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20 facts you must know about India's growth

2010-12-20T22:53:00.003+05:30

1)The Indian economy is the eleventh largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP).

2)India is poised to achieve 9 per cent economic growth in the current financial year itself, driven by robust performance by the agriculture and industry sectors.
The economy grew by 8.9 per cent in the second quarter of the current fiscal.

3)India has emerged as one of the world's top ten countries in industrial production. The nation's industrial production grew at the fastest pace in three months at 10.8 per cent.
Manufacturing grew 11.3 percent in October after a 4.6 percent gain in September.

4)India is one of the fastest growing automobile markets in the world, expanding at 35 per cent on average in the first four months of the current financial year.

5)The Bombay Stock Exchange has been rated as the world's best performing stock market recently. With a 13 per cent gain, Sensex is among the world's 10 biggest markets, according to data collected by Bloomberg.

6)Indian companies have become bigger and stronger in the last ten years with the average revenue of a company on the Fortune India 500 list standing at Rs 7,632.5 crore (Rs 76.32 billion).
The total revenue of the Fortune India 500 companies stands at Rs 38,16,239.40 crore.

7)India is the world's largest recipient of overseas remittances. The remittances grew from $49.6 billion in 2009 to $55 billion in 2010.
It is also the country with the second largest number of emigrants after Mexico, according to the World Bank.

8)India owns over 18,000 tonnes of above ground gold stocks worth approximately $800 billion and representing at least 11 per cent of global stock, according to estimates of World Gold Council.
India ranks 11th in the world with 557.7 tonnes of gold reserves.

9)India is among the top 10 nations in terms of foreign exchange reserves.
The country's foreign exchange reserves breached the $300-billion mark for the first time since 2008 with an addition of $2.2 billion on the back of a healthy rise in foreign currency. The nation's forex reserves currently stand at $296.40 billion.

10)India's services sector, backed by the IT revolution, remains the biggest contributor to the country's GDP, with a contribution of 58.4 per cent.

The industry sector contributed 24.1 per cent and the agriculture sector contributed 17.5 per cent to the GDP.

11)India's civil aviation sector will be among the top five in the world in the next five years.
Indian domestic air traffic is expected to reach 160-180 million passengers per year, while international traffic will exceed 80 million.

12)India's exports during November jumped by 26.8 per cent to $18.9 billion year-on-year. India's exports during April-September aggregated to $103.65 billion registering a year-on-year growth of 28 per cent.

13)India, China and Brazil are the top three target countries for foreign direct investment until the end of 2012 with the United States, for years number one, now in fourth place, according to the UN trade and development agency UNCTAD.

14)The Indian telecommunications industry is the world's fastest growing telecommunications industry, 723.28 million telephone (landlines and mobile) subscribers and 687.71 million mobile phone connections as of September 30, 2010.

15)The number of Internet users in India is estimated at 81 million. The Telecom Regulatory Authority of India pegs the number of broadband subscribers at 10.08 million in August 2010.

16)The Indian IT-BPO industry is expected to exceed $70 billion in fiscal 2011.
The Indian IT-BPO exports are projected to grow by 13 per cent to 15 per cent while domestic IT-BPO will grow slightly more by 15 per cent to 17 per cent during fiscal 2010-11.

17)India has the largest number of post offices in the world. The world's highest post office, Hikkim is located at 15,500 feet in the Lahaul Spiti district of Himachal Pradesh.

18)The largest employer in India is the Indian Railways, employing over 1.6 million people. Indian Railways started operations on April 16, 1853.

19)ndia ranks second in farm output globally. India is one of the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper.

20)Tourism is the largest service industry in India, with a contribution of 6.23 per cent to the national GDP. The number of foreign tourists visiting the country during September this year is higher than that of the same month last year.

Around 3.69 lakh (369,000) foreign tourists came to India in September this year as compared to 3.28 lakh (328,000) during the same month in 2009.

Courtecy:www.rediff.com

"Have Breakfast… or…Be Breakfast!"

2010-02-17T15:46:00.000+05:30

Who sells the largest number of cameras in India ?
Your guess is likely to be Sony, Canon or Nikon. Answer is none of the above. The winner is Nokia whose main line of business in India is not cameras but cell phones
Reason being cameras bundled with cell phones are outselling stand alone cameras. Now, what prevents the cell phone from replacing the camera outright? Nothing at all. One can only hope the Sony’s and Canons are taking note.
Try this. Who is the biggest in music business in India ? You think it is HMV Sa-Re-Ga-Ma? Sorry. The answer is Airtel. By selling caller tunes (that play for 30 seconds) Airtel makes more than what music companies make by selling music albums (that run for hours).
Incidentally Airtel is not in music business. It is the mobile service provider with the largest subscriber base in India . That sort of competitor is difficult to detect, even more difficult to beat (by the time you have identified him he has already gone past you). But if you imagine that Nokia and Bharti (Airtel's parent) are breathing easy you can't be farther from truth.
Nokia confessed that they all but missed the smart phone bus. They admit that Apple's I phone and Google's Android can make life difficult in future. But you never thought Google was a mobile company, did you? If these illustrations mean anything, there is a bigger game unfolding. It is not so much about mobile or music or camera or emails?
The "Mahabharata" (the great Indian epic battle) is about "what is tomorrow's personal digital device"? Will it be a souped up mobile or a palmtop with a telephone? All these are little wars that add up to that big battle. Hiding behind all these wars is a gem of a question – "who is my competitor?"
Once in a while, to intrigue my students I toss a question at them. It says "What Apple did to Sony, Sony did to Kodak, explain?" The smart ones get the answer almost immediately. Sony defined its market as audio (music from the walkman). They never expected an IT company like Apple to encroach into their audio domain. Come to think of it, is it really surprising? Apple as a computer maker has both audio and video capabilities. So what made Sony think he won't compete on pure audio? "Elementary Watson". So also Kodak defined its business as film cameras, Sony defines its businesses as "digital."
In digital camera the two markets perfectly meshed. Kodak was torn between going digital and sacrificing money on camera film or staying with films and getting left behind in digital technology. Left undecided it lost in both. It had to. It did not ask the question "who is my competitor for tomorrow?" The same was true for IBM whose mainframe revenue prevented it from seeing the PC. The same was true of Bill Gates who declared "internet is a fad!" and then turned around to bundle the browser with windows to bury Netscape. The point is not who is today's competitor. Today's competitor is obvious. Tomorrow's is not.

In 2008, who was the toughest competitor to British Airways in India ? Singapore airlines? Better still, Indian airlines? Maybe, but there are better answers. There are competitors that can hurt all these airlines and others not mentioned. The answer is videoconferencing and tele presence services of HP and Cisco. Travel dropped due to recession. Senior IT executives in India and abroad were compelled by their head quarters to use videoconferencing to shrink travel budget. So much so, that the mad scramble for American visas from Indian techies was nowhere in sight in 2008. ( India has a quota of something like 65,000 visas to the U.S. They were going a-begging. Blame it on recession!). So far so good. But to think that the airlines will be back in business post recession is something I would not bet on. In short term yes. In long term a resounding no. Remember, if there is one place where Newton 's law of gravity is applicable besides physics it is in electronic hardware. Between 1977 and 1991 the prices of the now dead VCR (parent of Blue-Ray disc player) crashed to one-third of its original level in India . PC's price dropped from hundreds of thousands of rupees to tens of thousands. If this trend repeats then tele presence prices will also crash. Imagine the fate of airlines then. As it is not many are making money. Then it will surely be RIP!

India has two passions. Films and cricket. The two markets were distinctly different. So were the icons. The cricket gods were Sachin and Sehwag. The filmy gods were the Khans (Aamir Khan, Shah Rukh Khan and the other Khans who followed suit). That was, when cricket was fundamentally test cricket or at best 50 over cricket. Then came IPL and the two markets collapsed into one. IPL brought cricket down to 20 overs. Suddenly an IPL match was reduced to the length of a 3 hour movie. Cricket became film's competitor. On the eve of IPL matches movie halls ran empty. Desperate multiplex owners requisitioned the rights for screening IPL matches at movie halls to hang on to the audience. If IPL were to become the mainstay of cricket, as it is likely to be, films have to sequence their releases so as not clash with IPL matches. As far as the audience is concerned both are what in India are called 3 hour "tamasha" (entertainment). Cricket season might push films out of the market.
Look at the products that vanished from India in the last 20 years. When did you last see a black and white movie? When did you last use a fountain pen? When did you last type on a typewriter? The answer for all the above is "I don't remember!" For some time there was a mild substitute for the typewriter called electronic typewriter that had limited memory. Then came the computer and mowed them all. Today most technologically challenged guys like me use the computer as an upgraded typewriter. Typewriters per se are nowhere to be seen.

One last illustration. 20 years back what were Indians using to wake them up in the morning? The answer is "alarm clock." The alarm clock was a monster made of mechanical springs. It had to be physically keyed every day to keep it running. It made so much noise by way of alarm, that it woke you up and the rest of the colony. Then came quartz clocks which were sleeker. They were much more gentle though still quaintly called "alarms." What do we use today for waking up in the morning? Cell phone! An entire industry of clocks disappeared without warning thanks to cell phones. Big watch companies like Titan were the losers. You never know in which bush your competitor is hiding!

On a lighter vein, who are the competitors for authors? Joke spewing machines? (Steve Wozniak, the co-founder of Apple, himself a Pole, tagged a Polish joke telling machine to a telephone much to the mirth of Silicon Valley ). Or will the competition be story telling robots? Future is scary! The boss of an IT company once said something interesting about the animal called competition. He said "Have breakfast …or…. be breakfast"! That sums it up rather neatly.
—Dr. Y. L. R. Moorthi is a professor at the IIM,Bangalore

Why the coming Budget is very significant

2010-02-12T22:59:00.000+05:30

The Budget to be presented on February 26, 2010 is one of the most important economic documents the United Progressive Alliance [ Images ] government will present in a long time. Over the past five years, though important, Budgets have not had the potential signalling impact that this upcoming event has acquired.

First of all, this upcoming document has come to be seen as a litmus test by foreign investors on the seriousness of the new UPA government to move ahead on structural reform.

There can be no more excuses; the finance minister got away last time by citing the limited time available to present Budget 2009. He deflected the need to present a credible game plan to bring the fiscal deficit under control, citing the pending (at that time, but since submitted) 13th Finance Commission report.

The policy-makers talked of doing reform throughout the year, and not bunching it all up in one Budget document; well, that bluff has also now been called over the last nine months.

Investors want to see intent on policy reform, willingness to bite the bullet and take some hard decisions as well as awareness that we have a serious fiscal problem.

Nobody wants to see yet more committees set up, lip service to how this deficit is unsustainable, but no action.

The minimum investors will want to see is a credible plan to cut the fiscal deficit, which actually leads to structural changes on both revenue and expenditure side.

Can there be movement on things like the Parikh committee report, a nutrient-based subsidy framework for fertilisers, further targeting of food subsidies? On the revenue side, will we get a credible date and structure for the GST, where are we on the direct tax code?

Attempts to bring the deficit down by recasting the GDP data, and assuming high growth rates will not cut it. Investors will, in my opinion, not react positively to a deficit-reduction plan which is in effect a simple and blind bet on high growth.

This is seen as too risky, as any slippages in growth for whatever reason can have very serious fiscal and economic consequences.

The importance of these structural issues is due to the need to cut the deficit and yet not harm growth. Structural reform like GST is so critical, as it will plug revenue leakages and thus boost growth, corporate profitability and economic efficiency simultaneously. Similarly, with the direct tax code, one has the chance to clean up exemptions, raise effective tax rates and improve productivity and efficiency.

The fear with cutting the fiscal deficit in OECD countries is the huge economic cost, as already weak growth impulses will get further crushed. India has a unique opportunity of being able to streamline and improve its tax structure, which will generate strong revenues and boost growth.

Cutting the fiscal deficit in India's case does not necessarily have the negative economic consequences of the OECD world. Our tax structure is warped enough, so that, if improved, it allow us the opportunity to fundamentally strengthen the economy.

Investors have cut India a lot of slack on the deficit, partly due to global circumstances -- when the whole world is running double-digit deficits, why single out India -- not realising, of course, that our double-digit deficit has very little to do with the global financial crisis, and everything to do with our own structural problems.

High growth and the admittedly-credible resilience of the Indian economy in 2008-2009, when the world was imploding, have also taken the focus off other structural issues like the fiscal. Investors are, however, a fickle lot, all you need is a surge in the oil complex, or a Greece-type situation to remind everyone of India's macro vulnerabilities.

We have already gone through a bout of this in 2008-2009, when our current account position came into question with oil prices surging past $125. We are too dependent on external capital to let this happen again. Even though we fully fund our deficit internally, external capital is important to fund incremental growth.

I already detect a lack of patience now building up, investors want to see action. There is nervousness among the investor base, given the events of the past few months.

The 3G auctions seem to be delayed once again, with absolutely no visibility on timing, so that is Rs 30,000 crore gone. The GST implementation is also delayed and caught in procedural and state-level issues, with again limited visibility towards time frame. The government remains committed to new social sector programmes like the Right to Food Bill, thus expenditure pressures continue.

The NTPC follow-on public offer was not particularly encouraging either, having been effectively bailed out by certain large public sector investment institutions. Not a particularly great start to an aggressive disinvestment programme.

Retail investors remain conspicuously absent from new equity issuances. The life insurance companies have, in effect, become the investor of last resort. They are the only institutions with enough firepower to stand up to sustained FII selling, bail out the corporate sector as we saw in 2009, or even support the government borrowing programme.

One can only hope that no legislative changes are made which seriously impact flows into these institutions.

A strong and credible policy document delivered by the finance minister is the need of the hour, it will seriously enthuse the investor base and potentially trigger strong capital inflows.

One can argue that India should not care about investors, especially foreign ones. The harsh reality, however, is that disinvestment seems to be (at the moment) the only credible plan the government has to bring down deficits, and without foreign investors, there will be no serious disinvestment.

Foreign capital providers will also be critical to ease the inevitable crowding out issues faced by the Indian private sector, as we try to simultaneously fund huge deficits and strong credit growth.

The world is searching for alternative growth engines, beyond the US and the OECD economies, and everyone wants to believe that India has a decade of 8-9 per cent GDP growth ahead of it.

The time has come to seize the opportunity and convince the investors that India and the UPA mean business.

Serious structural reform and a credible policy framework are needed to set the stage. Beyond the fiscal, one must also see policy movement on FDI and improvement in the capacity of the economy to absorb investment and accelerate supply-side response.

The upcoming Budget is a unique opportunity, we must not let it slip.

Source

Investing logic

2009-07-31T21:55:00.000+05:30

The road to financial prudence is straightforward: invest systematically and don’t get carried away by emotions. Unfortunately, like many well-known rules, this one too is observed more in the breach. In fact, so influenced are investors by emotion and sentiment—of the general market kind as well as those sparked by social interaction—that investment decisions are usually dependent on emotion hotspots. But as investors have often found, it is at their own expense.

Now with the global financial crisis having dipped confidence levels to a new low, even a slew of stimuli has failed to lure edgy investors back to the stock markets in large numbers. In such circumstances, 50 Psychological Experiments for Investors reveals valuable insights into investor behaviour. A compilation of research exercises conducted across the world, the book deconstructs the effect of biases, interaction and emotion on investor activity. Using a question-answer format, author Mickäel Mangot draws conclusions from experiments conducted by researchers of behavioural finance. Even though the studies have been carried out mostly in western countries, the learnings are for everyone to pay heed to.

Beginning with momentum investing, the book highlights a number of fallacies in human behaviour. For instance, investors turn optimistic when the markets are bullish and become pessimistic in bear markets. If a particular asset class generates positive returns for some time, investors increase their exposure to it. This, says Mangot, is due to momentum bias. “Increases of 15% in real estate or of 30% in the stock market are extreme phenomena that are much less probable than more modest changes confirming to historical averages. Betting on them is like betting on snow in Beijing in October,” he notes.

He also points to a weekly survey conducted by the American Association of Individual Investors during 1987-1992 to understand how past performances determine investor expectations. The study found that investor expectations are more directly linked to the performance of the index in the week prior to the survey. Coming to an investment conclusion based on immediate past results, instead of more concrete historical data, can be less than fruitful.

Another behavioural aspect that is more applicable to current times is the disposition effect. Investors tend to keep loss-making securities for a longer period than the winning ones. The popular tactic is to book profits in winning stocks and hold the loss-making ones, a strategy that has proved expensive for retail investors.

A study of 6,380 investment accounts of individuals from 1987 to 1993 by Odean for the book Are Investors Reluctant to Realize their Losses? found that the investors tend to sell gaining stocks more than the losing ones. The study also found that the winning stocks which were sold, outperformed the market on an average by 2.3% in the following year, while the losing stocks which were retained, underperformed the market by 1.1%.

“Thus, if the investors studied had kept the securities sold and sold the securities kept, they would have increased their annual performance by 3.4%,” points out Mangot. The author calls this a “sunk cost fallacy”. This fallacy induces the investors to go right till the end, that is to keep the stock until it reaches the break-even point.

Another discovery is that psychologically, owning a home increases selfesteem and autonomy in investment decisions. Also, children of homeowners tend to be more successful than the children of renters.

The studies also track the gender difference in financial behaviour: women are found to be fiscally more prudent than men because of higher risk aversion. They also prefer bonds to stocks and change their portfolios less often compared with men.

Even the effect of the lunar cycle on human behaviour is dealt with, albeit in a realistic manner, by taking inferences from studies conducted during these periods.

While most of the results and outcomes cited in the book make for an interesting perusal, readers could get bogged down by the number of references for each question. But for the sheer width of psychological insight into investment behaviour patterns, this book is probably unmatched. It’s a very useful tool to introspect one’s investing history— and to correct the way i n which one makes investment decisions in the future.

BEHAVIOUR DECODED

How we choose information on fallacious criteria

Q. Why do you think you have to invest in the stock market when prices have skyrocketed?
A. Investors think that what’s occurred in the recent past can recur, but it is necessary to observe phenomena over a long period to get an accurate picture.

Q. Why do you buy stocks when the market has gone up, and bonds, when it goes down?
A. The better the recent performance of stocks, the more they attract investors. When the market goes down, investors turn pessimistic and invest in bonds.

How loss and regret aversions inhibit our behaviour

Q. Which stocks do you sell quickly and which are the ones that you retain?
A. The stocks that are gaining are sold more easily by investors than those that are losing. Studies show that the stocks sold subsequently outperformed the market, while those that were held, underperformed.

Q. Why do you reinvest in losing securities?
A. Investors put time, energy and money in investment decisions, so they try and average out the purchase price by buying more of a losing stock. All this increases the overall risk to the portfolio.

How purchasing real estate affects financial performance

Q. Do owners live more happily than renters?
A. Research shows that ownership of real estate produces satisfaction. Owners, therefore, enjoy better psychological health than renters.

Q. Are children of homeowners more successful than those of renters?
A. Studies show a positive impact of ownership on the present and future behaviour of children through geographic stability and a better living environment. They also tend to be more successful in school.

Source

How to profit from losses

2009-07-31T09:55:00.000+05:30

The Income Tax Department is more often than not seen as the cloud; seldom is it the silver lining. In a rare exception, it provides muchneeded succour to those ravaged by the stock markets. So, if you are among the thousands of investors who lost money in the market collapse last year, there’s some solace. Any short-term loss suffered in the last financial year can be adjusted against profits made in subsequent years. What’s more, this loss can be carried forward for up to eight financial years.

Short-term losses are the ones you incur when you sell shares or equity funds within a year of buying them. But calculating these deficits is not an easy task. The sale of stocks and funds are on a first-in, first-out basis. This means the shares you bought first will be considered to be sold first. So, if you bought some more shares of a company that you already owned and subsequently sold some, the shares you bought first will be deemed to have been sold first.

One needs to be cautious while making the calculation because what you assume to be a short-term loss could actually be a long-term one, which cannot be offset against any other gain or carried forward. Just as there is no tax on long-term capital gains from equities and equity-oriented mutual funds, there is also no provision to set them off against any other gain.

