursday.

source : NDTV PROFIT

Indian Pharma: A Dark Horse

2009-01-29T22:22:00.000-08:00

Over the years pharmacy has grown in the form of pharmaceutical sciences through research and development processes. It is related to product as well as services. The various drugs discovered and developed are its products and healthcare it provides comes under category of services.
The Indian pharmaceutical industry is in the top rank of India’s science based industries with a vast array of capabilities in the complex field of drug manufacture and technology. This sector is categorized as highly organized sector registering turnover of $ 4.5 billion and growing at a rate of 8% to 9% annually. The Indian pharmaceutical industry is capable to meet country’s demand for any drug. The manufacturing units within the country are capable of meeting about 80% of the country’s drug requirement. There are about 20,000 production units in India with products sold at competitive lower prices than international drug prices. It ranks high in the third world in terms of technology, quality and range of medicines manufactured. From simple headache pills to complex antibiotics and complicated cardiac compounds, almost every type of medicine is made indigenously.

The Indian pharmaceutical sector is highly fragmented with more than 20,000 registered units. Drastic expansion has been witnessed in last 2 decades. The leading 250 companies control 70% of the market with market leader holding nearly 7% of the market share. It’s an extremely fragmented market with severe competition and government price controls.

Playing a key role in promoting and sustaining development in the vital field of medicines, Indian pharma industry boasts of quality producers and many units approved by regulatory authorities in UK and USA. International companies associated with this sector, have stimulated, assisted and spread head this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world.

India has 300 pharma companies of large and moderate size and another 10,000 small and tiny firms. But 70% of the production is by 100 larger companies. The industry manufactures around 440 of bulk drugs and almost entire range of formulations. About 1/3rd of India’s production – close to US $ 3.5 billion- is exported and exports are growing at 25% per annum. Exports to US fetch India about half billion dollars, while Germany, UK, Italy, Japan are among others. Large quantities of medicines are being exported from India to china, Brazil, Mexico and Nigeria.

PATENT REGIME
The signing of trade related intellectual property rights (TRIPS) agreement in 1995, which committed India to honor the WTO mandated product regime from 2005 marked the beginning of fresh chapter in industry’s evolution and India has finally transited into product patent regime from process patent. Process patent is the form of protection under which the process by which drug is manufactured is given protection. As there were many loopholes in this system companies very conveniently made very minor changes in the product and sold patented drugs at a lower price. Because of this MNC’s like Pfizer, Eli Lily was reluctant to launch their new molecules in Indian market. But under the product patent the molecule gets the protection and others cannot develop the similar molecule till the patent is valid.

POST 2005 SCENARIO
By issuing a patent ordinance, India met a WTO commitment to recognize foreign patents from January 2005, the culmination of 10 year process. In this new scenario, the Indian pharmaceutical manufactures won’t be able to manufacture patented drugs. To adapt to this new patent regime, the industry is exploring business models different from existing traditional ones.
New business models include:
1. Contract research ( drug discovery and clinical trials)
2. Contract manufacturing
3. Co-marketing alliances.

The focus of Indian pharma companies is also shifting from process improvisation to drug discovery and R &D. The Indian companies are setting up their own R &D setups and are also collaborating with research laboratories like CDRI, IICT etc.

CONTRACT RESEARCH
In 2002, the industry for clinical trials in India was $ 70 million. This market is growing at the rate of 20% per annum. According to experts, it will be industry worth anywhere between $ 500 million to $ 1.5 billion by 2010.
The global R&D is spending to the tune of $ 60 billion of which non-clinical segment accounts for $ 21 bn and clinical segment accounts for $ 39 bn. In terms of Indian prices this translates into ($ 7 bn at 1/3rd of US/EU costs) and ($ 7.8 bn of US / EU costs) respectively. This constitutes total potential for $ 14.8 billion for the Indian pharma companies.

CONTRACT MANUFACTURING
Many global pharmaceutical majors are looking to outsource manufacturing from Indian, companies which enjoy much lower costs both capital and recurring than their western counterparts. Many companies have made their plants CGMP compliant and India is having the largest number of USFDA approved plants outside USA.
The pharma companies are going for compliance with international regulatory agencies like USFDA, MCC etc for their manufacturing facilities.
Indian companies are proving to be better at developing API’s then their competitors from target markets and that too with non-infringing processes. Indian drugs are either entering into strategic alliances with large generic companies in the world of off-patent molecules or entering into contract manufacturing agreements with innovator companies for supplying complex under patent molecules.
Some of the companies like Dishman pharma, divis labs and matrix lab have been undertaking contract jobs for MNC’s in US and Europe. Even shasun chemicals, strides arcolabs, jubilant orgonosys and many other large Indian companies started undertaking contract manufacturing of API’s as apart of their additional revenue stream. The Boston consulting group estimated that contract manufacturing market for global companies in India would touch $ 900 million by 2010.

Growth Pattern of the Sector
The pharma industry has grown at 1.5-1.6 times the growth of the economy over the past couple of years. The industry has grown at a CAGR of 13 % from 2002-2007 and is expected to grow at a rate of CAGR of 16% over the period of 2007-2011. Accounting for the 2% of the world’s pharmaceutical market, the Indian pharmaceutical sector has market value of about US $ 8 billion. It ranks 4th in terms total global pharmaceutical production and 13th in terms of value. Over the last 2 years the sector’s market value has increased to about US $ 355 million because of launch of new products. According to an estimate 3900 new generic products have been launched in past 2 years. These have been by and large launched by big brands in the pharma sector. And in the year 2005 Indian pharmaceutical companies captured around 70% of the domestic market.
At present scenario only few people can afford costly drugs which have increased price sensitivity in the drug market. Now the companies are trying to capture the market by introducing high quality and low priced medicine and drugs. At present large number of Indian pharmaceuticals companies are looking for tie-ups with foreign firms for in license drugs. In 2005 6.2% of the disposable income was spent on healthcare as compare to 2.8% in 1995. Health insurance penetration is estimated at 10% in India and is expected to double in next five to seven years.

India is one of the top five manufactures of bulk drugs in the world and among the top 20 pharmaceutical exporters of the world. The value of the pharmaceutical output grew more than 10 fold from Rs 5000 crore in 1990 to over 65000 crore in 2006-07.india is now recognized a one of the leading global players in pharmaceutical industry. Europe accounts for highest share of Indian pharma exports followed by North America and Asia. The national pharmaceutical policy, aimed at ensuring availability of lifesaving drugs at reasonable prices is being finalized. Taking stock for the imperative requirement, the government has decided to set up six new institutes of pharmaceutical education and research (NIPERS) in different regions of the country. As anew initiative in pharmaceutical sector, the first pharmaceutical census of India is proposed to during 2007-08 to obtain robust database for the sector.

Pharma to emerge as Dark Horse in slowdown

In these tough times of recession [Indian] pharma sector has shown comparative resilience and has been relatively less impacted. There are two reasons for this: the domestic pharma market continues to experience healthy growth and the demand for generic (a biological equivalent of an originator pharmaceutical product) medicines is on the rise in international market.

Pharma is not completely immune to the slowdown and global economic crisis, but the impact is less severe. Over the past two years, the $8 billion domestic pharma industry has grown at a rate of more than 12%.
It is likely to see high single digit growth in 2009. The growing incidence of lifestyle diseases, rising disposable incomes, greater penetration of health insurance and expanding medical infrastructure will continue to foster growth in the domestic market. The fact is that however bad the economic environment, demand for medicines is relatively inelastic.

They will remain a hot centre for opportunity. There is also growing excitement as drugs worth $60 billion are expected to come off patent in the US in next few years. These positive trends signal a huge market opportunity for Indian pharma companies, who have over the years carved a niche for themselves, in most global markets

Investment scenario in India

2009-01-29T21:47:00.000-08:00

Being the fourth largest economy in the world and has second largest GDP among developing countries , in purchasing power terms , India is poised for growth with macro –economic stability and by 2025 Indian economy is projected to be about 60% in size of the US economy.
Investment is the key element which has taken India on high growth trajectory. In this post we try to analyze current scenario of investment in 3 core sectors: infrastructure, education and security.
Infrastructure investment
India has emerged as land of opportunities for infrastructure sector. The potential is exorbitant as many sectors have opened up for participation and private investment. In the last few years a number of Road Projects have been taken up under ambitious National Highway Development Programme costing about US$ 12 billion, in which large number of foreign construction companies are participating. The telecom sector has moved forward at a brisk pace and power reforms have gained momentum while the disinvestments process has got underway in the Telecom and Oil and Gas sector. In order to have an integrated development of Transport system, National Rail Development Programme has also been launched in Dec. 2002 envisaging an investment of about US $3.5 billion.
India has been prominent in attracting most of the infrastructure projects with private participation in the region. For instance an important role behind the extensive growth of Indian IT sector and BPO’s is played by availability of robust infrastructure (telecom, power and roads) in the country. Relevant telecom facilities are an important prerequisite for the success of the software industry and over the years, the Government has taken steps to ensure that telecom remains a priority area.
Similarly, regular, reliable, uninterrupted power, a major necessity for running IT software and services businesses, has also received substantial attention from the Government. Recent steps to privatize the distribution of power and bring in greater efficiencies and customer centricity in the market have been welcomed by the ICT industry.
The overall roads and highways scenario in India has also witnessed major improvements over the last few years. Most cities and first and second tier towns are connected and interlinked to each other. Major investments have gone into the development of highways, both on the side of the central and state Governments. Clearly, the Indian Government has understood the importance of infrastructure to industries such as IT and created a conducive environment for its development and expansion.
Present meltdown
In the present economic crisis when all sectors are facing the heat of downturn, infrastructure sector comes with no exceptions. The major hindrance coming in way of growth of this sector is scarcity of funds. This holds true especially in the case of large scale, complex projects, as in case of hydro power projects, which have long gestation periods. The Government needs to consider introducing mechanisms/ instruments that allow efficient long-term funding of projects. In addition, limits on external commercial borrowings for such infrastructure projects should be removed.
In recently announced fiscal package by government, in order to boost investment in the infrastructure sector, the government authorized the state-run India Infrastructure Finance Co. Ltd (IIFCL) to raise Rs.100 billion through tax-free bonds by next March. Announcing a Rs.3,000-billion ($60-billion) stimulus package to pump prime the economy, a government statement said IIFCL, set up to finance infrastructure projects in the country, could use the fund to refinance port, highway and power projects, being developed under the public-private partnership model.

Scenario of investment in private education
Indian education system has witnessed an impressive growth path since independence. From just 0.1 Million in 1947, enrollments in the country have grown to more than 11 Million in 2005-06. The education system in the country saw a revolution with the emergence of a whole new class of education providers, including private institutes, distance education providers, self-financing courses in public institutions and foreign education providers.
Despite the fact of rising enrolment figures, the cumulative expenditure of states on educational services as a % of total expenditure has shown a decline of 18% in 2007-08. Inter-state differences in per capita education spending across states are widening. While per capita fund flow to education in 2005-06 was Rs 483 in Uttar Pradesh and Rs 487 in Bihar. It was Rs 1034 in Maharashtra and Kerala and Rs 1777 in Himachal Pradesh. A slowdown in government spending in key areas of education infrastructure in many of these states has happened despite a marked improvement in the fiscal performance of most of these states. This is in sharp contrast to the post -1997 periods when a fall in education spending could be attributed to shortage in government finances due to deteriorating fiscal health of states.

Aftermath of terrorism on India Inc
Recent terror attacks in financial of the country Mumbai will post short term impact on Indian economy according to many economist and analyst. Being the home of Asia’s oldest stock exchange, country’s central bank, capital markets regulator (SEBI) and India’s biggest corporate houses- Tata’s , Birla’s , Ambani’s , accounts for country ‘s $ 1 trillion (Rs 49.9 trillion) economy and contributes one third of its direct taxes. According to various economists though these attacks will affect country’s economy but deeper impacts will come from global slowdown.
National security is a critical factor that determines the level of investment — both domestic and foreign — along with conducive business environment, positive policy matrix and return on investment. Global investors apply these parameters diligently while making their decision on investment destinations.
In tough times like we are in currently, the portfolio investment and allocation decisions by certain global funds could be affected. However, investment decisions by various multinationals to enter a market for strategic reasons tend to be made with a longer term and global view in mind and should not get impacted, unless these attacks continue for prolonged period. While overall FDI flows at $17 bn were 137% higher in the first half of this fiscal year, the second quarter ended September 2008 has seen a slowdown of 30% in FDI flows compared to the June quarter. On the other hand, portfolio flows into India (FII) have already seen a massive outflow this fiscal year of over $9 bn through end of October, while FIIs had invested over $13 billion in the Indian markets last fiscal year.
The business confidence which was weakening due to current global turmoil will now bear the heat of this terror attack, with sentiments further going weak. The hardest hit industries will be hospitality, travel and tourism and luxury retail business. Already tourism sector is struggling to beat economic slowdown, now these terror attacks have added to their struggle with hoteliers are expecting large scale cancellation of bookings mostly from overseas visitors. This will in turn affect the aviation business which is already in battle with the slowdown. Another immediate victim of this attack would be luxury retail business. The Taj and Trident are home to around a dozen of luxury retailers including Gucci, Ferragamo, Jimmy Choo, Estee Lauder, Louis Vuitton and Fendi. Business would be impacted not only due to space but also sales because lot of sales comes from in-house guests. Most luxury brands prefer to operate out of five star hotels because India doesn’t have high quality luxury retail space.

Boom time for security industry
In the times when Indian industries are battling with wicked effects of global slowdown and recent terror attacks on Mumbai, the only industry poised to book high profits in future is Indian security industry. Private security in India will become a Rs 50,000 crore (Rs 500 billion) industry in four years as corporate have increased their spending on safeguards after the Mumbai terror strikes. The private security business, a Rs 22,000 crore (Rs 220 billion) industry now, would touch Rs 50,000 crore as security all of a sudden has become top priority for Indian Inc.
Terrorism now is a universal phenomenon and most countries are facing it. It is the other overwhelming factors that will affect investments. Yet, it’s imperative that we put in place a foolproof security system that can sense and eliminate these terrorist attacks. We also need to improve risk management systems and disaster recovery plans.
India’s position in the emerging financial and economic architecture is going to be substantial. Stakeholders of the growth are not Indians alone but the world community. That calls for a joint action against terrorism.

Fiscal stimulus package

2009-01-29T21:45:00.000-08:00

In order to elevate the various sectors of Indian economy from global turmoil, government has finally uncovered its fiscal stimulus package, which gives 4% cut in CENVAT , in order to bring down prices of cars, cement textiles and other products.

