It has been a volatile 2011. S&P stripping the US of its top rating, problems compounding in the Euro-zone and revolution in the Middle East have surely made 2011 an eventful year. It has been a roller coaster ride and as a passive onlooker I thoroughly enjoyed every bit of the action.
Now, what's in store for 2012?
Well no one has the answer to that but I surely know who is going to write the script for the events that will unfold during the course of the year and I shall reveal that towards the end of the article.
As expected the crisis that emerged in Greece has managed to engulf the major nations in the Euro-zone. The pressure has been growing over the ECB to start printing more Euros in its Frankfurt office to solve the crisis. The recent LTRO operation has more or less acted as a proxy to a fully fledged QE. Germany has stubbornly resisted calls for QE but it is just a matter of time before the Germans succumb to the pressure. The LTRO operations have had a positive impact on the Euro-zone borrowing cost and bond markets. Rising uncertainty over the ability of the EFSF to raise funds and growing doubts over the credit rating of the nations in the region would eventually prompt the ECB to undertake a fully fledged QE to avert the catastrophe.
Calls for QE in the US, UK and Japan too have been getting louder. Looking at the worsening health of the global economy it is evident that at regular intervals we will be seeing most of the central bank undertaking easing measures to boost growth. It is clear that the easing measures by the Fed and BoE have helped their respective economies from collapsing. But are these measures taken by the major central banks improving the situation in Main Street?
The unemployment in the UK has reached record levels. There has been a marginal improvement in the US job market but analysts expect the job market problems to resurface after the euphoria following Christmas and New Year dies down. Moreover, unemployment in the US has remained above the 8% mark since the subprime crisis broke out. Japanese economy has indicated that despite continued easing measure for over two decades, problems related to growth and deflation continues to persist.
The problems that global economy faces is that none of the measures taken by the political class and policy makers in the central banks addresses the key issues faced by main street. QE/stimulus and other fiscal measures has enabled the economies to mathematically avoid a recession but deteriorating conditions in the job markets across the world has fuelled the discontent amongst common citizens across the nations. Besides problems related to unemployment, there is a growing discontent over policymakers and dictators across the world. The revolts in Middle East, protests in Wall Street and riots in the UK are all signs that people across the globe are urging their leaders and policymakers to implement reforms to bridge the gap between the rich and the poor.
It is clear that the seeds of revolution were sown in 2011. However, these worrying realities fail to awaken the political class which has been focusing on measures to stem the crisis rather than tackling the crisis head on. Elections in France and the US in 2012 and German elections next year will provide direction to how things shape out for the global economy.
Recent crisis clearly reveals that capitalism in its current form is clearly failing. The harsh reality is that when animal instincts hijack the human mind, capitalism gives birth to crony capitalism. With protests across the world against the current form of capitalism being practiced, let’s hope that the global economy moves away from crony capitalism to a system which enhances sustainable and inclusive growth.
Therefore, the person who is going to decide the course of 2012 is the protester in the Middle East, Russia, Wall Street, Britain and India. The protesters across the globe shall grab the headlines in 2012. Let's hope that these protesters successfully shape the future for a brighter tomorrow.
Tuesday, January 17, 2012
Monday, August 22, 2011
The Governance Deficit
Governance Deficit-It is among the widely used terms to describe most of the problems faced by our country. However, the entire world seems to be facing enormous problems due to inefficiencies shown by the governing class.
Let us ponder the crisis that we have landed into due to the mistakes that governments have committed in the past.
The Euro-zone is facing a huge sovereign debt problem, but the harsh reality is that the leaders of the region laid the foundation of this crisis. Let's analyse the performance of the largest of the PIIGS economies.
Based on the IMF and World Bank data Italian debt has risen by close to $400 billion in the last five years, while the country's GDP has grown by slightly more than $300 billion. So, for every $1.0 dollars borrowed, the country has managed to grow by $0.75. Meanwhile, in Spain, in the last two years the country's sovereign debt has risen by more than 40% but the unemployment rate has risen from 12% in 2008 to a whopping 21% in 2011. The stats for the other three economies that are a part of the PIIGS, are not encouraging either . These figures clearly suggest that, despite increasing the national debt, these large nations in the Euro-zone have failed to stimulate their respective economies in the recent past.
Much of the borrowing is undertaken to propel the government's social sector schemes. It is the fiscal mismanagement that leads to such crisis. It is time for the political class across the globe to look at deficit management from a different angle. It is utterly unfair for the political class to undertake popular social sector schemes on the assumption that the future generation would pay for it at a later date. Social sector schemes are not an outcome of brave initiatives taken by the political class, but they are actually schemes sponsored by the future generation to boost the current standard of living. John Maynard Keynes believed that fiscal deficit helps to bring the economy out of recession. History has shown us that Keynes theory is right. Using fiscal deficit as a tool to propel growth in difficult times should be appreciated. Meanwhile, reckless spending just to win the mandate of the people for few years would make the situation worse for the nation in the long run. The PIIGS economies present a clear picture, which highlight reckless spending can potentially derail the economy in the long run.
The Italian and Greek debt to GDP ratio currently stands at 116% and 113% respectively. In the last two decades there has been a steep rise in the debts of these nations. The slowdown a couple of years back added to the woes of these countries. Now these countries have piled up so much debt that the servicing costs of the national debt hits record highs in every bond auction. Therefore, it is essential for nations to set fiscal deficit targets and debt limits and act accordingly.
India has managed to outpace most of the global economies in the last ten years. Despite such high growth rates there are several governance issues that we face on a regular basis. Socialism seems to have been deeply embedded inside in our political system. Most of the policies framed in India are based on the socialistic ideologies that are deeply rooted in the minds of the political class. Policies such as the NREGA and the Food Security Act highlight this fact. One may argue that such policies will help the nation to alleviaate poverty and raise the standard of living of the weaker sections of the society, but I have my reservations about such policies. It would be better if policies are framed in such a manner that investments flow into areas comprising the weaker sections of the society and let the benefits of the increased flow in liquidity uplift these weaker sections. It would be unfair to blame just the ruling party for passing this Act. The Act was framed by a Parliamentary Standing Committee and the bill was passed by Parliament. NREGA may have helped in job creation, but it remains one of the leading factors that has fueled inflation in the country. Increase in wages have caused a shortage of manpower, and of course leakages only makes things worse. Barring Rahul Bajaj I have not come across any other Parliamentarian to have opposed this bill. NREGA has caused an outflow of close to $9 billion for the current year. Once the Food security bill is passed, expenses would increase further. Undertaking such policies for a temporary period of time, till development work is undertaken in a particular area is justified, but having such social sector schemes for an indefinite period of time would be irrational.
Austerity measures across the world seem to receive no support from the people. Widespread protests across Euro-zone are providing signals that such measures may not go down well with the citizens of the country. Implementing austerity measures, would be a way for choosing a hard landing. However, such measures would help revive the economy in the long run. Japan opted for a soft landing couple of decades back, and till date there seems to be signs of recovery for the country. Despite lack of support, governments should bite the bullet and go ahead with such schemes. Standard & Poor's downgrade of the US credit rating definitely caused jitters across the global markets, but lets closely analyze the statement provided by the agency. The rating agency stated that the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."
So the downgrade was mainly on account of debt reduction falling short of S&P's targets. It is encouraging to see the credit rating agency take such bold initiatives, especially after their mismanagement during the subprime crisis. However, it was unfortunate to see the US Treasury Secretary taking pot shots at S&P.
It is time for the US economy to introspect, especially when the writing is on the wall. To conclude, I would say that the current crisis across the globe is an outcome of series of errors committed by the political class, and focus would probably shift from the central bankers to the global leaders to tackle the problems that we currently face.
Let us ponder the crisis that we have landed into due to the mistakes that governments have committed in the past.
The Euro-zone is facing a huge sovereign debt problem, but the harsh reality is that the leaders of the region laid the foundation of this crisis. Let's analyse the performance of the largest of the PIIGS economies.
Based on the IMF and World Bank data Italian debt has risen by close to $400 billion in the last five years, while the country's GDP has grown by slightly more than $300 billion. So, for every $1.0 dollars borrowed, the country has managed to grow by $0.75. Meanwhile, in Spain, in the last two years the country's sovereign debt has risen by more than 40% but the unemployment rate has risen from 12% in 2008 to a whopping 21% in 2011. The stats for the other three economies that are a part of the PIIGS, are not encouraging either . These figures clearly suggest that, despite increasing the national debt, these large nations in the Euro-zone have failed to stimulate their respective economies in the recent past.
Much of the borrowing is undertaken to propel the government's social sector schemes. It is the fiscal mismanagement that leads to such crisis. It is time for the political class across the globe to look at deficit management from a different angle. It is utterly unfair for the political class to undertake popular social sector schemes on the assumption that the future generation would pay for it at a later date. Social sector schemes are not an outcome of brave initiatives taken by the political class, but they are actually schemes sponsored by the future generation to boost the current standard of living. John Maynard Keynes believed that fiscal deficit helps to bring the economy out of recession. History has shown us that Keynes theory is right. Using fiscal deficit as a tool to propel growth in difficult times should be appreciated. Meanwhile, reckless spending just to win the mandate of the people for few years would make the situation worse for the nation in the long run. The PIIGS economies present a clear picture, which highlight reckless spending can potentially derail the economy in the long run.
The Italian and Greek debt to GDP ratio currently stands at 116% and 113% respectively. In the last two decades there has been a steep rise in the debts of these nations. The slowdown a couple of years back added to the woes of these countries. Now these countries have piled up so much debt that the servicing costs of the national debt hits record highs in every bond auction. Therefore, it is essential for nations to set fiscal deficit targets and debt limits and act accordingly.
India has managed to outpace most of the global economies in the last ten years. Despite such high growth rates there are several governance issues that we face on a regular basis. Socialism seems to have been deeply embedded inside in our political system. Most of the policies framed in India are based on the socialistic ideologies that are deeply rooted in the minds of the political class. Policies such as the NREGA and the Food Security Act highlight this fact. One may argue that such policies will help the nation to alleviaate poverty and raise the standard of living of the weaker sections of the society, but I have my reservations about such policies. It would be better if policies are framed in such a manner that investments flow into areas comprising the weaker sections of the society and let the benefits of the increased flow in liquidity uplift these weaker sections. It would be unfair to blame just the ruling party for passing this Act. The Act was framed by a Parliamentary Standing Committee and the bill was passed by Parliament. NREGA may have helped in job creation, but it remains one of the leading factors that has fueled inflation in the country. Increase in wages have caused a shortage of manpower, and of course leakages only makes things worse. Barring Rahul Bajaj I have not come across any other Parliamentarian to have opposed this bill. NREGA has caused an outflow of close to $9 billion for the current year. Once the Food security bill is passed, expenses would increase further. Undertaking such policies for a temporary period of time, till development work is undertaken in a particular area is justified, but having such social sector schemes for an indefinite period of time would be irrational.