You can carry forward losses (both short- and long-term) for other investments as well. But keep in mind that you can do so only if you file your return by the due date. If you file after 31 July, you will not be allowed to avail of this benefit.

What can be carried forward
Short-term losses from equities and equity-based mutual funds.
Short- and long-term losses from debt-based funds and gold funds.
Short- and long-term losses from real estate, gold and silver.
Losses in business and selfemployment.

When it comes to real estate, the losses resulting from a sale can be carried forward. However, there is another type of loss that does not come from selling property. The interest paid on a home loan is considered a loss. Taxpayers can adjust up to Rs 1.5 lakh a year on this count against any income, including salary and business income, if the house is selfoccupied. If a property has been given out on rent, the entire loss (interest paid) can be adjusted against the income. However, the interest paid on a home loan cannot be carried forward.

Source

16 incomes that are not taxed in India

2009-07-30T21:55:00.000+05:30

Although the taxman has been vested with the task of collecting taxes on the incomes of the citizens, he has deemed certain kinds of incomes as 'not included in total income'.

Thus, if any earning that you receive falls under these incomes you don't have to treat it as income or pay tax on it!

Now, let us take a look at the different incomes that are not taxable incomes. . .

1. Agricultural income: Any income which you receive as income from any agricultural activity is deemed as not included in total income. If your father is into agriculture and he gives you a part of the income as a gift, then you don't need to pay tax on it, provided, your father files his tax returns.

2. Income for being partner in a firm: If you receive any income for being a partner of a firm which has already been assessed separately, then the income need not be included in total income. Thus any share in the profits that you have in a firm according to the partnership deed is not taxable.

3. Travel concession/assistance: Any monies that you receive from your company for the purpose of travel to any place in India along with your family for the purpose of leave. The claim can be made two times in a bucket of 4 years.

Family includes wife and children and also parents, brothers or sisters if they are dependent on you. The only check being that you have to maintain original bills to prove travel if the income tax department asks for it.

4. Rs 5,000: An amount of up to Rs 5,000 which you receive for any reason -- other than as prize money and is not a recurring amount -- can be excluded from your total income. It seems to be a very small amount, but sometimes this could be the difference between being in a higher slab and a lower slab.
5. Retirement/death gratuity: Any payment received under a pension or death-cum-retirement gratuity scheme by an individual or his widow, children or dependents.

The gratuity should not be more than the number of years in service multiplied by half month's salary based on a ten-month average. For example, if the average salary for the previous ten months prior to receiving gratuity is 10,000 and years in service is 15, then 15x5,000=75,000 will be not included in total income.

6. Leave salary: Any cash amount received as compensation for earned leave which is encashed at the time of retirement. (This applies only to employees of central/state government).

For employees other than government employees, the leave salary can be encashed up to a limit of ten months worth of earned leave. It also specifies that the entitlement to earned leave should not exceed 30 days for each year of service.

For example, if you have 76 days of earned leave and total years of service is two years, then, only the cash equivalent of 60 days of earned leave is not added to income.

7. Retrenchment: Any compensation received by a workman due to the closure of his company or change in the management of the company if new terms are less favourable than what was previously applicable.

8. Voluntary retirement: Any amount up to a maximum of Rs 500,000 paid at the time of voluntary retirement in accordance with and scheme of voluntary retirement of the company. But, the company paying the VRS should have a framework for VRS as prescribed by the government.

9. Life insurance policy: Any amount received as benefit from a life insurance policy, including bonus payment, is not included in total income. The only exception is the amounts paid as part of keyman policies.

10. Provident Fund: All payment which is received from a provident fund to which the PF Act applies or any PF fund of the government, is not included in total income.

11. Superannuation: Any payment made from a superannuation fund on the death of the beneficiary or as a refund of contributions or if the employee becomes incapacitated before retirement.

12. Payment of rent: Any allowance paid by an employer to an employee to meet expenditure actually incurred on the payment of rent for accommodation. But this is not allowed if the house is owned by the employee or he has not incurred the rental.

13. Income from government securities: Any earnings from interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the central government and also deposits taken by the central government.

In case of Non-Residents, if the bond have come to you by virtue of being a nominee or survivor of the Non-Resident, or if the bonds have been gifted to you by an NRI -- who purchased the instrument in foreign exchange and if the principal and interest will not be taken out of India by the recipient of the gift, the amounts will not be added to income.

14. Scholarships for education are not included in total income.

15. Awards and rewards: All payments receive in cash or kind as an award given by the central or state governments or by a body recognised by the central government to give such awards, will not be included in the total income.

16. Relief funds: Any amounts which are received by an individual as part of the Prime Minister's National Relief Fund or the promotion of folk art fund or students fund or foundation for communal harmony will be treated as not included in income.

Thus we see that although the taxman is mostly portrayed as a villain, he has been liberal enough to give us the benefit of income tax free income from so many sources.

The above learnings can be applied to our personal lives in two ways:

Try to increase the income, if any, coming under any of the above heads; and
Invest in any of the tax-free avenues given above so that we may get the benefit of the investment as well as tax free income when it comes to our hands later on.

RBI warns public against fictitious fund offers

2009-07-30T20:53:00.001+05:30

Cautioning public against fictitious offers of large funds from unknown entities, the Reserve Bank of India on Thursday advised them again to not get carried away by such offers.

"The Reserve Bank of India, has today once again clarified that remittance in any form towards participation in lottery schemes is prohibited under the Foreign Exchange Management Act, 1999," RBI said in a release.

Further, the RBI said that restrictions are also applicable on remittances for participation in lottery-like schemes functioning under different names.

The central bank clarified that it neither maintains any account in the name of individuals, companies or trusts in India to hold funds for disbursal nor does it allow individuals to open an account to deposit money with the Reserve Bank.

"The Reserve Bank has advised the public not to remit or deposit money in such accounts in response to fictitious offers/ representations. The public may immediately bring the details of such offers to the notice of local police authorities for booking the culprits," the release added.

The warning comes in the wake of many people falling prey to such tempting offers and losing money in the recent past. The central bank has also cautioned the public in the past asking them not to make any remittance towards participation in such schemes or offers from unknown entities.

The Reserve Bank further said that in addition to making offers through letters, e-mails, mobile phones, the fraudsters have now resorted to issuing certificates, letters, circulars on letter head that looks like that of the RBI's.

"The fraudsters also convince the victims by impersonating as senior officials of the Reserve Bank," it said.

The central bank said that many fraudsters have even opened accounts with banks in India and advised public to deposit money in these accounts.

"Once the money is deposited in their account, people mailing such offers withdraw the money and then vanish. The victim thus loses the money already paid," RBI said.
Source

Avoid these 2 mistakes and become rich!

2009-07-26T17:11:00.000+05:30

There are two big mistakes most investors make.

The first is following the crowd and not trusting their own intuition. Doing what everybody else is doing is often okay in the short run but in the long run it's usually wrong. Take five steps back and look at the big picture.

Is there a general market trend up or down? Has there been a shift in the trend? Are we really in a growth time frame or is this a time when companies are laying off people, having a difficult time increasing prices, holding off on capital investments, etc? What is your personal experience or experience of family and friends? What is your intuition telling you? You may believe that intuition has no value in investing, but how many of you knew the stock market was overvalued and yet in-vested because everyone else was making money and you felt left out of the game? Try to understand your motivation and create some belief of what the future is going to look like.

The second common mistake is not looking enough at history and understanding history and market valuations. People may understand the past twenty years at most, but they don't really study and understand the last one hundred years. You can see patterns when you're looking at the whole twentieth century. You look at the last twenty years and the stock market has done extremely well, but you look at twenty years before that and stocks did very poorly. So you have very long periods of time where the markets don't do anything.

History helps you see that. Markets tend to get greatly overvalued. You have extreme greed and extreme fear. What you see when you review long-term history is that when you have extreme greed, markets become very overvalued and bubbles occur, and, when you have extreme fear, markets become very undervalued - and, therefore, present a very valuable opportunity to buy.

It's very useful to understand these big cycles up and these big cycles down - what some people call regime shift. Ben Graham said something that was extremely valuable in his classic book, The Intelligent Investor. There used to be a belief - because of our traditional market allocation models and modern portfolio series - that you should hang in there for the long haul. Ben Graham, who is one of the best value investors of all time, said that in a normal 50 / 50 portfolio, when markets are greatly overvalued, you go 25 per cent in stocks, and, when markets are very undervalued, you go 75 per cent stocks.

You're really going against the crowd when you do that so it's very hard, but that keeps you from getting caught being greedy. You look at the markets and say, "Is the market overvalued or undervalued, and how much risk am I willing to take?"

In 1999, for example, valuations were very high, so it was time to start lowering stock allocations even though the share prices were still going up, and everybody was euphoric about the market. In hindsight, it certainly proved to be the right rule, but it was a difficult thing to do at the time. You want to be heavily invested when things are cheap and very cautious when things are expensive. You have to avoid saying that it's different this time and that markets are going to keep going up because of technology or whatever.

When you alter your strategy as valuations become very cheap or very expensive, do so gradually. In 2000, for example, the average investor in Japan had about 3 per cent in stocks, whereas the average recommendation in the United States had about 68 per cent in stocks, according to Barron's.

In the late 1970s, the average recommendation was between 25 and 30 per cent in stocks, and that was the time just before the beginning of the bull market. It just shows that we tend to see the very short past and not look at valuations and the big picture.

Major trends are very slow to change, so the investor doesn't have to do something every week. Once or twice a year is often enough to rebalance your asset allocation in order to reset it to your original allocation. Yes, it's very hard to take money off the table when things are going up, and it's very hard to add to equity portfolios when things are cheap, but this is exactly how you grow wealthy over the long-term.

A golden rule to remember is that greed and fear control the market in the short run. If you can understand greed and fear as the central short-term components, you can see what's going on and realize the pattern. Investment valuations at the time of purchase determine long-term returns. When people are more fearful, great values are created; when people are greedy, bubbles are created.

So, don't pay attention to short-term noise. It doesn't matter what the market does in the short run. You have to understand the basics - what's going on in the big picture - and not worry about missing some of the upside. In other words, let neither let greed nor fear hold you in their sway, indeed, it's in times of pervasive fear that great values are available.

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10 countries with largest foreign reserves

2009-07-26T13:43:00.002+05:30

Foreign exchange reserves, often taken as a yardstick to gauge a country's financial strength, are the foreign currency deposits and bonds held by central banks or monetary authorities (it is the Reserve Bank in the case of India).

Forex reserves include a country's gold holdings and convertible foreign currencies held in its banks, including special drawing rights and exchange reserve balances, with the International Monetary Fund. Foreign exchange reserves are used to back a country's liabilities, e.g. the local currency issued and the various bank reserves deposited with the central bank, by the government or financial institutions.

The quantity of foreign exchange reserves can change as and when a country's central bank implements the monetary policy. Large reserves of foreign currency allow a government to manipulate exchange rates -- to stabilise the foreign exchange rates to create a favourable economic environment.

India ranks 5th in the world with a foreign exchange reserves of $262 billion as of June 2009.

So let's find out which are the 10 nations with the largest foreign exchange reserves in 2009...

Rank 1: People's Republic of China -- $2.132 trillion

People's Republic of China is the largest country in East Asia and the most populous in the world with over 1.3 billion people, approximately one-fifth of the world's population.

China is the fastest growing major economy in the world. It now has the world's third largest nominal GDP -- 30 trillion yuan ($4.4 trillion). It is a member of the World Trade Organization and is the world's third largest trading power behind the US and Germany.

Analysing China's record foreign exchange reserves growth, economists discovered that luxury home sales in China's big cities saw robust growth in the second quarter. According to analysts, it is mainly because of increased purchase by overseas buyers.

Rank 2: Japan -- $1.019 trillion

Japan is the second largest economy in the world, after the United States, with about $5 trillion nominal GDP and third after the US and China in terms of purchasing power parity.

It is home to some of the leading and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods.

Japan's main export markets are the US, European Union, China, South Korea, Taiwan and Hong Kong. Japan's main exports are transportation equipment, motor vehicles, electronics, electrical machinery and chemicals.

The island country's service sector accounts for three quarters of the gross domestic product. Japan ranks 12th out of 178 countries in the Ease of Doing Business Index 2008.

Rank 3: Russia -- $401 billion

Russia has the world's largest reserves of mineral and energy resources,and is considered an energy superpower. It has the world's largest forest reserves, too.

It is the world's leading natural gas exporter and the second leading oil exporter.

The economic crisis that struck all post-Soviet countries in the 1990s was almost twice as intense as the Great Depression that hit Western Europe and the US in the 1930s. Russia's GDP was half of what it had been in the early 1990s, even before the financial crisis of 1998 had set in.

However, since the turn of the century, rising oil prices, increased foreign investment, higher domestic consumption and greater political stability have bolstered economic growth in Russia.

The country ended 2007 with its ninth straight year of growth, averaging 7 per cent annually since the financial crisis of 1998.

Rank 4: Taiwan -- $305 billion

Taiwan's rapid economic growth post World War II has transformed it into an advanced economy. Taiwan's growth is fondly referred to as the 'Taiwan Miracle'.

International Monetary Fund recognises Taiwan as an advanced economy while World Bank terms it high-income economy. Its technology industry has a major role to play in the global economy.

Taiwanese companies manufacture a large proportion of the world's consumer electronics.

Taiwan is one of the constituent of Four Asian Tigers alongside Singapore, South Korea and Hong Kong.

Today Taiwan has a dynamic capitalist, export-driven economy with gradually decreasing state involvement in investment and foreign trade.

Rank 5: India -- $262 billion

India is the seventh-largest country by geographical area, second-most populous country and the most populous democracy in the world.

India's economy is among the fastest growing in the world. It has the world's second largest labour force -- 516.3 million. In terms of output, the agricultural sector accounts for 28 per cent of GDP; the service and industrial sectors make up 54 per cent and 18 per cent respectively.

The International Monetary Fund recently raised India's growth forecast to 5.4 per cent for 2009 and said that the Indian economy is beginning to pull out of a recession.

The country is expected to witness a growth rate of 5.4 per cent in 2009.

The Indian economy is projected to expand at a rate of 6.5 per cent in 2010 while the world GDP is anticipated to grow by 2.5 per cent.

The country is well connected through maritime routes, although it lacks in airports and high-quality roads
Rank 6: South Korea -- $232 billion

South Korea, officially the Republic of Korea, is an East Asian country, located on the southern half of the Korean Peninsula.

South Korea is a presidential republic consisting of 16 administrative divisions.

South Korea is a developed country and a full democracy. It is a high-income Organisation for Economic Co-operation and Development member, having the fourth largest economy in Asia and the 15th largest in the world.

South Korea is a leader in technologically advanced goods such as electronics, automobiles, ships, machinery, petrochemicals and robotics, headed by Samsung, LG and Hyundai-Kia.

South Korea had the world's second-fastest growing economy from 1960 to 1990. However, from 2003 to 2008, South Korea's economic growth rate slowed to fall behind the global average.

The economy slipped from the 11th largest in the world to the 15th largest.

South Korea is classified as a high-income economy by the World Bank and an advanced economy by the International Monetary Fund.
Rank 7: Brazil -- $210 billion

The Federative Republic of Brazil is a country in South America. It is the fifth largest country by geographical area, occupying nearly half of South America.

Brazil is the largest national economy in Latin America, the world's 10th largest economy at market exchange rates and the ninth largest in purchasing power parity, according to the International Monetary Fund and the World Bank.

The country has been expanding its presence in international financial and commodities markets, and is regarded as one of the group of four emerging economies called BRIC (Brazil, Russia, Indian and China).

The country is known for its booming agricultural, mining, manufacturing and service sectors, as well as a large labour pool.

Brazilian exports are currently scaling new heights, its major export products being aircraft, coffee, automobiles, soybean, iron ore, orange juice, steel, ethanol, textiles, footwear, corned beef and electrical equipment.

Rank 8: Hong Kong -- $186 billion

Hong Kong, a self-governing territory of the People's Republic of China, is a global metropolitan and international financial centre, and has a highly developed capitalist economy.

Its highly capitalist economy has been ranked the freest in the world by the Index of Economic Freedom for 15 consecutive years.

Hong Kong is one of the world's leading financial centres and is one of the Four Asian Tigers. The Hong Kong Stock Exchange is the sixth largest in the world.

Hong Kong's economy was affected by the Asian financial crisis of 1997. The dangerous H5N1 avian influenza also surfaced that year.

After a slow recovery, Hong Kong suffered a setback again because of an outbreak of SARS in 2003.

However, today, Hong Kong continues to serve as an important global financial centre. The Hong Kong dollar has been pegged to the US dollar since 1983.

Rank 9: Singapore -- $166 billion

The Republic of Singapore is an island city-state located at the southern tip of the Malay Peninsula.

Since its independence on August 9, 1965, Singapore's standard of living has risen significantly.

Singapore's is an export driven economy and is one of the Four Asian Tigers along with Hong Kong, South Korea and Taiwan.

It happens to be the 5th wealthiest country in the world in terms of GDP per capita.

Foreign direct investment and industrialisation have created a robust economy focused on industry, education and urban planning.

In 2009, the Economist Intelligence Unit ranked Singapore the 10th most expensive city in the world and third in Asia, after Tokyo and Osaka.

The current economic crisis, however, has affected the economy of this island nation to a great extent

Rank 10: Germany -- $144 billion

The Federal Republic of Germany consists of 16 states. The capital and largest city is Berlin.

Germany is a major economic power with the world's fourth largest economy by GDP and the fifth largest in purchasing power parity.

Germany allocates the second biggest annual budget of development aid in the world.

Germany is the world's top exporter and is the leading producer of wind turbines and solar power technology in the world.

The largest annual international trade congresses are held in German cities of Hanover, Frankfurt, and Berlin.

Of the world's 500 largest stock market listed companies measured by revenue, the Fortune Global 500, 37 companies are headquartered in Germany. Some of them are: Daimler, Volkswagen, Allianz, Siemens, Deutsche Bank etc.

Germany is also home to well known global brands like Mercedes Benz, SAP, BMW, Adidas, Audi, Porsche, Volkswagen, and Nivea.

Source

All you wanted to know about GST

2009-07-15T09:55:00.000+05:30

One of the biggest taxation reforms in India -- the Goods and Service Tax (GST) -- is all set to integrate State economies and boost overall growth.
GST will create a single, unified Indian market to make the economy stronger.
Finance Minister Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010.
The implementation of GST will lead to the abolition of other taxes such as octroi, Central Sales Tax, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, et cetera, thus avoiding multiple layers of taxation that currently exist in India.
Goods and Services Tax -- GST -- is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level.
Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain.
Experts say that GST is likely to improve tax collections and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate.
Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimising exemptions.
It is expected to help build a transparent and corruption-free tax administration. GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).
Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold.

How will it benefit the Centre and the States?

It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.

What are the benefits of GST for individuals and companies?

In the GST system, both Central and State taxes will be collected at the point of sale. Both components (the Central and State GST) will be charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies.
India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction.

All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services.

Which other nations have a similar tax structure?

Almost 140 countries have already implemented the GST. Most of the countries have a unified GST system. Brazil and Canada follow a dual system where GST is levied by both the Union and the State governments.
France was the first country to introduce GST system in 1954.

Will this be an extra tax?
It will not be an additional tax. CGST will include central excise duty (Cenvat), service tax, and additional duties of customs at the central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the State level.

What will be the rate of GST?

The combined GST rate is being discussed by government. The rate is expected around 14-16 per cent. After the total GST rate is arrived at, the States and the Centre will decide on the CGST and SGST rates.

Currently, services are taxed at 10 per cent and the combined charge indirect taxes on most goods is around 20 per cent.

Will goods and services cost more after this tax comes into force?

The prices are expected to fall in the long term as dealers might pass on the benefits of the reduced tax to consumers.

Why are some States against GST; will they lose money?
The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the information technology systems and the administrative infrastructure will not be ready by April 2010 to implement GST. States have sought assurances that their existing revenues will be protected.

The central government has offered to compensate States in case of a loss in revenues.

Some States fear that if the uniform tax rate is lower than their existing rates, it will hit their tax kitty. The government believes that dual GST will lead to better revenue collection for States.