The package which sought to lower down the impact of global slowdown on various sectors, with entailing a loss of Rs 8700 crore , in the remaining four months of 2008-09 , aims to revive sectors like housing, exports, automobile, textiles and small and medium enterprises (SMEs).
The key highlights of the package are as follows:
· Package includes, the CENVAT on all products – except non petroleum goods – have been reduced from 14, 12, and 8 % to 10, 8 and 4% for various categories.
Full exemption from basic customs duty has been effected on naphtha to provide relief to the power sector.
· With the implementation of the package the export duty on iron ore fines has been withdrawn, the levy on export of iron lumps has been cut from 15 to 5 per cent.
· Government seeks to provide relief to the dooming housing sector with public sector banks will shortly announce a package for borrowers of home loans in two categories: up to 500,000 rupees and 500,000 rupees to 2 million rupees.
· For small and micro enterprises, the limits under the credit guarantee scheme have been doubled to 10 million rupees. The lock-in period for loans covered under the existing credit guarantee scheme is also being reduced from 24 to 18 months to encourage banks to extend more loans under the scheme.
· In an incentive for the automobile sector, government departments are also being allowed to replace older vehicles within the allowed budget, in relaxation of extant economy instructions.
The Planning Commission deputy chairman, Montek Singh Ahluwalia, said the package will “minimise the impact of weak global economy on the Indian economy” and help achieve a seven per cent growth rate.
Announcement of package turned out to be a sigh of relief for realty sector majors like DLF and UNITECH, particularly in the non-metros by way of a demand-boost for houses, but felt that the package for home loans by banks should have been for borrowings up to Rs 50 lakh instead of the prescribed limit of Rs 20 lakh.
However some reactions were anticipating a fiscal package of Rs 70,000 crore, how ever now how will this package will lead to bounce back of growth of Indian economy on previous high trajectory path? For that we need to wait and watch!!!!!!!!!!!!!! Please put your valuable opinion on what do you think of this package, how this will impact Indian economy.

Foreign currency convertible bonds

2009-01-29T21:43:00.000-08:00

While I was searching for this impact of US crisis on India and depreciation rupee I came across this term FCCB (foreign currency convertible bond).and I came to know this plays important role in Indian capital market.
Let’s see how it works
An instrument in debt market where in which convertible bond is issued in a currency which is different than issuer’s domestic currency. For e.g. reliance industries issues a convertible bond which is denominated in terms of dollars and not rupees. This is the mode of raising money by issuing company in terms of foreign currency. As the name suggests it’s a convertible bond, means bondholder has an option of converting it into stock. Therefore convertible bond is a mix between equity and debt instrument.

FCCB policy in India
MinistryFinancegovernmentofIndiadefinesFCCB.Accordingit:"Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; "

We all know that 2-3 years back Indian and emerging markets were on high growth trajectory path and were giving high returns. At that time FCCB became the popular tool for raising funds from overseas market. Aggressive companies went for the FCCB route to fund their expansion/acquisition plans because of the shorter lead times associated with the process as well as for the fact that the company gains exposure in to a global investor base.

The reasons behing for fccb becoming so popular and companies opting for it aggressively were following:
· Being hybrid instruments, the coupon rates on fccb are particularly lower than pure debt or zero, thereby reducing the debt financing cost.
· Fccb are book value accretive on conversion.
· Saves the risk of immediate equity dilution as in the case of public shares.
Lucrative offer for investors
Investors can also book profits through fccb route:
· Assured returns to investors on bond in the form of fixed coupon rate payments.
· Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds, which are activated when price of a stock reaches a certain point.
· Significant yield to maturity (YTM) is guaranteed at maturity.
· Lower tax liability as compare to pure debt instruments due to lower coupon rates.

In May 2007, at least 10 companies converted FCCBs into equity at a price decided when the bonds were issued to respective investors. The list includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek India, Jain Irrigation Systems and Maharashtra Seamless. FCCB holders have witnessed a significant rise in value of their investments in these companies on the back of a sharp rise in share prices since allotment of the bonds.

Present day situation
Indian companies that had raised money through fccb’s during Bull Run to finance their growth and acquisition plans are currently in situation of doom. With demise of Indian stock markets the conversion price of these fccb’s has gone several times higher than their current market price.
Various estimates show that India Inc has issued close to $20 billion of FCCB’s in the past few years. Now the investor will only exercise its option to convert his bond into fixed number of shares at predetermined price if conversion price is lower than the market price. Now in this scenario of dooming stock markets conversion price in most of the fccb issues is several times above the market price. Therefore in such a scenario investors won’t be interested in converting their bonds into equity.
Let’s explore now in this situation what options are left with the companies who have issued these bonds.
· Issuing companies will now have to search for resources to repay the debt along with redemption period whenever it matures. For this companies will seek to fresh borrowings, with high interest rates, which in turn would impact their profitability.
· Another option which companies have is to reset the conversion clause, to bring it closer to reality.

No doubt lender will get back his money, but this will create big pain for ordinary shareholder. With the current state of the stock markets, most of them will have to buy foreign exchange from the markets to get rid of their liability. But this will depreciation of rupee and create more volatility in forex market.
By looking at the below link you can check out data for companies which have raised money through FCCB and where they stand today.
http://www.business-standard.com/india/storypage.php?autono=336251

References:
Economic times
Business standard

IIP NUMBERS: INDIA INC IN TROUBLE

2009-01-29T21:41:00.000-08:00

Well here is a breaking news…..as given by all news channel………I don’t know how much you follow this number…..but INDEX OF INDUSTRIAL PRODUCTION IS OUT and its 1.3% for august 2008 in comparison to 10.9% in same period last year.

In India, the Central Statistical Organization (CSO) is responsible for compilation and release of the Index of Industrial Production (IIP). This is a monthly index and is intended to measure changes over time in the volume of industrial production. The base year of the current series of IIP in India is 1993-94 which being revised to 1999-2000 is. The current series of IIP with base 1993-94 is based on 538individual items clubbed into 283 groups of items. The distribution of these items (item groups) and weights (100) among the three sectors covered by the index is as under

Sector NO.Of items (item group) Weight
Mining 64(1) 10.47
Manufacturing 473 ( 281 ) 79.36
Electricity 1 (1) 10.17
TOTAL 538 (283) 100.00

The index is a simple weighted arithmetic mean of production relatives calculated by using Laspeyre’s formula
I=Σ(Wi*Ri)/ΣWi,

Where I is the Index, Ri is the production relative of the i-th item for the month in question and Wi is the weight allotted to it based on Gross Output. The item-wise indices are vertically aggregated at 2-digit of industrial classification based on weighted average, weights are proportionate to Gross Value Added.

The August 2008 Index of Industrial Production (IIP) stood at 1.3% as against 10.9% in same period of last year.
· Capital Goods growth was at 2.3% versus 30.8%.
· Mining growth declined at 4% from 14.7%.
· manufacturing growth declined at 1.1% versus 10.7%
· Consumer Durables growth declined at 5.1% from 6.2%.
The market which opened weak with all stocks in red, with this news tumbled more with sensex at 10,257 falling by 1070 points and the Nifty fell 298 points to 3,215, at 12:38 pm. BSE Midcap and Small Cap indices lost 7-9%. The two exchanges will halt trading if the Sensex falls 1275 points or the Nifty loses 390 points, which is 10% circuit.
With coming of these numbers lot of uncertainty about GDP growth rate has been generated. Many economists including MOF have said this to be an “industrial recession”. And have revised their estimates for GDP growth rate 6%.
It’s a bad time for world economies. But even with this finance minister quoting 7-8% growth rate for India and with this IIP numbers sounds doubtful.
This is a major concern for our economy and if you read this I would like to know from you what your expected growth rate for Indian economy is. Where India is headed.
Please post your valuable comments

Plague of US sub –prime crisis

2009-01-29T21:37:00.000-08:00

Nowadays common topic of discussion among employees, students & all is subprime crisis, fall of Lehman brother, US economy & impact on India. I also had this question surrounded by my mind what exactly happened which led to such financial crisis in world’s strongest and powerful country.
I have seen many posts on this and from searching materials from various places, I have tried to explain, how this whole cycle of sub prime began and made whole world dancing on its tunes.

Let’s begin with
What are Sub Prime loans?
The sub-prime loans are loans which are given to borrowers with low credit scores. These are the loans which are granted at interest rates above the prime lending rate. These borrowers are subject to sub prime lending on their defaults in credit card payments or any other type of credit default or delays.
According to US standards these are people who have FICO score < 620.
Now you might be wondering what is this FICO score, what I get to know of this was:
A FICO score is a credit score developed by Fao Isaac & Co. credit scoring method of determining the likelihood that credit users will pay the bills.
Credit scores analyze a borrower’s credit history considering number of factors such as:
· Late payments
· The amount of time credit has been established.
· The amount of credit used Vs amount of credit available.
· Length of time at present residence.
· Nature of credit information such as bankrupts, charge offs etc.

There are 3 FICO scores to be computed by data provided by each of the 3 bureaus- explain, Trans union and Equifax. Some lenders use one of these 3 scores, while other lenders may use middle score.

How this sub –prime loans came into being?
If we rewind ourselves to period of 2000, it is to be noticed that after the tech bubble burst and fears of 9/11 attack in 2001 , federal reserve began to cut rates drastically and federal funds rate reached at 1% in 2003 , which in central banking idiom is essentially zero. The overall idea of federal behind these rates cut was to prevent economy going into depression and to increase money supply to encourage borrowing, which would spur investment and spending. This led to aggressive lending by banking and financial institutions. However there was a good proportion of demand was from sub prime borrowers, so naturally when banks lend to them, it was with the pleasing knowledge that interest rates would be higher for this class of loans.
Every individual aspires a dream of having his own house. Americans were no exception to this. These low interest rates and increased liquidity increased demand for housing, which led to continuous growth in the market value of these assets (i.e. Real Estate), which was the collateral for the debt. Another angle is that the average American is highly debt-oriented, and resultantly, refinance is fairly commonplace in the US. In order to capture the market, banks began to value these assets higher and higher, as a higher valuation meant a higher loan amount which could enable them to win a deal over competition. This higher valuation also had an impact on the real money-value of the asset.
What was the role of investment banks?
First let me here clarify here what is investment banking & how it is different from commercial banking:

Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Now let’s see how this whole cycle worked:
Our story begins with an American, who like evrybody else has a dream to own a house. Now in order to fulfill his dream he seeks for a home loan. However his credit history is poor. But things become easy for this American with the advent of subprine loans (explained above).

· A subprime borrower (in our story American) takes a mortgage from institution like Well Fargo Home mortgage at 2/28 ARM terms.
· As soon as deal is signed these instructions package these mortgages into MBS (mortgage backed securities) and sell them off to other financial institutions like investment banks (Lehman brother, Morgan Stanley, etc).
· The banks then proceed to securitize these loans, chop them up, and package them into products called CDOs or Collateralized Debt Obligations which entitle the holders to the cash flows from the underlying mortgages.
· These CDOs are then sold to other market participants like hedge funds, pension funds, other banks and insurance companies based all over the world.
· The CDOs may then be traded like any financial security and thus ended up being held by banks and other market participants all over the world.

The question revolving in your mind now would be why financial institutions would buy loans of sub-prime borrowers here comes the role of rating agencies:
A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to different rating agencies. However the flip side is that it’s hard to sell a security if it’s not rated.

How this situation led to financial fiasco?
With the coming of these sub-prime loans for few years things went pretty well, as with low interest rates, economy started to surge upwards, with value of real estates assets touching the sky. This situation made it easy for borrowers to make payments, in case they did run into troubled waters they could top-up their loans, or re-finance their loans at more favorable terms. So this was kind of happy –go lucky times for financial institutions.
However as in case of every bollyood movies good times are snatched away by villains, something like this happened in US financial markets. The slowdown began in late 2006 and early 2007. With fast growing economy, money started to flow in to equities and money supply reduced. Following such a scenario FED started to increase interest rates. This situation made re-financing of loans by borrowers difficult. As loans became more expensive, the demand for housing reduced, leading to a reduction in the value of the asset. Now this led to a chaotic situation, where borrowers began to default on their loans at an alarming rate. The investing institutions who held the securities backed by this debt stood to loose.

These financial crises plagued like anything all over the economy. In this hue and cry banks stopped lending to each other. Most investment banks and hedge funds had to write down the value of their holdings or liquidate other investments to meet redemptions. With CDO prices at rock bottom levels, market players were forced to borrow heavily.

This led to a huge liquidity crunch in the global markets and subsequently runs on and the collapse of a few banks in Europe. With nobody ready to lend money, overnight rates in the money markets skyrocketed setting the stage for further runs on banks and even the freezing or possible collapse of the entire banking system.
Coming to Indian scenario, how all this is impacting India, will be covered in my next post……..till then enjoy reading!
References:
www.economictimes.com
www.investopedia.com
Financial blogs

Boom & Bust of Indian Real Estate Sector

2009-01-29T21:25:00.000-08:00

Engulfing the period of stagnation, the evolution of Indian real estate sector has been phenomenal, impelled by, growing economy, conducive demographics and liberalized foreign direct investment regime. However, now this unceasing phenomenon of real estate sector has started to exhibit the signs of contraction.
What can be the reasons of such a trend in this sector and what future course it will take? This article tries to find answers to these questions….

Overview of Indian real estate sector
Since 2004-05 Indian reality sector has tremendous growth. Registering a growth rate of, 35 per cent the realty sector is estimated to be worth US$ 15 billion and anticipated to grow at the rate of 30 per cent annually over the next decade, attracting foreign investments worth US$ 30 billion, with a number of IT parks and residential townships being constructed across-India. However current economic crises in India have made buying a home a far fetched dream for many.
The term real estate covers residential housing, commercial offices and trading spaces such as theaters, hotels and restaurants, retail outlets, industrial buildings such as factories and government buildings. Real estate involves purchase sale and development of land, residential and non-residential buildings. The activities of real estate sector embrace the hosing and construction sector also.

The sector accounts for major source of employment generation in the country, being the second largest employer, next to agriculture. The sector has backward and forward linkages with about 250 ancillary industries such as cement, brick, steel, building material etc.
Therefore a unit increase in expenditure of this sector has multiplier effect and capacity to generate income as high as five times.

Path set by the government
The sector gained momentum after going through a decade of stagnation due to initiatives taken by Indian government. The government has introduced many progressive reform measures to unveil the potential of the sector and also to meet increasing demand levels.
· 100% FDI permitted in all reality projects through automatic route.
· In case of integrated townships, the minimum area to be developed has been brought down to 25 acres from 100 acres.
· Urban land ceiling and regulation act has been abolished by large number of states.
· Legislation of special economic zones act.
· Full repatriation of original investment after 3 years.
· 51% FDI allowed in single brand retail outlets and 100 % in cash and carry through the automatic route.

There fore all the above factors can be attributed towards such a phenomenal growth of this sector. With significant growing and investment opportunities emerging in this industry, Indian reality sector turned out to be a potential goldmine for many international investors. Currently, foreign direct investment (FDI) inflows into the sector are estimated to be between US$ 5 billion and US$ 5.50 billion.

MAJOR INVESTORS
· Emmar properties, of Dubai one of the largest listed real estate developers in the world has tied up with Delhi based MGF developments to for largest FDI investment in Indian reality sector for mall and other facilities in Gurgaon.
· Dlf India’s leading real-estate developer and UK‘s famous Laing O Rourke (LOR) has joined hands for participation in airport modernization and infrastructure projects.
· A huge investment was made by Vancouver based Royal Indian raj international cooperation in a single real estate project named royal garden city in Bangalore over period of 10 years. The retail value of project was estimated to be around $ 8.9 billion.
· India bulls real estate development has entered into agreement with dev property development, a company incorporated in Isle of Man, whereby dev got subscription to new shares and also minority shareholding the company. But in recent developments indiabulls have acquired entire stake in dev property development in a 138 million-pound sterling (10.9 billion rupees) share-swap deal.
· Apart from this real estate developments opens up opportunity for associated fields like home loans and insurance. A number of global have shown interest in this sector. This include companies like Cesma International from Singapore, American International Group Inc (AIG), High Point Rendell of the UK, Colony Capital and Brack Capital of the US, and Lee Kim Tah Holdings to name a few.