Austerity measures across the world seem to receive no support from the people. Widespread protests across Euro-zone are providing signals that such measures may not go down well with the citizens of the country. Implementing austerity measures, would be a way for choosing a hard landing. However, such measures would help revive the economy in the long run. Japan opted for a soft landing couple of decades back, and till date there seems to be signs of recovery for the country. Despite lack of support, governments should bite the bullet and go ahead with such schemes. Standard & Poor's downgrade of the US credit rating definitely caused jitters across the global markets, but lets closely analyze the statement provided by the agency. The rating agency stated that the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."
So the downgrade was mainly on account of debt reduction falling short of S&P's targets. It is encouraging to see the credit rating agency take such bold initiatives, especially after their mismanagement during the subprime crisis. However, it was unfortunate to see the US Treasury Secretary taking pot shots at S&P.
It is time for the US economy to introspect, especially when the writing is on the wall. To conclude, I would say that the current crisis across the globe is an outcome of series of errors committed by the political class, and focus would probably shift from the central bankers to the global leaders to tackle the problems that we currently face.
Monday, August 15, 2011
The Quest for Safe Havens
Equity markets around the world have plummeted in the last few weeks. The downgrade of the US sovereign debt has dented market sentiment, and the quest for safe haven assets has begun. The US Federal Reserve has pledged to maintain the benchmark interest rates at near zero levels for another two years, hoping that lower interest rates would help revive the economy. Problems for the Euro-zone seem to have worsened in the last twelve months. The PMI readings across the emerging markets have dropped. There is a sense of uncertainty across the global markets.
The drop in appetite for riskier assets due to poor macro-economic data across the global economies has boosted demand for risk free assets. The yield movement in the 30 year US bond highlights this fact very much. Despite a credit downgrade, the bond prices rallied to record highs. This probably highlights the fact that despite the downgrade, the greenback seems to have retained its safe haven status. The US Treasury continues to maintain lower risk weights on the US bonds, thereby providing respite to the US banks. A US default is technically impossible, but it is practically difficult to digest the fact that, a country is enjoying a fall in its borrowing costs, despite its credit rating getting lowered. Rising global uncertainties have given birth to events that seem to defy common logic. Macroeconomic indicators from the US too have not been great. The first quarter GDP was revised significantly lower to 0.4%, while the growth rate for the second quarter stood at a dismal 1.4%. The growth rates should fall further as the QE 2 ended in July. The recent agreement to lower the country’s debt too should hamper growth. Bank of New York Mellon Corp. is planning to charge a fee for holding cash in accounts. Such unseen events are due to maintaining near zero interest rates for a prolonged period of time. Economic stimulus probably has helped the US banks to improve asset quality, but now that there has been an improvement in asset quality, the question that needs to answering is: How are these huge financial institutions going to grow in a stagnating economy?
Meanwhile, in the Euro-zone economic indicators are pointing towards weakening of the region’s economy. French GDP stagnated in the second quarter. Greek GDP recorded a steep drop in the previous quarter. There has been a contraction in the manufacturing output in July, which indicates that manufacturing, which occupies a major portion of the European economy, has probably slipped into recession. Countries are being forced into austerity measures to get their debt refinanced. The Spanish and Italian bond yields rose to record highs, prior to the ECB’s intervention in the bond markets. However, such actions would be temporary. The European Union leaders have to raise the EFSF to tackle this crisis. Currently the total funds in the EFSF stand at €440 billion. Inclusion of Italy and Spain to the EFSF should probably lead to the fund crossing the trillion dollar mark. Such an action could probably lead to a downgrade in the German and French credit rating. Many of the European banks have posted weak earnings in the current quarter. The fall in profits, was mainly due to provisioning in Greek debt. The central bank and the EU have not provided any concrete solutions to tackle the rise in toxic assets in the balance sheets.
It is clearly evident that both the US and Euro-zone economies are facing plenty of problems, that could eventually lead to the derailment of global economic growth. 85%-90% of the global reserves are held in form of US or Euro-zone assets. Such never-seen-before events have led to the outflow of liquidity into safe haven assets such as the yen, Swiss franc and gold. Low bond yield on Japanese bonds, enables the government to raise funds at lower interest rates. The Japanese economy has been facing many problems in the last few decades. Rising capital inflows should further cripple growth, since it is more of an export led economy.
Crude oil and base metal prices tumbled, amid concerns over slowdown in the global economy. Inflation has reached record highs in China, and declining growth in the Western areas should only contribute to the fall in the commodity prices.
The only safe haven asset that seems to be performing well is gold. It is the only safe haven asset which has a zero default risk. Gold has always performed well in times, when the world faced threats due to rising prices. Gold has been seen as a great hedge against inflation, but with commodity prices tumbling, the yellow metal has not provided any signs of cooling down. Markets seem to believe that holding precious metals in times of such uncertain environment should provide protection of wealth. There has been a steady rise in gold reserves across the world. Sovereign debt concerns seems to have spurred demand for the precious metal. Central banks in Korea, Mexico, Thailand and Russia have reported a steep rise in gold reserves in the last twelve months. Would the weakening greenback and rising global uncertainties force the world to return to gold standards?
The drop in appetite for riskier assets due to poor macro-economic data across the global economies has boosted demand for risk free assets. The yield movement in the 30 year US bond highlights this fact very much. Despite a credit downgrade, the bond prices rallied to record highs. This probably highlights the fact that despite the downgrade, the greenback seems to have retained its safe haven status. The US Treasury continues to maintain lower risk weights on the US bonds, thereby providing respite to the US banks. A US default is technically impossible, but it is practically difficult to digest the fact that, a country is enjoying a fall in its borrowing costs, despite its credit rating getting lowered. Rising global uncertainties have given birth to events that seem to defy common logic. Macroeconomic indicators from the US too have not been great. The first quarter GDP was revised significantly lower to 0.4%, while the growth rate for the second quarter stood at a dismal 1.4%. The growth rates should fall further as the QE 2 ended in July. The recent agreement to lower the country’s debt too should hamper growth. Bank of New York Mellon Corp. is planning to charge a fee for holding cash in accounts. Such unseen events are due to maintaining near zero interest rates for a prolonged period of time. Economic stimulus probably has helped the US banks to improve asset quality, but now that there has been an improvement in asset quality, the question that needs to answering is: How are these huge financial institutions going to grow in a stagnating economy?
Meanwhile, in the Euro-zone economic indicators are pointing towards weakening of the region’s economy. French GDP stagnated in the second quarter. Greek GDP recorded a steep drop in the previous quarter. There has been a contraction in the manufacturing output in July, which indicates that manufacturing, which occupies a major portion of the European economy, has probably slipped into recession. Countries are being forced into austerity measures to get their debt refinanced. The Spanish and Italian bond yields rose to record highs, prior to the ECB’s intervention in the bond markets. However, such actions would be temporary. The European Union leaders have to raise the EFSF to tackle this crisis. Currently the total funds in the EFSF stand at €440 billion. Inclusion of Italy and Spain to the EFSF should probably lead to the fund crossing the trillion dollar mark. Such an action could probably lead to a downgrade in the German and French credit rating. Many of the European banks have posted weak earnings in the current quarter. The fall in profits, was mainly due to provisioning in Greek debt. The central bank and the EU have not provided any concrete solutions to tackle the rise in toxic assets in the balance sheets.
It is clearly evident that both the US and Euro-zone economies are facing plenty of problems, that could eventually lead to the derailment of global economic growth. 85%-90% of the global reserves are held in form of US or Euro-zone assets. Such never-seen-before events have led to the outflow of liquidity into safe haven assets such as the yen, Swiss franc and gold. Low bond yield on Japanese bonds, enables the government to raise funds at lower interest rates. The Japanese economy has been facing many problems in the last few decades. Rising capital inflows should further cripple growth, since it is more of an export led economy.
Crude oil and base metal prices tumbled, amid concerns over slowdown in the global economy. Inflation has reached record highs in China, and declining growth in the Western areas should only contribute to the fall in the commodity prices.
The only safe haven asset that seems to be performing well is gold. It is the only safe haven asset which has a zero default risk. Gold has always performed well in times, when the world faced threats due to rising prices. Gold has been seen as a great hedge against inflation, but with commodity prices tumbling, the yellow metal has not provided any signs of cooling down. Markets seem to believe that holding precious metals in times of such uncertain environment should provide protection of wealth. There has been a steady rise in gold reserves across the world. Sovereign debt concerns seems to have spurred demand for the precious metal. Central banks in Korea, Mexico, Thailand and Russia have reported a steep rise in gold reserves in the last twelve months. Would the weakening greenback and rising global uncertainties force the world to return to gold standards?
Wednesday, November 17, 2010
The Printing Press
Recently The US federal Reserve announced it's plans for the second round of quantitative easing. The US fed should complete this 600 billion bond-buying program in the next eight months. The US Fed printing all this money to prevent the economy for going into a double dip recession.
In the last decade the two countries to have used this route were japan and Zimbabwe, both have failed miserably to revive their economy through quantitative easing. The increase in money supply has caused hyper-inflation in Zimbabwe and has failed to stimulate the Japanese economy, through these actions the central banks in these countries have been acting like a printing press. However it has to be noted that quantitative easing is used when the central banks are left with no other options. The interest rates in the US is close to zero, so QE2 was the last option with the US fed to tackle recession.
The bigger question that the federal reserve has to answer is that- will QE2 bring any significant changes to the economy?
Inflation in the US has been very low. The high unemployment rate has been one of the main reason for these low inflation figures, hence the increased money supply should not cause much problems in the short run. It can be noted that despite the increase in money supply after QE1, the inflation US has been stable. The main reason for stable inflation is because of the falling velocity of the greenback. the money supply has been rising but the falling velocity (circulation of currency) has been the main reason behind the failure to improve the economy.