However, backward and less-developed States could see a fall in tax collections. GST could see better revenue collection for some States as the consumption of goods and services will rise.

How will GST be implemented?

The empowered committee is likely to finalise the details of GST by August. But States have to sort out several issues like agreement on GST rates, constitutional amendments and holding talks with industry associations. Experts feel the drafting of legislation and the implementation of law will take time.

What are the items on which GST may not be applied?

Alcohol, tobacco, petroleum products are likely to be out of the GST regime.

Source

10 reasons why India will not become a superpower

2009-07-14T22:10:00.007+05:30

'Will India become a superpower?' This is a question that nags every Indian. With the nature of problems that plague India, the chances of the country becoming a superpower are remote.

"India needs to be, not a powerful or dominant country, but a country which is less discontented from within", says Ramachadra Guha writer, historian and biographer who spoke on the topic 'Ten Reasons Why India Will Not and Should Not Become a Superpower' in a meeting organised by Aspen Institute India in New Delhi.

Guha pointed out that in 1948, there was a mood of despair and gloom about India's prospects, the government was seen as the only agent that could bring about change.
Today, however, there is a sense of optimism about India's prospects, although the government is seen as the major impediment in the country's progress.

Tarun Das, president, Aspen Institute India, said India needed more debates such as this to provide a more balanced view of the country's growth and development.
Of the 10 reasons he listed, Guha suggested that environmental degradation is likely to remain the most pressing challenge facing India. Primary education also remains a significant challenge that needs to be overcome.
He went on to elucidate the ten points that he thought would objectively prevent India from becoming a superpower:

1.Religious extremism: Long term trends indicate that liberals and moderates in every religious community in India are on the defensive.
2. Left wing extremism: Extremism in the form of the Naxalite movement, which is a result of geographical reasons and also social and political forces, owing to the continued dispossession and deprivation of tribal people in India.
3. Corruption: The corruption and corrosion of the power center in India, as a result of political parties functioning as family firms rather than open, transparent political systems.
4. Decline of public institutions: This includes universities, police, civil services, the judiciary (except for higher judiciary) etc.
5. Rich-poor divide: The increasing gap between the rich and the poor which is particularly manifested through farmer suicides in India, a phenomenon that has become pervasive only in the last 10-15 years, perhaps because there is now the expectation of a 'good life' that did not exist before.
6. Environmental degradation: The degradation at a local level, which is impacting people's lives in very real ways, whether in the form of massive depletion of underground aquifers, chemical contamination of soil, death of rivers, loss of species etc.
7. Apathy of the media: Apathy in covering issues of rising income inequality, environmental degradation.
8. Political chaos: The political fragmentation manifests as coalition governments at both the central and regional levels, which makes it very difficult to forge sustainable long term policies in the realm of health, education, etc.
9. Border disputes: India's unresolved border disputes, especially in Kashmir and the North East (Nagaland and Manipur) which indicates that there are parts of India that are not comfortable with being part of India.
10. Unstable neighbour: India's increasingly unstable neighbourhood is another serious impediment to our superpower ambitions.

Source

Payment By Cheques: What The Law Says

2009-07-09T16:14:00.000+05:30

Every single reader of this article must be having at least one bank account with cheque book facility. We are so used to making and accepting payments by cheque that we do not even bother to give it a second thought, let alone consider the legal implications.

How many of us are really aware as to what is considered the date of payment when a cheque is issued? Is it the date when the cheque is physically handed over? Or is it the date when the cheque is debited to drawer’s account and credited to payee’s account? In this article, I will deal with the law on the subject and its interpretation by the Supreme Court.

Under the Negotiable Instruments Act, 1881 a cheque is an instrument which is negotiated by delivery. The drawer is discharged when payment is made in due course. In simple terms, this means that when cheque is tendered there is a presumption that payment would be realised in due course, and hence the date of payment is considered to be the date on which the cheque is delivered, regardless of when the cheque is actually presented for payment.

This principle would not apply in the event of the cheque getting dishonoured. Thus the date of tendering the cheque is to be considered as the date of payment, just like a cash payment.

Now let us consider the interpretation of the law by the Supreme Court.

Case1

In the case of Commissioner of Income-Tax, Bombay South, Bombay v/s Ogale Glass Works Ltd, the Supreme Court took into consideration various English case-laws and commentaries.

It observed that payment by negotiable instrument is a conditional payment, which means that if the negotiable instrument is dishonoured on presentation the creditor may consider it as waste paper and resort to his original demand (Stedman vs Gooch).

In “Benjamin on Sale,” 8th Edition, it was stated that payment takes effect from the delivery of the bill, but might get defeated by the happening of the condition of non-payment at maturity. In “Byles on Bills,” 20th Edition, the position was summarised pithily as “A cheque, unless dishonoured, is payment.”

In “Hart on Banking,” 4th Edition, Volume I, expressed the same view as Byles on Bills. In the case of Felix Hadley & Co v/s Hadley, Justice Byrne, expressed the same idea, ie, that payment by a cheque or a bill is a conditional payment of the debt,...
the condition being that the cheque or bill should be duly met or honoured at the proper date.

Lord Maugham in Rhokana Corporation v/s Inland Revenue Commissioners, held that the common law rule is to the effect that the sending of a cheque in payment of a debt is subject to the condition subsequent that the cheque must be met on presentation, but the date of payment, if the cheque is duly met, is the date when the cheque was posted.

The Supreme Court concluded that even if cheques are taken conditionally, when the cheques are not dishonoured but cashed, the payment relates back to the dates of the receipt of the cheques and in law the dates of payments were the dates of the delivery of the cheques.

Case 2

In the case of K Saraswathy alias K Kalpana (Dead) By Legal Heirs v/s PSS Somasundaram Chettiar, the Supreme Court observed that payment by cheque is an ordinary incident of present day life, whether commercial or private, and unless it is specifically mentioned that payment must be in cash there is no reason why payment by cheque should not be taken to be due payment if the cheque is subsequently encashed in the ordinary course.

Relying on the judgement in the above case of Ogale Glass Works, the Supreme Court held that payment by cheque realised subsequently on the cheque being honoured and encashed, relates back to the date of the receipt of the cheque, and in law the date of payment is the date of delivery of the cheque.

Despite these judgements and the authoritative pronouncements of the Supreme Court, it is quite common to find even the Government authorities refusing to follow the well-established legal interpretation as laid down by the Supreme Court.

In the next article, I will explain the relevance of these judgements which came in handy for deciding a matter in the consumer courts where complainants had been filed for negligence and deficiency in service.

Source

If only economists could be like dentists

2009-07-06T09:55:00.000+05:30

Discussions about governance in India repeatedly turn into discussions about individuals. The Delhi Metro happened because of E Sreedharan; Sebi works well because of CB Bhave; education malfunctioned under UPA I owing to Arjun Singh. Why did urban governance in Surat or Nagpur work well? A few key individuals fixed the problems. If this is the core issue, it puts a huge burden on the appointments process.

Economists are trained to be unsatisfied with explanations based on individuals, and look for deeper sources of dysfunction. The story that an economist would tell is one where India has bad elementary education because Sarva Shiksha Abhiyan has basic design mistakes.

How would we make drinking water in Bombay work well? An emphasis on personalities would demand finding the right person to run it. How does this happen in advanced economies? The typical small town in an OECD country—and in many developing countries—has 24x7 supply of clean drinking water in the taps. This isn’t done by having a miraculously effective appointments process. There is a fairly humdrum process of recruiting fairly ordinary bureaucrats into water utilities, or contracting out to private utility companies, and the job gets done. In OECD countries, 24x7 clean drinking water in the taps is not exotic rocket science. It happens all the time, because the deeper institutions are structured correctly.

This is clearly the scalable path. A few good successes in the appointments process might achieve 24x7 drinking water in a few towns. But the real story is clearly deeper. It is about getting to an institutional mechanism that can be rolled out all across the country, which will deliver 24x7 clean drinking water in 5,000 towns.

Institutional change is hard, and all too often there is a temptation to paper over a dysfunctional institutional mechanism by demanding top quality leadership, which will produce good outcomes despite bad institutions. A good judge will overcome all problems in the legal system, work hard, process a large number of cases per month and deliver good judgments against the odds. A good doctor will rise above the terrible problems of a government hospital and heal patients all the same. These individuals are revered, and rightly so.

Each good judge and each good doctor deserves the gratitude of society for being useful against all odds. But these are drops in the ocean. Good governments are not built out of good individuals. They are built out of good laws and good incentive structures. The men who will heal health policy are more important than the men who will heal patients.

Keynes once wrote, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” Mervyn King of the Bank of England famously said the purpose of monetary policy reform is to make it boring. This is all about removing the ‘mystique’ from central banking, depersonalising it so the identity of the governor does not matter. Instead, central banking should be based on transparency, predictability, accountability. A good central bank is one that delivers the same correct reaction function across changes in staffing.

An informal slogan at the ‘Water and Sanitation Program’ (WSP) was: “Don’t fix the pipes. Fix the institutions that fix the pipes.” What we need today is not a leader to properly run an organisation that repairs water pipes. What we need today is the leadership that will change laws and incentives so that we achieve good institutional arrangements on water supply.

A useful analogy is TN Seshan’s role in building the election commission, which is now one of India’s great institutions. We respect Seshan today not because he ran one or two elections well, but because he was an important actor in institution building. An equally great contribution was made in recent years with the implementation of electronic voting machines. This field has been successfully depersonalised: the performance in conducting elections has held up despite occasional dubious staffing choices at the election commission.

So do we hire great men or do we build great institutional arrangements? We hire the great men who will do institutional reform. As long as we are a third world country struggling to get ahead, we will remain vulnerable to the vicissitudes of the appointments process. But the recruiters should not look for the right person to man the system. His job should be to fix it. The interesting candidate is not someone who knows how to make decisions on raising or lowering interest rates. He is someone who knows how to set up a central bank that knows how to raise or lower interest rates.

Source

Alternative social investments

2009-07-05T16:26:00.000+05:30

This has been the worst year or so in history for the hedge-fund industry, with many funds suffering deep losses and record numbers of them going out of business. Yet some leading hedge-funders remain firmly committed to giving away a chunk of their fortunes.

Frugal Busson and bill-killerAs The Economist went to press the Children’s Investment Fund Foundation, a charity based in London, was due to announce that it had received a whopping £495m ($812m) in the 2008 fiscal year from TCI, a hedge fund, under covenants built into the fund when it was founded by Christopher Cooper-Hohn in 2003. The gift took the value of the endowment to just over £1.5 billion, all of which Cooper-Hohn and his wife, Jamie, who oversees the day-to-day running of the foundation, will use to help children in the developing world.

Yet the crisis has taken its toll on London’s hedge-fund philanthropists. In two instances, the Cooper-Hohns have filled (at least temporarily) a funding gap caused by partners suffering such deep losses that they could no longer fulfil their pledges to fund projects. On June 5th an annual gala and auction organised by Arpad Busson, a starry hedge-fund boss, for Absolute Return for Kids (ARK), another charity, raised £15.6m, well down from £25.5m in 2008.

That made the annual transatlantic hedge-fund give-off between ARK and the organisation that inspired it even less of a contest than usual. At its gala auction in New York in May the Robin Hood Foundation, which tackles poverty in the city, raised a record $72.6m, up from $56.5m in 2008 and topping by just over $1m the previous high in boom-era 2007. The achievement owed much to George Soros, the original hedge-fund philanthropist, who pledged to give up to $50 million over two years if it was matched by a similar sum from Robin Hood’s board members. That created a pool of up to $100m to be used to match other pledges.

In keeping with the times, both galas were lower-key affairs than usual. ARK cut the cost of the evening by two-thirds, and for entertainment attendees had to make do with a speech from Boris Johnson, the mayor of London. And Robin Hood’s traditional auction of items such as dinner with Mikhail Gorbachev or a day on the set of the next James Bond movie, which has been criticised as a platform for rich show-offs, was replaced with a fund-raising session using wireless technology that allowed donors to give anonymously.

Source

Indian economy better placed than China’s, says Roach

2009-07-05T09:55:00.000+05:30

Stephen S Roach, chairman of Morgan Stanley Asia, expressed his optimism on the prospects for the Indian economy over that of China, saying that India has made a lot of improvement in recent years on the macro developments, especially with an increase in foreign direct investments, higher savings and improvement in infrastructure in the share of India in GDP.

“These improvements reinforce the long-standing accomplishments of India on the micro front—large collection of world-class competitive companies, well educated IT competent workforce, extraordinary entrepreneurs and innovators, well developed capital market, solid financial institutions, rule of law and democracy,” said Roach in a press conference, adding that what has been missing in this interplay between the micro and now the improved macro has been the political impetus to reforms, something it has hobbled your government in the last five years.

“India is a more balanced economy than the rest of export-led Asia,” Roach told reporters in Mumbai on Wednesday. In fact, for the first time, Roach is now more optimistic about prospects for India than China. “China faces major challenges for the first time in 30 years,” Roach said. “It pushed its export-led model too far, leaving it too dependent on the external climate.”

Roach noted that the recent election changes the prospects for reforms going forward and hopes that the new Congress-led government will be more effective in pushing the reforms forward on a number of fronts and will be much less hobbled by the politics of coalition management.

Talking about the growth forecast for the Indian economy, Roach said the growth would remain between 5.5-6.5% for now. Incidentally, Morgan Stanley on May 28 raised India’s growth forecast to 5.8% in the fiscal year to March 31, 2010, from an earlier estimate of 4.4%. The economic growth in the $1.2 trillion economy may turn out to be the real surprise in Asia, Roach said.

“The growth in the Indian economy cannot go beyond 8% in another 2-3 years time,” he said. Roach also noted that disinvestment is important for India to reduce its fiscal deficit.The fiscal deficit of India widened to a seven-year high of 6.2% in the fiscal to March 31 as government borrowed more to fund fiscal stimulus packages.
Source

The credit card protection plan (CPP) was introduced in India

2009-07-04T19:26:00.000+05:30

The credit card protection plan (CPP) was introduced in India recently. How long has it been available in the UK? How has the response been?
The concept of plastic card protection has been around for 30 years or so. It originated in the US and then went to the UK. Since then it has moved around the world.

CPP is an essential accessory for someone who carries any form of plastic—debit, credit, loyalty or membership card. We are there to support consumers if they lose their wallet or misplace their card.

The response has been outstanding in the UK. You can look at 60 per cent of the UK market [including past and present users].

Why was CPP launched in India?

Roughly, there are 150 million bankable customers in India and the number is growing. So, strategically, India is a very important market for us. The 150 million bankable customers in India are using around 125 million debit and credit cards. That, on an average, is under one card per person. In the UK, only 50 million bankable customers would be using around 140 million pieces of plastic [debit and credit cards].

What’s the reason behind this?

The reason is the stage of development of the plastic market in the UK compared to India. Over the next 5-10 years, we see two things happening in India. First, the number of cards per bankable customer will increase from less than one to around three. Second, rise in the number of bankable customers with the growth in the Indian economy and the financial services sector that supports it.

Due to the current financial turbulence, banks have tightened their credit appraisal process for issuing cards. This was not so, say, two to three years back. In this scenario, what do you have to say about the growth of plastic in India?

Effectively, we are a service company; we are not a bank or a financial services company. What you are seeing now [as a result of the economic environment] is the increased level of caution on the part of banks with respect to consumer finance. The number of new cards issued at present is much lower than what it was one to two years ago. But, still many customers do not have CPP. The number of new cards issued over the next 12-24 months would be less than normal. But once the economy begins to move up, the growth of card issuance will resume to its former level.

How has the response been in India?

The response has been excellent. We are around three months old in India. We are working with four leading banks now. We are in discussions with other banks, too.

After the launch in India, how many enquiries did you get?

The operations in India are at a very nascent stage and it will not be right to share the numbers at the moment. In the UK, we currently have around 5 million customers. The UK market is a fraction of the size that the Indian market will become. Already, there are 150 million customers in India compared to the 50 million customers in the UK. We foresee the Indian market to become as big as the UK market.

As of now, CPP India has tied up with Citibank, Standard Chartered Bank, Kotak Mahindra Bank and HSBC. Are you looking at more partnerships in the future?

Primarily, we partner with debit and credit card issuers, but we are also open to store value card issuers, retail companies or insurance companies. In the years to come, we hope to be a product in every bank’s portfolio.

CPP can be bought from one of the four partner banks or from CPP India directly. Which route is more advisable?
We have a website for our India operations, so customers can come to us directly. We also have a contact centre in India. Instead of spending money on marketing and brand development directed towards the consumer, we pay our partners a commission so that they use their distribution channels to promote our product. You can buy the product directly from us, but it’s not our primary distribution method. Going through our partner banks is a better option.

How do you plan to educate potential customers?

Our bank partners advertise the product through their channels. CPP is not a difficult product to describe. Everybody understands what can happen if they lose their card. Also, it’s an inexpensive assistance product. The communication will be a combination of background awareness, advertising by our partners and direct mailing. There will be specific communication via telephone as well.

What other measures can a card-holder take to avoid misuse of the card?

First, do not let the card out of your possession. Make sure you’ve signed it. I am still amazed how often people write down their PIN number on a piece of paper and keep it in their wallet. Also, if you feel that your card could be misused at a particular merchant establishment, don’t use it there. If the issuing bank offers a specific security feature [like authorisation to process a transaction above a specific limit], opt for it. Research, however, shows that when people steal a card, they tend to use it for small purchases because it is easier to escape detection. As a result, you need to report the loss of a card as quickly as possible. Do not wait for a few hours, because that’s when the fraud occurs. There is plenty of research to show that fraud on the card happens in the first 3-5 hours of the loss of the card.

CPP sets a pre-notification limit. In case misuse of a lost card results in a loss that is more than this limit, how much would CPP India refund? How long would it take to do so?We generally process claims within 14 days. We would only refund up to the limit. We use the limit to establish joint responsibility with the consumer. If there was no pre-notification limit, the consumer would not be in a hurry to report the loss thinking he is covered for an unlimited amount. This would not be reasonable to us.

How To Take Card Protection?

Call 6000-4000 (prefix city code if calling from a mobile)
Choose your preferred plan
Register your cards
Membership annual
Fee for single ownership of a classic card is Rs 995 and a premium card is Rs 1,295
Fee for joint holding of a classic card is Rs 1,495 and a premium card is Rs 1,945

Source

Trading volume: What it reveals about the market

2009-07-04T17:30:00.000+05:30

Volume is the number of shares of stock, bonds, options, or futures con tracts traded over a designated period (e.g., daily, weekly, monthly). Advancing volume is the total volume for all stocks increasing in price; declining volume is the total for all stocks decreasing in price. To remove variability elements, it may be advisable to smooth this measure with a moving average (e.g., 5 days).

Volume reflects the intensity (strength) of a stock, commodity or index. Volume also provides an indication of the quality of a price trend and the liquidity of a security or commodity.

What volume reveals about the market's strength

High volume means greater reliance can be placed on the movement in price than if there was low volume, because heavy volume is the relative consensus of a large number of participants.
High volume indicates an active market; in an active market, the spread between bid and asked prices is usually narrower.
High volume is often characteristic of the initial stage in a new trend, such as a breakout in a trading range. Before a market bottom, investor nervousness leads to panic selling, a characteristic of which is high volume.
High volume is also attributable to a market top when strong buyer interest exists.
Low volume often exists during an unsettled period, such as at a market bottom. Low volume reflects a lack of confidence that is usually indicative of a consolidation period when prices are within a sideways trading range.
A sizable increase in volume may point to a breakout (start) or climax (culmination) of a move, which may be temporary or final. In a rare case, it may represent a shakeout.
Volume typically follows a trend, expanding on rallies and decreasing on reactions. Volume is useful in ascertaining how strong a change in expectations really is.
How volume and price moves reveal the market's trend

It is important to look at the relationship between volume and price. A price move, up or down, that is on higher volume is more significant. Therefore, an analysis of price and volume allows the investor to better interpret the trends in price and any changes thereto. In other words, volume gives an indication of the strength (momentum) of a move in price.