Simultaneously many Indian retailers are entering into international markets through significant investments in foreign markets.
· Embassy group has signed a deal with Serbian government to construct US $ 600 million IT park in Serbia.
· Parsvanath developers is doing a project in Al – Hasan group in Oman
· Puravankara developers are associated with project in Srilanka- a high end residential complex, comprising 100 villas.
· Ansals API tied up with Malaysia’s UEM group to form a joint venture company, Ansal-API UEM contracts pvt ltd, which plans to bid for government contracts in Malaysia.
· Kolkata’s south city project is working on two projects in Dubai.
On the eve of liberalization as India opens up market to foreign players there is tend to be competitive edge to give quality based performance for costumer satisfaction which will consequently bring in quality technology and transparency in the sector and ultimate winners are buyers of this situation.
However this never ending growth phase of reality sector has been hard hit by the global scenario from the beginning of 2008. Analyst say situation will prevail in near future, and latest buzz for the sector comes as a “slowdown”.

Sliding phase of the reality sector

In this present scenario of global slowdown, where stock markets are plunging, interest rates and prices are mounting, the aftermath of this can now also be felt on Indian real estate sector. Overall slowdown in demand can be witnessed all across India which is causing trouble for the major industry players. Correcting property prices and rentals are eroding away the market capitalization of many listed companies like dlf and unitech

Reality deals in major cities like Delhi, Mumbai, Bangalore, Chennai and Hyderabad have shown enormous downfall from October 2007 – March 2008. The downfall had been cushioned by fall in stock markets as it put a stop for wealth creation, which leads to shortage of capital among investors to invest in real estate activities. Apart from this in order to offset their share losses many investors have no choice, but sell their real estate properties.
Other factors which have contributed to this slowdown are raising interest rates leading to higher costs. Due to this almost all the developers are facing serious liquidity crunch and facing difficulties in completing their ongoing projects. Situation seems to be so disastrous that most of the companies have reported 50-70% cash shortfall. The grade A developers which are facing cash crunch include DLF ,MGF , Emmar , Shobha developers , Unitech , Omaxe , Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group. As a outcome of this liquidity crunch many developers have started slowing down or even stopped construction of projects which are either in their initial stages of development or which would not effect their bottom-line in near future.
Also with increasing input costs of steel iron and building material it has become it has become unviable for builders to construct properties at agreed prices. As a result there may be delays in completion of the project leading fincial constraints.
At the same time IT industry which accounts for 70% of the total commercial is facing a slowdown. Many residential buyers are waiting for price correction before buying any property, which can affect development plans of the builder.

Aftermath of reality shock to other sectors
Cement industry hitted by reality slowdown
The turbulence in the real estate sectors is passing on pains in cement industry also. It is being projected that growth rate of cement industry will drop down to 10% in current fiscal. The reasons behind such a contingency are higher input costs, low market valuations and scaled up capacity which are in turn leading to reduced demand in the industry. High inflation and mounting home loan rates have slowed down the growth flight of real estate sector which accounts for 60% of the total cement demand. The major expansion plans announced by major industries will further add to their misery as low market demand will significantly reduced their capacity utilization.
Setting up new facilities will impart additional capacities of 34 million tone and 45 million tone respectively in 2008-09 & 2009-10. This is likely to bring down capacity utilization in the industry down from current 101% to 82%. Even as it loses power to dictate prices, increased cost of power, fuel and freight will add pressure on input costs.
Ambuja Cements too is trading at a higher discount than previous down cycle, suggesting bottom valuations. However, replacement valuations for Madras Cements and India Cements indicate scope for further downslide when compared to their previous down cycle valuations.
All this has added to stagnation of the cement industry.

Dying reality advertising
The heat of reality ebb is also being felt by the advertising industry. It is being estimated that all major developers such as DLF, omaxe, ansals & parsvnath have decided to cut down on their advertising budget by around 5%. The advertising industry in India is estimated to be around 10,000 crore. This trend can be witnessed due to weakening spirits of potential buyers and real estate companies call it a reality check on their advertising budgets. A report from Adex India, a division of TAM Media Research, shows that the share of real estate advertisements in print media saw a drop of 2 percent during 2007 compared to 2006. According to Adex, the share of real estate advertisement in overall print and TV advertising last year was 4 percent and 1 percent, respectively. It’s a known fact that infrastructure and real estate companies are responsible for advertising industry maintain double digit growth rate. Therefore it’s understood that a recent slowdown in Indian reality sector has made things worse for advertising industry. The Adex report indicates that the top 10 advertisers shared an aggregate of 16 percent of overall ad volumes of real estate advertising in print during 2007. The list includes names such as DLF Group, Parsvnath, Sahara, HDIL and Omaxe group. However, the real estate had maximum share in South India publications followed by North and West publications with 32% and 26% share, respectively, during 2007.
According to many advertising agencies consultants, this phenomenon is taking a toll as all real estate companies want a national foot print and also these companies are turning into professionals. Therefore they are setting standards when it comes to advertising to sales ratio.

Falling stock markets knock down reality stocks
Reality stocks have been hard hit by uncertainties prevailing in the stock market. The BSE reality index is the worst performer having shed 51% of its 52-week peak reached in reality. The BSE benchmark index has shed 24% since January. The country’s largest real estate firm DLF scrip lost 54% while unitech lost 64% from its peak. The scrips of Delhi bases parsvnath and omaxe have lost 68% each since January.
The sector is facing a major downfall in sales volume in most markets of the country. The speculators have exit the market and Mumbai and NCR, the biggest real estate markets in markets are cladding subdued sales. In Gurgaon and Noida, which had seen prices almost treble in four years, sales are down 70%, leading to a price correction of 10-20%.

Lets us have a look how major cities are afftected by reality downfall
Top 4 metros taking the lead – in slowdown
Delhi &NCR
While bears are ruling the stock market, the real estate sector in Delhi & NCR region has started facing departure of speculative investors from the market. According to these developers based in region the selling of flats has become very complicated at the launch stage due to lack of interest from the speculators. Developers attribute this to stability in prices against the past where prices were up surging on monthly basis. The scenario has changed so much in the present year that developers are now facing difficulty in booking flats which may delay their projects and reduce their pricing power for instance a year ago, if 100 flats were being sold in month at launch stage now it has come down 30-40 per month. Till mid 2007 speculators made quick money by booking multiple flats at launch of the project and exiting within few weeks or months. But now due to the stabilization of the property prices little scope is left for speculators to make money in short term. Therefore outcome is their retreat from the sector.

Mumbai
Mumbai real estate market, which witnessed huge increase in prices in recent years, which made the city to enter in the league of world’s most expensive cities, is now feeling the heat of slowdown. Property sales that have been growing at a clank of around 20% every year have been plumped by 17% in 2007-08.
Though slowdown news of property market in country’s financial capital has been much talked about, but it was first time that figures proved the extent of slowdown. Information about residential and commercial property sales from the stamp duty registration office show almost 12,000 fewer transactions during the last financial year compared to the year before. From April 2007 to March 2008, 62,595 flats were purchased in Mumbai as against 74,555 in 2006-07.
According to reality analyst sales volume can die out further in south as developers persist on holding to their steep prices and buyers anticipate a further fall with current rates beyond reach. They further add that market is on a corrective mode and downward trend is anticipated for another 12 months.
Between 1992-96, the market ran up the same way it did during 2003-07. Post-’96, the volumes dropped by 50%. This time again it is expected to drop substantially though not so steeply. The demand is now extremely sluggish and customers do not want to stick out their necks and transact at prevailing rates.
Chennai
in past few years we witnessed reality index gaining huge heights on BSE and it also impact could be felt allover India. Amongst them Chennai was no exception. With IT boom in past few years and pumping of money by NRI’s have led to prices touching skies. Chennai also witnessed a huge boom property prices over the last few years. However in past few months it has been facing slowdown in growth rate.
Following factors can be attributed to this:
· This is one of the common factor prevailing all over India- rise in home loan interest rates , which has made it extremely difficult for a normal salaried person to be able to afford a house.
· Depreciation of US dollar , which means NRI’s who were earlier pumping money into the real estate are now able to get less number of rupees per dollar they earn in US. Therefore many of them have altered their plans for buying house in India.
· The Chennai Metropolitan Development Authority (CMDA) has imposed stricter norms for apartment construction and penalties for violations are more severe than before.
· Failure of the legal system of chennai to prevent intrusion , forged documentsand illelgal contstruction has added to the problem as many NRI’S are hesitating to buy plots in chennai.
· Apart from this tsunami of 2004 has shaken the confidence of many investors to invest in real estate.
However many analyst are quite bullish about this region. Especially in areas like old mahabalipuram, south Chennai etc because of numerous IT/ITES/ electronics/automobile companies are expected to set up their centers in these areas. Once these projects are complete and companies begin operations their, many people would like to live near to such areas and outcome will be boom in residential sector.
Bangalore
As discussed for above cities Bangalore is also dwindling between the similar scenarios. Bangalore seems to be in midst of low demand and supply. This trend is due to myopic developers , due to sudden growth in Bangalore in last few years , lot of builders have catched the opportunity of building residential houses thinking their will be lot of employment , increase in salaries and hence demand for housing. Past few years have been jovial for Bangalore as IT industry was doing well and banking and retail sectors were expanding.
However with this sudden economic slowdown, due to which Indian stocks markets are trembling, interest rates are high, jobs and recruitment put on freeze have led to cessation of investment in local property markets.
According to the developers real-estate industry of Bangalore has experienced a drop of about 15- 20% in transaction volumes. Adding to it grade A developers have faced a dropdown of 50% on monthly levels of booking compared to what they enjoyed in December 2007.

Future outlook
Indian realty sector is struggling with worst crisis in recent years with most of the companies’ balance sheets showing losses after riding on a boom in last couple of years. The impact on Indian realty turns out to be so severe that realty index on Bombay Stock Exchange, an indicator of investor mood for industry has fallen by 25% in October 2008 and 75% in the past year. According to analysts this is just an indication of long term crisis as developers went aggressive on land acquisition without paying attention to the delivery of projects.
The story of crisis also started to be reflected in second quarter results of realty sector, where company after company reported of huge losses in their balance sheets.
· Realty major DLF , which had long ago raised Rs .100 billion over ($ 2 billion) in what was then the largest ever initial public offering in India , reported of 4% drop in consolidated net profits for the July-quarter.
· In similar to this was unitech, which reported a 12% profit decline in net profit.
· Parsvnath Developers, it was a second straight quarter of decline with a dip of 78.6% in July – September period.
· Another Delhi-based realty firm, Omaxe, which is also facing turbulent times for the second straight quarter, reported an 87.3-percent decline.

However in the current scenario Indian real estate market is going through a phase of correction in prices and there are exaggerated possibilities that these increased prices are likely to come down.

In this scenario what will be the future course of this sector?
Many analysts are of view that tightening of India’s monetary policy, falling demand and growing liquidity concerns could have negative impact on profiles of real estate companies. Slowing down would also aid in the process of exit of some of the weaker entities from the market and increasing the strength of some of the established developers. A prolonged slowdown could also reduce the appetite of private equity.
Its also been projected that large development plans and aggressive land purchases have led to a considerable increase in the financial leverage (debt/EBITDA) of most developers, with the smaller players now being exposed to liquidity pressures for project execution as well as a general slowdown in property sales. Property developers hit by falling sales and liquidity issues would need to reduce list prices to enhance demand, but many still seem to be holding on to the asking price - which, would delay the process of recovering demand and increase the risk of liquidity pressures.It was being witnessed that before the slowdown phase the projects were being sold without any hook at an extravagant rate. But at ppresent negative impact is highly visible as lots of high end projects are still lying unsold. In such a scenario , there may be blessing in disguise as high profile speculators will be out making way for the actual users.
But here also sector faces trouble as correction in prices has been accompanied by increase in home loan rates by the banks which have led to erosion of purchasing power of middle and upper middle class majority of whom are covered in the category of end users or actual users.
Therefore for future of real estate sector analyst call for a wait and watch method to grab the best opportunity with the hope of reduction in loan rates.

Banks to face High NPA’s in 2009

2009-01-29T21:24:00.000-08:00

With the commencing of 2009, Indian banks enjoying high profits, with stable credit growth and non interest income, will now have to face challenging times.
Though banks are showing high profits in their balance sheet, but main figure to impact in coming quarters will be of NPA’s (non-performing assets).

NPA’s are also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time.
In the current scenario of global meltdown, these are the real testing time for banks in terms of asset quality of their portfolio and for any new venture they are willing to undertake. The asset quality of Indian banks has shown substantial improvement in recent years—median Net NPA improved 0.73 per cent as against 0.83 per cent in ’07. However, 2008-09 and 2009-10 has the potential to reverse this trend.

As India witness slowdown in economic activity, banks will face a lower demand for loans. NPA’s will also increase on account of borrowers finding it difficult to repay loans. Credit growth is expected to fall to 14% in 2009-10 , in comparison to 22% of last financial year. Rise in NPA’s would mainly be attributed to export oriented small and medium enterprises(SME’s)which are hard hit due surging costs. The growth in credit in the industry in 2008 was in the range of 25-29 per cent on account of working capital requirements of small-, mid- and large-size industries, and the bankers expect an average 25 per cent rise in their credit in 2009. While state-owned banks were quick to respond to the recent signals from policy-makers by reducing interest rates periodically, many Private Sector Banks (PSB) are yet to follow the suit, mainly owing to pressure on their margins.

In this challenging period banks need to prevent exacerbation in their NPA’s. The challenges include: rapid shrinkage in corporate balance sheets, specifically those exposed to commodities and metals; funding of expansion and acquisition plans by highly-leveraged corporate; export-oriented firms facing a slowdown in business due to weak global demand; and volatile currency movements impacting corporate cash flows.

Fresh NPA accumulation could rise to 3.5% of total loans (on 2-year lag), which though lower than the 4.5-5% levels seen in the previous cycle (in the late 90s), may still result in a 2-3 fold jump. Defaults are expected from retail segment like auto loans.

The worst-case scenario for India, which assumes GDP growth will reduce to 6 per cent over the next few years, is likely to create a major challenge for Indian banks. Should they be focusing on growth or should they focus on keeping NPAs under control? Banks may then have to extensively rely on refurbished and dynamic credit scoring models, de-centralized decision-making based on ground level relationship assessment and increasing use of tracking MIS to control their portfolio in these uncertain times.
In comparison to global banks, Indian banks turn out quite strong from asset quality, diversified risk portfolio and low cost deposit base perspective. This is due to their effective management of the business and partly due to the conservative nature of our bankers and the regulator. The key question now facing the industry is:” Is the Indian banking system safe and sound to fight this financial meltdown”.

GREAT DEPRESSION 1929 Vs CURRENT CRISIS

2009-01-29T21:14:00.000-08:00

1929-33 was a period when universal banks were ruptured into separate commercial and investment banks, which led to ascension of big giants like Goldman Sachs, Morgan Stanley and more. However current global turmoil has taken a reverse gear where many of these investment banks are again turned into large commercial banks.
This article intends to seek out differences and similarities between great depression of 1928 and current global fiasco.
But before going in to details let’s go back and brush ourselves on what exactly was great depression.