Banks in the US are sitting on surplus reserves and the increased liquidity should only inflate this surplus reserves. The problem is the lack of confidence to lend. Fear of defaults in the US is the main reason behind the falling velocity of the US dollar. There are not many lucrative investment options in the US and this is forcing the dollar to move out of the US system to much greener pastures in Asia. The increase in supply of dollar is one of the main reason for the rise in emerging market equities and precious metals. The only positive impact that is visible through this policy is that this increase in supply should depreciate the dollar making US exports more attractive. Despite the fall in dollar it is going to be very difficult to compete with the Chinese exports mainly because of the pegged Renminbi. The bond purchase should bring the prices of the US treasury higher, but a depreciating dollar may prevent the central banks from making any significant inflows into the US treasury. The spike in gold prices is a clear indication suggesting that the central banks are looking at better options to invest their surplus reserves.
The emerging markets are witnessing huge amounts of capital inflows, this should further give rise to protectionist policies to prevent the domestic currencies from appreciating. The bigger worry for the emerging economies should be the probability of a bubble in metals and crude. The rise in inflows should fuel inflation, and it may in the end force countries like India too to implement capital controls. Looking at the recent monetary policies of China and South korea it is clear that the countries in Asia are going to use liquidity tightening measures to fight the threats they could face due to QE2. The currency wars between nations seems to have fueled the speculation that the world is moving towards a new exchange rate system, the World Bank president Robert Zoellick too seems to have joined these speculators.
The news flows from the European union continues to disappoint. Analysts predict Ireland could face a potential default. The bond yields have risen by more than 500 basis points. It is just a matter of time before the ECB announces a bail out package for Ireland. The most troubling part about the situation in Europe is that the toxic assets gets transferred from banks to the government and then to mightier organizations like the IMF and the ECB. This may lead to greater problems considering the fact that there may be many more nations in line waiting for a bailout.
It is now going to be interesting to see how the emerging markets tackle inflation worries and how the US and the EU deal with their set of problems.
In the last decade the two countries to have used this route were japan and Zimbabwe, both have failed miserably to revive their economy through quantitative easing. The increase in money supply has caused hyper-inflation in Zimbabwe and has failed to stimulate the Japanese economy, through these actions the central banks in these countries have been acting like a printing press. However it has to be noted that quantitative easing is used when the central banks are left with no other options. The interest rates in the US is close to zero, so QE2 was the last option with the US fed to tackle recession.
The bigger question that the federal reserve has to answer is that- will QE2 bring any significant changes to the economy?
Inflation in the US has been very low. The high unemployment rate has been one of the main reason for these low inflation figures, hence the increased money supply should not cause much problems in the short run. It can be noted that despite the increase in money supply after QE1, the inflation US has been stable. The main reason for stable inflation is because of the falling velocity of the greenback. the money supply has been rising but the falling velocity (circulation of currency) has been the main reason behind the failure to improve the economy.
Banks in the US are sitting on surplus reserves and the increased liquidity should only inflate this surplus reserves. The problem is the lack of confidence to lend. Fear of defaults in the US is the main reason behind the falling velocity of the US dollar. There are not many lucrative investment options in the US and this is forcing the dollar to move out of the US system to much greener pastures in Asia. The increase in supply of dollar is one of the main reason for the rise in emerging market equities and precious metals. The only positive impact that is visible through this policy is that this increase in supply should depreciate the dollar making US exports more attractive. Despite the fall in dollar it is going to be very difficult to compete with the Chinese exports mainly because of the pegged Renminbi. The bond purchase should bring the prices of the US treasury higher, but a depreciating dollar may prevent the central banks from making any significant inflows into the US treasury. The spike in gold prices is a clear indication suggesting that the central banks are looking at better options to invest their surplus reserves.
The emerging markets are witnessing huge amounts of capital inflows, this should further give rise to protectionist policies to prevent the domestic currencies from appreciating. The bigger worry for the emerging economies should be the probability of a bubble in metals and crude. The rise in inflows should fuel inflation, and it may in the end force countries like India too to implement capital controls. Looking at the recent monetary policies of China and South korea it is clear that the countries in Asia are going to use liquidity tightening measures to fight the threats they could face due to QE2. The currency wars between nations seems to have fueled the speculation that the world is moving towards a new exchange rate system, the World Bank president Robert Zoellick too seems to have joined these speculators.
The news flows from the European union continues to disappoint. Analysts predict Ireland could face a potential default. The bond yields have risen by more than 500 basis points. It is just a matter of time before the ECB announces a bail out package for Ireland. The most troubling part about the situation in Europe is that the toxic assets gets transferred from banks to the government and then to mightier organizations like the IMF and the ECB. This may lead to greater problems considering the fact that there may be many more nations in line waiting for a bailout.
It is now going to be interesting to see how the emerging markets tackle inflation worries and how the US and the EU deal with their set of problems.
Friday, October 29, 2010
Currency Wars
The unemployment rate in the USA has been hovering around 9% for the past 6 months. Despite the turnaround of many of the firms, there has been little change in the unemployment rates. Such high unemployment rates is not going to improve the consumer spending.
The key to recovery is to bring down the unemployment rates. It can be noted that despite the increase in liquidity in the U.S economy there has not been any significant improvement in the unemployment rates. The answers to this lies in China's growing current account surplus and the appreciation in currencies of the emerging economis.
China's growing current account surplus clearly highlights the fact that they have been the biggest beneficiaries of the increased liquidity in the global markets. The boom in the manufacturing sector has enabled China to take advantage of this excess liquidity. However it has to be noted that the exporters too have benefited due to the pegging of the Chinese currency. Analysts and Economists are of the view that the Chinese currency is undervalued by 20%-40%. The fixed currency regime is enabling the Chinese exporters to fight competition from other manufacturers throughout the world. US has been amongst the largest consumers on the Chinese products. This rise in demand for Chinese products is leading to fall in demand for the US manufactured goods and this in turn is one main reasons for rising unemployment in the U.S
US senate is currently considering imposing restrictions on Chinese imports but this issue will be in the back burner till the completion of the mid term election. Imposing restrictions on Chinese imports is not going to be a easy task considering the amount of US debt held by the China. Any restrictions on Chinese imports will also be countered by restrictions on US exports to China. Exports to China has been one of the main reasons for the turnaround of companies like GM and Ford. US treasury secretary Timothy Geithner has been very cautions during the recent G 20 summit. Upper limits for current account surplus for countries like China should enable the US to reduce its trade deficits but this move may not force China to stop pegging it's currency. Growing criticism from US may force China to appreciate its currency, but this appreciation may not factor in the real macro economic picture. It should be interesting to see how the US tackles this issue after the mid term elections. Republicans are expected to do well in this elections, it is going to be interesting to see how the right wingers in the US intend to tackle this problem.
The chairman of the Federal Reserve Ben Bernanke has expressed his interest to infuse more money into the system. These funds will be used to purchase more of the US treasury leading to the surge in liquidity. Increasing supply of dollars should lead to depreciation of dollar against most of the currencies. This surge in liquidity should further lead to the rise in the Emerging market equities and asset prices.
Depreciating Dollar has been a cause of concern for most of the emerging markets. Brazil recently has doubled the tobin tax on capital inflows, Thailand has recently reintroduced the withholding tax. These moves should curtail the currency appreciation of these countries to some extent. RBI has intervened in the currency markets to arrest the Rupee appreciation. However recently the finance minister has openly said that a country like India having a high current account deficit should refrain from imposing taxes on capital inflows. Shankar Acharya (Former advisor to the PM) in his column in business standard wrote that capital inflows should be taxed considering the fact that the inflows may rise after Fed's QE2 announcement causing the Rupee to further appreciate.
In the past many analysts were of the view that P-Notes were (partially) banned in 2007 mainly to bring down the capital inflows. This move did not go down well with the FII's. Similarly any moves to tax capital inflows may hamper the confidence of the FII's. Since we are a capital importing country we must not bring in any reforms that will hurt the confidence of the FII's.
Considering the above case it can be said that the finance ministry is taking the right step by not taking any actions against capital inflows. However appreciating Rupee is surely a cause of concern for exporters. Therefore RBI intervention is a must considering the fact that taxing capital inflows may not be positive for the country. Slowing down Rupee appreciations should enable exporters to compete with countries like Brazil and other emerging economies.
Looking at the recent events it can be said that G 20 has become very important in today's context. It should be interesting to see how the global economies intend to bring an end to the recent currency wars. Fed's bond purchase plan should help RBI determine it's role in the currency markets. To sum it up I would say that wars are now being fought using paper.
The key to recovery is to bring down the unemployment rates. It can be noted that despite the increase in liquidity in the U.S economy there has not been any significant improvement in the unemployment rates. The answers to this lies in China's growing current account surplus and the appreciation in currencies of the emerging economis.
China's growing current account surplus clearly highlights the fact that they have been the biggest beneficiaries of the increased liquidity in the global markets. The boom in the manufacturing sector has enabled China to take advantage of this excess liquidity. However it has to be noted that the exporters too have benefited due to the pegging of the Chinese currency. Analysts and Economists are of the view that the Chinese currency is undervalued by 20%-40%. The fixed currency regime is enabling the Chinese exporters to fight competition from other manufacturers throughout the world. US has been amongst the largest consumers on the Chinese products. This rise in demand for Chinese products is leading to fall in demand for the US manufactured goods and this in turn is one main reasons for rising unemployment in the U.S
US senate is currently considering imposing restrictions on Chinese imports but this issue will be in the back burner till the completion of the mid term election. Imposing restrictions on Chinese imports is not going to be a easy task considering the amount of US debt held by the China. Any restrictions on Chinese imports will also be countered by restrictions on US exports to China. Exports to China has been one of the main reasons for the turnaround of companies like GM and Ford. US treasury secretary Timothy Geithner has been very cautions during the recent G 20 summit. Upper limits for current account surplus for countries like China should enable the US to reduce its trade deficits but this move may not force China to stop pegging it's currency. Growing criticism from US may force China to appreciate its currency, but this appreciation may not factor in the real macro economic picture. It should be interesting to see how the US tackles this issue after the mid term elections. Republicans are expected to do well in this elections, it is going to be interesting to see how the right wingers in the US intend to tackle this problem.
The chairman of the Federal Reserve Ben Bernanke has expressed his interest to infuse more money into the system. These funds will be used to purchase more of the US treasury leading to the surge in liquidity. Increasing supply of dollars should lead to depreciation of dollar against most of the currencies. This surge in liquidity should further lead to the rise in the Emerging market equities and asset prices.
Depreciating Dollar has been a cause of concern for most of the emerging markets. Brazil recently has doubled the tobin tax on capital inflows, Thailand has recently reintroduced the withholding tax. These moves should curtail the currency appreciation of these countries to some extent. RBI has intervened in the currency markets to arrest the Rupee appreciation. However recently the finance minister has openly said that a country like India having a high current account deficit should refrain from imposing taxes on capital inflows. Shankar Acharya (Former advisor to the PM) in his column in business standard wrote that capital inflows should be taxed considering the fact that the inflows may rise after Fed's QE2 announcement causing the Rupee to further appreciate.