Current trading volume and average trading volume should be compared. Average trading volume typically decreases when a stock is in a downtrend, because investors view negatively a stock declining in price. An increasing price is typically coupled with increased volume, but the price can decrease without an increase in volume if investors lose interest in the issue. On the other hand, a declining stock price may be coupled with higher volume when, for example, negative news comes out about the company.

The significance of a change in volume is related to the associated price trend or pattern. For example, a good time to buy stock is when there are simultaneous price and volume increases.
Volume Price Interpretation
Increasing Rising Bullish

Decreasing Falling Bullish

Increasing Rising Bearish

Decreasing Falling Bearish

Volume should be evaluated in appraising market strength or weakness. If volume is increasing, whether prices are going up or down, it is probable that prices will continue their current trend. However, if volume is decreasing, the current trend will probably not continue and a reversal may be imminent.

A strong uptrend usually has more volume on the upward legs; similarly, a strong downtrend will have more volume on the downward legs. After the trend ends the corrective leg usually has lower volume. A downtrend may nevertheless be extended whether average trading volume increases, decreases, or is static.

Volume is relative in that it usually is greater approaching the top of a bull market than near the bottom of a bear market. Further, trading volume typically increases and continues higher than average in an uptrend, but is below average during a downtrend.

Trading volume typically goes up as the price breaks out to the upside of a pattern or formation. In this case, a significant increase in volume is a strong buy signal. However, volume is an indicator of a trend reversal if it goes in a direction contrary to a prevailing trend.

Volume / price analysis, on balance volume, upside/downside volume ratio and line, volume up days / volume down days, cumulative volume index, trade volume index, positive volume index, and volume reversal are among the ways volume can be analysed.

Summary

The following guidelines apply to the study of volume:

The market is bullish if a new high occurs with heavy volume. A new high on light volume is deemed temporary.
A new low price with high volume is a bearish indicator. A new low on light volume is less significant.
A rally to a new price high on expanding volume but with less activity than the previous rally is questionable. It may point to a coming reversal in trend.
A rally on contracting volume is questionable. It warns of a possible price reversal.
If prices advance after a long decline and then go to a level at or above the previous trough, the indicator is bullish when volume on the secondary trough is less than the first.
If the market has been increasing for a while, an anemic price increase coupled with high volume is a bearish sign. After a decline, substantial volume with minor price changes points to accumulation, typically a bullish indicator.
Source

Portfolio management under Sebi scanner

2009-07-04T14:08:00.002+05:30

The Securities and Exchange Board of India (Sebi), after tightening the norms for the mutual fund industry, is now looking at portfolio management services. The market regulator will soon be coming out stricter and comprehensive guidelines for PMS.
According to a senior banker with a leading foreign bank that offers wealth management and portfolio management services, Sebi has been in dialogue with several service providers to get their views on making the services more transparent and investor-friendly. "We have been deliberating with the regulator and it should be coming out with guidelines in the coming few weeks," the executive said on the condition of anonymity.
Earlier, a senior Sebi official has mentioned the watchdog is indeed looking at all areas for making things transparent and investor-friendly. According to industry sources, there are several aspects that the regulator is looking at and one important aspect is the PMS fees.
There are no restrictions now on fees charged by service providers. However, since the market is competitive, rates remain reasonable. "But there are instances of fee structures changing with the market trend. During the boom of 2007-08, some charged atrocious fees, and there were also some handsome profit sharing agreements," says a Mumbai-based broker. Hence, the regulator is expected to cap the fees charged by portfolio managers.
This, however, might not go down well with the 229-odd portfolio managers registered with Sebi. But rthe regulator isn't much worried about that. "In 1992, when we had asked brokers to disclose the fees they charge to clients, there was an uproar, and trading closed for four days, however, they had to comply and things are much better now," said the Sebi official.
Generally, portfolio managers have three schemes, one where a flat fee of around 2% of the portfolio amount is charged, and the service provided includes investment advice at regular intervals and managing the portfolio. The second scheme includes a fixed fee and a profit-sharing scheme, the latter usually kicks in when a return over the government bond (risk-free return) rate is crossed. Then, there is the totally variable scheme where the manager charges a total variable fee structure based on profit sharing.
The first two are said to be the more popular, and the third variety usually gains ground when the market is booming and is offered to high-ticket clients.
The norms are also expected to cover the 'wealth management' area. There are no specific norms now for this burgeoning industry that has several service providers like banks, brokers, financial service firms and individuals. Sebi has applied to the finance ministry to extend the definition of the term 'securities' in the Sebi Act to several instruments, especially alternative investments like those in art and several structured products that usually beat the definition and thereby the Sebi purview. Wealth managers are known to offer such products to their clients and there is usually an issue in the valuation of these instruments, noted a banker. They don't want a Madoff- like situation happening in India where exotic products are peddled to wealthy clients under Ponzi schemes, he adds.
The market size of PMS is estimated to around Rs 1 lakh crore. Sebi has been tightening the PMS norms over the years. In May 2008, Sebi had increased the networth requirement for portfolio managers from Rs 50 lakh to Rs 2 crore and also asked the portfolio managers not to pool accounts of clients. Pooling of clients would mean portfolio managers becoming quasi-mutual funds, not giving customised services.
On June 23, 2009, Sebi clarified that there should be a clear segregation of each client's fund through proper and clear maintenance of back-office records. It also mentioned that portfolio managers were not allowed to use funds of one client for another client. Portfolio managers will also have to maintain an accounting system containing separate client-wise data for their funds and provide statement to their clients for such accounts at least every month. Importantly, managers will have to reconcile client-wise funds with the funds in their bank account every day.

Transparency drive

#Sebi likely to set limits on fee charged by PMS providers

#Guidelines may cover 'wealth managers' as well

#Alternate assets like art, structured products under lens

#Emphasis on reporting asset position and charges likely

#Has already ordered separate client accounts and statement

Source

Highlights of the Economic Survey 2008-09

2009-07-04T13:58:00.000+05:30

Finance Minister Pranab Mukherjee on Thursday tabled the Economic Survey for 2008-09 that prescribes doing away with cess, surcharges on taxes, including fringe benefit tax, and sweeping refroms in areas like petrol pricing and financial sector.

Following are the highlights of the pre-Budget Economic Survey: 2008-09.

Unleash reforms - phase out cesses, surcharges and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax).
Introduce new Income Tax Code that results in neutral corporate tax regime.
7-7.5% growth possible in 2009-10.
Allow 49% FDI in defence and insurance; permit FDI in multi-format retail starting with food.
Proposes another round of fiscal stimulus including tax cuts and increase in expenditure.
Decontrol petrol and diesel prices; end Govt monopoly in railways, coal and nuclear energy.
Lift all bans on future contracts to restore price discovery; decontrol sugar and fertiliser.
Revitalise disinvestment programme to generate Rs 25,000 crore annually, list all PSUs and auction those beyond revival.
Economic growth decelerated in 2008-09 to 6.7 per cent from 9 per cent in 2007-08.
Fiscal deficit in 2008-09 shot up to over 6 per cent from 2.7 per cent in 2007-08.
Survey indicates FRBM-II to get back to path of fiscal consolidation.
Complete the process of selling 5-10 per cent equity in identified profit-making non-'Navratna' PSUs.
List all unlisted PSUs and sell a minimum 10 per cent equity to public.
Auction all loss-making PSUs that cannot be revived.
In PSUs with zero net worth, allow negative bidding in the form of debt write-off.
Auction 3G spectrum.
The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act.
Rationalise Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver.
Reform petroleum (LPG, Kerosene), fertiliser and food subsidies to reduce leakages and ensure targeting.
Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household.
Phase out kerosene supply-subsidy by ensuring that every rural household has a solar cooker and solar lantern.
Review customs duty exemptions and move to a uniform duty structure to eliminate inverted duties.
Implement GST from April 1, 2010.
Rapid operationalisation of UID Authority within 3 months.
Agriculture growth fell sharply to 1.6 per cent in 2008-09 from 4.9 per cent.
Exports grew at 3.4 per cent to $168 billion in 2008-09 from $163 billion in previous fiscal.
Imports grew at 14.3 per cent to $287.75 bn from $251.65 bn Trade balance deteriorated to $119.05 bn from $88.52 bn.
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The key to India's economic boom

2009-05-20T21:55:00.000+05:30

It seems that notwithstanding the global financial crises, India is set to become a high-growth state and more of a welfare state under the new government.
The so-called work programme of 2009-2014 has already been chalked out in the Congress party manifesto and there should be no political or other constraints in pushing it through.
There is a good chance then that by 2014, the economy would be comfortably chugging along towards a double digit GDP growth rate or may even have reached it. At the same time, the footprint of the state would be much larger in the welfare space.
Here are the key elements of that journey to 2014:
The GST boost
While there may or may not be another stimulus package, the move to a "moderate" goods and services tax (GST) in about ten months would provide a big boost to the economy.
As much as $15 billion of additional output could annually be added to India's trillion dollar economy as a result of the tax which would subsume all other central and state level indirect taxes and lead to the all-India common market.
The productivity push
The plan to invest Rs 30,000 crore (Rs 300 billion) or a whopping $6 billion on a nation-wide skill development programme focused on the youth of the country should enhance national productivity, even if one assumes a low efficiency of the spend.
Similarly, the plan to connect each and every one of the 600,000 odd-villages of the country to a broadband network within three years would yield productivity gains even if one takes into account the fact that many of these villages continue to be denied the most basic facilities like electricity and water.
There is also the odd chance that broadband connectivity would expedite the provision of other basic support infrastructure.
A welfare state
Having sensed that its aam aadmi thrust has yielded results, there is going to be no holding back the Congress government on its welfare agenda. There is a plan for enactment of a Right to Food law. There is a commitment to provide 25 kilograms of rice or wheat monthly at Rs 3 a kilogram for families below the poverty line.
Subsidised community kitchens are proposed to be set up in all cities for the homeless people and migrants. And of course, the rural employment guarantee programme is to be strengthened.
There is also a plan to extend rural health insurance to every family living below the poverty line in three years. Social security cover for urban homeless, elderly and backward communities is proposed. Educational loans or scholarships are to be extended to all students.
There is talk of more schools with better trained teachers. There are special incentives planned for survival of the girl child aimed at correcting the adverse sex ratio.
There are also plans to take forward the scheme of monetary incentives to female students on the completion of various levels of schooling. The spends on these initiatives are certain, even though the outcome may not be.
Welfare agriculture
In the case of agriculture, what is proposed to be done to boost industralisation of agriculture is not so clear though the welfare aspects of the government's agricultural plan are clearly marked out.
All small and marginal farmers in the country will have access to soft loans. To check the moral hazard that arises from the massive loan waiver programme, there is a plan to extend interest relief to farmers who repay their loans on schedule.
Crop insurance, direct income support to farmers in ecologically vulnerable areas and procurement at the doorstep of farmers are some of the other measures that are proposed in this term.
Missing the SME beat
The one sector which would boost employment and growth together would be the small scale industry, which contributes 40 per cent to the national manufacturing output and accounts for about a third of the country's exports.
The small scale units are among the worst hit by the financial crunch though they are yet to get a serious relief package.
The Congress party has however promised a "new deal" for the small units, as well as first generation entrepreneurs, which would include access to collateral-free credit and freedom from multiplicity of laws and inspectors.
There is also a plan for a cluster-based approach to growth of SMEs though one needs to see how quickly it would be put in place.
Plugging the Infra gap
The new government needs to work out a focused plan for the infrastructure sector if it is to meet its overall objective of high growth.
It is not immediately clear how much of the targeted $500 billion investment planned in the current five year plan has been managed in the two years that have passed, though one can be sure that it is inadequate.
Investment in infrastructure needs to be enhanced and tracked, even though it is not part of the work programme. The only thing mentioned there is the aggressive target of adding 12,000-15,000 Mw of power generation capacity every year without any explanation of how it will be done.
What is nevertheless welcome though is the stated intent of creating a new model of urban administration with financially-viable self-government institutions.
Land @ market rates: Market rates for agricultural land required for industrial projects and an option for the farmers to become stakeholders in the industrial ventures on their land, which is part of the work programme, would finally set to rest the controversies on land acquisitions.
Source

All about the New Pension Scheme

2009-05-09T14:20:00.001+05:30

From May 1, Indians have access to another investment avenue to plan for retirement in the New Pension Scheme (NPS).
The scheme has been in the pipeline for at least five years but it finally took shape in 2007-08. Although the government was pushing for the scheme after a law providing statutory backing to the regulator was enacted, the Left parties, which were supporting the United Progressive Alliance government, did not allow the passage of the Bill.
So, last year, the government decided to go ahead by allowing the NPS Trust to enter management agreements with fund managers. What benefits does the NPS offer? Who is eligible?
Who can join the New Pension Scheme?
Any Indian citizen between 18 and 55 years. At present, only tier-I of the scheme, involving a contribution to a non-withdrawable account, is open.
Subsequently tier-II accounts, which permit voluntary savings that can be withdrawn at any point of time, can be opened. But to be eligible to open a tier-II account, you need a tier-I account.
How do I enrol?
You will need to visit a point of presence (PoP), fill up the prescribed form with the required documents.
Once you are registered, the Central Recordkeeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN), along with telephone and internet passwords.
How much can I invest?
There is no investment ceiling. But the minimum investment limit has been fixed at Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at least once a quarter but there is no ceiling on how many times you invest during the year.
What is the penalty for failure to make the minimum payment?
You will have to bear a penalty of Rs 100 per year of default and will need to pay it with the minimum amount to reactivate the account. Also, dormant accounts will be closed when the account value falls to zero.
Are my investments guaranteed?
No. There is no guarantee since NPS is a defined contribution scheme and the benefits depend on the amount contributed and the investment growth up to the time of exit.
How should I select my investment option?
You can choose the investment mix between equity or E (high risk but high returns), mainly fixed income instruments or C (that come with medium risk and returns) and pure fixed investment products or G (which offer low returns but have very low risks associated with them). Equity investment is capped at 50 per cent.
At present, the equity investment consists of index funds that replicate the Sensex or Nifty portfolio. The C segment includes liquid funds, corporate debt instruments, fixed deposits and public sector, municipal and infrastructure bonds. The pure fixed investment instruments include state and central government securities.
There is a trade-off between risk and returns, with a younger investor placed better to take risks.
If you are unable to decide the investment mix, the default option will kick in.
What is the default option?
The default option, called auto choice lifecycle fund, will see the investment mix change according to the age of the subscriber. At the lowest entry age of 18 years, auto choice entails an investment of 50 per cent in E, 30 per cent in C and 20 per cent in G.
The ratios will remain unchanged till the subscriber turns 36, when the ratio of investment in E and C will decrease annually, while the proportion of G rises.
By the time the subscriber is 55 years, G will account for 80 per cent of the corpus, while the share of E and C will fall to 10 per cent each
Who will decide the fund manager?
At the moment, the Pension Fund Regulatory and Development Authority (PFRDA) has selected six fund managers -- State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance -- on the basis of a bidding and technical evaluation process.
You have to select one fund manager at the time of deciding your investment option; later, PFRDA may allow subscribers to choose more than one fund manager.
Can I change my investment mix and the fund manager? You can shift from one fund manager to another from May 2010.
What happens if I relocate to another city?
The PRAN remains the same and you can access a toll-free number (1-800-222080). The details of your PRAN and the statement of transactions will be available on the CRA website (www.npscra.nsdl.co.in).
How can I exit the scheme?
The normal retirement age has been fixed at 60 years. At 60, you will be required to use at least 40 per cent of your accumulated savings to buy a life annuity from an insurance company. A phased withdrawal is also allowed but the lump sum benefit has to be availed of before you turn 70 years.
For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings but buy an annuity with the remaining 80 per cent.
If the subscriber dies before he or she turns 60, the nominee can receive the entire pension corpus. Alternatively, a subscriber can exit if the account value falls to zero or if the citizenship status changes.
The age of exit will be reviewed by PFRDA from time to time. There will also be the option to select an annuity that will pay a survivor pension to your spouse.
Are there tax benefits for NPS?
At present, the investment is covered under section 80CCD of the Income Tax Act and a tax will be levied if you withdraw the money.
You can avoid paying tax by transferring the entire corpus to the annuity service provider. PFRDA has, however, approached the government to treat investment in NPS on a par with instruments like Employees Provident Fund and Public Provident Fund, for which no tax is levied at the investment, accumulation or withdrawal stage.

Source

World's top 10 buyers & producers of gold

2009-05-01T13:05:00.003+05:30

Gold has held mankind enraptured since time immemorial. It has been prized for its beauty, easy workability, indestructibility, and value.
The average global demand for gold in the past 10 years has been mainly for jewellery at 76 per cent, followed by industrial applications of 14 per cent and 10 per cent for investors. The available gold supply is from new mining, reclaimed scrap, official or new bank sales and gold loans made from official reserves.
There are five international gold trading centres: New York, London, Zurich, Tokyo and Hong Kong.
But who are the world's largest buyers and producers of gold?
India, world's number one buyer of gold!
The craze for the yellow metal in India is phenomenal. It has traditionally been the world's largest consumer of gold. India buys an average of 800 tonnes of gold every year and its total jewellery market is worth more than $20 billion.
However, in recent times the demand for gold in India has waned slightly, with the price of the precious metal zooming to record highs. Yet, the country remains the largest buyer of gold, at 770 tonnes in 2007.
China: 2nd largest buyer; number one producer
Beijing has gold holdings of 1,054 tons, up from 600 tons in 2002, and still wants to buy more gold.
China produced 280.5 tons of gold in 2007, making it the world's number one producer of the precious metal.
China is also the world's second largest buyer of gold. It bought 328 tons of gold in 2007.
USA: 3rd largest buyer; 4th largest producer
The United States of America is the world's third highest buyer of gold. In 2007, it purchased 275 tons of the yellow metal.
However, the US is also the world's fourth largest producer of gold. In 2007, it produced 240 tons of gold.
Turkey: 4th largest buyer
Turkey is the world's fourth largest buyer of gold. In 2007, it bought 250 tons of the precious metal.
Saudi Arabia: 5th largest buyer
Saudi Arabia purchased tons of gold in 2007, making it the world's fifth largest buyer of gold.
UAE: 6th largest buyer
The United Arab Emirates is the sixth largest gold-buyer at 107.2 tons (figures pertain to 2007).
Russia: 7th largest buyer; 6th largest producer
The world's seventh largest buyer of gold is Russia. In 2007, Moscow procured 85.6 tons of gold.
Russia is also a big producer of gold. In fact, it is the world's sixth largest gold-producer. In 2007, it produced 169.2 tons of gold.
Vietnam: 8th largest buyer
Vietnam bought 77.5 tons of gold in 2007, making it the world's eighth largest gold-buyer.
Egypt: 9th largest buyer
Egypt follows in the ninth position. In 2007, it procured 69 tons of gold making it one of the biggest gold-buyers in the world.
Italy: 10th largest buyer
Italy is the tenth largest buyer of gold in the world. In 2007, it purchased 59.2 tons of the yellow metal.
South Africa: 2nd largest producer
South Africa is the world's second largest producer of gold after China. In 2007, it produced 270 tons of gold.
Australia: 3rd largest producer
Australia is the world's third largest producer of gold. In 2007, it produced 246.3 tons of gold.
Peru: 5th largest producer
Peru produced 170 tons of gold in 2007, making it the world's fifth largest producer of gold. The United States is the world's fourth largest gold-producer
Indonesia: 7th largest producer
Having produced 146.7 tons of gold in 2007, Indonesia is the world's seventh largest producer of gold. Russia is the world's 6th largest producer of gold.
Canada: 8th largest producer
Canada follows Indonesia in gold production at 101.2 tons (figures pertain to 2007), making it the world's eighth largest producer of gold.
Uzbekistan: 9th largest producer
Uzbekistan is the ninth largest gold-producer in the world. In 2007, it produced 75.3 tons of gold.
Ghana: 10th largest producer
At 75 tons of gold production in 2007, Ghana is marginally behind Uzbekistan. Ghana is the world's tenth largest producer of gold.