Great depression
The great depression which originated in 1929 in US and spread world over by 1930’s was characterized by barren business and huge unemployment. The main cause of this depression which took all the nations in its web was crashing of the stock markets in 1929. Thousands of investors lost their money in stock markets, leading to a longest recession which comprised huge lay offs, unemployment , wiping out of business activities , which left million of people to depend on government or charity for food.
By 1930’s this depression became a worldwide phenomenon, taking all countries into its grip. This lead to vast downfall in global trade as each country tried to protect its own industries by imposing high tariffs on imported goods.

Causes of great depression
· Stock market crash: As mentioned above one of the factors which triggered off this depression was failure of stock markets on October 29, 1929, which led to loss of about 40 billion dollars to stakeholders. Though stock markets after that started to regain on the path of recovery, by end of 1930, but some other factors at work impelled America to do into deep recession.
· Bank failures: During the period of 1930’s 9000 banks filed for bankcruptcy.Bank deposits were not insured and thus as banks failed people lost their savings. The banks which survived in this turmoil, due to gloomy economic conditions and to survive in these conditions stopped creating new loans, which in turn led to slowdown in business activities and less expenditure.
· Cut-back in purchasing power: with the failure of stock markets and fears of further financial fiasco, led to cut – back in purchasing of items from all individual classes. This in turn led to piling up of inventories, which stimulated a cut down in production, leading to layoff of employees. Unemployment reached to a level of 25%, leading to lowering the purchasing power of individuals.
· Hawley –Smoot Tariff: as businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation

Current scenario
Before doing comparisons lets see what current global turmoil looks like: As it’s said truth is bitter, the fact is we are going through a most severe global turmoil since the days of great depression. The similarity between both the crises is that they both originated from USA and now worldwide nations are facing its spillover effects. This financial global turmoil is a combined result of some intermingled financial mistakes. There are some fundamental causes at roots of this depression.
· Firstly are the conceited norms in USA. USA has always been relishing sustainable economic development, buffered with low inflation rates in last two decades. This led to complete ignorance of business cycle of economy. The signs of this were reflected 20 months ago, when America was combating excess liquidity in the market. That was the plenteous sign of coming of real estate bubble and asset price inflation.
· Secondly is the protection enjoyed by these private and investment banks. Booming economic conditions craved these banks to take higher risks, among which most of the deals of these banks were highly leveraged transactions. However these risks turn out to be evil for these high flying banks as they didn’t get enough capital in support of their high risk investments.
· Last but not the least reason which I think would be failure of top tier management to provide guidance to their deal makers. Greed took over and rest is history.

Though today symptoms of current events are similar to that of great depression, but according many economists making their comparison is misleading. Though current time hold similarities with great depression of 1929-33, but outshined by certain differences.
For instance in 1930, Hawley Smoot act came along in decade of restrictive tariffs and international disharmony. However today global turmoil is characterized by prominent degree of free trade and global cooperation. The era of 1929-33 was the one saw the absence of shock absorbers like such as social security and deposit insurance which could safeguard people from economic crises.

In the 1930s, some of the world's largest economies—Germany, the Soviet Union, Japan, and Italy—were run by leaders hostile to the very notion of market capitalism. Today, U.S.-style market capitalism is under assault from self-inflicted wounds, and Germany, Italy, and Japan (Russia, not so much) are working with the United States to cope with a common problem.
Apart from this the policies of Federal Reserve differ in both the periods. 1930’s policy was “downturn as a force for good”. Liquididate labor, stocks, farmers, so that people will work harder and live more moral lives. However in today’s crisis Federal Reserve is making full efforts to increase liquidity in stocks, to farmers and real estate.

It’s true that current crisis are nowhere in comparison to great depression, but still we need to put a full stop over these ongoing crises, which is hard-hitting the nations worldwide. The another difference which can be drawn over these two crisis is that in present day we have president Barack Obama who promises to solve the crisis . The methods which he plans to initiate are to follow policy of creation of jobs and more spending by American people. Apart from this we have seen bailout packages already becoming the breaking news. Therefore it can be said roots of current crisis are same but nature is totally different. We can hope to see a better future in near term.

2009-01-29T21:03:00.000-08:00

As economies continue to struggle with global financial turmoil, a question which has gained heap among investors is “will current crisis halt the growth of emerging markets”?
Decoupling has been one of the most common and optimistic words used since the onset of the current recession. But before going into further discussions, lets look on to what exactly decoupling theory means;

Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession

This however does not conclude that global economic slowdown will have no impact on developing economies. Emerging markets have become more integrated with world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). However the effect of American downturn on GDP Growth of emerging markets will be less in comparison to previous downturns.
Decoupling has been one of the hottest issues of debate among economists. If we look at the growth rates of India and China over the last year gives us enough reason to believe that Asian economies will decouple from world economy. Impressive improvement in its macro foundations of growth – especially in saving, infrastructure, and foreign direct investment. Chinese industrial output growth reaccelerated to an 18.5% over the Jan-Feb period – up from 15% in final period of 2006. India, not as brisk as China, has a 10% y-o-y pace in early 2007 which was well above 7.25% in late 2005 and early 2006 when there was no recession in US. There is a 5.5% of annualized increase in Japanese economy.

Decoupling is also evident from fact that though exports to America have lurched, but to other emerging economies have surged. For instance China’s growth in exports to America slowed to only 5% (in dollar terms) in 2007. However this slowdown was offset by increase in exports to countries like India, Brazil & Russia by 60% and to oil exporters by 45%.Likewise, South Korea's exports to the United States tumbled by 20% in the year to February, but its total exports rose by 20%, thanks to trade with other developing nations.
Reasons for Decoupling

A study by IMF shows that decoupling and globalization can go hand in hand. According to IMF methodology they divide 106 countries into 3 groups – developed, emerging and low income developing countries. And then measure how the correlation between economies has changed over time as cross border flows have expanded.

Outcome of their study shows that growth has become contemporize in both developed and emerging economies. But economic activity in emerging economies has surprisingly decoupled from that of developed economies in past two decades, since technology bubble burst. Exports of consumer goods to United States declined to 6% of total Asian exports in 2006 from 8% in 2001. Emerging economies have now started trading with each other, which accounts for half of their total exports.

Another reason that can be attributed for decoupling and globalization going together is that opening up of economies have not only boosted poor countries trade, but also has stimulated their productivity growth and in turn boosted domestic income and spending. In 2007 emerging economies' real domestic demand grew by an average of 8%, almost four times as fast as in the developed world.

U-Turn of Decoupling
In the year of 2008, India and China have shown the signs of overheating due to current global meltdown. Many economist are of view that boom in emerging economies was largely driven by exports to American consumers, easy access to cheap capital and high commodity prices. All these tools have now dried up. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates. However dependence on exports to American markets is always exaggerated. No doubt that emerging economies won’t be able to record higher growth rates of 2007. But at the same time it is wrong to presume that emerging markets will not recover until America rebounds.
There are enough reasons to believe that emerging markets share of world growth will continue to surge.

Economists argue that most emerging economies are not victims of America’s obscure structural problem, such as of swelling debt, which could pinch growth for several years. Though 2009 will be a painful year for poor countries, but those with high savings and modest debt could recover quickly. On account of measures such as government and external balances emerging economies are sounder than developed ones.
Let’s have a brief overview of these emerging economies:
· Russia: has been badly hit by current crisis, by outflow of capital and credit squeeze, despite of running current account surpluses for many years. It has become excessively difficult for banks and companies to pay off their foreign debts; due to this it has lost its shareholders trust. Official reserves have fallen by $160 billion or 25% since August. As a result of lower oil prices, Russia is likely to run its current -account and budget deficits in a decade and its economy may well contract in 2009.
· China: 2009 will prove out to be more severe to China than 2008, with GDP growth rate slowing down to 7%. According to many economists China will follow a “007 pattern”; 0% world financial growth; 0% interest rate world wide and 7% growth in China. In China property and export sectors are ones which are in enormous trouble, the government might introduce another round of interest rate cuts on a large scale in the first half of 2009. In the summer, the one-year deposit interest rate might drop to as low as 1 percent from its current 2.25 percent. Apart from this China has the fiscal room to expand spending and cut taxes, which should be an effective stimulus. It may take a few months for the package to have a big effect, and that is why the first part of 2009 looks particularly difficult. But the infrastructure projects in the package will stimulate demand for steel, cement and construction. That in turn should have a positive spillover effect on the rest of the economy.
· India: is not an export driven economy, therefore it is not as susceptible to global meltdown as China is. World Bank forecasts India’s growth rate at 5.6% in 2009, followed by a bounce back of 7.7% in 2010. The reasons for such a slow growth can be accounted to the fact that main drivers behind explicit growth had been overseas borrowings and new equity issuance. Both of which have dried up now. Therefore picture for 2009 is gloomy. India will need capital for growth while global capital will remain in short supply. Corporate India, which has led the investment boom from the front in the last four years, will also be shy of putting more capacities into place due to falling demand. Even those who want to precede with their capex plans may find it difficult to raise money even from the domestic markets.
· Latin America: Global financial turmoil is ending a half-decade of more than 5 percent growth in Latin America, as prices for its commodity exports sink and foreign investors sell off assets to cover losses at home. The global downturn has slashed demand for oil, copper, iron ore, grains and other regional exports, narrowing trade surpluses, while credit for farmers and small businessmen has tightened amid the global crunch, boosting unemployment and poverty. Economic growth could slow to 2 percent across the region in 2009, its lowest level in years. Latin America's two largest economies, Brazil and Mexico, have seen growth forecasts more than halved, while analysts worry that Argentina, one of the world's top-five exporters of wheat, corn, soy and beef won't be able to service payments on $20 billion in debt next year as income from export taxes stalls.
In past five years emerging economies have boomed, but not completely busted. In order to safeguard themselves from this ongoing recession these economies need to be high savers and able to stimulate their own economies. These economies are likely to face major headwinds in 2009 and negative earnings revisions for emerging market companies are likely to increase in the next six months.
However if we analyze MSCI EM index (An index created by Morgan Stanley Capital International that is designed to measure equity market performance in global emerging markets.The Emerging Markets Index is a float-adjusted market capitalization index. As of May 2005, it consisted of indices in 26 emerging economies: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela) , which have fallen by 57% in the first 11 months of 2008 , have outperformed the MSCI World IndexSM (A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets)by 10.3% per annum for the seven years ending 30/11/2008. In fact, over very long time periods, the performance of emerging market equities has tended to confirm the widely-held view that high rates of economic growth in emerging markets offer the potential for returns superior to developed markets. Thus, for the 18 years ending 9/30/2008, the MSCI EM Index has outperformed the S&P 500® by more than 76 basis points per annum.

But many uncertainties still exists in emerging markets these include the magnitude and severity of the global recession, bank regulation and/or recapitalization (with many commentators suggesting that several US banks will be nationalized), credit availability, and the ability of China to avoid a "hard landing." And the recent tragic terrorist attacks in Mumbai remind investors that specific political risks in some emerging markets remain high. And now icing on the cake would be recent Sataym fraud which have raised issue on corporate governance practices, will also affect investor’s sentiments in time to come.
In summing up, long term prospects for emerging markets remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010–15, similar to that during the past decade, and more than twice as fast as in the 1990s. Though investors have lost their sense of perspective on these markets but economic fundamentals of these economies are stronger and will be able to survive the global financial meltdown. Therefore there might be some recoup ling will be there in short term, but in longer term decoupling will bounce back.

Affinity between stock markets & GDP

2009-01-29T20:54:00.000-08:00

Sensex reached a peak of 20,000 and felled like a pack of cards to 10,000. What do these numbers suggest about macroeconomic growth of a country? Whenever there is news regarding some inflation numbers, IIP numbers markets react, but does this really matter, is there any evidence to it? Let’s find out:

Keynesian thesis states that “stock market is a casino”. However he also agnize that stock markets enable people with money to invest together with people who can put that investment to productive use.

This is one of the ongoing debates, on relationship between stock markets and macroeconomic growth, which has led to many studies done by various economist, analyst and financial policymakers but still not much is concluded.
I can’t mention various studies done on this issue but ill be here putting up a brief summary, on core theme of this debate.

If we trace the period between 1995 -2004, the CAGR (compounded annual growth rate) of real GDP and the BSE sensex shows a high degree of correlation, while real GDP has grown at 6.1%, sensex has also posted similar gains. However if we analyze the data more deeply, year on year examination gives a different picture. The outcome of this examination shows that, though Real GDP has shown a steady growth under the period of study, BSE sensex has been very volatile during the entire period. On year –on- year basis there seems to be no sync between the 2 factors.

However if one tends to consider growth in nominal GDP and corporate performance at the top-level, there it seems to be high degree of correlation. This is on account of the fact that GDP is aggregate of output of agriculture, industrial and services sector.

If we look at the trend stock markets are not always guided by fundamentals but also by sentiments. For instance, lowering of interest rates by the RBI (like until 2004) typically has an impact on the economy with a lag. But the signal that the RBI is reducing interest rates may prop up stock markets immediately and stock prices may react much faster.

However in present period there is a bit change in the trend, this due to the fact that Indian Economy is now more integrated with global world than before. At worldwide level capital markets evince attributes of perfect market with no or acceptable entry barriers, large number of buyers and sellers, absence of, or very low, transaction costs, tax parity, and free trading.
To attract international investments, countries compete with each other and promote their capital markets with savvy sops and policy announcements. It is in fact a reality that no modern economy can exist without an efficient capital market. This is what have attracted international investors and in recent years have made India their favorite destination. Since our markets globally integrated if we look in recent time trends, for instance when November IIP numbers came positive, were unable to pick up the markets, however most of the times we get to hear that markets are beaten due to weak global cues , or any uncertain event at international level have an effect on our markets.

The crux of the issue is that economy goes through business cycles of recovery, boom, slowdown and recession. Stock market also moves on the similar pattern. For instance if India GDP grows at 10% in one year, the sensex may not gain similar percentage during the same year. However, the relationship may hold true over the longer-term. It may be stated that the state of the economy has a bearing on the share prices but the health of the stock market in the sense of a rising share price index is not reflective of an improvement in the health of the economy.
In summing up the basic purpose of all studies done is to find out relation between economic growth and stock markets. Though it can’t be neglected that stock market directions are based on fundamentals in long term, however these assumption may turn out to be dangerous for investors in short term. Therefore all analyst advice to go for investment in stocks with a long term view.

WPI vs CPI

2008-10-01T00:58:00.000-07:00

Now as we have seen how inflation is calcualated with WPI , its now time to analyze wthether WPI is a good measure of inflation or not.

Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation. But our country, India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

The main difference between WPI and CPI is that wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at final stage of production.

In last post we discussed about WPI, now let’s have a better understanding of CPI and how it’s better from WPI:

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

In use of WPI there are certain problems which have been encountered.
· Economists say that main problem with WPI is that more than 100 out of 435 commodities included in the index have abstained to be important from consumption point of view. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
· WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. Therefore we see here that WPI does give the true picture of inflation.
· In present day service sector plays a key role in indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI.
· Moreover the inflation figures that we get on Friday hardly makes a differnce to consumers, as the commodites on which inflation is calculated are not part individual consumers budget. Therefore in order to know what exact number of inflation is affecting your budget , it is advisible you should do your own calculation. You can compare your expenditure for previous years and with present scenario required to maitain your lifestyle and you ill come to know that increase in expenditure would be a few times higher than the official inflation figure.