In the past many analysts were of the view that P-Notes were (partially) banned in 2007 mainly to bring down the capital inflows. This move did not go down well with the FII's. Similarly any moves to tax capital inflows may hamper the confidence of the FII's. Since we are a capital importing country we must not bring in any reforms that will hurt the confidence of the FII's.
Considering the above case it can be said that the finance ministry is taking the right step by not taking any actions against capital inflows. However appreciating Rupee is surely a cause of concern for exporters. Therefore RBI intervention is a must considering the fact that taxing capital inflows may not be positive for the country. Slowing down Rupee appreciations should enable exporters to compete with countries like Brazil and other emerging economies.
Looking at the recent events it can be said that G 20 has become very important in today's context. It should be interesting to see how the global economies intend to bring an end to the recent currency wars. Fed's bond purchase plan should help RBI determine it's role in the currency markets. To sum it up I would say that wars are now being fought using paper.
Thursday, October 21, 2010
The left turn to default.
Analysts and economists have been rejecting the prospects of a double dip recession. The global equity markets led by the emerging markets have performed extra ordinarily well in the last few weeks mainly due to the change in sentiments. Stress test results of the European Banks din't turn out to be as bad as people expected. Greece has managed to raise funds and the bail out package from the European Union too should prevent the possibility of European nations defaulting. U.S Fed plans to reinvest the principal repayments into bonds, this will have a positive impact on the global liquidity.
Signs of recovery are very much visible, but the bigger question is - "How did we land in this mess?"
Let's first look at all the countries that have leading contributors to this mess.
P.I.G.S is an acronym that refers to the economies of Portugal, Italy, Greece and Spain mainly in matters relating to sovereign default. Mismanagement of funds has been the main reason behind this crisis. Let's take a look at the debt to GDP ratios of these nations.
Italy tops the list with 116%
Greece-113%
Portugal-77%
Spain-54%
Italy's debt to GDP ratio was 109% in the year 2001 and it has risen to 116% in the year 2009. Silvio Berlusconi has been the Prime Minister for a major period of time in the last decade. Despite the right of center reforms Silvio's government has failed to bring down the public debt, the fiscal deficit too has gone up due to the stimulus provided to the economy. Silvio's government has introduced many austerity measures to bring down the deficits but there has been growing protests against these measures.
The bailout package prevented Greece from defaulting. The public debt rose to such high levels due to reckless spending by the socialist governments that were in power in the last decade. Figures were fudged due to which the problem was unnoticed. Portugal and Spain have been governed by socialist governments in the last decade.
Barring Italy it can be observed that all the other three countries were governed by Socialist governments in the last decade. One of the major problems faced by the countries ruled by socialistic governments is that they fail to cap the growing public debt and fiscal deficits. Socialism mainly deals with government funding most of the social sector schemes which in turn helps in the growth in the economy, but unfortunately most of these governments end up misusing the socialistic policies to garner votes. Socialistic governments generally resort to unnecessary spending which ends up inflating the fiscal deficits and the public debt, but such schemes tend to have a positive impact on the electorate in the short term, and end up damaging the economy in the long run. Several austerity measures must be undertaken to bring down the deficits and the debts. While undertaking such austerity measures the government is forced to cut down most of its social expenditure. This causes widespread protests by the people since they have been pampered by these schemes for years together.
Looking at the past it can be observed that countries that followed socialistic policies have not been very successful and the recent crisis in Europe too suggests the same.
Indian preamble says that India is a Socialistic Republic. Gandhi family has not distanced itself from Nehruvian Socialism. It may be a cause of concern but with the economy growing at such high growth rates it should not cause any problems in the near future, but it is necessary for the literate voters in India to understand the problems the country may face due to socialism and reckless spending of the government. India's debt to GDP ratio stands at 54%. It is higher when compared to most of the emerging economies, however >8% economic growth should help us bring it down. To conclude I would say that a government following conservative policies would prevent problems caused due to excessive spendings in the long run.
Signs of recovery are very much visible, but the bigger question is - "How did we land in this mess?"
Let's first look at all the countries that have leading contributors to this mess.
P.I.G.S is an acronym that refers to the economies of Portugal, Italy, Greece and Spain mainly in matters relating to sovereign default. Mismanagement of funds has been the main reason behind this crisis. Let's take a look at the debt to GDP ratios of these nations.
Italy tops the list with 116%
Greece-113%
Portugal-77%
Spain-54%
Italy's debt to GDP ratio was 109% in the year 2001 and it has risen to 116% in the year 2009. Silvio Berlusconi has been the Prime Minister for a major period of time in the last decade. Despite the right of center reforms Silvio's government has failed to bring down the public debt, the fiscal deficit too has gone up due to the stimulus provided to the economy. Silvio's government has introduced many austerity measures to bring down the deficits but there has been growing protests against these measures.
The bailout package prevented Greece from defaulting. The public debt rose to such high levels due to reckless spending by the socialist governments that were in power in the last decade. Figures were fudged due to which the problem was unnoticed. Portugal and Spain have been governed by socialist governments in the last decade.
Barring Italy it can be observed that all the other three countries were governed by Socialist governments in the last decade. One of the major problems faced by the countries ruled by socialistic governments is that they fail to cap the growing public debt and fiscal deficits. Socialism mainly deals with government funding most of the social sector schemes which in turn helps in the growth in the economy, but unfortunately most of these governments end up misusing the socialistic policies to garner votes. Socialistic governments generally resort to unnecessary spending which ends up inflating the fiscal deficits and the public debt, but such schemes tend to have a positive impact on the electorate in the short term, and end up damaging the economy in the long run. Several austerity measures must be undertaken to bring down the deficits and the debts. While undertaking such austerity measures the government is forced to cut down most of its social expenditure. This causes widespread protests by the people since they have been pampered by these schemes for years together.
Looking at the past it can be observed that countries that followed socialistic policies have not been very successful and the recent crisis in Europe too suggests the same.
Indian preamble says that India is a Socialistic Republic. Gandhi family has not distanced itself from Nehruvian Socialism. It may be a cause of concern but with the economy growing at such high growth rates it should not cause any problems in the near future, but it is necessary for the literate voters in India to understand the problems the country may face due to socialism and reckless spending of the government. India's debt to GDP ratio stands at 54%. It is higher when compared to most of the emerging economies, however >8% economic growth should help us bring it down. To conclude I would say that a government following conservative policies would prevent problems caused due to excessive spendings in the long run.
Tuesday, August 3, 2010
The Deregulation Gimmick
Deregulation is surely going to help the global market forces in determining the petrol prices in India. Post deregulation the international oil prices is going to be the determining factor for the price of petrol we pay in pumps.
As per the Kirit Parikh committee report the benefits of deregulation of oil prices far exceeds the pain the society has to bear for the spike in oil prices. The oil marketing companies should reduce the losses which in turn should increase the revenue receipts for the government and decrease the expenditure. This increase in revenues/reduced expenditure can be utilized to fund the various social sector schemes undertaken by the government.
Many may agree with the above analysis but there are a few facts that we need to consider before we give the credit to the government. Let's calculate the cost price for 1 liter of petrol.
CRUDE OIL Rs. 22.5 p/l (@$80 per barrel )
Refining cost Rs. 3.5 p/l (@$0.07 refining cost)
Marketining expense Rs. 1.05 p/l
Shipping & Transport Rs. 6.00 p/l
---------------
Total Rs. 33.05 p/l
After going through these facts we may realize that never in the last decade we have paid less than Rs. 40 for 1 liter of petrol. What's even more interesting is that despite the subsidies we have been paying more than the cost price of petrol (Cost price as per $80 barrel.However avg. crude oil price in this decade should be lesser than $80 per barrel).
The reason why we have been paying such high prices for petrol is because of the heavy taxes levied on it. Here is how the cost price post tax looks like
CRUDE OIL Rs. 22.5 p/l (@$80 per barrel )
Refining cost Rs. 3.5 p/l (@$0.07 refining cost)
Marketining expense Rs. 1.05 p/l
Shipping & Transport Rs. 6.00 p/l
Excise Duty Rs.14.35 p/l
CESS Rs. 0.43 p/l
VAT Rs. 3.50-5.50 p/l
customs Rs. 2.64 p/l
-----------------
Total price Rs. 53.97-55.97 p/l
It can be concluded that prior to deregulation the tax paid on petrol was greater than the subsidy provided by the government. Interestingly except for VAT all the other taxes are under the purview of the Central Government. It is going to be difficult for the state governments to reduce VAT on petrol, since there are not many heads under which they can make up for the loss they will face after reducing VAT on petrol. Hence blaming the state governments would be unfair. Deregulating without making any changes to the existing tax structure is surely going to be very unfair on the common man.
This high rates of taxation is in turn used to compensate for the under-recoveries arising from sale of kerosene and L.P.G. It is going to be difficult if not impossible to sell LPG and kerosene at market price, however it would have been better if the prices would have been hiked as per the recommendation of the committee. The government lacks political will and the guts required to touch the LPG and kerosene prices.
Looking at the government's functioning it can be said that the entire act of deregulation was mainly undertaken to increase the revenues to reduce the deficit. If this entire process of deregulation has been undertaken to reduce the deficit then I am quite sure that subsidies will be re-introduced by the U.P or L.S elections or by the next oil bubble (The government would have managed to bring down the deficits by then). The biggest beneficiaries are the oil marketing companies. However its very early to comment, its better to make conclusions only after the government meets its promise of deregulating the diesel prices and raising the LPG and kerosene prices. Finally the timing was very interesting. Bihar is the only state to go for elections this year, Congress surely is not expecting much from Bihar. So going by this logic will the government find an appropriate time to deregulate diesel and raise the prices for L.P.G and kerosene???
As per the Kirit Parikh committee report the benefits of deregulation of oil prices far exceeds the pain the society has to bear for the spike in oil prices. The oil marketing companies should reduce the losses which in turn should increase the revenue receipts for the government and decrease the expenditure. This increase in revenues/reduced expenditure can be utilized to fund the various social sector schemes undertaken by the government.
Many may agree with the above analysis but there are a few facts that we need to consider before we give the credit to the government. Let's calculate the cost price for 1 liter of petrol.