Source

Indian Government expected to file affidavit on black money Monday

2009-04-26T17:55:00.002+05:30

With its 48-hour deadline expiring on Friday, the union government is now expected to inform the Supreme Court Monday on its efforts towards retrieving over Rs.70 trillion ($1.4 trillion) in black money believed to be stashed away in foreign banks by Indians.
The government had made the commitment Wednesday before a bench of Chief Justice K.G.
Balakrishnan, while responding to a lawsuit accusing it of sitting idle on the question of retrieving the illicit wealth.
Asserting that the government is not sitting idle on the matter, Additional Solicitor General Gopal Subramaniam had offered to file an affidavit in the court within '48 hours', detailing the actions taken by it so far.
The government's self-set deadline of 48 hours began a little after 2 p.m. Wednesday and expired Friday.
Though the apex court had not issued any direction to the government to file the affidavit within '48 hours', the court, accepting the government's offer in good faith refrained from issuing any formal notice on the matter.
Without issuing any notice, the court adjourned the matter for next hearing to May 4.
The government is expected to file the affidavit on Monday, sources said.
Subramaniam had asserted Wednesday that the government had written to the German
government seeking details of the possible Indian citizens having secret accounts in foreign banks in that country within 24 hours. The move followed a report by a leading business daily in February 2008 that a former employee of the LGP bank in Liechtenstein had sold data on about 1,400 people who had money there to tax authorities across the world.
The German government, which too bought the data, had offered to provide it to any country that sought the information, the news report had said.
Subramaniam had said the New Delhi-based financial daily had carried the report on Feb 27, 2008, and the government had written to Germany seeking details of the possible Indian tax evaders on Feb 28, within 24 hours of the report being published.
He said the government had also received the German government's response, which he said could not be disclosed in the open court.
The union law ministry sources, however, attributed the government's failure in filing the affidavit within the 48 hours, to its 'displeasure at the highest level' with Subramaniam's 'over-enthusiasm' in self-imposing a deadline on filing the affidavit.
The sources said the government at its highest level is of the view that the law officer should not have made the commitment on his own, and that too such an early deadline.
The government is of the view that it would have preferred filing an affidavit only after issuance of notice on the lawsuit, said sources.
The officials said the government was however largely appreciative of Subramaniam's handling of the issue in the apex court, especially his arguments on the 'mystifying timing' of filing the lawsuit and the political motive behind it.
The lawsuit was filed Tuesday jointly by former law minister Ram Jethmalani, former Lok Sabha general secretary Subhash C. Kashyap and former Punjab Police chief K.P.S. Gill.
The lawsuit is based on a research article written by noted economist and Bangalore's Indian Institute of Management professor E. Vaidyanathan for the institute's in-house journal Eternal India.
Vaidyanathan has estimated that 'between 2002 to 2006, $1.4 billion, roughly equivalent to Rs.7,000 crore (Rs.70 billion), have been siphoned off from this country and stashed away in foreign banks'.
Return of the illegal wealth of Indians in foreign banks, particulary Swiss banks, has become a major poll planks of the Bharatiya Janata Party (BJP).
Source

10 don'ts for smart stock market investing

2009-04-26T16:51:00.002+05:30

This is a great check list of 10 habits, impulses and tendencies you steer clear of in order to keep your investments healthy.
1. Don't be arrogant
The market teaches humility and that is how you must approach it. As soon as you believe you know why the market acts the way it does, you will be proven wrong. Arrogance can kill a portfolio. You must be able to admit defeat and preserve enough capital to fight again.
Following point and figure charts, which depict the battle between supply and demand, helps keep you out of the 'I know why' attitude of investing.
2. Don't wait until you feel comfortable to buy when a sector reverses up
Falling into the waiting trap is a great way to ensure that you buy the stock at a higher price. When sectors reverse up from oversold levels, it is often when the news is the most dire.
Conventional wisdom would suggest this is the last place in the world you would want to invest. Buying at this time is gut wrenching, but to be successful you must act with complete confidence.
As the sector moves higher, the comfort level increases. If you use comfort level as your guidance, however, you will for sure leave a lot of money on the table, or worse, buy as the sector peaks.
3. Don't be afraid to buy strong stocks
Don't avoid stocks just because they have gone up. Doing so will keep you out of the long-term winners. In the United States, for example, this mentality would have kept you out of General Electric, which was up 188 per cent between January 1995 and December 1997 only to see it rally another 96 per cent by the end of 2000. It also would have kept you out of Cisco, which was up 376 per cent between January 1995 and December 1997, and then it moved up another 312 per cent by the end of 2000. These are only two examples, but there are many others.
More important than how much the stock is up is its supply and demand relationship. By evaluating the point and figure chart, you can gain insight into this relationship and whether or not the stock is likely to move higher. Stocks that double can easily double again. Don't miss out on these great opportunities.
4. Don't sell a stock simply because it has gone up
Doing this cuts profits short. Buying a stock right is only half the battle. You have to be able to sell it right to win the war. Just because a stock has rallied 30 per cent or 50 per cent, don't be tempted to take your trade off for that reason alone.
Consider trimming the position and leave part on the table to continue in the uptrend. Let profits run.
5. Don't buy stocks in extended sectors because 'it's different this time'
On the surface, the stock market appears different all the time. The leadership changes: in come new stocks into the Nifty 50, and then out they go. Small-cap stocks outperform for a while, then it's back to the large caps.
However, the underlying forces that drive the stock market are always the same. They are true and time-tested and do not change. They are supply and demand. That's why buying sectors that are extended (overbought) will not be different this time.
6. Don't try to bottom fish a stock in a downtrend
'The trend is your friend' is a true statement. So don't go against it without some inkling that the trend has changed.
Bottom fishing a stock in a downtrend is the opposite of being afraid to buy strong stocks. Do not buy a stock just because it fell sharply. You want to buy a stock that is likely to move higher, not one that is not likely to fall further.
At a minimum, wait for the stock to show a sign that demand is back in control and suggesting higher prices. That may be a simple buy signal on the chart or a reversal back to the upside after holding an area of support. Also remember why you initiated the position. Be careful not to let a trade turn into something else.
7. Don't buy a stock simply because it is a 'good value'
These days, value is in the eyes of the holder, and therefore it is a subjective term at best. If a stock has become a good value, ask why. This is important, because a stock can stay a good value by not moving for the next decade, or worse, become a better value by dropping another 20 per cent.
The true value of a stock is determined by its capital appreciation potential, not numbers on a balance sheet. The basis for capital appreciation lies in the supply and demand relationship of the stock. Appreciation can occur only if demand grows stronger for the stock and buyers are willing to pay a higher price. Watch the point and figure charts to determine if a stock is likely to move higher in price and become a good value.
8. Don't hold on to losing stocks and hope they come back
Hope is eternal, but your portfolio is not. Holding on to a losing stock is the best way to let your losses run. Combine this mistake with selling a stock that has gone up and you can create a portfolio of dogs.
When buying stocks, there will always be some losers: Count on it. However, how you manage that loss often determines the success or failure of the overall portfolio. Keep losses small so that you have the capital to play again. Hanging on to losing positions, hoping that they will come back, can be deadly.
A $50 stock that is stopped out at $40 is a 20 per cent loss. It's a bad trade, but it is manageable. In order to recoup that loss you would have to make 25 per cent on a $40 stock. What if you held on to that $50 stock, hoping that strong earnings would come in and turn it around, but instead it continued lower to $25?
Finally, you decide to exit, but now it takes a 100 per cent return from a $25 stock just to get back to even. Those results are hard to find, and if you are able to find one, you don't want to waste it on getting back to even
Learn to recognize your losing positions for what they are. If a stock cannot trade above its support line or is not outperforming the averages, find one that is and swap it.
9. Don't pursue perfection
There are two types of mistakes to discuss here. The first is the constant belief that there is a better system out there, and you need to find it.
Using a new system to invest each week will not get you to your goal. You will become good at nothing and moderate to bad at everything. To be good requires that you stay focused, disciplined, and skilled at whatever methodology you choose.
You need to have the strength of conviction in your chosen discipline to learn from mistakes rather than to run away from them and find another methodology. There is no Holy Grail in investing.
The second mistake is to wait for the perfect trade. There is no such thing. If you only buy stocks that have all positive attributes you will maintain a portfolio of cash. Rarely, if ever, do you find a stock that has all the pluses on its side.
Look for the big ones like relative strength, trend, and signal. Also remember that 80 per cent of the cause of price movement in a stock is based on the market and sector. You are better off being approximately right than precisely wrong.
10. Don't do anything based on a magazine cover
Following the hot news that appears on magazine covers is a shortcut to the poor-house. Why should you follow the advice of someone who has just moved from the society pages to the business section?

Source

Minting political capital

2009-04-23T15:43:00.002+05:30

At first it seems like an idea from the 1970s. From the era of nationalisation. An idea whose time is past, that has become an alibi. Indeed, when L.K. Advani, PM-designate for the NDA, first spoke about it last Sunday, it seemed like a hard weave and dodge to duck the imbroglio involving Varun Gandhi.
By April 1 it was an SMS in demand. It seemed the time was just right for the idea of getting stashed loot back to the country. Suddenly the BJP itself woke up to an idea with all the makings of sound political capital.
The idea itself was born of a political imperative and economic circumstance. The political imperative stems from the need for a differentiator in an era when mandates are jigsaw puzzles and the economic circumstance calls for an idea that works both as rhetoric and a promise of a better life.
After all, the estimated $500 bn stashed abroad is enough stimulus to resurrect growth and alter the face of India's infrastructure. Sure, the first debate on Swiss numbered accounts featured in Parliament in December 1968 and after two decades of probe and litigation on the Bofors case nobody saw any of the bribe money. The circumstance, though, has changed.
Rs 25 lakh crore belonging to Indians is estimated to be stashed away in Swiss Banks.We will do our utmost to bring this wealth back to India.SMS from L.K.Advani to voters
Hope is embedded in the first-of-itskind action seen in the US. Last September the UBS of Switzerland revealed to the US that it held 47,000 secret accounts for Americans but refused to disclose their identity. Last month, however, after being caught soliciting business, UBS agreed to reveal 250-300 clients and paid $780 million in fines.
The plea bargain was driven by desperation to avoid closure and international sanction. Pressure is mounting globally. British Prime Minister Gordon Brown and German Chancellor Angela Merkel have both stated that there was no place for tax havens . The days of bullet-proof confidentiality are clearly over and Advani's promise is based on this premise.
So, what is the quantum of Indian money in the Swiss banks? What is the source of the declaration of between $500 bn and $1,400 bn stashed in Swiss accounts ? First a perspective: $500 bn is India's GDP for six months and $1,400 bn would be India's GDP for a year and three months or five quarters.
Quote unquote
We raised the issue of money in Swiss banks in February and asked the Government to get it back.Advani has only followed it up. Prakash Karat, CPI(M) General Secretary What did they do for six years? Why was he silent as the leader of the Opposition for five years? It is a poll promise as they are short of issues. Kapil Sibal, Union Minister for Science and Technology A country-by-country breakdown of accounts in Die Banken in der Schweiz published by the Swiss National Bank (the Swiss central bank) in 2007 reveals assets belonging to Indian entities were worth only $2.5 bn or CHF2,923 million (Swiss Francs).
Swiss bankers also managed CHF1,383 mn ($1.2 bn) belonging to Indians in a fiduciary capacity. In fact, the total assets of all foreigners in Swiss banks is CHF2,070,437 million (or $1.8 trillion).
Contrast this with the range of $500 bn to $1.4 trillion of just Indian money stashed in Swiss banks as claimed by Team Advani.
Perhaps, money is hidden in custody accounts. By end-2008 the value of securities in these secret accounts of foreigners was CHF2,190 billion ($1.9 trillion). It is a moot point how much of this could be Indian money.
Quantum of money apart there is also the leverage factor. Does India have the kind of leverage US has? And mind you, the US government failed to get the UBS to spill out all the names.
As Kapil Sibal, a top lawyer and Union minister for science and technology, says, getting to the pot of money is a complex exercise as one has to first prove violations . Sibal also questions the timing of this idea. Why didn't they do anything when they were in power for six years? Why didn't Advani raise this issue in the past five years as the leader of the Opposition? If the issue is raised now after 11 years of silence, it is because they are short of poll issues.
There is, of course, no debate that Indians have stashed huge sums in overseas entities. The sources are unlimited from business to corruption to crime. Indians, without doubt, own a substantive stake in the $11-plus trillion stashed across the globe.
One route is overinvoicing of imports. India imported capital goods worth $45 billion last year, and officials believe, at least 10 per cent is siphoned and stashed abroad making India one of the top 10 countries with illicit outflows. This, though, is not the only route. The Satyam saga is validation of software exports being another route.
Over the years the adulterous politician-babu-corporate nexus has worked together to orchestrate the framing and changing of rules to suit end use.
The formula: to send money abroad inflate costs of goods or services sought abroad and to bring money back inflate income. Indeed, it is passe to stash in Swiss banks. Corporates now have legal ways and means to keep money outside India. FIIs, sub accounts and P-Notes are all part of the routing process and Cyprus, Singapore, Dubai, Mauritius are all new destinations.
None of these facts should detain Team Advani or the government of India from pursuing the idea. Hot pursuit of hot money is an idea whose time has come. India must take advantage (as it has indeed in the case of Liechtenstein's LGT Bank) of the emerging consensus across the globe against tax havens. But for rhetoric to translate into outcome it would also have to address issues at home. They would range from ending the abuse of double tax treaties to wiping out the P-Note and sub accounts culture. Very simply, the next political idea must be to dismantle the benami empires whether of dons, politicians
Loot vault
The amount of funds held offshore globally by individuals is about $11.5 trillion with a resulting annual loss of tax revenue of about $250 bn.
Tax Justice Network
Global proceeds from criminal activities, tax evasion and corruption is estimated at between $1 tn and $1.6 tn per year.
UN & amp; World Bank Report, 2007
During 2002-'06, $10 bn to $100 bn have been stolen out of India every year.
Global Financial Integrity Report, 2006
At least $6.2 trillion of wealth is held offshore, depriving developing countries of annual tax receipts of $64-124 bn.
Oxfam Study
India is estimated to have lost $5.2 bn just in taxes due to bilateral trade mispricing with the EU and US in 2005-'07.
Christian Aid

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How elections can swing markets

2009-04-18T21:55:00.000+05:30

Given the sluggish macroeconomic scenario, the markets are hoping for an alliance that could provide stability and move the reform process ahead.
Elections are an important event for the country given its impact on the corporate sector, individuals and markets. This time around, if experts are to be believed, the importance of elections has only risen as they expect a fractured verdict with no single party garnering a meaningful majority.
Although it is too early to guess the outcome as well as how many seats the individual parties would secure, markets are more concerned about economic stability and continuity in reforms, which would drive growth in future.
So, expect markets to remain volatile as the poll dates come closer as well as if uncertainty prevails post-May 2009. History is proof of this. In 2004 elections, the BJP-led NDA government lost power paving way for the Congress-led UPA to form the new government at the centre completely surprising the market. Firstly, the markets were expecting the NDA to stay in power.
And secondly, the UPA government was supported by the Left parties raising questions regarding stability and policies of the new government. The result was that, on 17th May, 2004 the Sensex made an intra-day low of 4,227, which was over 16 per cent lower as compared to its previous close of 5,070 per cent. Thereafter, once it felt confident about the future prospects and growth rates improved, it secured new highs.
This time around, however, the key concern is that the economy is not in good shape and requires some bold initiatives if it has to once again grow robustly. Thus, the need for a strong and stable government at the centre is even higher. Read on to know the possible scenarios, and what it could mean for the markets.
Congress-led alliance
One of the important things during UPA's tenure was the support from parties like the Left parties, Lalu Prasad's Rashtriya Janata Dal (RJD), Nationalist Congress Party (NCP) and Dravida Munnettra Kazhagam (DMK). Then, the Congress had only 145 seats. This time, its biggest alliance partner (the Left) has departed to form a Third Front.
Also, the performance of the Samajwadi Party in Uttar Pradesh (accounts for 80 seats) will count as Mayawati's Bahujan Samaj Party (BSP) is seen to have an upper hand. Similarly, its alliance partners like RJD and NCP are yet to fully confirm their support, but are open to do so post-elections.
Additionally, experts believe that Congress itself might get lesser seats. "In 2004 elections, Congress won about 45 seats in Tamil Nadu, Andhra Pradesh and Bihar, which this time could come down to 22 seats," says P Phani Shekhar, fund manager (PMS), Angel Broking.
Nevertheless, the markets will give a thumbs up to a Congress-led UPA. Its manifesto lists economic revival and restoring high growth as its immediate priority. It also mentions that public expenditure on agriculture and infrastructure will be stepped up. Experts also expect policies in the nuclear power and related segments to gain traction.
They believe that UPA's policies towards allowing FDI in insurance, telecom and retail sectors have been good. On the flip side, experts indicate the lack of sufficient reforms in the past in areas like fuel pricing (still administered) and PSU divestment. Concerns also exist on how it will tackle the growing fiscal deficit.
However, all will depend on the combination of partners, which will ultimately have a bearing on the depth and execution of policy initiatives. And, this holds true for any coalition - UPA, NDA or the Third Front.
BJP-led alliance
Although, the BJP-led NDA is the other contender for forming the next government, the expected poor performance in Rajasthan and MP could pose some challenges. Additionally, since its large ally, Biju Janata Dal (BJD) in Orissa, has departed, the alliance will have to make up for this loss of 11 seats.
Meanwhile, while there are challenges before the party, how the alliance shapes up post elections � ability to rope in parties like BSP � will be crucial. Also, "if the Third Front is not supported by the Congress, it might lead to a split in Third Front, which could be good news for NDA," says Shekhar.
Meanwhile, on April 3, the BJP declared its manifesto mentioning income tax exemptions for individuals with an annual income of Rs 3 lakh and Rs 3.5 lakh for women. This could mean higher disposable incomes for individuals, and thus, increased consumption of consumer durables, automobiles, travel, FMCG and entertainment among others.
Its manifesto also indicates lower interest for farmers and certain housing categories besides, abolition of fringe benefit tax. This in turn, indicates gains for companies catering to rural India, as well some gains for India Inc.
Additionally, while the market believes that NDA, too, has similar policies towards agriculture, infrastructure and for reviving the economy, it has also been pro-divestment in the past. Thus, one could expect divestment of non-core PSUs as well as enhanced reforms to strengthen remaining companies.
Emergence of Third Front
The growing strength of Third Front, which has already upped its ante against the BJP and the Congress, is also a reason for experts now realising its impact on election results and subsequent government formation.
"The possibility of the Third Front emerging strong has increased over the past month given the alliances and seat sharing agreements across parties (like BSP, AIADMK, TDP, NCP)," says, Nischal Maheshwari, head research, Edelweiss Securities.
"There is high probability that the Third Front might come into the picture including the left parties. In that case, there would be lot of uncertainty and chances are high that significant or crucial ministries like finance and external could go to the Third Front," says Shekhar. Also, due to the involvement of a large number of parties, it could lead to instability and distorted policies.
We have already seen this in the past during 1989 (V P Singh government) and 1996-97 (H D Deve Gowda) supported by the Third Front.
But, both these governments had short life spans and there was uncertainty in the markets during these periods. Notably, the Third Front manifesto claims that it would restore long term capital gain tax and abolish STT (on equities) and remove tax concessions given to some sectors like IT, which may not go down well with the market.
Although, they will also focus on infrastructure, rural development and agriculture, experts believe that its policies towards SEZ, foreign trade, FDI and FII (in certain sectors) and PSU divestments may not be market-friendly.
What should you do?
As of now, most experts believe that the election results could be extremely fractured where no party will have a majority.
They say, based on the seats won by individual parties, alliances and negotiations among parties (besides Congress and BJP, there are a large number of big and small regional parties which account for almost 50 per cent of total Lok Sabha seats) would intensify and will also play a crucial role in portfolio (ministry) allocation, thus its impact on the markets.
"There could be lot more volatility in the market with a downward bias once the elections are over," says Satish Ramnathan, head equities, Sundaram BNP Paribas Mutual Fund.
"It is surprising to see the markets rally despite the looming uncertainty due to elections and fourth quarter results, which are expected to be as bad as we have seen in quarter three," says Ambareesh Baliga, VP, Karvy Stock Broking. In this context, what should investors do? Baliga advises, "Book profits and sit on some cash. I will rather invest at 10 per cent higher levels. At least at that point in time we will have some clarity as to who is forming the government and their policies."
Likewise, experts say, to deal with volatility, investors could hedge their existing portfolios by taking some suitable derivatives (options) exposure.
Besides, investors can avoid cyclicals and cling on to some defensives like FMCG, utilities and pharma. Exposure to infrastructure and agri-based companies, where revenue visibility is higher and which is the focus of all political parties, should prove beneficial.