But it is not easy for country like india to adopt to CPI , as in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are:
· CPI Industrial Workers;
· CPI Urban Non-Manual Employees;
· CPI Agricultural labourers; and
· CPI Rural labour.
Apart from this official staements say that there is too much of lag in reporting of CPI numbers, which makes it difficult for india to calcualte inflation based on CPI figures.
India calcualtes inflation on weekly basis , whereas CPI figures are available on monthly basis. So all this give little ground for indian government to adopt CPI in calculating inflation.

How Inflation is measured

2008-09-29T23:28:00.000-07:00

Thursday has become one of the most important days of our lives (at least for me). Well inflation figures come out and these numbers decide how every individual household budget would be like. But for many concept of inflation is just till the word “manghai badh gayi hai”. So I thought why not to discuss this interesting concept of manghai today:

What is inflation?
Inflation is the increase in prices of baskets of goods and services that represents economy as a whole. It is measured as an annual percentage increase. For e.g. We all love to watch movies; there was a time when movie ticket was for Rs 50 and now its cost Rs 100, the prices have doubled, this is how inflation affects us. Take another e.g. suppose with Rs 100 you can buy only 6kg of groceries , the same amount of money can only buy 6/ ( 1+I) kg of groceries next year , where I refers to rate of inflation beyond today. Thus if the rate of inflation is 5%, other things being equal you can buy only 6/1.05 worth of groceries.
Well all of us know what is inflation and what are its causes……..so I won’t be going much in to it….

Measurement scale of inflation
Inflation can be measured by the following 2 ways:
· Inflation based on changes in consumer prices for specific baskets of goods known as consumer price index (CPI).
· Inflation based on changes in average prices of goods traded in wholesale market called as wholesale price index (WPI)
In India inflation is calculated on the basis of WPI. WPI is calculated on weekly basis unlikely CPI that is calculated on monthly basis.
WPI in India includes a total of 435 commodities and tracks the change of prices in these commodities.
These goods can be classified as under:
· Primary articles ( food articles non-food articles and minerals)
· Fuel ,power ,light ,lubricants and manufactured products like food products , beverages , tobacco , textiles ,leather and leather products).
Now with one eg ill show how WPI is calculated
WPI is calculated on base year and WPI base year is assumed to be 100
Let’s calculate the WPI for year 2007: assume that price of kilogram wheat in 2007 is Rs 7 and for 1993-94 kilogram wheat costs Rs 5
Therefore the WPI of year 2007 is:
Price of wheat in 2007 – price of wheat in 1994 / price of wheat in 1994 *100
7-5 /5*100 = 40
Since WPI for base year is assumed to be 100, WPI for 2007 will become 100+40 =140.

Calculation of rate of inflation
If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be:

(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100)
For e.g. WPI on 1st January 2007 are 141.2 and on January 2008 are 144.4, then inflation rate for year 2008 is,

144.4-141.2 / 141.2 *100 = 2.26 %, therefore we can conclude inflation rate for the year 2008 is 2.26% (I know this number seems to be unbelievable but it’s just an e.g.)

There is an on going argument that CPI is better than WPI and government should measure inflation with use of CPI…….for this wait for my next post……

Reference books
Macroeconomics by Campbell R McConnell and Stanley L Brue

Appreciation and depreciation of currency

2008-09-26T04:07:00.000-07:00

As per my post on basics of appreciation and depreciation of rupee, we saw what appreciation and depreciation of rupee means. Now this post will help us to understand what causes appreciation and depreciation of a currency and its effects.

As from our previous example, we assume that there are 2 countries India and USA, and there is flexible exchange rate regime. Therefore value of currency of each country in terms of the other depends on the demand and supply of their currencies. It is in the foreign exchange market that exchange rate among different countries is determined. It is a market in which currencies of various countries are converted into each other or exchanged for each other. In our case, Indians sell rupees to buy US dollar and the Americans will sell dollars in exchange for rupees.

Demand for dollar
Now demand for dollar by Indians arises due to the following:
· The Indian individuals, firms or government who import goods from USA into India, as they need to pay for goods and services imported.
· The Indian individuals travelling and studying in USA would require to meet their travel expenses and education expenses.
· The Indians who want to invest in equity shares and bonds of the US companies and other financial instruments.
· The Indian firms who want to invest directly in building factories, sales facilities, shops in USA.

Supply of dollar
Let’s see what causes supply of dollars in exchange market:
· The individual firms and government which export Indian goods to USA will earn dollar from American residents who would buy Indian goods imported into USA and pay their price in dollar.
· Americans who travel to India and use the services of Indian transport, hotels etc .will also supply dollars to be converted into rupees for meeting these expenses.
· American firms and individuals who want to buy assests in India , such as bonds and equity shares of Indian companies or wish to make loans to Indian individual and firms will also supply dollars.
Equilibrium is establish in foreign exchange markets by simple demand and supply of currencies…..when
Demand= supply, then foreign exchange market is said to be in equilibrium. The equilibrium in the foreign exchange market will be disturbed if some changes occur in the underlying factors that determine the demand for and supply of foreign exchange.

Appreciation of rupee
For e.g., if there is in increase in incomes of American people due to boom conditions in the US economy, it will affect the equilibrium rate of exchange. The increase in incomes of the people of USA will lead to increase in demand for imported goods those of India. Now this would lead to increase in supply of dollars, which would in turn lower the price of dollars in the foreign exchange market by simple theory of demand and supply, as now there will be excess supply of dollars. This implies that increase in imports by USA from India leading to more exports from India will cause dollar to depreciate and Indian rupee to appreciate.

Depreciation of rupee
On the other hand if due to increase in incomes of Indian people causing arise in demand for American consumer goods or there is picking up of industrial activity in India requiring more imports of material, machines equipments and other capital goods from USA the Indian imports from USA will increase. The increase in imports from USA by India will have to be paid in dollars causing demand for dollars to increase. This will cause disequilibrium in the foreign exchange market, as with increase in demand for dollars, there will emerge excess demand for dollar which will push up the price of dollar and this rise in price of dollars in terms of rupees implies depreciation of value of rupee.
This how the foreign exchange market works……………..for more details you can refer to books like
· Dornbush R. and S. Fisher., Macroeconomics
· Mankiw, N.G., Macroeconomics
· Froyen R.T., Macroeconomics,

Biofuel Policy of India

2008-09-26T00:28:00.000-07:00

The national government released its first ever national biofuel policy which was most notable for its mandate that 20% of all diesel demand should be met using plant based rather than fossil based diesel by 2017. The policy also stipulated that 10% of all gasoline demand should be met using ethanol compared with current mandate of 5%.
The policy also suggested removing all central taxes on biodiesel and according declared goods status to biofuels that would ensure a uniform 4% sales tax on the product across states.
With the mounting inflation it seems that root cause of it is use of food stocks in creation of biofuels. But when we analyze costs and benefits of creation biofuels, the picture turns out to be different.
The assumption that biofuel production will lead to crowding out of food production is also misleading. Jatropha plant which is the main source of production of biodiesel in India is a hardy plant which can grow on land on which traditional food crops cannot grow, which means that arable land need not to be sacrificed for fuel production. In addition to this jatropha production is estimated to utilize less than 1% of water required for traditional food crops. Similar to this other crops which are used in production of biodiesel have low inputs, meaning that even large-scale production of biodiesel will not result in a significant diversion of scare water resources from food production.

The Jatropha advantage
Jatropha is an eternal hardy shrub which can survive in arid and semi arid tropics. It grows wild in many areas of India and even thrives on infertile soil. This makes it an ideal feedstock for, biodiesel as India has more than 170 million hectares of wasteland which need revegetation. Since jatraopha is water efficient and widely adaptable, large scale jatropha plantations require for the biodiesel industry could lead to generation of these wastelands.
The yield of Jatropha oil is quite high, ranging from 1 to 5 tonnes/ ha depending upon the soil conditions and rain fall, and oil can be extracted from seeds starting from the second year. Jatropha biodiesel projects can also help in rural developments by introducing new employment opportunities in agricultural and small and medium industrial sectors. Assimilation of atmospheric carbon, to the extent of approximately 10 tonnes CO2 per hectare, can be realized by Jatropha plantations! Since India is a developing country, this can be traded under the Clean Development Mechanism (CDM). Article 12 of Kyoto protocol specifies that developing countries can benefit from CDM projects resulting in "certified emission reductions" (CERs) and that industrialized countries may use CERs to comply with their quantified emission reduction commitments. This is an additional economic advantage favoring Jatropha biodiesel projects in India.

Encouragement by government
The government is making efforts not to encourage biofuels at the cost of food grain production. The government has decided that no food grain or oilseed should be used for producing biofuels. The The idea is to prevent a repeat of the American experience where diversion of corn for ethanol production is being blamed for foodgrain price spurt across the globe. Therefore, use of even coarse grains for biofuel production would not be allowed. In the case of sugarcane too, there are concerns that focus on ethanol would lead to lower production of sugar.
Only wasteland is to be used for growing biofuel producing plants such as jathropa. While biofuel production is yet to catch up, there is growing concern over diversion of farm land pushing up price of foodgrains. The risk cannot be afforded at a time when Indian entities are looking at purchasing farmland in south America, Africa and Canada to grow pulses and oilseeds. Land has become a scare resource and disputes are raging in various parts of the country over use of farmland for other purposes, including industrial development.
Recently, some companies have started cultivation of biofuel crop on wasteland and degraded forest land. BP, IOC, BPCL, Reliance and IKF Technologies have already rolled out plantations in about 3 lakh hectares of wasteland spread across the country. The National Policy on Biofuels has set an indicative target of 20% blending of biofuel in both petrol and diesel across the country by 2017.

Advantages of Biofuels for India

2008-09-24T01:48:00.000-07:00

Decreased emissions of harmful pollutants: Ethanol and biodiesel contain oxygenated compounds containing no sulphur. These fuels do not produce sulphur oxides which lead to acid rain formation. Sulphur is removed from petrol and diesel by a process called hydro-desulphurization. This process causes loss in lubricity which has to be rectified by producing an additive. Biodiesel has natural lubricity and thus no lubricity enhancing additive is required.
Condensation in green house gas emissions: The net CO2 emission of burning a biofuel like ethanol is zero since the CO2 emitted on combustion is equal to that absorbed from the atmosphere by photosynthesis during the growth of a plant (sugarcane) used to manufacture ethanol. Biofuel contribute significantly to climate change by reducing CO2 emissions. Biodiesel projects can qualify as CDM projects and thus can fetch in additional income through the sale of certified emissions reductions.

Employment generation: Biofuel industry in future can become major source of employment. The investment in the ethanol industry per job created is $ 11000, which is significantly less than $220,000 per job in petroleum sector. In India sugar industry which is the backbone of ethanol production is the biggest agro industry in the country. The sugar industry is the source of livelihood for about 45 million of farmers and their dependents comprising 7.5% of rural population. Another half a million people are employed as semi-skilled laborers in sugar cultivation. The first phase of the National Biodiesel Mission demonstration project will generate employment of 127.6 million person days in plantation by 2007. On a sustained basis, the program will create 36.8 million person days in seed collection and 3,680 person years for running the seed collection and oil-extraction centres.
Energy security and decrased dependence on oil imports: India ranks sixth in world in terms of energy demand. India‘s domestic crude oil production only satisfies about 25% of this consumption. Dependence on imported fuel leaves many countries vulnerable to possible disruption in supplies, which leads to physical hardships and economic burdens. The volatility of oil prices poses great risks for world’s economic and political stability, with unusually dramatic effects on energy importing developing nations. Renewable energy, including biofuels can help to diversify energy supply and energy security.

Improved social well being: A large part of population, mostly in rural areas does not have access to energy services. The increased use of renewable (mainly biofuels) in rural areas is closely linked to poverty reductions because greater access to energy services can:
· Improve access to pumped drinking water. Potable water can reduce hunger by allowing for cooked food (95% of food needs cooking).
· Reduce the time spent by women and children on basic survival activities (gathering firewood, fetching water, cooking etc).
· Allow lightening which increases security and enable night time use of educational media and communication at school and home.
· Reduce indoor pollution caused by firewood use, together with reduction in deforestation.

Lack of access to affordable energy services among the rural poor seriously affects their chances of benefiting from economic development and improved living standards. Women, older people and children suffer disproportionately because of their relative dependence on traditional fuels and their exposure to smoke from cooking, the main cause of respiratory diseases. Electricity through transmission lines to many rural areas is unlikely to happen in the near future, so access to modern decentralized small-scale energy technologies, particularly renewables (including biofuels), are an important element for effective poverty alleviation policies. A programme that develops energy from raw material grown in rural areas will go a long way in providing energy security to the rural people.

Biofuel Industry

2008-09-24T01:43:00.000-07:00

Biofuel is any fuel that is derived from biomass. It is a renewable source unlike other natural resources, such as petroleum, coal and nuclear fuels.

Overview of the industry
With the prices of crude oil surging up to $ 150 barrel, biofuels have essential role to play in meeting energy needs for India. Most of the energy requirements are at present satisfied by fossil fuels – coal, petroleum based products and natural gas. Domestic production of crude oil can only fulfill 25-30% of national consumption and extensive demand for oil has forced India to depend on other countries for oil. This has increased risk exposure of the country to the high price of the crude oil in the international market.
India started on with its biofuel journey in 2003 with an impressive growth. Ethanol and biodiesel are gaining acceptance worldwide as good substitutes for oil in the transportation sector.
· Ethanol is currently produced in India by the fermentation of sugarcane molasses is an excellent biofuel and can be blended with petrol.
· Likewise, biodiesel which can be manufactured by the transesterification of vegetable oil can be blended with diesel to reduce the consumption of diesel from petroleum.
· Brazil uses pure ethanol in about 20 per cent of their vehicles and a 22 to 26 per cent ethanol-petrol blend in the rest of their vehicles.
· The United States and Australia use a 10 per cent ethanol blend.
· With a normal production rate of 1,900 million litres a year, India is the world’s fourth largest producer of ethanol after Brazil, the United States and China.
· Beginning 1 January 2003, the Government of India mandated the use of a 5 per cent ethanol blend in petrol sold in nine sugarcane producing states. The Government will expand the 5 per cent ethanol mandate to the rest of the country in phased manner.

Biofuels offer a number of environmental, social, and economic advantages, including lower emissions of harmful pollutants; decreased greenhouse gas emissions; increased employment; increased energy security, especially in rural areas; decreased dependence on oil imports; and good fuel properties for vehicles.

Key findings
· Ethanol dominates the world biofuel market and its production is expected to grow at a CAGR of around 6% during 2008-2017.
· Worldwide biodiesel production is expected to grow at a CAGR of over 5% from 2008 to 2017.
· Ethanol production of India is likely to attain a CAGR of slightly over 2% during the period 2008-2017.
· Increased ethanol use is expected to supersede the production during the forecasted period. Domestic ethanol consumption in India is projected to expand at a CAGR of around 6.5% during 2008–2017.
· India’s total biodiesel requirement is projected to grow to 3.6
· Million Metric Tons in 2011-12, with the positive performance of the domestic automobile industry.
· Similar to Brazil and the US, the Indian automobile industry has huge potential for the flex-fuel vehicles.