CRUDE OIL Rs. 22.5 p/l (@$80 per barrel )
Refining cost Rs. 3.5 p/l (@$0.07 refining cost)
Marketining expense Rs. 1.05 p/l
Shipping & Transport Rs. 6.00 p/l
---------------
Total Rs. 33.05 p/l
After going through these facts we may realize that never in the last decade we have paid less than Rs. 40 for 1 liter of petrol. What's even more interesting is that despite the subsidies we have been paying more than the cost price of petrol (Cost price as per $80 barrel.However avg. crude oil price in this decade should be lesser than $80 per barrel).
The reason why we have been paying such high prices for petrol is because of the heavy taxes levied on it. Here is how the cost price post tax looks like
CRUDE OIL Rs. 22.5 p/l (@$80 per barrel )
Refining cost Rs. 3.5 p/l (@$0.07 refining cost)
Marketining expense Rs. 1.05 p/l
Shipping & Transport Rs. 6.00 p/l
Excise Duty Rs.14.35 p/l
CESS Rs. 0.43 p/l
VAT Rs. 3.50-5.50 p/l
customs Rs. 2.64 p/l
-----------------
Total price Rs. 53.97-55.97 p/l
It can be concluded that prior to deregulation the tax paid on petrol was greater than the subsidy provided by the government. Interestingly except for VAT all the other taxes are under the purview of the Central Government. It is going to be difficult for the state governments to reduce VAT on petrol, since there are not many heads under which they can make up for the loss they will face after reducing VAT on petrol. Hence blaming the state governments would be unfair. Deregulating without making any changes to the existing tax structure is surely going to be very unfair on the common man.
This high rates of taxation is in turn used to compensate for the under-recoveries arising from sale of kerosene and L.P.G. It is going to be difficult if not impossible to sell LPG and kerosene at market price, however it would have been better if the prices would have been hiked as per the recommendation of the committee. The government lacks political will and the guts required to touch the LPG and kerosene prices.
Looking at the government's functioning it can be said that the entire act of deregulation was mainly undertaken to increase the revenues to reduce the deficit. If this entire process of deregulation has been undertaken to reduce the deficit then I am quite sure that subsidies will be re-introduced by the U.P or L.S elections or by the next oil bubble (The government would have managed to bring down the deficits by then). The biggest beneficiaries are the oil marketing companies. However its very early to comment, its better to make conclusions only after the government meets its promise of deregulating the diesel prices and raising the LPG and kerosene prices. Finally the timing was very interesting. Bihar is the only state to go for elections this year, Congress surely is not expecting much from Bihar. So going by this logic will the government find an appropriate time to deregulate diesel and raise the prices for L.P.G and kerosene???
Tuesday, April 27, 2010
THE RED INDIANS
Last month we witnessed one of the most dreadful naxal attack since the 60 years of independence.76 CRPF jawans lost their lives fighting against the naxals.The media has been calling P.Chidambaram the best home minister India ever had,but I can say this with great amount of certainty that "India's best home minister" was completely shaken after this incident.He offered his resignation which was not accepted.Opposition had a valid point that,the Home minister by offering his resignation,is sending wrong signals to our enemy.
Naxals claim to be fighting for the rights of the poor in the rural areas of India,but the question is-Do the rural people really consider the naxals their messiah???
In the last decade the naxal recruits have increased tremendously.These recruits are mainly from the rural areas.Some of them fight for the ideology and most of them fight for the money.However it is certain that naxals do receive public support.Jharkhand CM Shibu Soren won elections in few constituencies with the help of naxals.Nitish Kumar has always been against the use of force on naxals.Recently Railway Minister Mamta Banerjee went on record to say that there were no naxals in Lalghar.There were rumors circulating in the media that Mamta Banerjee had sought help from the naxals to carry out her protests in Singur against the Tata's.The reason why naxals have been receiving support from these politicians is because of their popularity amongst the locals. Hence we cant outrightly reject the possibility of naxal's receiving support from the poor in rural areas.Naxals have been targeting the corporates and they have been vocal against the illegal mining activities carried out in the backward areas.Their presence has been observed in areas where illegal mining activities are widely carried out.In the past they have been attacking few industrial units in Bihar and Orrisa,they also had kidnapped a group of Posco executives who visited India after signing a MOU with the Orissa Government.Naxal ideologues are of the view that the presence of these corporates would hamper the lives of the tribal people.The naxals claim that they are against the signing of these MOU's which would eventually lead to the depletion of mineral resources and forest cover making life difficult for the tribals in these areas.In all debates it has been clearly evident that the so-called human right activists bring all these arguments forward to defend the maoists.
The naxal sympathizers must understand that these are just tactics used by the naxals to prevent any kind of development in these backward areas.MP's and MLA's refrain from visiting their constituencies because of their fear of the naxals,this prevents any possibility of carrying out developmental activities in these backward areas.People in these areas are generally isolated from the outside world,and eventually they are forced to support the naxals due to the lack of availability of external help.
So therefore it has to be understood that eliminating naxals is the only way through which developmental activities can be carried out in these areas.The CRPF jawans and the local police should be provided with proper training,logistics and weapons to fight the naxals.It is necessary for the CRPF and the police force to work together,this clearly did no happen in dantewada.It should be a collective responsibility of the state and center to eliminate these anti-nationals.Air force should be used for logistical support since these areas are highly inaccessible.Post-Dantewada its evident that negotiations with the naxals should be of no use,naxals may probably use the cease-fire time to strengthen their army.The government should look into the channels through which these naxals receive their funding,it has been widely speculated that they receive their funding from China.This angle must be seriously probed into,because China can use these maoists to fight a proxy war against India,and of course lets not forget that the maoists in Nepal have openly said that they would support the Indian naxals.The Indian government should take the right steps to prevent the naxals from seeking help from the other side of the border.In a recent article in the DNA it was mentioned that there have been instances in the past where Christian Missionaries operating in the remote areas have provided support to the naxals.This probably justifies the naxal aggression against the RSS social workers.
It has been encouraging to watch the opposition parties promising unconditional support for government on this issue,but sadly there seems to be difference of opinion amongst the members of the UPA.The recent article by Digvijay Singh in the Economic Times clearly highlights this difference in opinion,Mamta has always been against the use of force against the naxals.The face of the Gandhi's are always brought forward when it comes to fiscal spending,but unfortunately when it comes to issues such as naxailsm and terrorism the Gandhi family chooses to remain silent.Sad that media never questions the "YUVRAJ"of Indian politics on these issues,but I am quite sure that if he is asked questions on this issue,he would go ahead and blame the system-conveniently forgetting the fact that the system has been designed by his great grand father,grand mother and his father.The reason I have brought Rahul Gandhi into picture is because it is very well known that Digvijay singh has been Rahul Gandhi's mentor.Digvijay through his article in ET has asked the government to negotiate with the maoists,whereas P.Chidambaram has initiated the operation Green Hunt.The whole country would like to know which side the Gandhi family is in,and as always the Gandhi family chooses to remain silent on issues which would fail to garner any political mileage-"Power without Responsibility"
To conclude I would only say that it is time the government gets its act together on this issue.The government must speaking in an united voice.I am saddened by the recent difference of opinion between ManiShankarAiyyer and Digvijay Singh v/s P.Chidambaram.
Naxals claim to be fighting for the rights of the poor in the rural areas of India,but the question is-Do the rural people really consider the naxals their messiah???
In the last decade the naxal recruits have increased tremendously.These recruits are mainly from the rural areas.Some of them fight for the ideology and most of them fight for the money.However it is certain that naxals do receive public support.Jharkhand CM Shibu Soren won elections in few constituencies with the help of naxals.Nitish Kumar has always been against the use of force on naxals.Recently Railway Minister Mamta Banerjee went on record to say that there were no naxals in Lalghar.There were rumors circulating in the media that Mamta Banerjee had sought help from the naxals to carry out her protests in Singur against the Tata's.The reason why naxals have been receiving support from these politicians is because of their popularity amongst the locals. Hence we cant outrightly reject the possibility of naxal's receiving support from the poor in rural areas.Naxals have been targeting the corporates and they have been vocal against the illegal mining activities carried out in the backward areas.Their presence has been observed in areas where illegal mining activities are widely carried out.In the past they have been attacking few industrial units in Bihar and Orrisa,they also had kidnapped a group of Posco executives who visited India after signing a MOU with the Orissa Government.Naxal ideologues are of the view that the presence of these corporates would hamper the lives of the tribal people.The naxals claim that they are against the signing of these MOU's which would eventually lead to the depletion of mineral resources and forest cover making life difficult for the tribals in these areas.In all debates it has been clearly evident that the so-called human right activists bring all these arguments forward to defend the maoists.
The naxal sympathizers must understand that these are just tactics used by the naxals to prevent any kind of development in these backward areas.MP's and MLA's refrain from visiting their constituencies because of their fear of the naxals,this prevents any possibility of carrying out developmental activities in these backward areas.People in these areas are generally isolated from the outside world,and eventually they are forced to support the naxals due to the lack of availability of external help.
So therefore it has to be understood that eliminating naxals is the only way through which developmental activities can be carried out in these areas.The CRPF jawans and the local police should be provided with proper training,logistics and weapons to fight the naxals.It is necessary for the CRPF and the police force to work together,this clearly did no happen in dantewada.It should be a collective responsibility of the state and center to eliminate these anti-nationals.Air force should be used for logistical support since these areas are highly inaccessible.Post-Dantewada its evident that negotiations with the naxals should be of no use,naxals may probably use the cease-fire time to strengthen their army.The government should look into the channels through which these naxals receive their funding,it has been widely speculated that they receive their funding from China.This angle must be seriously probed into,because China can use these maoists to fight a proxy war against India,and of course lets not forget that the maoists in Nepal have openly said that they would support the Indian naxals.The Indian government should take the right steps to prevent the naxals from seeking help from the other side of the border.In a recent article in the DNA it was mentioned that there have been instances in the past where Christian Missionaries operating in the remote areas have provided support to the naxals.This probably justifies the naxal aggression against the RSS social workers.