Source

RBI knows banking better than US Fed: Stiglitz

2009-04-18T21:13:00.001+05:30

Nobel laureate Joseph Stiglitz complimented the Reserve Bank of India last week for resisting pressures to deregulate the banking sector.
Stiglitz, a professor at Columbia University, said one reason India is "one of the least dark spots" in the gloomy global economic scenario is that its central bank has resisted such moves.
Stiglitz said India had largely averted a crisis that felled the United States because India's central bank did not act like its counterpart in the United States.
"The Indian central bank understands central banking and regulation much better [than the US Fed]. . . There were some political pressures to deregulate and RBI resisted some of those pressures," Stiglitz said.
"Now I think the financial markets are thankful that India's central bank did resist those pressures. The result is that India's financial markets are in better shape than they would have been if the RBI allowed wholesale deregulation [the way the] United States has done," he said, while keynoting the India Conference at the Columbia University.
The 2009 conference was organized by the Columbia Business School's South Asian Business Association.
Noting that although developing countries, especially India and China, are doing much better than the rest of the world, including the US, Stiglitz said one should not believe the effect of the US economic downturn would not affect emerging economies worldwide.
Stiglitz said that about an year ago people used to talk about de-coupling, meaning that emerging economies, especially that of India, are not linked to the global economy and so any downturn would not spread to countries like India and China.
"I always thought that that was a myth, and today it seems that the downturn in the world's largest economy has to have global implications and that is what is happening today. We are tied by a whole set of connections -- capital markets, export markets, labour, all that. . .," Stiglitz said, adding that India's economy is likely to continue growing but at a slower rate than before the crisis.
Asked how long the global crisis would continue, he said there were actually two crises: "A financial crisis and a conventional economic crisis. When the origin of the crisis lies in the financial sector, typically, downturns are a deeper and longer and this is a very severe serious financial sector crisis. And we can expect a very long and difficult period of recovery," he said.
Stiglitz justified his pessimism, giving the example of the economic downturn that hit some Asian countries in 1997-98. They were able to recover quickly, partly because there was demand for their exports. But now, countries like the US cannot rely on exports because markets everywhere are weak, he said.
Stiglitz said that today the US is not doing a good job of fixing its financial system.
"It is not likely to work. We are spending huge amounts of money that will put taxpayers in much worse shape. It is being done in a very non-transparent way that is undermining people's confidence in the government. Even after we fix the financial problem, the recovery is not going to be very robust," he said.
Source

Railways: Largest contributor to India's e-commerce

2009-04-04T16:44:00.000+05:30

With the Indian Railway Catering and Tourism Corporation pushing electronic booking of tickets and scores of online travel portals entering the business, the share of tickets sold online in the total ticket revenues of the railways has doubled to nearly 30 per cent this year.
"Until February, we sold 38.7 million tickets. This is already a 104 per cent increase over the total number of tickets sold online in (the whole of) 2007-08, which stood at 18.9 million," said an Indian Railways official.
The estimated gross sales for 2008-09 stand at Rs 3,400 crore (Rs 34 billion), which makes IRCTC the largest contributor to e-commerce in the country, accounting for over a third of the total e-commerce of Rs 9,000 crore (Rs 90 billion).
"I won't be surprised if IRCTC is the biggest contributor. Last month alone, it did Rs 412 crore (Rs 4.12 billion). I am sure it has a better margin than online air ticketing agents and the non-travel e-commerce players may not have similar revenue potential as a train ticketing website," said Mrutyunjay Mishra, co-founder of JuxtConsult, an IT consultancy firm.
There are about 7.9 million active online buyers, of which 80 per cent buy travel products.
The entry of travel portals like Cleartrip, Ezeego1 and Yatra into the fray has given customers more options, besides enhancing the customer profile. These portals have tied up with IRCTC and customers can buy railway tickets through these sites, too. The portals charge Rs 10 to Rs 20, in addition to IRCTC charges, as service fee.
Cleartrip, which is the largest player in railway bookings, has grown 100 per cent between January and March. According to Noel Swain, vice-president (marketing), Cleartrip, the company sells 3,000 tickets every day. Yatra, which started online railway bookings a month ago, has grown from 8-10 tickets a day to about 1,000.
On booking railway tickets from a travel portal, a customer now gets offers similar to those on air tickets.
"We have launched a 10 per cent cash back offer on railway tickets for all Master Card users on our website from April 1," said Cleartrip's Swain.
Mudit Khosla of Yatra added: "All the offers that were given on airline tickets are now being tried on railway tickets also. For instance, various consumer durables companies are now trying to push vouchers to rail tickets as well."
Neelu Singh, COO of Ezeego1, said that although the margins on rail tickets were not very high, she pushed the sales of other products.
Although the travels portals together account for a minuscule chunk of the overall e-bookings of the railways, they enhance the customer profile. For instance, both Cleartrip and Yatra have an AC to Non-AC bookings ratio of 70 to 30, while for IRCTC, the ratio is the opposite.
The scope for expansion is huge. According to the JuxtConsult study, only 9 per cent of the 35.09 million internet users buy products online as most of them do not have credit cards or do not trust the medium.

Source

The basics of PPF

2009-04-04T13:41:00.003+05:30

It is that time of the year when most of us would have already made our decision as to where we will make our investments or would at least have had the chance of looking at different investment instruments.
At one point in time or the other we would have come across 'Public Provident Fund' as an effective investing instrument. But how much do we know about Public Provident Fund, or PPF?
What is the Public Provident Fund?
PPF is a long-term, government-backed small savings scheme of the Central government started with the objective of providing old age income security to the workers in the unorganised sector and self-employed individuals.
What is the interest rate offered through PPF?
Currently, the interest rate offered through PPF is around 8 per cent, which is compounded annually. Interest is calculated on the lowest balance between the fifth day and last day of the calendar month and is credited to the account on March 31 every year. So to derive the maximum, the deposits should be made between 1st and 5th day of the month.
What is duration of the investment?
People who are interested in liquidity or small-term gains would not be very keen about PPF because the duration for the investment is 15 years.
However, the effective period works out to 16 years i.e., the year of opening the account and adding 15 years to it. The contribution made in the 16th financial year will not earn any interest but one can take advantage of the tax rebate.
The account holder has an option to extend the PPF account for any period in a block of five years after the minimum duration elapses. The account holder can retain the account after maturity for any period without making any further deposits.
The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
What is the minimum and maximum amount of deposit?
The minimum deposit that you can make into a PPF account in a year is Rs 500. The maximum is Rs 70,000.
Who can open a PPF account and where?
A PPF account can be opened by an individual (salaried or non-salaried) on his own behalf or on behalf of a minor of whom he is the guardian or on behalf of a Hindu Undivided Family (HUF) of which he is a member or on behalf of an association of persons or a body of individuals. An individual can open only one account for himself.
A PPF account can be opened with a minimum deposit of Rs 100 at any branch of the State Bank of India or branches of its associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalized banks, like the Bank of India, Central Bank of India and Bank of Baroda and at any head post office or general post office.
What are the tax benefits from PPF?
The amount you invest is eligible for deduction under the Rs 100,000 limit of Section 80C. On maturity, the entire amount including the interest is non-taxable.
Is it possible to withdraw the amount deposited at any time during the tenure?
Yes. You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 2009-10, the first loan can be taken during financial year 2011-12 (the financial year is from April 1 to March 31).
The loan amount will be up to a maximum of 25 per cent of the balance in your account at the end of the first financial year. You can make withdrawals during any one year from the sixth year.
You are allowed to withdraw 50 per cent of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower. For e.g., if the account was opened in 2000-01, and the first withdrawal was made during 2006-07, the amount you can withdraw is limited to 50 per cent of the balance as on March 31, 2003, or March 31, 2006, whichever is lower.
Source

Do companies respect shareholders?

2009-03-30T21:55:00.000+05:30

The Crompton Greaves stock lost nearly a fourth of its value in just two trading sessions. Investors slammed the stock after they heard that the Thapar-owned engineering firm was picking up a 41 per cent stake in a group company, Avantha Power. Avantha Power is into power generation.

To be fair, Crompton has not violated any rules or laws of corporate governance. But what has put off shareholders is that a fair amount of the listed company's cash -- around Rs 225 crore (Rs 2.25 billion) -- is being channelled into a business that needs large amounts of money but returns from which could take their time coming; the cash, they feel should have been reserved for Crompton especially at a time when things aren't going too well in the US and Europe.

Even if the company didn't have use for the money immediately, it could have come in handy for acquisitions. How could the promoters, without so much as a by-your-leave, decide to use the cash for their own company?

Analysts also questioned the value of the acquisition; J P Morgan believed it was difficult to value Avantha for more than Rs 250-Rs 300 crore (Rs 2.5-Rs 3 billion) with most of the capacity still in the pipeline. At Rs 550 crore (Rs 5.5 billion), Crompton had valued the business at nearly twice that amount.

Valuation can be a matter of opinion but managements need to be far more forthcoming with shareholders and far more transparent when they're dealing with cash. The Crompton management didn't even think it necessary to put out any financial details about Avantha at the time of the announcement.

Unfortunately, more and more companies seem to care less and less about the interests of minority shareholders. A couple of months back, shareholders slammed the Siemens stock after the multinational announced that it was spinning off its infotech subsidiary to its parent Siemens AG.

It was surprising, analysts pointed out, how the operating margins of the infotech business had weakened just before the divestment and how there had been a similar occurrence earlier when another subsidiary had been spun off. Late last year, the J P Associates stock lost around 10 per cent in a single session after it announced a group restructuring.

While none of these companies may be skirting the law, what is happening is that companies are increasingly getting away with decisions that are not necessarily in favour of minority shareholders.

In September last year, the promoters of Sterlite wanted to transfer the high-quality aluminium business to group company Malco in return for high-cost and reportedly low-quality copper Konkola mines. After the stock lost 18 per cent, the management gave up the idea but only after some foreign institutional investors kicked up a fuss.

Take also the case of Larsen and Toubro. The company initially denied that it had an interest in picking up a stake in Satyam and only later conceded that it was planning to bid for it -- around Rs 650 crore (Rs 6.5 billion) from the L&T balance sheet had been spent on a 12 per cent stake without anyone having an inkling of what was going on. Not surprisingly, the stock has been thrashed.

In most instances the management may be well within its rights to restructure the business -- it's not that the moves are always regressive, but there are far too many cases where minority shareholders are losing out. Companies seem to have little respect for shareholders' money. With this kind of behaviour, the attempt to improve corporate governance practices seems almost a farce.

Grant Thornton and FICCI have just finished talking to a clutch of midmarket-listed smaller companies on the subject. The findings are politically correct.

Most companies say they see significant value in adopting the corporate governance practices prescribed, and 84 per cent of the 500 respondents say that 'compliance with section 49 enhances the perception of their stakeholders on the conduct of the company's business.'

Judging by the actions of most companies, you wouldn't think they cared two hoots what shareholders thought or didn't think! Most of them felt that Clause 49 was 'adequate to bring the requisite levels of transparency to the business.' Of course! The fact is that the rules don't prevent promoters from doing related-party transactions -- like the Satyam-Maytas and Crompton deals -- and allow them to get away with pulling out cash or transferring a business.

The point is that related-party transactions need to brought under the scanner and the laws suitably changed so that these deals are run past shareholders. Since it won't help if the promoters own a majority share, the transaction should be voted on only by minority shareholders as is the case in several countries. Unless this is made compulsory, promoters will continue to play truant.

For all their fascination with corporate governance, not too many seem to be doing much about it -- the survey revealed that just 9 per cent of the companies spoken to were 'in the process of developing a suitable strategy to comply with clause 49.' That's not surprising. Given how the bigger lot is getting away doing as it pleases, why would smaller companies want to even try?

Source

Businessmen in Parliament

2009-03-30T15:30:00.000+05:30

Does politics drive business or is it the other way round? The jury's been out on it for long. Nonetheless, it is interesting to see the number of businessmen/traders/entrepreneurs that sit on the benches in the Lok Sabha and the Rajya Sabha. Here are some of them:

Naveen Jindal

Naveen Jindal, vice chairman and managing director of Jindal Steel and Power Ltd, is a Member of Parliament since 2004.

39-year-old Jindal represents the Kurukshetra constituency in Haryana. He was instrumental in getting the Supreme Court's permission to let all citizens fly the Indian flag inside and on their buildings.

JSPL is part of over $10 billion Jindal Organisation. The company was established in 1990 by hiving off the Raigarh & Raipur Divisions of Jindal Strips Ltd.

Vijay Mallya

Vijay Mallya is a member of the Rajya Sabha.

The 55-year-old chairman of the United Breweries Group and Kingfisher Airlines, Vijay Mallya entered politics in 2000 as the president of Janata Party.

He took over United Breweries in 1983 and under his leadership the group has grown significantly, and has over sixty companies.

Vijay Mallya is known for his successful bidding of 175,000 pounds for the sword of Tipu Sultan at an auction in London in 2004. Earlier this month, Mallya successfully bid for the belongings of Mahatma Gandhi at $1.8 million in a New York auction.

Praful Patel

Praful Patel is a member of the Rajya Sabha and Minister of State for Civil Aviation. Patel was elected as a member of the Lok Sabha in 1991 at the age of 34.

The 52-year-old Patel was elected three times consecutively to the 10th, 11th, and 12th Lok Sabhas. After losing in the Lok Sabha elections in April 2000, he became a Rajya Sabha member. He has huge business interests in Nagpur and Gondia in Vidarbha.

Dayanidhi Maran

Dayanidhi Maran, member of the Lok Sabha, was Minister of Communications and IT in the Union Cabinet.

He is the younger brother of Kalanidhi Maran, the founder and managing director of Sun Network, the group that owns satellite television channels in southern India. 43-year-old Dayanidhi belongs to the Dravida Munnetra Kazhagam Party.

Rahul Bajaj

Rahul Bajaj, chairman of the Bajaj Group, is a Rajya Sabha member from Maharashtra. He has the support of the Shiv Sena, the Bharatiya Janata Party, and the Nationalist Congress Party.

In June 2006, Bajaj was elected as a Rajya Sabha MP from Maharashtra. The 71-year-old took over control of the Bajaj Group in 1965. Under his leadership, the company made great progress. The Bajaj Group finds a place among the top Indian corporates. Its business spans over a wide range of industries, automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance, travel and finance.

Rajkumar Dhoot

Rajkumar Dhoot is Shiv Sena-nominated member of the Rajya Sabha. Dhoot is the chief executive officer of Datacom Solutions.

The 54-year-old is the brother of Venugopal Dhoot, chairman of Videocon Industries. Datacom Solutions, is a subsidiary of consumer durables major Videocon Industries, which received telecom licences to begin pan-India operations.

Suresh Kalmadi

Suresh Kalmadi, a Lok Sabha member, belongs to the Congress party. He is the president of the Indian Olympic Association, the Asian Athletics Association, and the Athletics Federation of India.

In 1977, Kalmadi became the president of the Indian Youth Congress, Pune, and was the president of the Indian Youth Congress, Maharashtra, from 1978-1980.

The 65-year-old Kalmadi has been member of the Rajya Sabha for three terms from 1982 to 1995, and again in 1998. He was also elected to the 11th Lok Sabha in 1996, and to the 14th Lok Sabha in 2004. He heads the Sai Service Group, which has the dealership of Maruti and Bajaj vehicles. The group also markets Mahindra vehicles.

T R Baalu

T R Baalu, Union Cabinet Minister of Shipping, Road Transport and Highways, is a member of the Lok Sabha. The 68-year-old Baalu has been elected four times since 1996

He represents the DMK. An industrialist with an engineering background, he began his political career in 1957 when he was just 16 years old.

Baalu's family owns companies like King Chemicals and King Hi Power. He was recently at the center of a controversy for using his post to favour gas deals for his companies.

Sharad Pawar

Sharad Pawar is the president of the Nationalist Congress Party which he founded in 1999, after separating from the Indian National Congress.

The 69-year-old Pawar has held the posts of Defence Minister of India and Chief Minister of Maharashtra, and currently serves as Union Minister of Agriculture and Consumer Affairs, Food and Public Distribution.

Pawar hails from Baramati in Maharashtra. An agriculturist and businessman, he owns several sugar manufacturing factories in his home town.

M P Veerendra Kumar

M P Veerendra Kumar, member of the Lok Sabha, represents the Kozhikode constituency in Kerala. Member of the Janata Dal-S, 72-year-old Veerendra Kumar is also the chairman and managing editor of the Malayalam daily Mathrubhumi.

He is also the president of Kerala state unit of the political party called Janata Dal. He took over as the managing director of the Mathrubhumi Printing & Publishing Company Ltd in 1979.

Rajeev Shukla

Rajeev Shukla, a Rajya Sabha member, serves as the secretary of the All India Congress Committee.

The 50-year-old Shukla is also the founder and director of BAG Films Limited.

Before beginning his political innings, Shukla was a reporter for the Northern India Patrika. He has been a Rajya Sabha member since 2000.

Shukla is the also the vice president of the Board of Control for Cricket in India (BCCI).

Amar Singh

Amar Singh, general secretary of the Samajwadi Party, is a member of the Rajya Sabha.

An influential politician, he hit the headlines recently for his generous grant of million of dollars to the Clinton Foundation.

On November 6, 2008, Amar Singh told the Election Commission that he had net assets to the tune of Rs 37 crore (Rs 370 million). A public interest litigation (PIL) has been filed against him in this regard.

The 53-year-old Singh is close to business tycoons like Anil Ambani and film stars like Amitabh Bachchan.

Saleem Iqbal Shervani

Saleem Iqbal Shervani represents the Badaun Lok Sabha constituency in Uttar Pradesh. The 53-year-old Shervani has held the posts of Union Health Minister and Foreign Minister.

He is the owner of Neoli Sugar factory and president of Krishi Inter College.

Jyotiraditya Scindia

Jyotiraditya Scindia is among the youngest members of Parliament.

The 38-year-old was elected to the Lok Sabha in February 2002 from his father the late Madhavrao Scindia's constituency Guna in Madhya Pradesh.

He is the director of Scindia Investments Pvt Ltd, a private equity investment company with real estate, leisure and hospitality properties portfolio. He was also the director of Garware Petrochem Ltd from 1997-1999.

Murli Deora & Milind Deora

Minister of Petroleum and Natural Gas Murli Deora has inherited a family business of manufacturing and trading. A social worker and an industrialist, the 72-year-old Deora has also served as Municipal Councillor and Mayor of Mumbai.

His son, Milind, joined politics following his father's footsteps. 33-year-old Milind Deora is among the youngest Parliamentarians. Elected in April 2004 from Mumbai South, he represents the Indian National Congress.

He entered into politics with his mission of making Mumbai a world class city. He founded SPARSH, an NGO, to help the underprivileged. He joined the Indian Merchants' Chamber and was soon elected the chairman of its Young Entrepreneurs' Wing.

Vinod Khanna

Vinod Khanna, actor and member of the Bharatiya Janata Party, hails from a business family. His father KC Khanna had a textiles, dyes and chemicals business.

Vinod Khanna has acted in several films. The 62-year-old Khanna is also a film producer. In 1997, he joined the BJP and won the Lok Sabha seat from Gurdaspur, Punjab in 1998. Since then he has been elected three times.

Maneka Gandhi

An environmentalist, animal rights activist, journalist and a minister in four governments, Maneka Gandhi has donned various roles.

Maneka has authored a number of books on etymology, law and animal welfare. The Lok Sabha site mentions her as a writer and trader. A Member of Parliament from the Pilibhit constituency, 53-year-old Maneka has won every time she has contested from Pilibhit, except once. She has changed parties often and contested on different tickets.