Basics of appreciation and depreciation of rupee

2008-09-18T22:36:00.001-07:00

Nowadays it’s very important to know meanings of these 2 terms, appreciation and depreciation. If switch on cnbc or ndtv profit we hear these terms very often. So what these terms mean and what is logic behind them?

Let’s have a look
What is exchange rate?
In simple terms it is defined as rate or price at which one country’s currency is exchanged for another country’s currencies.
Suppose there are 2 currencies $ and rupee (R), now exchange rate between these 2 currencies can be expressed as $/R or R/$. These are reciprocals of each other. Thus if E is the $/R exchange rate and V is the R/$ exchange rate then E = 1/V.

For e.g. on September 15 th 2008 the following exchange rate prevailed,
E =45 which implies V= 0.022
V= 0.023 which implies E =43.47

Currency value
It is important to understand that value of one currency is always given in terms of other currency. Thus the value of Indian rupee (INR) in terms of dollar is the $/R exchange rate.

Currency appreciation: currency appreciates with respect to another, when its value rises in terms of the other. The rupee appreciates with respect to dollar when if the $/R exchange rate rises.
For e.g. value of rupee in terms of dollar is:
September 15 - 45
September 16 – 44

Using the percentage change formula: (new value – old value)/ old value
44-45/45 *100 =2.22%
Therefore rupee has actually appreciated by 2.22%. Here the value of rupee rises against dollar by 2.2%.

Currency depreciation: A currency depreciates with respect to another when its value falls in terms of another.
For e.g. Value of rupee in terms of dollar is
September 15 - 44
September 16 – 44.78

Using the same formula
44.78-44/44*100 = 1.7%

Therefore rupee has depreciated by 1.7%. Here value of rupee falls against dollar by 1.7%
This is in simple terms what is appreciation and depreciation. Who gets affected by appreciation and depreciation and how it’s impacting India will be discussed in my following post.

Hysteria of sub -prime crisis

2008-09-18T22:36:00.000-07:00

We all are familiar with the word of sub-prime crisis, for instance few months back , when I was pursuing my masters , and there was placements going on , the only topic used to be discussed was global downfall, due to sub-prime crisis. But when it was asked “what are sub-prime crisis, very few had an answer, and I wasn’t among the few. Even if you search on Google you won’t get many results. So let me try and explain what this sub prime crisis is?

In simple words sub prime crisis are associated with demand and supply of houses. Housing prices started gaining upward momentum in US in early years of this decade and continued through mid 2006, with the borrowing and lending rates extremely low, which elevated the demand for and supply of new existing houses.
Result of this demand and supply was creation of sub-prime lending industry by banks.

Sub prime lending refers to lending (at higher interest rates) to people, who may not be eligible for loan in normal circumstances. May be they don’t have job or income or defaulted in the past. It means many institutions offered home loans to borrowers with poor or no credit histories, requiring higher than normal repayment levels- creating now what is known as sub prime mortgages. Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they good sell the mortgaged property.

However happy days started to end when on June 30th 2004, when Federal Reserve started with interest rates hikes that raised the cost of borrowing from the lowest levels registered since 1950’s. It increased the interest rates seventeen times and paused only in June 2006 when the borrowing cost touched 5.25 per cent. The US housing market began sliding in August 2005 and that continued through 2006. Building rates and housing prices tumbled.
The excess liquidity slowly started to evaporate. It turned into creator of problems for Americans, informs of job losses, less consumer spending and fears of slowdown if not recession. A similar situation may develop in the UK, where housing prices during last five years have risen very rapidly, creating a wealth effect just as in the US. But prices there have now started correcting. This has a contagion effect and we may see a huge write-off by banks doing business in the US and the UK.
In US more than 25 sub-prime lenders declare bankruptcy, announce significant losses or put themselves for sale.

Turmoil in India
Given the dominance of US financial markets in other developed and developing economies, the sub prime crisis affected markets and institutions all over the globe.
The Indian economy showed signs of over-heating in mid -2007, with inflation rising above 6%.
The main channels through which global credit crunch and a recession in US can affect India are:
· A decline in capital inflows and lower corporate access to credit in international markets.
· Slowdown in export of goods and services from India to the US.
· remittances
India is running a current account deficit (CAD) which is likely to increase to 2.6% of GDP in 2009 from the 1.5% in 2008, driven largely by the sharp increase in international prices of oil and food commodities. So far India’s CAD has been comfortably financed through capital inflows and FDI. In this scenario, the question whether a global credit crunch and significant slowdown in the US economy could undermine India’s growth prospects, becomes pertinent.

Recent financial tsunami
September 2008: 9/15 will now be recognized as black Monday in history of financial system with Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.
In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merrill Lynch) who in turn sold retail bonds to individuals.
Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honored, the banks could not repay these financial institutions who in turn could not repay retail investors.

Growth of Urban Poverty

2008-09-04T03:00:00.000-07:00

With India achieving higher growth trajectory and acquiring the status of most promising emerging economy, have we ever thought of status of poor people in India whose conditions are deteriorating day by day? Well here I would like to discuss about that even after 60 years of independence the subject of Indian poverty still remains a cause of concern.
It’s a well known fact that even urban poverty is prevalent due to impoverishment of rural peasantry which pushes them to migrate from villages in search of subsistence living in towns and cities.

Why Indian people are poor?
Well we have answered this question several time in exams, but answering it again will take us to jovial memories of our school times!
Major cause of poverty in India is lack of productive assets and financial resources for both communities and individuals. High levels of illiteracy, inadequate health care and extremely limited access to social services are common among poor rural people. Microenterprise development, which could generate income and enable them to improve their living conditions, has only recently become a focus of the government.

Poverty map of India
Poverty is most prevalent in parts of Rajasthan, Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Orissa and West Bengal. Large population of rural India resides in India’s semi arid tropical region. In these areas shortages of water and recurrent droughts inhibit the transition in agriculture which green revolution has been able to achieve elsewhere. There is also high incidence of poverty in flood prone areas such as those extending from eastern utter Pradesh to the Assam plains and especially in northern Bihar. Poverty affects the lives of tribal people in forest areas, where loss of resources has made them even poorer. In coastal fishing communities’ people’s living conditions are deteriorating because of environmental degradation, stock depletion and vulnerability to natural disasters.
Statistics reveal that about 2/3 of India’s population live in rural areas and almost 170 million of them are poor. Poverty in India can be defined as a situation where certain sections of people are unable to fulfill their basic needs.
The economics of urban poverty
There is huge momentum in growth of big cities than smaller towns. India’s mega cities constitute of highest percentage of slum dwellers in the country. As India is transforming into more urbanized economy, more it is getting prone to urban poverty.
The reasons behind this urban poverty can be stated as below:
· Improper training
· Growing population
· Slower job growth
· Failure of PDS system
The urban poor population of India is estimated to be nearly 8 crores, while slum population 4 crores.

The complicated scenario of poverty
Urban poverty is diagnosed by following symptoms:
· Scanty household income: resulting in insufficient consumption of basic necessities, sometimes exacerbated by uneven distribution of consumption within household, between men and women and between adult men and children.
· Partial asset base : for individuals households or communities
· Inadequate provision for public infrastructure and services
· Exploitation and discrimination

Conundrum of urban poverty
Urban poverty was by far detectable due to lack of land tenure, access to affordable shelter and basic amenities, particularly health, education and social security. The bulk of urban poor are residing in extremely deprived conditions with inadequate physical amenities like low cost water supply, sanitation, sewerage, drainage, community centers and social services relating to health care, Pre School, non-formal education.
Workers who are engaged in informal sector form the majority of urban poor. Workers in this sector earn low wages or if they are self employed their income is poor. Large number of people among them consists of low skilled rural migrants or migrants from small towns. There is hardly any working regulation for these people and they earn wages which are less than specified minimum wages.
Informal sector comprises people like vegetable vendors, rickshaw pullers, maids who come to work in our homes, people employed on streets and many more. When these people come to the city, due to lack of appropriate skills they get into the informal sector. The only difference which they get in migrating from village to city is that now they come under urban poverty level rather than rural poverty.
Many people in these urban areas are homeless, without access to clean water and hygiene systems of waste disposal and they live in polluted degraded environment.

Poverty alleviation programmes
Any work on poverty of India is incomplete without mentioning of poverty alleviation programmes. So to provide all you readers full information on urban poverty lets have look at some of these poverty alleviation programmes.
Urban poverty alleviation is one of the most challenging tasks for government which calls from some imaginative new approaches in this direction. The basic need of the hour is to provide these urban poor with assistance in setting up of microenterprises there by providing them avenues for enhancement in their incomes, so that they get access to physical amenities like clean drinking water, drainage , sanitation , community centers , health care , nutrition , preschool and formal education.
The ministry of Tamil Nadu urban development is monitoring the implementation of 3 significant programmes relating to urban poverty alleviation.
· The Nehru Rozgar Yojna
· The urban basic services for the poor
· The environmental improvement of urban slums

This is what the government is doing but we educated people also have some responsibility in alleviation of such cause:
Here I would like to share with you something: Here I quote one e.g. which is taken from my daily routine: most of the times in morning I commute to office by bus and in bus daily am accompanied by small kids of age about say 6- 10 years . You must be wondering that they might be on their way to school but that’s the plight of our country these kids daily commute by bus to supply or I guess sell magazines like India today , stardust etc etc… to retailers or they sell themselves on roadsides. You must have also seen children selling things on red lights. The point here I want to highlight is education is right of these kids, but because of their poor living conditions these kids are forced into such work.
And I know there are thousands of such examples which we all witness daily. But something needs to be done. Government is doing what it can. But we earning people also have some duties towards our society. M not saying to donate thousands of rupees in some charity or stuff. But we all educated people at least can fund education of any one or 2 children or we themselves can try to teach these kids around us in our free time. I think effort made by times of India to teach children is great work by them in this direction. This will not alleviate poverty but at least it will help in reducing it in future years to come. Iam also a member of charitable institution in which iam supporting education of women. Help provided by us in any form will be fruitful for all these poor people.
Well I think all we need to think on this and make our decisions. I hope by readings this you will at least give it a thought.

2008-09-03T23:57:00.000-07:00

Happy –go –lucky times for oil companies

Kabhi khushi, kabhi gam….do not worry I am not changing my blog name- well this quote is for Indian oil companies who faced lot of gam and now its time for them to have some khushi.

In the present era new synonyms that are continuing to be associated with high oil prices are, global turmoil, high inflation, crashing stock markets, rising food prices, weakening of dollar and many more. Few days back prices of oil have reported a hike of $ 139 a barrel and according to estimations can reach $ 150 by July because of ever increasing demand and political tautness.
However now we witness a change in the trend- in September 2008 oil prices are near $ 109 a barrel due to falling demand from major oil consuming countries against hurricane threats to the US oil sector. This fall in oil prices has shown a sign of relief for India Inc, in times when India is suffering from lot of macroeconomic instability.

Let me here try to explain this whole phenomenon of rise in crude oil prices:
Crude oil is regarded as an element that is required for all commercial and residential purposes. In order to ensure that we have enough crude oil for our needs certain amount of money is paid to the countries from which oil is imported. These companies have a set crude oil price. The unit in which crude prices are measured is based on barrel production amount. The companies from which oil is imported can only drill certain amount of oil from drilling fields, due to this the most famous law of demand comes in to play i.e. lower the production , higher will be the price of oil. Oil prices are defined in dollars for most of the oil exporters. There is a vicious cycle of higher oil prices which leads to higher trade deficits, which in turn leads to weakening of dollar and again leading to higher oil prices. In order to explain this phenomenon lets start with rising oil prices. Suppose in the initial years rise in price of oil can be attributed to the following factors:
· Increase in demand for oil from emerging economies like China and India.
· Supply breakdown from Iraq, Nigeria, Venezuela, Russia and US Gulf coast.
· A terrorism / war premium
· Buying by traders speculating that oil prices would rise.
Now since US imports oil, now with the advent of rise in oil prices, trade deficit of US – the difference between the cost of imports and export, will increase. This is where the vicious cycle comes in; every dollar increase in the price of a barrel of imported oil increases the size of the U.S trade deficit. This is due to the fact that oil is priced in dollars in global market. Now this increased trade deficit will put pressure on the dollar which will make it weaker further, this in turn makes OPEC countries to raise dollar – denominated price of barrel of oil to make up for the dollars fall and so on.
So this is the story of rising oil prices. Now since oil is pegged in dollars, India was badly hit by rise in its prices.

Now due to slowing of demand leading to fall in prices of oil has started showing some positive sentiments on Indian stock exchange. Another relief comes in for central banks as easing of pressures on hike of interest rates. According to finance ministry we may soon witness single digit inflation numbers, which is the essential need of the hour.
Moreover if oil comes below $100 a barrel on a consistent basis, the fisc should easily self-correct by over 1% of GDP. With macro indicators improving, the next challenge will be to ensure that growth does not fall below 7.5-8%.

New sign on indian currency notes

2008-09-02T22:14:00.000-07:00

Well after giving you such big write-ups which i know is hard to read in now busy days , i thought why should not i share this interesting piece of news with you !

From September 5th onwards our currency notes will have new sign of Dr Duvvuri Subbarao. He will assume charge as governer of RBI when office holder Yaga Venugopal Reddy's 5 year tenure ends.

What excited me to write about this news was his qualifications ( you must have guessed it by blog name) .

IAS topper of 1972 batch
alumini of IIT Kanpur ( physics graduate)
completed MS in economics from Ohio state university
completed phd. economics from Andhra university

Another attraction in his biodata is that he has worked with world bank as lead economist for 5 years and has worked in our finance ministry in the intial phases of reforms of 1990's under manmohan singh as finance minister.

But from here work for our new governer becomes tough and challenging in scenario of double digit inflation , slowdown of growth , forthcoming election year and pending reforms in finacial sector.

Lets hope he meets all these challanges . All the best wishes and till then we wait to see new signature on currency notes!

Typhoon of Rising Food prices

2008-09-01T23:43:00.000-07:00

Present era of 2008 is stormed by rising food prices world wide. The aggregation of rising energy prices , use of food crops for biofuels and torpid food aid have threaten food security of many developing countries.

Globally agricultural commodity prices were significant during 2004-06: corn prices rose 54 %, wheat 34%, soybean oil 71% and sugar 75%.But this trend hastened in 2007, due to continued demand for biofuels and drought in major producing countries. Wheat prices have risen more than 35 percent since the 2006 harvest, while corn prices have increased nearly 28 percent. The price of soybean oil has been particularly volatile, due to high demand growth in China, the U.S., and the European Union (EU), as well as lower global stocks.
Estimated results of food and agriculture organization of United Nations shows that the high food prices of 2006 increased the food import bill of developing countries by 10 percent over 2005 levels. For 2007, the food import bill for these countries increased at a much higher rate, an estimated 25 percent.
Let’s find out in detail what the causes of such a scenario……are……….
As in case for every product demand and supply theories apply, food prices are no exceptions. However no one particular factor can be blamed for rise in prices. Contributions of some unfortunate conjunction of activities over past years have led to mounting prices.
· Meat mania
With the increasing wealth of emerging economies like china and India, there is escalating demand for meat in these countries , which in turn intensifying the demand for cereals to feed the animals. The demand for grains and chapattis is always associated with population growth, which has been remaining flat during the past years, meaning slow growth in population. However demand for meat linked to economic growth. Generation of higher incomes in countries like china and India have made people enough rich to afford meat and other food products. For instance if we look at the history, during 1985 average Chinese consumer ate 20 kg of meat a year ; now he eat more than 50 kg.