It has been encouraging to watch the opposition parties promising unconditional support for government on this issue,but sadly there seems to be difference of opinion amongst the members of the UPA.The recent article by Digvijay Singh in the Economic Times clearly highlights this difference in opinion,Mamta has always been against the use of force against the naxals.The face of the Gandhi's are always brought forward when it comes to fiscal spending,but unfortunately when it comes to issues such as naxailsm and terrorism the Gandhi family chooses to remain silent.Sad that media never questions the "YUVRAJ"of Indian politics on these issues,but I am quite sure that if he is asked questions on this issue,he would go ahead and blame the system-conveniently forgetting the fact that the system has been designed by his great grand father,grand mother and his father.The reason I have brought Rahul Gandhi into picture is because it is very well known that Digvijay singh has been Rahul Gandhi's mentor.Digvijay through his article in ET has asked the government to negotiate with the maoists,whereas P.Chidambaram has initiated the operation Green Hunt.The whole country would like to know which side the Gandhi family is in,and as always the Gandhi family chooses to remain silent on issues which would fail to garner any political mileage-"Power without Responsibility"
To conclude I would only say that it is time the government gets its act together on this issue.The government must speaking in an united voice.I am saddened by the recent difference of opinion between ManiShankarAiyyer and Digvijay Singh v/s P.Chidambaram.
Monday, April 5, 2010
The Dragon Tactics
Pegging is the process of stabilizing a particular currency.Yuan is a fixed currency and it is pegged against the US dollar.The six month high for Yuan is 6.83 and the six month low for the currency is 6.82.The people's bank of China has successfully managed to keep the yuan between these levels.So how is pegging helping China?
China undervalues its currency,this makes the Chinese exports to the US cheaper.This has been one of the main reasons the Chinese manufacturing industry has flourished.In India we often come across reports of the textile industries being badly hit due to Rupee appreciation,This is because the Rupee is not a fixed currency(however Nepalese rupee is pegged against the Indian Rupee),R.B.I enters the currency markets generally to reduce the volatility,to reduce the losses for the importers and the exporters.The RBI perceives that long run equilibrium is different from the actual values.However in the past we have seen RBI allowing the Rupee to appreciate and depreciate up to10% over a period of 12 months(we have seen the rupee fall from 39 to 44 in 2009),and I am of the view that these actions are quite justified in case of a developing nation,comparing the fluctuations in the Yuan and Rupee it can be said that RBI has not been as aggressive as the People's bank of China.We have to appreciate RBI for letting the market forces determine the movement in the Rupee.
Having said that we have to understand the fact that a fixed Yuan actually benefits the exporters in China,and therefore may have a negative impact on the exporters in India.For instance when it comes to pricing we can say that the Chinese textile industry has an upper hand over the Indian textile industry because of the fixed Yuan and the floating Rupee.Unfortunately Indian government has always been in the back foot when it comes to raising its voice against China.
For a brief period the Yuan was allowed to appreciate,and during this period the Yuan appreciated by 20%.Most analysts today are of the view that Yuan is undervalued by 10%-50%.So if the central bank stops pegging we can say that the Chinese manufacturers will be forced to raise their prices in proportion with the appreciation in Yuan.
Recently many senators in the US congress have been protesting against this policy of China.A group of senators in the US are planing to bring in a legislation which would impose taxes on Chinese imports.Increase in Chinese imports has made life difficult for the local US manufacturers,this legislation should certainly help the US manufacturers compete with their Chinese counterparts.However any aggressive step taken against China will have a negative consequence on the US considering the fact that China is currently sitting on 2.4 trillion of foreign reserve,most of which is US T-bills.This is one of the main reasons why the recent statements by the treasury secretary T.Geithner does not sound threatening towards China.It is going to be interesting to see if US is going to accuse China for being a currency manipulator considering the fact that China is currently having T-bills worth trillions.Let us also not forget that the US consumers are the major beneficiaries of these low priced Chinese products.So any action against China can potentially affect the US bond market and the US consumers.
Coming back to China-to prevent the Yuan from appreciating the Chinese central bank sells Yuan.The Chinese central bank may increase the supply of Yuan to prevent it from appreciating,this may in turn lead to a rise in inflation in China.Looking at the broader picture we can actually say that the Chinese central bank is helping the Chinese manufacturers sell their products in the US markets,but what is unfortunate is that these benefits does not get transferred from the employers to the employees.Workforce in China continues to be exploited to meet the rising demand,and we come across cases of workforce exploitation in China on a regular basis.
Considering all this it should be interesting to see how the US and China deal with this issue.
China undervalues its currency,this makes the Chinese exports to the US cheaper.This has been one of the main reasons the Chinese manufacturing industry has flourished.In India we often come across reports of the textile industries being badly hit due to Rupee appreciation,This is because the Rupee is not a fixed currency(however Nepalese rupee is pegged against the Indian Rupee),R.B.I enters the currency markets generally to reduce the volatility,to reduce the losses for the importers and the exporters.The RBI perceives that long run equilibrium is different from the actual values.However in the past we have seen RBI allowing the Rupee to appreciate and depreciate up to10% over a period of 12 months(we have seen the rupee fall from 39 to 44 in 2009),and I am of the view that these actions are quite justified in case of a developing nation,comparing the fluctuations in the Yuan and Rupee it can be said that RBI has not been as aggressive as the People's bank of China.We have to appreciate RBI for letting the market forces determine the movement in the Rupee.
Having said that we have to understand the fact that a fixed Yuan actually benefits the exporters in China,and therefore may have a negative impact on the exporters in India.For instance when it comes to pricing we can say that the Chinese textile industry has an upper hand over the Indian textile industry because of the fixed Yuan and the floating Rupee.Unfortunately Indian government has always been in the back foot when it comes to raising its voice against China.
For a brief period the Yuan was allowed to appreciate,and during this period the Yuan appreciated by 20%.Most analysts today are of the view that Yuan is undervalued by 10%-50%.So if the central bank stops pegging we can say that the Chinese manufacturers will be forced to raise their prices in proportion with the appreciation in Yuan.
Recently many senators in the US congress have been protesting against this policy of China.A group of senators in the US are planing to bring in a legislation which would impose taxes on Chinese imports.Increase in Chinese imports has made life difficult for the local US manufacturers,this legislation should certainly help the US manufacturers compete with their Chinese counterparts.However any aggressive step taken against China will have a negative consequence on the US considering the fact that China is currently sitting on 2.4 trillion of foreign reserve,most of which is US T-bills.This is one of the main reasons why the recent statements by the treasury secretary T.Geithner does not sound threatening towards China.It is going to be interesting to see if US is going to accuse China for being a currency manipulator considering the fact that China is currently having T-bills worth trillions.Let us also not forget that the US consumers are the major beneficiaries of these low priced Chinese products.So any action against China can potentially affect the US bond market and the US consumers.
Coming back to China-to prevent the Yuan from appreciating the Chinese central bank sells Yuan.The Chinese central bank may increase the supply of Yuan to prevent it from appreciating,this may in turn lead to a rise in inflation in China.Looking at the broader picture we can actually say that the Chinese central bank is helping the Chinese manufacturers sell their products in the US markets,but what is unfortunate is that these benefits does not get transferred from the employers to the employees.Workforce in China continues to be exploited to meet the rising demand,and we come across cases of workforce exploitation in China on a regular basis.
Considering all this it should be interesting to see how the US and China deal with this issue.
Wednesday, March 24, 2010
The US-PAK nuclear deal
US has shown its willingness to sign a nuclear deal with Pakistan,it should be quite similar to the Indo-US nuclear deal.IAEA approved India's safeguard agreement treaty.One of the main reasons India got this approval was because it has successfully managed to safeguard its nuclear secrets.Whereas in case of Pakistan we are very much aware of A.Q Khan's case.A.Q Khan had sold off nuclear weapons technology to Iran and Libya.The wealth he would have amassed through this transaction would have made him the richest man on the planet.
Past has shown us that Pakistan has a poor history when it comes to safeguarding its nuclear secrets,despite this well known fact we are seeing the Americans willing to sign a nuclear treaty with Pakistan.One of the main reasons for American willingness is because of the war in Afghanistan.The Obama administration plans to increase the troops deployed in Afghanistan.In such a scenario US would be needing Pakistan's help,besides it is going to be difficult to win the war on terrorism without Pakistan's help.Pakistan in the past has expressed its displeasure over the Indo-US nuclear deal.So this move is mainly aimed to satisfy the ruling Pakistani administration.
This deal should certainly increase the security concerns of several nations,and lets not discount the possibility of this technology falling into the hands of the terrorists.US and Pakistan have been allies since Pakistan's independence in 1947.Similarly during the post independence period India and the Soviet Union were seen as great allies(mainly due to Nehru's inclination towards socialism),But we had seen a dramatic change in foreign policy when the NDA government came into power.We had actually seen the Vajpayee Govt. taking the initiative for the Indo-US nuclear deal.It was during the NDA regime that we had seen the Indian Govt negotiating with the US.
Recently US ambassador rejected the possibility of US providing access to Headley,US may prevent India getting the custody of Headley since it would help India prove the involvement of Pakistan in 26/11.Giving custody of Headley to India can potentially hamper the US-PAK relation.
Coming back to the US-PAK nuclear deal,I doubt if Pakistan would receive the support of the nations in IAEA due to its poor history when it comes to safeguarding it nuclear secrets.
This is my first post on foreign policy/politics.I often get criticized for being biased towards a particular ideology,which prevented me from making posts on these topics.Please comment if you feel this post is biased.
Past has shown us that Pakistan has a poor history when it comes to safeguarding its nuclear secrets,despite this well known fact we are seeing the Americans willing to sign a nuclear treaty with Pakistan.One of the main reasons for American willingness is because of the war in Afghanistan.The Obama administration plans to increase the troops deployed in Afghanistan.In such a scenario US would be needing Pakistan's help,besides it is going to be difficult to win the war on terrorism without Pakistan's help.Pakistan in the past has expressed its displeasure over the Indo-US nuclear deal.So this move is mainly aimed to satisfy the ruling Pakistani administration.
This deal should certainly increase the security concerns of several nations,and lets not discount the possibility of this technology falling into the hands of the terrorists.US and Pakistan have been allies since Pakistan's independence in 1947.Similarly during the post independence period India and the Soviet Union were seen as great allies(mainly due to Nehru's inclination towards socialism),But we had seen a dramatic change in foreign policy when the NDA government came into power.We had actually seen the Vajpayee Govt. taking the initiative for the Indo-US nuclear deal.It was during the NDA regime that we had seen the Indian Govt negotiating with the US.
Recently US ambassador rejected the possibility of US providing access to Headley,US may prevent India getting the custody of Headley since it would help India prove the involvement of Pakistan in 26/11.Giving custody of Headley to India can potentially hamper the US-PAK relation.
Coming back to the US-PAK nuclear deal,I doubt if Pakistan would receive the support of the nations in IAEA due to its poor history when it comes to safeguarding it nuclear secrets.
This is my first post on foreign policy/politics.I often get criticized for being biased towards a particular ideology,which prevented me from making posts on these topics.Please comment if you feel this post is biased.