Source

'Crisis: There is scope for India to do well'

2009-03-30T09:55:00.001+05:30

Martin Feldstein is the George F Baker Professor of Economics at Harvard University and a member of the Economic Recovery Advisory Board convened by the US President. He is also President Emeritus of the National Bureau of Economic Research and served as former US President Ronald Reagan's chief economic advisor.

In India to address the Canara Robeco Thought Leadership Series, Feldstein, who is also a Business Standard columnist. spoke to Niladri Bhattacharya and Sidhartha about the global economic situation. Excerpts:

Do you see some change in India in the last 12 months?

It has slowed down more than I expected. I thought India would be more immune to the global slowdown. I was quite worried about the global economy, and India, unlike the other Asian countries, is less involved in manufacturing, and I thought it would therefore be less adversely affected.

It was affected, partly due to a lack of credit, which affected large industries, and also because of the equity market, due to panic selling by emerging market investors.

They did not make a distinction between the potential health of the Indian economy and the hit that Thailand and Malaysia have taken. You were also hit very hard by high energy and food prices, and that led to a tightening of monetary policy.

But I remain relatively optimistic about India, with energy prices down and food prices no longer at such elevated levels. There is more scope for India to do well than what it's been doing over the past year.

How does India compare with China?

China is going to do very well. It is suffering because of a loss of exports and due to a very sharp decline in manufacturing.

But Chinese officials have made it clear that they are going to use this as an occasion for a major shift to domestic activity, which is not just cyclical but for bolstering both consumer spending and government spending to provide services to consumers. China has the levers or controls to do it.

In the past few days, there has been some optimism, especially in the stock markets. Do you see certain signs of revival in the global economy, given the latest data?

There have been some recent statistics in the US about aggregate demand and housing and retail sales. I would like to believe that it's the beginning of a recovery, but I really do not. January was awful and so the fact that February bounced back a little may be just that. If you take the two months together, we are still looking at a net decline and that's not something very positive.

If we have two more months of positive numbers, then I would be surprised and pleased and start seeing things coming back.

There is a good chance that we see a few months of very positive news, not necessarily positive GDP growth, when the stimulus is introduced. The stimulus is going to add $250 billion in a year and about $60 billion on a quarterly basis. It's not a lot, but it's about 1.5 per cent of the quarterly GDP.

A national income accountant will multiply that by four and make an annual rate out of it and say it's a 6 per cent increase in GDP.

Even if the rest of the GDP is falling by 5 per cent, you put the two together, and the national income accountant would say it is zero or one per cent and politicians can say growth is back. But it would just be a mechanical, one-time level effect.

A year ago, the NBER had not officially declared the US in recession but my sense, by looking at individual monthly numbers, was that we were sliding into a recession and a deep-lasting recession. It took us several months before we got a confirmation.

We will not turn the corner in 2009. If we are lucky, it will happen by this time in 2010, but it may well not happen. It is very hard to see anything and say with confidence that there is a recovery.

Will the recovery start from the US?

China will get its act together sooner than anybody else. Who goes first will depend on trade patterns and things like that. But we (the US) will come out before Europe.
Will the Geithner plan be one of the key drivers?

It has the potential to be so. It's not clear that it is ready to do the full job. There are a number of problems, but it's much better than any of the plans that have come along before. A trillion dollars sounds like a lot of money, but if the purpose is to cleanse the balance sheets, then banks have $10 trillion worth of securities.

They have large amounts of underwater paper in residential and commercial mortgages and consumer loans. It's not clear if $1 trillion is enough to make the institutions and counterparties say, this is cleared up and start lending. If it is not a big enough step, then people may say it has failed.

It's not clear if the whole process will deliver that. It's not clear if the banks will be willing to sell the mortgages they have, because if borrowers are paying, then the loans can be carried at the initial value and do not have to be marked down. Once banks sell it, they have to take the loss and they will see if they have the capital to do so.

Do you see more shocks like Lehman going down?

A shock is something that you did not expect. The risk is that we will see declines, especially in commercial real estate and you may see some significant losses that could bring down commercial banks.

It is not clear if the plan is going to succeed in avoiding nationalisation or avoiding bank failures. They have got the right idea and they will discover if banks are ready to sell. If they are not, they have to go back and reconsider what the viable strategies are.

There is talk of tighter regulation and better supervision. Will we see overregulation?
It may happen. What's needed is more supervision and not regulation. One of the reasons supervisors did not do a good job was because they were falling back on the language of Basel.

For instance, Basel allowed them to ignore off-balance sheet assets. If that's what the Financial Stability Forum and BIS concluded, then who is a bank supervisor to question that? Bank supervisors did not use common sense to go beyond what was written.

Do you see traditional banking making a comeback?

There was a strong case for the repeal of the Glass-Steagall Act for integrated financial services. That is not what brought us down. A very high loan-to-value ratio and things such as that are the problems that have to be dealt with. The fundamental structure of banks need not be changed.

What are your expectations from the G 20 meeting?

These things do not normally produce much. With the conflict of what ought to be done, I do not see them producing much.

Source

Help clean up the economic mess: IMF to G-20

2009-03-29T21:21:00.000+05:30

Ahead of the G-20 Summit in London next week, the International Monetary Fund, on Friday urged the participating world leaders to make cleaning up the financial sector as their top priority and ensure that the stimulus money is available next year too.

Observing that the world is at a crossroads now as it faces the greatest economic crisis in 60 years, the IMF managing director Dominique Strauss-Kahn said at a news conference that the G-20 leaders have the opportunity to spur a recovery next year if they take the right action.

Asserting that cleaning up the balance sheets of banks and getting the financial sector working again was critical to reviving world growth, Strauss-Kahn said: "Countries can do it in different ways, but they have to do it and do it now."

Responding to questions from reporters in London, Paris and Washington through video conferencing, he said the governments around the world had done very well in announcing stimulus plans to counter the current downturn and create jobs.

But they now needed to ensure that efforts were sustained in 2010, he said.

Strauss-Kahn said though the crisis did not start with emerging markets, the collapse of trade finance and drying up of capital flows is hurting many emerging markets.

The IMF needs enough resources to assist emerging markets; otherwise a collapse in emerging economies would have a devastating impact on developed economies, reinforcing the crisis. He also called for aiding low-income countries.

Terming it a crucial meeting for resolving the world economic crisis, Strauss-Kahn said it is vitally important that the G-20 leaders reach agreement at the April 2 meeting in London. "If there's a big clash it will not be good for confidence," he declared.

Hoping that the meeting would show unity and leadership, the IMF chief said the changes agreed in London could amount to the same strategic shift that took place with the creation of the IMF and the World Bank at Bretton Woods, New Hampshire toward the end of World War II.

In addition to endorsing his five-point IMF agenda, he wanted to see steps agreed to start reforming the international financial system, including regulation of tax havens, rating agencies, and hedge funds. "I'm not expecting something very new. What I expect is the commitment of world leaders to take a step forward and to make it rapidly."

Global activity is now projected to contract by 0.5-1 per cent in 2009 on an annual average basis -- the first such fall in 60 years, the IMF has said.

Source

Management lessons from Chanakya

2009-03-29T15:30:00.000+05:30

Throughout history, wars have left an indelible mark on human psyche. Serious debates have been held on the morality of and the strategic necessity for war. And yet, like every dark cloud that has a silver lining, wars too at times leave a society wiser.

India is no stranger to wars. And there are many lessons to be learnt from each of those battles -- management lessons, to be precise. Here we present the third in a series of articles on management lessons drawn from Indian history. This one picks out management gems from the role of the redoubtable Chanakya in the rise of the Mauyra empire.

Rise of the Maurya empire: Role of Chanakya (circa 320 BC)

Chanakya was also known as Kautilya and Vishnugupta. He wrote Arthashastra, the ancient Indian political thesis. There are several stories on Chanakya. One of them goes like this: Alexander's invasion of western India, circa 326 BC, led to political turmoil that provoked Chanakya, a renowned teacher of Takshila, to sew up a coalition to take on the Greek forces.

He tried to convince many kings, but none agreed to his plans. Finally, he came to Patliputra, the capital of Magadha, ruled by the powerful Nanda dynasty. He went to their palace and found ten golden thrones. Nine were for the Nanda princes and their father, and the tenth was for the most learned person. Chanakya quietly occupied it.

When the princes came back, they asked him to vacate the seat, but Chanakya didn't and demanded a debate to prove his supremacy. The Nandas rejected the debate demand and did not give him any position.

Lesson: Even though Chanakya was reputed and famous in Takshila, it does not mean he would be famous in Patliputra too. So his asking for the debate is justified to prove his worth. Similarly, a �high performer' in one team or company needs to prove his worth in a new environment to gain the same tag.

Chanakya was prepared to face it. But he could try a different approach for the desired result. In the corporate world, referral plays a major role in hiring key senior employees. If any of the key ministers of the Nandas had referred or introduced him, he might have got the position.

Chanakya did not vacate the golden seat, and the Nanda princes physically pulled him down. During this process, a lock of his hair got ruffled up. At this moment, Chanakya took a vow to redo the hair only after defeating the Nandas.

They were about to punish him with the death sentence, but one of the ministers prevailed upon the princes to forgive him. Chanakya went out of Magadha and met Chandragupta, who was waiting for him.

There are many stories on how Chanakya first met Chandragupta, but one thing was clear: Chanakya could sense the inherent qualities in Chandragupta and trained him as he wanted to build an empire by making him the king who could protect India from the Greek invasion.

Lesson: Fearlessness, perseverance and patience are the key attributes of any leader. This helps in setting lofty goals and fuels the determination to achieve them by executing against the well-laid-out plan.

Another great quality exhibited by the leader is in spotting' talents and grooming them to take bigger challenges.

Chanakya's first step was to sneak in a spy to keep a watch on the Nandas' inner circle. He knew one Jeevasiddhi, who was intelligent and could do the job. Chanakya told Jeevasidhi about some of the secrets of the palace learnt from Chandragupta who had heard about these from his father.

They sent Jeevasiddhi to the palace. Jeevasiddhi convinced the Nandas that he possessed supernatural powers by narrating the secrets hidden in the palace. The Nandas started leaning on him and consulting him before making any major decision. Slowly, he became a part of their coterie.

Lesson: A background check is required for most hires, but a detailed one is a must for senior positions to ensure right fit. At a very senior level, where information regarding tender, bid, intellectual property and other trade secrets is involved, company must take steps to protect it.

Many companies ask people to sign the non-disclosure agreement and, at times, activate special clauses restraining them from joining rival or competing companies for a few years.

Meanwhile, Chandragupta started helping the people of Magadha. His popularity started soaring. This acted as a threat to Nandas. The Nandas had an intelligent minister in Amatya Rakshasa. He advised the Nandas to kill Chandragupta. Jeevasidhi learnt of the plan and helped Chandragupta escape.

Chanakya encouraged Chandragupta to take over the Magadha throne. Chandragupta networked with people and built the Mauryan army. Most of them were people disillusioned and unhappy with the Nanda rule. Chanakya and Chandragupta Maurya announced a battle plan and ensured that the Nanda army could be diverted to reach a distant battlefield to fight the Mauryan army.

In the meantime, a civil war erupted in Magadha. Chanakya manoeuvered popular support for Chandragupta and the Nandas were uprooted without any fight.

Lesson: A peaceful handover to the new management is desirable as it saves the company from infighting that could weaken it. It would be faster and fruitful to scale new heights from a stable company rather than a wrecked one. It helped Maurya kings to reach new heights faster not only due to their great leadership skills, but also due to peaceful transition.
It was a monumental task to build an efficient government for Chandragupta Maurya. Chanakya convinced Rakshasa to continue to be the minister of Chandragupta by sharing his grand vision of fighting against the invasion.

Chandragupta was able to leverage Rakshasa's excellent skills in administering the kingdom. Chanakya assumed the position of an elder statesman.

Lesson: One needs to perform and show results to be considered as a key resource. Key people are always in demand, but more so during organisation's transformation.

People are the main asset. Their knowledge and expertise can provide a big leap to any activity. They should be retained. Managers should not be biased in working with �high performers' even if they used to work with their adversaries in the past, provided the person maintains loyalty and confidentiality.

Top performers are attracted by lofty visions/goals and are willing to face difficult challenges.
While serving Chandragupta Maurya, Chanakya started adding small amounts of poison in his food so that he could get immune to it and would survive any attempts at poisoning.

One day, his queen, Durdha, shared the food with the Emperor while she was pregnant. She died and Chanakya extricated the baby from the womb. A drop (bindu in Sanskrit) of poison had got into the foetus, and hence Chanakya named him Bindusara.

Bindusara would go on to become a great king, and his son, Ashoka, would emerge as one of the greatest emperors.

Chanakya had a political adversary called Subandhu, who was in the court of Bindusara. He kept looking for opportunity to defame Chanakya in the eyes on Bindusara. On finding the right occasion, he mentioned to the king that Chankaya had killed his mother. However, the bigger question that remains is: why did the Maurya kings keep Subandhu when his envy towards Chanakya was well known?

Lesson: In a healthy organisation, diversified and divergent views can exist. One needs to have people with great skills who can deliver better results by having a good team work and right division of work.

Peer pressure helps in extracting best from the people, but it should be managed well to avoid destructive peer relationship. If team work is becoming difficult, the leader should clearly identify roles based on strengths and in such a way that there is minimal overlap to avoid conflict. Team with high performers helps in better results and also cushions attrition.

Bindusara became angry with Chankaya. On knowing this, Chanakya walked out of the city, donated all his wealth and sat on a fast. When Bindusara learnt the truth, he felt ashamed and asked Subandhu to apologise to Chanakya.

Subandhu hatched a plan to meet him and asked him to forgive him. But secretly, he set Chanakya's abode on fire. Chanakya was killed in the fire.

Lesson: The important lesson here is a long-standing ally and staunch supporter of the Maurya empire was mistrusted by the king without understanding the complete picture. A vital resource like Chanakya was lost due to this lack of trust.

Managers should demonstrate maturity by having an honest one-on-one with the employee and listening to the other side of the story with an open mind before taking any drastic step. It takes time to build the trust, but it takes a moment to destroy it.

Source

A life jacket for US and China

2009-03-27T21:55:00.000+05:30

The US remains locked into a policy mode of punishing savers and rewarding borrowers with low interest rates, first to borrow and second, to bail them out.
Many commentators were shocked and are still in awe of the US Federal Reserve after its decision last week to purchase many debt securities, including US treasurys, to the tune of nearly a trillion dollars. Mainstream financial media in the West closed ranks behind the Federal Reserve. In particular, the Financial Times called it an act of “prudent boldness”. The Economist wrote that Ben Bernanke had done his part. Those who would like to learn more about what the Fed had done before reading further should click on this link:
www.ft.com/cms/s/0/8ada2ad4-f3b9-11dd-9c4b-0000779fd2ac.html
This newspaper noted that the purchase of long-term debt securities by the Fed would bring down the interest rates and thus reduce the margin that banks enjoy by borrowing short and lending long. It is insightful, but this is not a new situation. The yield curve in the US was mostly flat between 2004 and 2006. Banks, in theory, should have had it tough. But their profits were booming. How? They made up in volume what they lacked in prices. That is why we had the credit boom up to 2007 followed by the bust. Now, Bernanke wants them to repeat the same pattern of behaviour.
Lower interest rates are not only meant to support households with their existing debt obligations but also to encourage them to borrow more. Otherwise, banking will not return to health. Normally, households must pay down their debt by saving more out of their current income. That means savings rates of US households must rise. Lower interest rates discourage savings. The US remains locked into a policy mode of punishing savers and rewarding borrowers with low interest rates, first to borrow and second, to bail them out. It is unable to muster and articulate the case for bearing the pain required to break free of this unhealthy policy shackle.
Further, for savings to rise, jobs with incomes must be available. The last economic expansion from 2001 to 2007 was the weakest on record for job creation. Further, three categories—financial activities, professional and business services and construction—created nearly 43% of the incremental private sector jobs, in the US, in the six years ending in December 2007. These three sectors will be shedding jobs for at least a couple of years more. Manufacturing must pick up the job slack. That requires the sector to be competitive which, in turn, requires a substantial devaluation of the dollar.
The announcement by the Fed on Wednesday to engage in asset purchases did just that. The dollar fell sharply against most currencies after the announcement. Well, not so fast. If the dollar decline spirals out of control, then its global reserve currency status and its seigniorage benefits would be lost. The idea is to get the dollar to depreciate, but not crash. Quite simply, the dollar must depreciate gently, but persistently as it did between 2002 and 2007. How to go about it?
Consider the fact that a weakness of the dollar bails out China’s export sector as it weakens the yuan, too, given the country’s tight peg to the dollar. If China’s exports pick up or do not fall further, China would have to continue to channel the trade surplus into US assets. That would grow China’s reserves again, helping to cover the fact that the dollar decline depletes China’s foreign exchange reserves.
Given the weak global demand, other countries will have to work harder to protect their export competitiveness in the face of this lifeline thrown by the US to China’s exports. They will have to make sure that their currencies do not appreciate against the dollar too much. They too will have to buy dollar assets. Significantly, the Fed’s action came after the treasury report on net foreign purchase of US assets showed a precipitous decline in January. Moreover, in the three months ending in January, money fled all long-term US bonds (source: blogs.cfr.org/setser/2009/03/18/a-bit-more-to-worry-about-foreign-demand-for-long-term-treasuries-has-faded/).
The US corned global savings for the better part of this decade. Some American commentators have tried to blame foreign savers for that. This move helps to quash such arguments. The quantitative easing programme launched by the Fed reinforces the Faustian bargain it had stuck with China on supporting the latter’s export sector in return for its support (directly and through distorting other nations’ exchange rate policies) in financing excess demand in the US. The source of excess demand has shifted now to the public sector. The problem remains. America’s claim on savings in rest of the world is set to increase. The Fed’s move is central to its success.
In short, America is trying to erase 2008 and restore the world of and up to 2007. Rising global incomes helped to gloss over the unsustainability and dangers of that world order. In its absence, a big question mark hangs over the success of the latest audacious Fed move. Hence, to be safe, private investors, too, should help America achieve its aim of weakening the dollar.
Source

Watch out for these 7 money facts!

2009-03-27T09:55:00.000+05:30

Statement #1: The more you pay the better quality you get.

False. You believe the more expensive the price tag, the better the quality, but that might not always be true. You perhaps pay for easy availability or the ambience for the place you shop at. For instance, the same apparel that is available in the nooks and corners of T Nagar in Chennai, might be showcased at triple the price at a branded store.

Most commodities in your local kirana store will be way cheaper as opposed to the ones you buy at a supermarket. So always shop around for the better deal on price, at least for the products you buy often.

Statement #2: Life insurance doubles up as good investment and everyone needs it.

False. Life insurance is just that. It is for the sake of insuring your life and even that only when there are people who are dependent on you. This should ideally go towards maintaining the same standard of lifestyle that you are providing them, when living.

If you have no dependents or if there is no dire need for a life insurance policy, don't opt for it. Also, never misunderstand it as an instrument for investment. Opt for a pure insurance plan if you must go for one. For investment purposes, there are exclusive investment opportunities.

Statement #3: If you visit a credit counselling centre then you are marked for a bad credit score.
Absolutely false! A credit score is awarded to you depending on how you have maintained your repayment track record and has nothing to do with a counselling session on how to prevent yourself from bloopers on management of funds or generating liquid cash from investments that will help you repay your loans!

Statement #4: If stock prices are crashing, it is a great opportunity to invest.
False. Given the volatility of the market, what is the guarantee that they will not dip further resulting in bad losses for what you invest ?

The downward trend could just be the tip of the iceberg. Sorry to be such a pessimist but when you are investing your hard earned money you need to think twice about every money move, especially so when recession ripples in the global market are felt back here in India.

Statement #5: You need to earn a handsome sum of money to start saving!False. Whatever your earnings, you can set aside a portion for saving. Simple budgeting, translated as spending lesser than you earn can pave the way to start saving.

If you do not think about saving as early as possible you will lose out on significant sums of money at a later stage in life.