It takes 7 to 8.5 pounds of grain to produce a pound of beef and 5 to 7 pounds of grain to produce a pound of pork.

· Ethanol for American cars
Another and one of the most dominant reasons behind mounting of food prices is surging demand for ethanol as fuel for American cars. If we look at the figures it can be figured out that in 2000 around 15m tones of American maize crop was into ethanol ; in the current year it is likely to be around 85 m tones. America is one of the largest maize exporters and now it tends to use more of its maize crop for ethanol rather to fetch trade surplus in its balance of payments by selling it abroad. Ethanol has not only contributed to the rise in prices of maize crops but also accounts for rise in prices of other food crops. Partly this is because maize is fed to animals, which have now become more expensive to rear. Partly it can be due American farmers, who are anxious to take advantage of biofuel boom, went out all to produce maize this year, planting it on lands which have been used previously for wheat and soybean.

In the current year overall downfall in stockpiles of all cereals will be about 53m tones The increase in the amount of American maize going just to ethanol is about 30m tonnes. In other words, the demands of America's ethanol programme alone account for over half the world's unmet need for cereals. Without that programme, food prices would not be rising anything like as quickly as they have been. According to the World Bank, the grain needed to fill up an SUV would feed a person for a year.

· Unfavouable weather conditions
Global climate change brought about by the rising temperature of the Earth is the fourth major cause. Altered weather patterns have been accompanied by floods, tropical storms and droughts all over the globe. Australia, normally a big exporter of wheat and rice, is in the grip of a multiyear drought and has seen its grain production plunge.
· Export restrictions
Some major countries have introduced or have increased export taxes or bans and other restrictions on domestic products to keep down domestic prices. This in turn will lead to adding surmounting pressure on prices. Many countries have imposed food –price controls of some sort. Argentina, morocco, Egypt, Mexico and China have put restrains of domestic prices. A dozen countries include India, Vietnam, Serbia and Ukraine has imposed export taxes or limited exports. Governments of all these countries are trying to safeguard their people from rising prices of food. From such policies some will benefit while others have to bear the repercussions of it.
Obviously, farmers benefit—if governments allow them to keep the gains. In America, the world's biggest agricultural exporter, net farm income this year will be $87 billion, 50% more than the average of the past ten years.
Other recipeient of such policy benefits are in poor countries. Food exporters like india , south africa will gain from increased exprot earnings. Countries such as Malawi and Zimbabwe, which used to export food but no longer do so, also stand to gain if they can boost their harvests. Given that commodity prices have been falling for so long in real terms, this would be an enormous relief to places that have suffered from a relentless decline in their terms of trade.
In emerging economies lot of income inequality prevails between cities and countryside over the past few years. As now many countries have gone through transition phase of shifting from agraian based economy to more industrial and services oriented , urban wages have score off the rural ones. The Asian Development Bank reckons that China's Gini coefficient(measure of inequality) rose from 0.41 in 1993 to 0.47 in 2004. If farm incomes in poor countries are pushed up by higher food prices that would extenuate the gap between incomes of cities and countryside. But will this happen?
Lets look at the answer to it…………………….
According to the World Bank report, 3 billion people live in rural areas in developing countries, of whom 2.5 billion are involved in farming. That 3 billion includes three-quarters of the world's poorest people. So on the fundamental basis the poor overall should benefit from higher farm incomes. In practice many will not. There are large numbers of people who lose more from higher food bills than they gain from higher farm incomes. Exactly how many varies widely from place to place.
From the above context the major losers from high food prices are big importers.this will include Japan , Mexico and Saudi Arabia. A more deeper look shows that these countries might can afford but worry is about countries like Bangladesh and Nepal and Africa who will face higher import bills. Developing countries as a whole will spend over $50 billion importing cereals this year, 10% more than last.

The travail of agflation
Food prices are tipped to rise 50% in another 5 years. The delinquent behind this is agflation.
The up surging prices of bushels and barrels are interrelated. Like the price of agricultural commodities the prices of oil and metals have increased substantially in the past few years. Food prices world over are rising so quickly that a new term has been invented to describe the inflating prices of breakfast staples and dinner favourities i.e. agflation.
As we have already witnessed the causes of this global agflation above, apart from this agflation is also causing headaches for central banks. In most countries when central bank takes appropriate steps of monetary policy to control inflation they exclude food and energy prices. Both are sensitive and erratic to supply shocks. As central banks try to control demand they tend not to react to price fluctuations caused by see-sawing supply.
The major sufferers of agflation are the developing countries as residents of these countries devote large percentage of their personnel expenditures on food. This is reflected in the heavy weighting given to food in the commodity baskets used to measure inflation in developing countries. For instance in America food carries just 14% weight in consumer price index ( measure of inflation) ,china accounts for 33% , south africa 25% , phillipines 50% and india it is 46%. Insuch countries rising prices of food which gives more weight to food in their CPI will lead to high inflation levels all over. In addition, if food prices stay high, and if consumers spend less on other goods, other parts of the economy might suffer. Good reason, therefore, for central bankers and others to hope that the pain of agflation is not shared too widely.

The world food crisis and financial markets
The primary concern underlying current food crisis is not physical lack of food but rather its unaffordability for growing number of people due to rapidly mounting prices.
Among the immediate factors causing the rapid worsening of the food crisis, a major role is played by the explosion of speculative investment in basic commodities such as oil and grain, itself bound up with the difficulties facing US and world financial markets and the decline in the US dollar. Thriving speculation by hedge funds and other big market players has increased costs, encouraging private firms to further bid up prices in a competitive drive to amass as much profit as possible.
The basic reason behind upsurge in prices of agricultural commodities is that big investors have pulled out of tradional investments and credit markets due to bursting of US housing and credit crisis. Speculative capital has shifted investments in more profitable avenues.
The one such aveneue of profitable investments is commodity futures. This involves finacial bets that prices of basic goods such as oil , grains and metals will continue to rise. Since these futures are used as benchmarks for actual trading in the physical commodities, their heady rise has helped sharply pull up market prices for the commodities themselves.
Is this speculation or investment..?
In technical terms speculation is referred to as purchase of something in the hope of gaining profits from change in its price. In this context2 forms of speculation are visible.
1. The purchase / hoarding of commodities in expectation that their price will continue to rise.
2. Purchase of agricultural commodities future and options – essentially, bets that prices will either rise or fall – purely as investment strategy (rather than as a way to manage risk related to the sale and purchase of commodities.
At the end of March 2008, according to Citigroup, investors worldwide held an estimated $400 billion in commodity futures contracts—about $70 billion more than at the beginning of the year, and twice as much as in late 2005. These investors include commodity index funds, commodity trading advisors, hedge funds, and exchange-traded funds. Many of them are trying to assemble commodity portfolios that replicate the performance of major commodity-price indexes, such as the Standard & Poor's/Goldman Sachs Commodity Index and the Dow Jones/AIG Index. They are doing so for two reasons. One is that commodity investments generally increase in value when other classes of assets decline. The second is that many investors believe that the commodity markets are in the midst of a "super cycle"—a long-term trend that will drive prices higher for years to come.
While we have seen number of reasons for rising food prices, there is growing concern that supply and demand do not explain the accurately the speed and severity of price increases. Blame of rising food prices is being put on flood of speculative capital into the U.S commodity future markets , which attract lot of capital from worldwide and set global benchmark for prices.
According to Bloomberg, quoting the Forward Markets Commission, volumes on the National Commodity Exchange, which trades futures contracts in 48 commodities, reached $226 billion in the year ended March 31, 2006. That was more than the $184 billion of shares traded on the Bombay Stock Exchange in the same period. Forward and futures trading had been promoted on the ground that it helped traders deal with market uncertainty by hedging their transactions, and stabilised prices for the final producers. However, the surge in futures trading could not be explained by pure hedging requirements, and obviously reflects an increase in speculative activity.

Indian scenario
Rising inflation… reaching to a level of 12.8 % is a burning issue.
The issue has cause serious worry for policy makers political circles as well as consumers who are facing shrinking purchasing power. The whole sale price index have reached to a 13 year high of 11% on june 7, 2008. The WPI index was close to 4% at the end of 2007 and it has taken just 6 months to reach current level. The volatility in the economy has put the political position of the government into risk , forcing it to take measures like complete elimination or sharp reduction in import duties and ban or increase in export duties of few commodities like rice, steel and cement. However, despite these measures, inflation is well above the comfort zone of both the RBI and the finance ministry. The high inflation rate has seen the government coming under pressure, with both its supporters and the opposition encircling it over the price rise issue. Meanwhile, there is an increasing hubbub from some to impose a ban on futures trading in essential commodities. The case for a ban is mainly on the ground that speculation in futures trading is largely responsible for the price rise.
The most obvious question that comes before us is whether futures trade is actually contributing to a rise in prices or not?
The futures market performs twin functions of efficient price discovery and provides with management to various constituents. The exchange markets have evolved over the years to provide efficient platform for the producers and consumers to extenuate their underlying price risk associated with particular commodity. Price discovery which is a key for any market would become more efficient if number of participants are large and comprises both of hedgers and non-commercial users. As typically the hedgers (producers & consumers) would prefer to take a risk neutral stance while trading on the exchange and would always want to hedge their price risk using the futures markets. However, if both parties remain risk averse, in any economic activity, it becomes very important for somebody to take the economic risk required so that a particular activity is carried. The activity so carried out may not be tangible in the traditional sense of how Keynes would like to define the GDP, but this is more service oriented and the agent willing to undertake this activity is defined as "speculator. Looking at the overall economic situation in India, these economic agents are bashed for carrying out their work. Unfortunately their role in future markets is not well judged. The current rise in prices should be analysed from a both national and international perspective. Internationally, the world has seen a sharp rise in the prices of all commodities, including food items, particularly cereals. Almost each and every economy is facing the problem of price rise and inflation, and India is no exception to this trend. At the national level, prices have also increased more because of supply side problems. These basically relate to years of neglect of the agricultural sector, resulting in general stagnation of agricultural production, productivity and the non-creation of buffer stocks to meet exigencies.
Indian agriculture is characterized by problems of low level public investment particularly in irrigation facilities , low yeild per unit area exhaustion of the yield potential of new high yielding varieties of wheat and rice, unbalanced fertiliser use, low seeds replacement rate, unavailability of extension services and an inadequate incentive system. It’s a fact that reforms need to be carried to address supply side constraints and improve food security. Making futures trading the scapegoat and imposing a ban on it is not realistic on part of the government and will give negative signals to investors. Such a ban will hamper the growth of the market system in India, which already lags other developed economies in this regard. The market is in a nascent stage and must be nurtured for it to yield its full potential benefits. A ban will do just the opposite, Developing a well-regulated market is the only way forward to integrate better with global market, as each economy depends on international market for trade. Even a country like China, with its controlled economy, has a rampant futures market.
Evidence shows that: prices of rice, wheat and tur have increased despite of ban .In fact, rice prices had increased by over 20 per cent since the ban. Against this, the prices of sugar and potato have remained constantly stable since last year even as they continue to be traded on the futures market. A UNCTAD study conducted in five leading exchanges of the developing world, including India and China, suggests that the impact of these exchanges have remained positive and they can contribute in the development of physical infrastructure, imparting transparency and empowering farmers while maintaining quality standards. In an another study by NCDEX, a leading Indian commodity exchange, it has been shown that prices of essential commodities traded in the futures market have increased at a slower pace than of those that remained outside the ambit of futures trading.
Thus its seems to conclude that india is facing a trend of imported inflation i.e inflation due to global rise in food prices.
While it is difficult to ascertain the effect that the Indian economy may face in the future as result of a closer linkage with the global economy, the challenge is to be better prepared to tackle our fundamental weakness, which is the ailing agricultural sector. The banning of futures trade is not a solution for rising prices; instead we must approach issues objectively.
While the commodity markets in the West and in China have achieved the status of price-setters, the Indian commodity markets struggle to stand on their own

Future of global food crisis
Having a look at how global supply and demand changed between 2005 & 2007, it may appear to ones mind that nothing much spectacular has happened that could spark off these price increases than actually observed. Yet, there has effectively been a gap between growth rates of demand and supply wide enough to cause prices to rise significantly on markets where neither supply nor demand (can) respond flexibly and swiftly to price changes – at least not in the short term.
According to the experts sharply rising costs for food staples and fuel are leading to deadly clashes in impoverished countries and likely will continue for some time. According to a world bank report Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline, but they are likely to remain well above the 2004 levels through 2015 for most food crops.
Prices of foods will continue to rise until there is a new balance between food production, bio fuel production and a new price balance.
World agriculture is facing new challenges that, along with existing forces, pose risks for poor people’s livelihoods and food security. This new situation calls for policy actions in three areas:
1. comprehensive social protection and food and nutrition initiatives to meet the short- and medium-term needs of the poor;
2. investment in agriculture, particularly in agricultural science and technology and in market access, at a national and global scale to address the long-term problem of boosting supply; and
3. trade policy reforms, in which developed countries would revise their biofuel and agricultural trade policies and developing countries would stop the new trade-distorting policies with which they are hurting each other.
In the face of rising food prices, both developing and developed countries have a role to play in creating a world where all people have enough food for a healthy and productive life.

Decelerating Global Economy

2008-08-31T22:54:00.000-07:00

Nowadays alphabet R has become centre of attention all over the world. The word causing tension in, minds of all policy makers is recession. The global economy is on a stringy spot, stuck between aggressive slowing demand in advanced economies and surging inflationary trends in emerging and developing economies.
The growth slowdown is on a run
The global growth deceleration which started last summer has taken a flight. Global growth decelerated to 4½ percent in the first quarter of 2008 (measured over four quarters earlier), down from 5 percent in the third quarter of 2007, with activity slowing in both advanced and emerging economies. With weakened industrial production, pulling back of business and consumer sentiments in advanced economies and sluggish business activities in emerging economies indicate further slowdown in second half of 2008.
Accordingly, global growth is projected to moderate from 5 percent in 2007 to 4.1 percent in 2008 and 3.9 percent in 2009.
Indicators show that growth figures for United States in 2008 would moderate to 1.3%. The economy is estimated to contract moderately during second half of 2008 as consumption would deteriorate by rising oil and food prices and tight monetary policy, before it start gradually to recover in 2009. Growth projections for other advanced economies such as Euro and Japan will also put up a show of slowdown in second half of 2008.
Growth in developing and emerging economies is also on verge of slowdown. Growth in these economies is ease to around 7% in 2008-09, from 8% in 2007. In China, growth is now projected to moderate from near 12 percent in 2007 to around 10 percent in 2008-09.