Sunday, March 7, 2010
Its all Greek and goldman
Was researching on the recent crisis in Greece.Recently people in Greece have been protesting against the government for the hikes in taxes and reduction in spendings.pay cuts have been announced for the people working in the government sector and subsidies for the farmers have been reduced substantially.These austerity measures have made the farmers and the citizens of Greece to raise their voice against their government.
What has forced the government to adhere to such strict measures?
A recent report suggests that Greece's debt to GDP ratio is set to touch 120% and next years fiscal deficit is set to touch 13%.These figures should certainly scare all investors investing in Greece.The volumes in the bond market has fallen by more than 10% and the yield spreads have risen by more than 50 basis points last week,besides Euro has been under performing most of the currencies in the last couple of months.
Lets now look at the performance of the investment Bank.....oops sorry commercial Bank Goldman Sachs.Goldman has reported a profit of 4.78b USD.The gross income is as much as the income of the 5 big US banks combined.We haven't seen any significant improvement in the US economy, in spite of this Goldman has managed to post a 5b bottom line figure,a great achievement.But looking at the recent reports of Goldman's involvement in the Greek crisis I have my doubts on how Goldman has managed to post such a high profit figure.
Recently came across a article about the deal between Goldman and Greece.The article said that in the beginning of this decade prior to the Athens Olympics,Goldman helped Greece borrow billions,what was interesting was the method used by Goldman to fund Greece.Goldman provided cash upfront,but it was not reported as it was treated as a currency swap.Greece in return would have to forgo some of its future earnings.
Hmmm....now I wonder how much of this revenue has managed to find its way into Goldman's profits.In the past we have several countries seeking support from IMF, isn't it possible these countries would have approached Goldman prior to approaching IMF,isn't it possible that Goldman would have bailed out many such countries using such unethical practices.It may be unethical but unfortunately its not illegal,so we cant say for sure unless these countries voluntarily inform us about such transactions. Until then these government would continue to cheat its citizens and Goldman's profits should continue to move up.
Saturday, February 27, 2010
BUDGET 2010
Budget has been a non event for the past few years,but this years budget is certainly something that cannot be ignored,I am saying this even after considering the fact that there are hardly any positive or negative surprises in the budget.However,now that the event is over, I expect the focus to shift to monetary policy and the crisis in Europe.
The Finance Minister needs to be praised for giving a proper road map to tackle fiscal deficit.The gradual removal of stimulus should help the growth in the economy.This should help prevent a double dip recession.The F.M has announced to divest upto 40k crores,however looking at the primary market,it is certainly going to be a tough task to raise funds through the primary market.Some money must be left on table for the investors,to successfully raise funds.Most of the analysts dint expect the finance minister to touch the corporate tax rates,but MAT was raised to 18% from 15% which did come as a negative surprise.This should increase the tax liability by 241cr,219cr,183 cr. for Reliance ind. Infosys and Bharti Airtel respectively.Reduction in surcharge should reduce this liability to some extent.Raise in MAT rates is in line with D.T.C which seeks to end exemptions.
The revised income tax slabs should certainly increase savings and spendings which will therefore fuel growth.This should also help the middle class tackle inflation,further a deduction of 20k can be claimed by investing in infrastructure bonds.The revised slabs will also help the middle class to cope up with the interest rates which are set to rise in the future.
Allocations in NREGA and Rajiv Gandhi yojna have not been raised significantly.There are not many steps taken to help the poor in urban and rural areas.The hike in import duty and excise duty on petrol and diesel is going to fuel the inflation.The revised income tax slabs too can fuel inflation,which may eventuaaly lead to a widening of gap between the rich and the poor.The budget has not provided much help to the poor to tackle inflation.The loan waiver has been extended by six months,but the agri sector has recorded a fall of 2.5% for the previous quarter.Due to the lack of initiative towards the farm sector the prayers to lord Indra is going to get louder.
No significant reforms have been mentioned in the budget.The past has shown us that government generally does not use the budget as a platform to announce reforms.Looking at the minister's statements ,I can say with some certainty that Kirit Parikh committees recommendations would be taken seriously.Non banking financial institutions can now get banking license,it is certainly a great move since it will increase competition. Few months back there were rumors in the street about Reliance Capital taking control of Dhanlakshmi Bank,after this announcement R-cap was amongst the top performers in yesterdays market.NBFS's such as IDFC and IFCI moved up after this news.
Finally to sum up I would say it was a great budget for the middle class.The corporates would not be complaining,but it is certainly a bad budget for the poor since much of their problems have not been addressed.The focus of the budget seems to be to increase growth ie. G.D.P but it would be better if the focus shifts to increasing our H.D.I ie. inclusive growth.
Saturday, February 20, 2010
INDIA-the socialist democratic republic
Received a phone call from Satan a couple of days back.By listening to his voice I could make out that he was upset with something.When I probed into it ,he told me that he was going through a really bad phase because Jyoti Basu has managed to form a union .
Socialism has been one of the most important reasons why India has failed to progress after independence.Nehruvian socialism is one of the most commonly used jargon in the news studios,and I personally feel that Nehruvian socialism still seems to play an important role in our foreign policy.
Many may argue by saying that Nehru was a great leader and it was socialism that made him a great leader.I do not disagree with this view,but through this post the message that I wish to convey is that socialism is all about providing best possible solution in the short term by turning a blind eye to the future.
Let us take the case of a group of workers going on strike.A leftist government more often than not would come to the support of the workers i.e their electorates.This may help to solve the problems of the workers in the short run,but in the long run investors would prefer to stay away from such states/nations.
After jyoti Basu's death I came across an article by a famous journalist-Kanchan Gupta-Through the article he described the journey of Kolkatta towards darkness(after the left's tenure began in mid 1960's ).The city was blessed wit great infrastructure but the leftist ideology prevented the city from moving forward.Kolkatta would have been a mumbai if not for jyoti basu..
Jyoti Basu and Nehru have been loved by the public because of their inclination towards socialism,but in the long run there are not many takers for their ideology.A leftist govt generally maintains a low tax rate which again makes them popular among the electorates,but this is what spoils the fiscal policy of the country.insufficient fund allocation towards the society causes deaths due to hunger,poor infrastructure(roads,rail etc.)If you sum up this figure it should be 100 times more than the deaths during the Godhra riots.These lives have been lost because of our inclination towards socialism.
off late I have been praying regularly...I dont want to meet Jyoti Basu!
Thursday, February 18, 2010
The Travesty of Judicial System in case of Quattrocchi(by amogh pathak)
The Quattrocchi saga is a blot on the Congress led UPA government--which it cannot wash away. I don’t recollect any incident where the government has actually went out of the way to save any individual (of course there was a selfish motive though).The dropping of the cases against Q was bound to happen .First it was the defreezing of Quattrocchi’s accounts. Second the govt. facilitated the withdrawing of Interpol’s red corner notice. Third it gave the final clean chit to the Italian corrupt fraudmaster ‘Q’ by dropping all charges against him. In this whole saga what comes through is the proximity of Mr. Quattrocchi to 10, Janpath. The sum alleged may be small as compared to the huge corruption that prevails in the Indian political arena. But the way it was done and the underhand methods used so blatantly to get Quattrocchi walk free is something which cannot be easily explained off.
The questions that actually aghast me are :- Why was the UPA government under Mrs Sonia Gandhi so keen on freeing ‘Q’? What is the relationship of ‘Q’ to the first family? Why did the law minister sent an envoy to the UK to defreeze his account keeping the PM in the dark? Why was Quattrocchi not extradited from Malaysia, when the Central government did say that it was a fit case for extradition? Why did the then Solicitor General Mr. Gopal Subramanium withdrew case against Italian Businessmen Ottavio Quattrocchi when CBI had once suggested a strong case existed? What happened between then-with a strong case in existence?
I think it all started when Margaret Alva was the Minister in charge of Personnel, the Congress allowed Quattrocchi to sneak out of the country? 64 crores may be peanuts for the ministers and the first family- the fact remains that the Congress strongly helped the fleeing and then the freeing of Mr. ‘Q’. If there was no case then why had ‘Q’ not appeared for the questions, faced the charges and cleared himself? Instead he was running as a refugee from country to country. The role of Congress is surely a suspect. It has brought disgrace and disrepute to the country and its investigation agencies and made a farce of our whole justice system.
All the big tamasha of sleeping in a dalit’s house and sharing a night meal with them, travelling in local trains in Mumbai etc. is big propaganda for Rahul. This is sheer hypocrisy. If the Congress and Rahul really feels the plight of the poorest of the poor then I think Mr. Rahul is smart enough to understand that one night’s dinner is not gonna suffice the cause. You really require people like Baba Amte, Amritanandamayi Devi, Mother Teressa etc. to actually bring a real change. It takes a lot of courage to fight corruption because corruption is the root cause for all the ills. Is one night stay of Mr. Rahul Gandhi going to actually eradicate the poverty of the poor people? If really Rahul and his mother believe in eradication of poverty then Quatrrocchi’s case should have been different.
At the end I would say it is not the 64 crores but the message that they will go upto any level to save people who are close to them; the government led by Mrs Sonia Gandhi will not hesitate to make a farce of this whole judicial system and block its process.
“JAI HIND, JAI MAHARASHTRA”
Friday, February 12, 2010
The math behind the farmer suicides(part2)
The increase in farmer suicide has been a cause of concern in the past couple of years.In the previous post I have managed to highlight the causes of farmer suicides in India.One of the major reasons for the increase in farmer suicides is because of the inability of the farmers to cope up with the rising prices and decrease in rainfall.
Despite the economic crisis and 26/11 the U.P.A government managed to win the lok sabha elections in 2009.Most of the experts in news studios were of the opinion that the Indo-US nuclear deal helped the government to win the election with such a comfortable margin,but I strongly disagree with this view.I feel that the farm loan waiver was one the main reasons why the congress party was successful in winning more than 200 seats.However the Indo-US nuclear treaty was one of the main reasons why the congress party was successful in the urban areas.The harsh reality as of today is that the farmers in rural areas would require such stimulus packages on a regular basis to continue with the agri production,but due to such high fiscal deficit it would be difficult for the govt. to come up such similar packages.
I am not a leftist,but a leftist policy is required to prevent this problem from escalating(This is one of the main reason why naxals have been receiving support from the people in rural areas.)Stimulus must be given to the agri sector on a regular basis(say annually).proceeds from disinvestment,3G auction should be channeled in such a manner that this sector is the greatest beneficiary.A federal body should be formed,which can help to administer the funds in a proper manner.The federal body should have the freedom to decide the package to be provided for a particular region(based on the rainfall ).
Recently chief minister of Gujarat Narendra Modi recommended that the PDS should be strengthened.I strongly agree with this suggestion,but surprisingly the finance minister Mr.Pranab Mukherjee saw this as a gimmick by Modi to target the central govt. Improving the current PDS can help the people in rural areas to tackle inflation in a better way.It would be beneficial to the country if the govt. takes Modi's comments seriously.
Finally I would say that in the past decade many of the economies throughout the world have started growing at a faster pace.We are currently seeing a scenario where focus is shifting from agri to industrialization.If such a transition takes place,we have to understand that the food production should fall over a period of time(causing the food inflation to rise).In such a scenario the Indian farmer would be a great asset to the country.It would help if the politicians stop fighting on petty issues and start focusing on such issues.The focus of the govt. should be to increase the growth rate in the H.D.I rather than increasing the growth rate of the country's GDP.It would help if the media starts focusing on these issues.It would help if the NGO's stop fighting for gay rights and start fighting for the rights of the Indian farmer.Until then,Let's hope that Aatmaram does not consume that bottle of poison.
Thursday, February 4, 2010
The math behind the farmer suicides(part1)
Aatmaram a farmer in Vidharbha spends around 12 hours in his field.Its not because he is busy working.He prefers to stay back in his field,so that he could avoid the sight of his hungry family.Due to the insufficient rains Aatmaram has failed to generate sufficient income to feed his family and thereby he has failed to capitalize on the rising food prices.The greedy moneylender threatens Aatmaram on a daily basis to repay the money loaned to him.The only solution that Aatmaram has thought of is to consume the bottle of poison that he has been carrying in his pocket for some time.
So now let us analyze what is leading farmers to take such a drastic step.In the past 5 years we have been growing at 6%-10%,inflation has been hovering between 4%-13%(however the year 2009 was an exception).Looking at these wonderful growth rates it is difficult to digest the fact that thousands of farmers have been committing suicides annually.Unfortunately what we fail to understand is that the answer lies in the numbers.We have seen the inflation hover between 4%-13%,but the growth rate in agriculture has always been below 4%.despite a higher food inflation the farmers have failed to capitalize on it due to the inability to increase production(supply of land is generally limited for a poor farmer) and poor monsoons.So we are seeing a scenario where the expenses and costs of a farmer to take care of his field and his family has been growing at a faster pace than the pace at which his income has been growing,besides the purchasing power in the urban areas has shot up significantly and these farmers are finding it difficult to cope up with this sudden change.
Poor rainfall this year is only going to make the problem worse.As always I criticize Mr. Pawar for the lack of initiative taken as the agri min. of the country.He seems to be working as the agri minister of western Maharashtra.It would be helpful if he realizes that he is the agri min. of India.
Finally the question that comes to my mind is,will Aatmaram consume the bottle of poison that he has been carrying in his pocket..............to be contd................
Monday, February 1, 2010
Mercy for Cricket Bowlers…(By RAHUL TANK)
Mercy for Cricket Bowlers…
The Cricketing fraternity is shocked by the latest Ball Tampering incident by (Famous for all wrong reasons) Shahid Afridi (man who thought he would secure his place in this year’s IPL but thanks to Almighty he is not there). Only God knows whether he was smelling,chewing or licking the ball. This was an absurd and never heard before act . He said he really smelled the ball… apparently, with his teeth. He later said he wanted to win the match for Pakistan and by tampering the ball he could get the wickets….Afridi, who was 19 years old for at least two years or more, has been the bad boy of Pakistani cricket for some time. He has been involved in a number of dressing room clashes – physical, not just verbal. Making him captain is like making Saddam Hussian, the Head of World Peace Movement. Now the real Question is why are the cricketers indulging in the practice of tampering the ball? Why there is a need for them to make such unfair practices in order to get wickets and win the match.
According to me BALL TAMPERING (It is an action in which a fielder illegally alters the condition of the ball.) should be legalized in All forms of Cricket. I believe, Batsman have an edge over bowlers in Cricket.Rules such as power play and free hits,makes the batsman's job easier. But I pity the bowlers as they have to maintain their Line and length. The margin for error is very less for bowlers, so if batsman has the option of power play, let the bowlers also have the option of using the ball as they want. As a result there would be a fair competition in the cricket field. The irony is that ball tampering is usually linked to reverse swing, so bowlers can make maximum use of it and which in turn should make it difficult for the batsman to score. Also batsman use various types of bats in terms of, size ( thickness) and weight to score runs,then why there is only one type of ball being used by the Bowlers?? so let them make the best use of the ball i.e. tamper the ball according to the situation..
So I strongly favour the bowlers and want ICC to legalized Ball Tampering
Sunday, January 31, 2010
Friday the 29th
R.B.I has increased the C.R.R by 75 basis points to 5.75%.This came as a huge surprise since most of the analysts dint expect the R.B.I to raise rates beyond 50 basis points.As mentioned in my previous post R.B.I has used C.R.R as a tool to suck liquidity and has left the repo rate unchanged.
Lets now analyze the impact of rate hikes on the economy.
1)Food Prices:-
The rate hikes should not bring about significant change to food prices since the rise in food prices has mainly been triggered due to supply side concerns.Only the agriculture minister can arrest the rising prises of these commodities,but irresponsible comments from the agri minister will only make the problem worse.
2)Banks:-
Due to the rise in liquidity the deposits have increased significantly,but the decrease in net interest margins of most of the banks in this quarters results signifies that they have found it difficult to increase lending due to decrease in demand.Hence the banks may not raise rates in the short term,but in the long run the increasing government borrowings due to high deficits may push the rates higher(The crowding out effect).
3)Real Estate:-
Price rise in real estate has been a cause of concern for some time now,but the central bank will find it difficult to arrest the prise rise in this sector as long as the banks start raising rates.
To conclude I would only say that nothing significant is going to happen until the banks start to raise rates.
Saturday, January 23, 2010
THE HANGOVER
The stock markets indices in the past 12 months has doubled.The money invested in any of the blue chip companies have given a return of anywhere between 50 to 200 percent returns in the past 2 years.
So is it safe to say that the bullish phase is back??
To be honest, I have my doubts on this.In the last year it has to be noted that enormous amount of money was pumped into the system by the government through stimulus packages.The effects of the stimulus packages are very much visible through the growth in the I.I.P numbers,besides billions of dollars have been pumped into the global economy.It would be safe to assume some amount of this money must have found its way into emerging markets including India.It is this excess liquidity which has been driving the growth in the Indian economy.I would say that the growth in the economy is just a hangover of the excess liquidity pumped in the system.
The economy cannot be in this state for a long period of time.Let's say that the govt. discontinues the stimulus packages (seems probable due to the high fiscal deficit.),this would lead to a decrease in the govt. spending which has been one of the vital contributor to the growth in G.D.P.Therefore corporate earnings,capital inflows and exports will have to fill in for the vacuum created by the decrease in govt spendings.Let's now evaluate the possibility of this happening.
1)Capital inflows
Long back I remember Warren Buffet saying in an interview that inflation is going to be the next big threat to the global economy.Looking at the weekly W.P.I numbers his concerns seem genuine.So it is safe to assume that the surplus liquidity will move to safer destinations such as T-Bills,G-Secs.Therefore probability of this component accelerating the G.D.P is very less.
2)Exports
There has been a year-on year increase in oil prices.Therefore increase in oil price should more or less offset the increase in exports.It would be safe to assume that the increase in exports would not be significant enough to offset the decrease in govt spending.
3)Corporate earnings
I had great expectations from this quarters earnings.The I.T cos. managed to come up with stellar set of numbers.RIL too managed to come up with decent set of numbers.Results of L&T and ICICI were disappointing.With the rate hikes around the corner it would be unfair to expect much from the interest rate sensitives.It is clearly evident that the corporate earnings is a mixed bag and it would be foolish to expect the corporate earnings to fill in for the vacuum created by the decrease in govt. spending.
All I would say is that,enjoy this phase (the hangover phase),dont be surprised if there is a dip before we climb the ladder.I would be happy if my analysis turns out to be correct,but I would be happier if my analysis turns out to be wrong.....since it would increase my chances of getting a job after my studies...........CHEERS:-)
Sunday, January 17, 2010
THE GREAT INDIAN RATE TRICK
The food inflation is close to 20%,the W.P.I is close to 7%.I think it is time the R.B.I starts to raise the interest rates.It would be safe to assume that any student of Economics would not disagree with this view.
The inflation concerns have forced the central banks of China and Australia to raise rates.These measures will help these countries to be well equipped to fight inflation and suck the excess liquidity from the system.
I remember,a lot of credit was given to R.B.I by many investment bankers post the Lehman crisis.The pro active measures taken by R.B.I during that period helped to insulate the economy from the crisis to some extent,but surprisingly and unfortunately it was the socialistic policies of Indira Gandhi which received more credit from the media and the members of the U.P.A government.
So, the question that arises in our minds is why is the Central Bank dragging its feet when it comes to raising the interest rates?i.e. what has changed in the past 2 years??
Ans:-Nothing much,except for the governor,Reddy was replaced by Subbarao.It is a well known fact that Subbarao is very close to the politicians in Delhi.I think this is the only reason that justifies the silence of the governor.His predecessors both Reddy and Bimal Jalan were definitely amongst the best governors we ever had,but one of the main reasons for their success is the freedom with which they used to operate.They were appointed as governors when the NDA govt. was in power.Therefore some amount of credit must be given to the NDA govt. for letting them function without much political pressure.It is a well known fact that CBI and EC are being run by the stooges of the Congress party,now it seems that RBI is a new entrant to the list.
Well now the question you may ask is why would the govt. not want the RBI to raise rates?
Ans:-The govt. is in need of money.The govt. is forced to borrow from the market because of the failure of the 3G auction.Issues of NTPC(11000cr.1st week of feb.) REC (1500cr.third week of feb.)NMDC(14000cr.2nd week of march) are expected to hit the market.Success of these issues solely lies in the hands of the RBI.It is therefore safe to assume that RBI will be dragging its feet till the last week of March.I do not suggest that there wont be any rate hikes till April,but it would be safe to assume that the rate hikes would be at a slower pace,till the govt. manages to achieve its goals.
hmmm....so who are the losers??
Its us.Inflation is going to be a problem till the government manages to raise funds. Of course Pawar is going to be richer and suicides in Vidharba are going to continue........Jai Hind
Subscribe to:
Posts (Atom)