Global economic outlook
Global economy is in the grip of slowdown. Weakening of economic growth around the world reflects the fallout from sub prime crisis and financial market turmoil. A recession has been strongly approaching United States, now question arises about its severity and length. With this also other developed countries is expected to go slow. And this slowdown is occurring in period with ample of inflationary pressure, complicating the job of macroeconomic policy makers.
US accounts for quarter of global economy and has important trade and financial linkages around with almost every economy around the globe. Therefore any kind of slowdown of US economy leads to chain effect in other economies.
The proximate cause of the US recession is its housing sector. Construction of new houses has fallen sharply, reflecting an unwinding of an oversupply of houses. Exacerbating the construction downturn are rising mortgage default rates -- particularly the sub-prime ones -- and falling house prices. Flowing on from all this is an intensifying credit squeeze -- put simply, banks and lending institutions have become extremely cautious, denying loans to some borrowers who have projects that would have been funded in other, less turbulent, times. The housing and financial market developments are mutually reinforcing. As a result, the IMF's baseline scenario has the US economy dipping into a mild recession in 2008.
Sustained growth in emrging economies
However projections made by IMF do not predict a drastic decline in the emerging economies. This is broadly consistent with” decoupling theory” which holds that major emerging economies – namely India and china and smaller ones such as NIE’s or ASEAN 5 – have matured enough so that US recession might not effect them as much as in the past.
For e.g. turning our focus to some of these emerging economies, we find that Chinese economy continues to grow forward. However growth will slowdown from 11.5% to 10% this year and next. On the policy front, the key action that should be taken—but that the Chinese authorities have so far refused—is a significant step appreciation of the renminbi against the dollar and in real effective terms, combined with policies to stimulate domestic demand.
In the rest of emerging Asia, growth will likely moderate somewhat in 2008 and 2009 but stay above 6 percent, with India continuing to grow at nearly 8 percent.
In Latin America, Mexico will suffer spillover effects from the slowing US economy, and growth this year is likely to fall to about 2 1/2 percent before recovering modestly in 2009. In contrast, Brazil should be able to sustain growth of nearly 5 percent, despite the strong appreciation of the real against the dollar. Growth in Argentina and Venezuela is expected to slow from the high rates of recent years, bringing down the growth rate for all of Latin America to about 4 1/2 percent this year and slightly less in 2009.

For the Middle East, high oil prices will help keep growth strong in the energy-exporting countries. The larger and more diversified economies of Egypt and Israel should also maintain growth rates in the 5 percent range.
High commodity prices will continue to benefit many African countries, and growth in the region appears likely to continue at least at a 5 percent rate.
Slowdown in other industrial countries
If we see among industrial countries other than United States, growth will slower from 2 3/4 % advances of 2007 to barely more than 1 1/2% this year. There is significant risk of recession to be in Japan and Italy. The impact of the yen's recent appreciation and weakening of exports to the United States, together with deteriorating sentiment among Japanese businesses and consumers, could push GDP into a couple of quarters of negative growth, even if year-over-year growth remains slightly positive. And the Japanese policy authorities have little room to provide offsetting stimulus.
In Canada, growth this year will likely fall a little below 2 percent, under the impact of slowing US growth and a strong Canadian dollar. However, solid income growth from strong export revenues should keep domestic demand relatively robust, and the Canadian authorities have considerable room to ease policy should that appear needed to forestall very weak growth or recession.
In case of united kingdom growth is expected is slowdown by less than 2%.But this is not entirely unwelcome in view of the need to curb inflationary pressures, and the Bank of England has opulence of room to abate further should that appear warranted. The Reserve Bank of Australia has continued to tighten in recent months and would surely welcome the forecasted slowing of growth to 3 percent this year.
The euro area is no exception to these industrialized countries. Growth is expected to slowdown to 1.6%. This slowdown will affect all the countries of this area. The Italian economy is in sluggish phase and is at risk of going into the grip of recession. Growth tends to remain stronger in Germany, affirmed by good export performance in the face of weak consumer demand. France will lag slightly behind Germany, while Spain will slow considerably due to a sharp downturn in home building. The slowdown will probably be reflected in a small uptick in unemployment and will be unpopular with most politicians. However, with inflation running well above the ECB's tolerance rate of 2 percent, the central bank is likely to see the slowing of growth more as a solution than as a problem.
Plague of inflation
Inflation is spreading like an irretrievable disease in both advanced and emerging economies. In many countries pushing force behind this higher inflationary trend is higher food and fuel prices. Oil prices have surged substanially against the previous records in real terms , due to supply concerns and limited spare capacity and inelastic demand, while driving force behind food prices is bad weather conditions and strong growing demand.
This kind of inflationary environment makes the job of all macro-economic policy makers all the more challenging. In addition to this history also gives the ground of pessimism. The last time the world economy faced the inflationary shock generated by commodity boom in 1970. It ended in period of high inflation and unemployment, slow growth an episode which was named as inflation. And recessions that involve major damages to the financial systems and housing markets tend to last much longer than other recessions, with the Great Depression of the 1930s being the most extreme example of how bad things could get.
Advanced countries centeral banks are in major dilema with current inflation figures which rose to 3.5% in may 2008. The increase in inflation is more marked and broader in emerging and developing economies with figures reaching to the peak of 8.6%. In these economies, food and fuel make up a larger share of consumption baskets and sustained strong growth has tightened capacity constraints.
Peeping into future of these advanced economies inflationary pressures are likely to be refuted by inflationary presures and with commodity prices to stablize , the inflation figures will start to moderate by 2009. In emerging and developing countries, inflationary pressures are surging faster, fueled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 percent and 7.4 percent, respectively.

Financial markets turmoil
Financial markets all over the globe are facing tough times. This current financial turmoil is being regarded as key source of uncertainty in United States for present economic situation with spillovers in Europe, Japan and emerging markets. Among this global turmoil the markets for credit instruments and financial institution which deals in such instruments have suffered the most.
Now one needs to find out what caused such a trigger to financial markets.
Before probing the cause’s one thing that is needed to be noted is the turmoil has been most severe in US financial markets and institutions. In United States the main difficulties arose from subprime mortgages and financial instruments involving such mortgages. Analyzing on broad gamut credit markets has become illiquid and dysfunctional. The extent of this crisis in credit markets is even more remarkable in view of the exceedingly aggressive actions taken by the Federal Reserve and the important but less aggressive actions of other leading central banks.

Bombshell in Indian stock markets
India is not any exception, in the era of economic integration with world economy, the ripple effect of global financial turmoil can also be felt in India. With sensex, crossing 20,000& plus, the brokers, trade pundits predicted new highs for 2008. And their predictions started to become true with sensex crossing 21000 mark on 8th January 2008. But this jovial period was short lived. The mounting sensex suddenly took a different route of dropdown. Sensex witnessed a biggest absolute fall in history, shedding 2062 points intraday. It closed at 17605.35, down 1408.35 points or 7.4%. This fall was sparked off by weakness in global markets. These markets crashed on the account of broad based sell off that emerged in the global equity markets. Fears over solvency over major western banks rattled stocks in Asia and Europe.
Now what can be the reasons for such a trend?
Let’s try to figure out answer for this question.
Analyzing the financial figures it turns out that first month of financial year 2008-09, turned out to be positive for investor, with BSE index closing at a gain of 10.5%. A combination of firm global markets and technical factors like short covering were the main reasons for the move up in the market.
April was last month when sensex closed in green. There after there is no stability found and sensex mostly ending in red. Sometimes sensex gained 600pts but the very next day it tumbled by 800 pts and this trend till now seems to be never ending. All the predictions made by analyst, trade pundits, brokers have failed. This see-saw game played by sensex is initiated by high inflation rates, mounting crude prices tightening RBI policies, weak industrial production data, and political uncertainties and sentiments of domestic as well as FII’s. The only positive sign which came as sign of relief was depreciation of Indian rupee which enlightened the IT sector and UPA gaining confidence. At current phase sensex is revolving around 14000 to 14500 and it’s hard to predict in which direction it will move.

The market declined sharply when hike in fuel price were announced by government 4th June 2008. This fueled the possibility of reaching inflation into double digits. The BSE sensex declined 843.39 points or 5.24% to 15,572.18 in the week ended 6th June 2008.
Presently we witness market tumbling after the RBI announced further hikes in repo rate as well as CRR both increased to 9%. Also blasts of Ahmadabad and Bangalore adding to the worries and enhancing negative sentiments.
Currently hike and seek is being played by crude oil prices and inflation & RBI are effecting are markets to great extent. It seems to quite surprising that epicenter of sub prime crisis is US and tremors are being felt in India also. The loss of market cap in US is 14% vis-à-vis 38% in India. Even after analyzing these causes of financial there is lot in more store for Indian story. Or else $ 200 billion institutional investors would have fled to safer waters.
Exports account for 14% of India’s GDP, India is less sensitive to external shock than many Asian nations. Savings in India have risen to 35% on the growing GDP base: 17% of this is in gold, commodities and real estate while rest 18% represents financial savings. Even this is skewed towards deposits both banking and non banking, while percentage of savings in share and debentures is just 6.3%. If there is increase in percentage of this to 25%, there would be in total $ 40 billion diverted to capital markets. So even after a facing such financial turmoil, we can hope for a positive market.
Uncertainties surrounding global economy
· Oil prices kicked off to$150: mounting of oil prices will put central banks in a fix. With no control over oil prices or oil supply central banks counts upon slowdowns to reduce inflation pressures. How these high oil prices add further fuel to the fire to an sensitive global economy dealing with weak consumer demand, taut credit and slow income growth. These higher oil prices cut demand in long run, but in short run we have to bear this trend of high global inflation.
· Skate into global recession: already hitted by US and European housing woes, Asian countries may face another round of turmoil from it. If demand pulls back in shock, we could be well into a recession before policy can stop the glide. Geographic and/or asset diversification would likely do little to protect investors as all markets ride the slump together.
· Stagflation: though today’s conditions are widely different from those of 1970’s, but there is a constant fear of economies falling in to the grip of 1970’s stagflation. However such a cycle would be painful for bond and equity markets, but it should be for shorter period than 1970’s experience.

Policy framework to curb inflation
Policy makers are going through a tough time. They have to maintain two things of curbing inflation plus also being mindful of downside risks to growth.
Many central banks have tightened monetary policy stances but interest rates in emerging and developing economies generally remain negative in real terms, particularly in countries where exchange rate management has limited monetary policy flexibility.
The risk of second-round effects from the surge in commodities prices and continued stress in financial markets complicates the response to the slowdown, particularly in advanced economies. The case for policy tightening in these economies is stronger than before the recent oil price increase but still not established, given that inflation expectations and labor costs are projected to remain well anchored and growth momentum is weak. However, inflationary pressures need to be monitored closely. In many emerging economies, particularly those that continue to operate above trend growth, monetary policy needs to be tightened combined with greater fiscal restraint and, in some cases, with more flexible exchange rate management, in order to reverse the recent build-up in inflation.
In summing up it can be said that though this US slowdown crisis will affect every economy’s growth trajectory. In an attempt to cushion economies from ill effect of this crisis, it is desirable that steps should be taken to increase demand.
As far as Indian economy is concerned it will get affected but impact would be moderate on India’s growth story. India is now far headed from period of 1970’s , shocks wont be hampering its growth story.

Sectors to be Bullish in 2009

2008-01-29T21:06:00.000-08:00

In the period of downturns investors should make safer bets by investing in defensive stocks. These stocks tend to perform during recession. These stocks remain stable through various phases of business cycle. They however tend to underperform during an expansion phase. However they are able to register profits in their balance sheets as they produce goods and services which are always needed such as food, power, water and energy.

It is easy to estimate share prices of defensive sectors as they tend to grow relatively at a stable rate that can be predicted with some degree of accuracy, based on historical trends. Some of the defensive sectors to watch in 2009 are as follows:

Telecom: Despite of being in news over the year for various controversies, analysts are still bullish on telecom sector for 2009. In the atmosphere of this economic turmoil telecom is adding on consumers at a whirlwind speed. The figures released by the Telecom Authority of India (TRAI) for the month of October show an unprecedented 10.5 million users added. Resisting the current financial turmoil, India continues to witness high demand in its mobile- phone segment at an increasing rate in FY 2009. This is due to rollout of 3G technology and WIMAX networks and implementation of mobile number portability (MNP). In numeric terms India’s mobile phone is expected to upsurge to 136 million units up by 23.9% from 110 million units in 2008. This compares 16.8% growth in 2008. According to isuppli cellular subscribers in nation will show a growth of up to 319.9 million by the end of 2008, up by 36.9% from 233.6 million of 2007. It is also being estimated that India’s total wireless subscriber’s base will grow at compound annual growth rate (CAGR) of 25.1% from period 2007 to 2012 to reach 715 million by end of 2012.
The reason behind increase in India mobile handset market is decreasing costs of calls, the availability of inexpensive handsets, increasing geographical coverage and operators rising portfolio of value added services (VAS).2009 is expected to be the rollercoaster for telecommunication sector mainly driven by 3G and WIMAX coming in the markets.
Stocks to look in this sector: MTNL, Bharti Airtel, reliance communications (which has launched 3G services)

Engineering and capital goods: in short to medium term current global slowdown may impact growth momentum in capital goods sector. However, the order books of many companies in this sector are strong, leading to visibility of earnings in near future. There has been a growing consensus among policymakers that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. This will lead to larger participation for private sector companies in large infrastructure projects. The gap between supply and demand for power increasing. So, power equipment companies can look forward to increase in revenue from power generation and distribution, as the government will be forced to augment the supply side. There is a thrust on development of new wells and improvement of output from old wells in the oil and gas space. This will lead to more projects for engineering companies.
Stocks to look in this sector: BHEL, Punj Lyod, JP associates, Suzlon energy

Oil and gas: India ranks 6th in the world with refining capacity of 3.4%. 76% of India’s demand for petroleum met through imported crude. There has been restive change in the governments approach to E&P activities in the country. Just over 60% of potential in oil sector has been explored so far. In order to enhance energy security of the country, the government has increased thrust on exploration leading to substantial investments in this sector. With this refining activity has been growing.
Current status of India’s refining capacity
· 19 refineries’: 17 in public sector, 2 in private sector
· Capacity had grown from 62 MNT in April 1998 to 149 MNT in January 2007
· Refining capacity is expected to reach 235 MMT BY April 2012.
· Surplus refining capacity of 86 MMT projected in 2011-12
· Large export potential.

Thus post -2009 increased production of oil and gas will be seen. The demand growth for oil and gas will outperform supply growth for sometime to come. The demand for natural gas in India is estimated to increase from about 113 million standard cubic meters per day(mscmd) in the financial year 2008 to 396 mscmd by year 2022.demand for petrol , diesel and jet fuel are expected to grow at a compounded annual rate of 1.7% ,2.5% , and 2.2% respectively till 2010. The medium term outlook for refining margins looks positive due to robust growth in demand.
Stocks to look on to: ONGC, reliance industries, reliance petroleum, carin India

FMCG
FMCG market is something no one can overlook. Increased focus on farm sector will boost income of the rural population and provide more growth prospects for the FMCG companies. FMCG sector is also likely to benefit from growing demand in the market. Since the per capita consumption for almost all the products is low in the country, FMCG companies have extensive opportunities for growth. FMCG companies are showing resilience to economic slowdown. The sector had witnessed higher sales growth in the inflation environment. FMCG sector is expected to grow over by 60%. That means it will translate into a annual growth of 10% over a 5 year period. Products like, hair care, household care, male grooming, female hygiene are and chocolates and confectionary segments are likely to be fastest growing segments.
With cooling of commodity prices, FMCG companies have further reason to cheer. Products in categories like coconut oil, skin care would benefit with lowering of commodity prices. As the sector has the domestic focus, the possibility of an impact of global slowdown on these companies is limited.
Stocks to look on to: HUL, P & G, ITC, Colgate Palmolive