Needs are different from wants, the more you earn, the more you will spend on your wants. Hence, it is best to define your spending patterns early, so that you make a habit of saving.

Statement #6: All your debts perish with you.

False. When a person passes away, their debts will ideally be cleared from the property or movable assets they left behind, the remainder of which would be handed over to the heirs. This includes any property or money the person has bequeathed in his will as well.

In the case of joint bank accounts or co-owned properties that particular person with whom the account is jointly held or property is co-owned, will be held accountable for the payment of the debt.

Statement #7: Being a co-guarantor of a loan has an impact on my credit score.

True. Never readily accept becoming a co-guarantor for somebody else's loan. You are putting yourself at a great credit risk if the person fails to repay the loan.

It will go into your credit records and the bank or financial institution will hold you liable for the repayments the original loan consumer has to make. This could end up being a very sad situation for you and one best avoided.

Source

A real estate crash is good for you; and India!

2009-03-25T13:55:00.000+05:30

CONVENTIONAL economics says a crash is bad. In reality, however, it’s a boon. A real estate crash is an economic blessing for billions of people and the country.

Two years back, no one would have imagined that real estate prices could crash by 50 per cent. Today, it’s a fact. Compared to peak prices of 2008, you can expect a correction by 70 per cent in the coming years. Despite that a lot of properties will be lying vacant as there is a huge oversupply – in India and all over the world.

Many builders and brokers will probably send me hate mails for saying this but the fact remains that a 70 per cent crash is a good time for them to create much more wealth and to tap a large market. This crash is excellent for home buyers, businesses, and the entire economy.

Reason: A lot more cash is available for more productive activities in the economy such as building roads, electricity, etc.

How is that?
Let us say earlier a property you wanted to buy was being quoted at Rs 1 crore. To get money to buy this, you might have to scour your entire life savings and take additional loans. You and your family might have to slave for at least 20 years to pay off the EMIs to banks. A lot of your savings gets sucked into unproductive assets like real estate.

Today cost of construction per square foot is only around Rs 600. Based on this a 1000 sq. ft apartment should cost not more than Rs 6 lakhs to construct. Just imagine a flat that cost barely 6 lakh to construct is being sold for Rs 1 crore. A few might argue – that we need to consider land costs.
Land cost is artificially inflated across the country – India has an abundance of land all across. Just move out of the major cities and you will see thousands of acres of vacant land.

Now imagine if that same property is available for Rs 20 lakh, which is the fare value for such a property. Now there is an additional Rs 80 lakh available in the economy for more productive uses.

What happens to this surplus of Rs 80 lakh?
Previously, only a small minority of builders enjoyed this surplus of Rs 80 lakh but now it can be invested to boost consumption.

Roads, factories and new service industries can boom if each family uses this Rs 80 lakh more productively. Electricity, roads, water, health care and education will get a huge boost from this money. No amount of interest reduction or artificial stimulus package can have the same effect as this.

When property prices go down, automatically the ‘black cash’ element would disappear. People would not see the need to find the back alleys to pay Rs 20 lakh.

The question, you should ask!
Today, a place like Dubai, which has sunk billions of dollars into unproductive real estate, is on the verge of collapse. Had they utilised this money for better use, the economy would have been much better today.

A lot more to a crash that is excellent for the economy. The real estate crash has not yet happened in India and is still to come and will probably surprise a lot of people.

India has a bright future ahead and millions of new jobs are going to be created. A lot of new capital also is going to be used productively thanks to this global economic crash. I’ll once again stress that this is one of the best opportunities in history to create immense wealth for all those who are armed with knowledge and have a little bit of patience.
Source

IT Industry and fraud

2009-03-25T09:55:00.000+05:30

Recession. Slowdown. Companies across sectors praying for customers. Contrast that with information technology and business process outsourcing firms, where customer count was always a recurrent boast. Before Satyam, that is: investigators into the Satyam scam are now trying to find out, among other things, if the IT major at all had the large customer base it used to claim before promoter B. Ramalinga Raju was caught with his hand in the till.

Among the other things Satyam inflated or is suspected to have inflated: earnings and employee headcount. For the authorities, regulators, investors and industry brethren, the Satyam case has raised a red flag over the entire IT industry and its numbers. The nature of their products make physical verification almost impossible. Conventional methods are more geared to checking how many tables, chairs and equipment exist and not for an equivalent audit of, say, how many customers it has, who they are and what their order size is.

Observers feel that IT companies and their auditors need to devise foolproof ways to measure customers, employee numbers and orders/ sales, even though industry insiders say this is a time-consuming job in a sector traditionally in a hurry to declare quarterly results. The trade-off is between doing things thoroughly and doing things quickly. Apart from land in the Indian context, people form the asset base of an IT company. The focus has been to attract and retain people by “paying more” and offering a campus life that is the envy of other sectors. In IT, the ability to earn revenues is entirely dependent on the headcount, which is akin to plant capacity in manufacturing. One of the first questions emerging from the Satyam scam—till the time the new board members clarified—related to headcount. Did the company actually have as many as it claimed, or was money being siphoned out in the name of fake employees?
The metric system
Then, the metrics, or numbers relating to billing rates, utilisation, dollar size of clients and man-months billed. IT is the most metrics-driven sector across industries—and there lies another danger. Consider what analysts at Edelweiss Securities point out: “Back in 2000-01, when Infosys was the first in the IT sector to make public operating metrics such as billing rates, utilisation, client metrics and man-months billed, little did we know that this consistent and tireless action on the part of Infosys was to usher in a metrics-driven information revolution.’’

Soon enough, other IT companies followed suit. No one questioned the metrics, even though they are self-reported and certainly not audited by external auditors. The Satyam scam will cast a cloud over the metrics claims of all IT outfits, till may be there is an audit in place.

As an Edelweiss report notes: “In theory, metrics such as utilisation, billing rates, onsite-offshore split can be manipulated so as to provide consistency and assurance with the reported revenues.” The report is captioned: “Weighing Consequences of Satyam on Indian IT and India Inc.”
Exports: Zeros & Ones?
After numbers and metrics, comes the biggest black hole: the product or service exports that form the very basis of an IT firm’s revenues. IT exports are not like physical items such as automobiles, garments or ore that can be counted, weighed, valued or even seen by customs and tax authorities as they are shipped. IT exports are software, complex and customised code that travels over broadband to the buyer.

There are checks and balances and IT companies do need to fill in a Software Export Declaration (Softex) form with the Software Technology Parks of India. But there is no way of checking the value, when value lies in the eyes of the buyer, or input costs, when inputs are intellectual. Debanjan Banerjee, Partner at the law firm Fox Mandal Little, says: “In spite of these controls, there are cases of fudging… then the artificial figures of sales and receivables and inflated profits push up share prices, and benefit the promoters as they sell or pledge their shares.”

“The ‘software products’ of IT/ITES firms are predominantly intangible in nature, and, therefore, it is difficult to make an assessment of the price. There are no checks and balances if a firm decides to sell similar packages to different customers at vastly different prices. There may be wide variation between price points depending on the nature of the product, the service provider and the end-customer,” he points out.

Accounting Standard X
That leads to the question of accounting practices and standards. Take a simple case of cost of completion method of accounting where, if you start recognising revenues but do not book all the costs or do not book the real costs, you could constantly have inflated profits. As Tushar Chawla, Partner, Economic Laws Practice, a law firm, says: “The most common malpractice observed in IT companies seems to be the reporting of inflated figures, done by booking fictitious income, i.e., income from nonexistent customers or inflated income from existing customers.”
He cites a multinational IT major that had inflated revenues by booking sales of software licences that were actually transferred to a related distributor. Satyam seemed to have gone a step further by showing fictitious cash and bank balances. So, why should an IT company do all this—book fictitious exports, inflate income etc? Money laundering. “A lot of IT companies are merely incorporated as shell companies that are actually laundering money,” says Chawla. According to him, a nexus has emerged between the export earnings of IT companies and money laundering transactions, with a large number using hawala for showing export incomes.

Without naming any company, he says this could be driven by the fact that, with export earnings and earnings per share shrinking, promoters are more likely to show inflated income either to get good finances or to exit. This again, Chawla says, would not be happening in big companies but in small ones with revenues of $10-100 million. Listed entities, especially. “This also allows the promoters to convert their cash into official export income at a low premium without paying any income tax,” he says.

However, Indian IT does not mean just the Big Four or Big Five. According to NASSCOM’s recent strategic review 2009, the Indian IT-BPO export industry has seven players with revenues over $1 billion each. They accounted for over 47-48 per cent of software and services exports in fiscal year 2008.

Then come 75-80 mid-sized players (revenues $100 million-$1 billion) who account for 35-37 percent of total exports, and 300-350 emerging players (revenues $10 million to $100 million) with a 7-8 per cent share, and over 3,500 small and start-up companies with revenues less than $10 million who account for 8-10 per cent.

Rivers of cash
As Banerjee of Fox Mandal Little says: “The IT sector is export-oriented and very cash rich. Naturally, the cash and receivables management takes a key role. …It makes it easier for the companies to move the liquid cash from one company to another, especially through various investment vehicles and structures.” “There are possibilities of overand under-invoicing and cross border fund mobilisation and movement,” he says. Because of the rapid expansion of the sector and its export-earning capacity, the regulatory system and accounting practices are often not fully operationalised.

“That keeps loopholes for informal movement of currencies through several devices,” he says. Auditors stress the need to be very careful in making an invoice and tracking work-in-progress as well as receivables. Are the IT companies doing so? Four months ago, who knew what was happening at Satyam? There is good reason, therefore, that B.V.R. Mohan Reddy, Chairman and Managing Director of Hyderabad-based Infotech Enterprises, an IT solutions provider, says: “The systems and processes we have at this point are good enough but there has only to be a rigour in following them.” Banerjee points out that the IT majors have “a high degree of internal checks and controls and people like compliance officers, risk assurance officers and revenue leakage assurance in place to ensure that accruals of revenue are genuine and accurate.” Also, it is not as if companies are free from external checks, says Banerjee. IT companies are not totally tax-free.

As the IT sector waits for the Satyam report card, it is ironic that a company whose founder believed in speed and detailed metrics finds itself stuck in netherland. There is no Raju to preach his favourite metrics: the 6 Ps (people, process, product, proliferation, patent and promotion), 5 Rs or the service outcome attributes (faster, better, cheaper, larger and steadier) and the various indexes. The abstract defined. The definable abstracted.
Source

Coming Age Of Default

2009-03-24T23:55:00.000+05:30

Traditional banks in the West never thought twice about lending to their rich clients. They understood that rich people’s incomes went up or down while their desires brooked no waiting. If a country house caught a client’s eye or he felt like sailing to Grenada with his paramour, all he had to do was to take his banker out for lunch; everything could be settled in an hour. Though not so readily at their clients’ service, Indian banks took an equally benign view.

That suddenly changed after the 1971 nationalisation. Favours to personal clients came to be frowned upon, and close relationships with them looked on with suspicion. Nationalised bankers soon learnt the lesson, that they were serving the great socialist god and must finance projects of national development. Consumption was evil; financing it was treason. An occasional overdraft might be given after an old depositor had kowtowed suitably and given solid collateral; but it must be recovered before too long.

This new patriotic morality was first diluted when the government issued licences to a few private banks in the early 1990s. They found it difficult to penetrate the longstanding relationships between nationalised banks and their clients; few businessmen would have dared to enrage the government bank that had been his principal source of credit for ages and move to an untried little private bank. Thus frustrated, some of the private banks started to consider personal loans against solid security.

The 1990s were also the time when credit cards began to catch on in India; and since the Reserve Bank made it difficult for others to enter the business, banks captured the credit card business. It involved personal credit, but under restrictive conditions. Most of it was for less than a month; if a customer did not pay in time, he would soon find his credit card cancelled.

Then came the slowdown of 1997 and after; business borrowings could no longer keep up with banks’ lending capacity. Businesses stopped repaying loans. The hard way was to write off bad debts; banks naturally preferred the soft way, which was to give more loans — they brought down the ratio to credit of ‘nonperforming assets’, in other words, bad debt.

In the late 1990s, the balance of payments began to improve, and foreign exchange reserves started rising. As they rose, domestic money supply increased. Businesses’ cash balances went up, and they needed to borrow less. The government grew more relaxed, and allowed businesses to borrow abroad; so they needed domestic banks less. As business loans slowed down, banks began to give personal loans. The growth in personal credit was phenomenal. Its share in new loans was roughly a quarter in the early 1990s. It went up to a third by the end of the decade. By 2005-06, it had risen to an astonishing two-thirds. Its share in total credit rose from about 9 to 23 per cent.

That was the time the government dismantled the barriers it had created in the financial markets, which had reserved housing loans for specialised institutions. Banks took to housing loans with relish; their fervour increased when the housing boom began in 2002. By 2005-06, half of the banks’ personal credit was going to real estate. Car loans also caught on, though banks faced competition from the car manufacturers, who set up their own car finance arms.

The number of credit cards has gone up from 3.7 million in 2000-01 to 27 million. But the business remains relatively small. Indians are typically cautious borrowers. They are aware of the extortionate interest banks charge on credit card debt. Most of them got credit cards from obscure sales agents who make themselves scarce once they have collected their commission; and credit card holders are scared of unauthorised collection agents. So they borrow little on credit cards.

Now, a downturn is beginning. If the economy turns down, bad debts cannot be far off. As early as in 2007, there were stories of banks engaging hooligans to repossess cars; the courts frowned on them, and they seemed to have slowed down. But personal loans will turn bad as surely in the coming slump as business loans did in earlier downturns; and banks will find it even more difficult to deal with personal borrowers than they did with businessmen. For there are many more personal borrowers, and being more numerous they are more difficult to pursue and have more political influence. Amongst those who worry about this is Asset Reconstruction Corporation of India, which has prepared a white paper on retail lending. Good luck, Arcil!
Source

No sign of deflation

2009-03-24T22:28:00.001+05:30

The fall in the rate of inflation in terms of wholesale price index to below 1% in the first week of March, 2009 does not signal the onset of deflation and “could be the result of the high base effect of inflation” which stood at 7.78 per cent during the corresponding week of March 2008, the Cabinet Secretary, KM Chandrasekhar said in New Delhi on Thursday.

Speaking to mediapersons after inaugurating the National Conference on ‘Common Service Centres: The Change Agents’ organised jointly by the Department of Information Technology, Ministry of Communications & IT and the apex industry body, FICCI Chandrasekhar said: “I do not see any signs of deflation, as demand for certain core sectors like steel, cement and automobiles is picking as also rural demand. The inflation trend clearly shows that the stimulus packages rolled out by the government are starting to show results,” adding that only those sectors heavily dependent on overseas demand would take time to pick up.

The two-day conference will deliberate on ‘Augmenting agricultural services through CSCs’, ‘e-Governance services’, ‘Addressing healthcare challenges in rural India through CSCs’, ‘Rural development and financial inclusion’, ‘Increasing access to education’, ‘Innovative and new services ‘, and ‘Infrastructure framework for CSCs’.

Reacting to the latest wholesale price inflation figure released by the government, the President of another apex industry body Assocham, Sajjan Jindal, in a press statement said that it was heartening to note that it had slipped to 0.44% but its reflection on primary food articles was yet to noticed because the weightage of inflation on them was still between 6-7%. He said that the reduced inflation had shown its impact on prices of metals especially copper, zinc, aluminium and even in steel and cement and also manufactured goods whose prices had come down.

“The only concern is that the common man has yet to stand beneficiary on this record inflation rate but it will take some time to reduce the weightage of inflation on prices of essential commodities. The Assocham foresees the next impact of reduced inflation on further relaxation of interest rates,” he said hoping that the Reserve Bank of India would take a cue from it and might as well take a few more monetary measures so that India witnesses one more interest cuts to boost demand and infuse liquidity in the market.

The FICCI President, Harsh Pati Singhania said, “Inflation rate has been coming down over time and these latest numbers are not entirely unexpected. However, the fact that WPI has come down to 0.44% on a year on year basis despite prices of food articles going up by 7.3% on a year-on-year basis shows that inflation in case of other products has declined significantly. The high base effect also has a role to play in this case as inflation stood at 7.78% during the corresponding week of the previous year”

He further said, “Looking at the weekly variation in the price indices, we see that prices of primary articles, both food and non-food products, have indeed moderated. The fall in prices in the case of primary articles is largely supply driven as reports from different parts of the country show that market arrivals for different agricultural products have been reasonably good”.

Within the primary articles segment, it is the non-food articles whose prices have seen a substantial decline by 2.1%. Prices of food articles have also shown a decline though the fall here is a moderate 0.7%.

“Given that the Rabi crop is expected to be good, we expect that the price line in case of primary articles would remain under check for at least the next two months”, said Singhania.

“In view of the receding inflation levels, FICCI would once again urge the RBI to further ease the monetary policy to aid the industrial sector. Further, in view of the evolving situation the banks must shed their conservative stance with regard to lending to corporates and consumers. In fact the RBI and the government should embolden and incentivise the banks to direct resources for productive purposes,” he added.

“What is particularly worrisome is that given the present inflation rate and the interest rates being charged by banks, the real rate of interest in the economy is at double digit levels. The banks must lower the lending rates to single digit levels if economic activity is to be stimulated,” said Singhania.

The Cabinet Secretary said his scheduled meeting with bankers this month end would review the credit disbursal situation and suggest ways to increase the liquidity flow to the industry for stimulating demand and investments. In this context, he said, the public sector banks have been far more active in the disbursal of credit to industry and hoped that the private banks would play their role in bringing down lending rates.

Asked whether there was any possibility for the Reserve Bank of India to cut the CRR further, the Cabinet Secretary said, “It is for the RBI to decide what measures it would want to take”.

Earlier, while inaugurating the conference, the Cabinet Secretary pointed out that the Common Service Centres (CSCs) initiative was envisaged not only as an instrument, but for catalysing and achieving inclusive growth and rural empowerment as well. The initiative, he said, aimed at providing a broad-based and inclusive platform for empowering the citizens while at the same time enabling the government, private and social to align their social and commercial goals to harness opportunities at the bottom of the pyramid.

He said, the network of 100,000 CSCs, linked by broadband and created on an innovative public-private partnership (PPP) format, was expected to emerge on its completion by year-end, as a key governance, development and empowerment platform whereby bthe potential of rural India and citizens could be gainfully harnessed.

He said the scheme was likely to generate over 400,000 direct jobs opportunities, as well as indirect employment avenues of a like number in rural India. The scheme was structured to promote rural entrepreneurship. By creating appropriate support structures that enable demand driven services as well as capacity building and training, rural entrepreneurs can be empowered to as change agents for rapid socio-economic change in rural India.

The inaugural session of the conference was also addressed by the Secretary, Department of IT; Jainder Singh, Special Secretary, Department of IT, R Chandrasekhar and Joint Secretary, Department of IT, Shankar Aggarwal.

The world is not flat

2009-03-16T20:55:00.000+05:30

Tom Friedman has got his challenger. The world is not flat, says the World Bank, in its latest World Development Report.

And don't you believe in the "death of distance", because distance from a centre of economic activity is a critical factor for both people and geographies.

Indeed the report, titled "Reshaping economic geography", argues that development is almost always concentrated -- and that is the way it is meant to be. So governments should be encouraging such concentration by facilitating migration and building the infrastructure that helps the process (like transport linkages).

It cites Tokyo-Yokohama's dominance of the Japanese economy and Cairo's in Egypt to make the point, though the Report does not seem to argue a 'cause and effect' sequence that goes beyond merely recording a fact that is obvious.

And yet, readers will immediately recall the success of China's coastal strategy, which was deliberately designed to encourage concentration of economic activity, and worked--one of the thoughts behind India's official support to special economic zones.

The report challenges some long-established notions, especially in India where the spatial distribution of industrial activity has been part of official policy for more than half a century.

There is the effort to "provide urban facilities in rural areas" (or Pura); there is Narendra Modi with his notion of a "rurban" (rural-urban) model for Gujarat; and variations on these themes.

The report does not necessarily disagree with such initiatives, arguing that policies should encourage inclusive growth and try to equalise standards of living across geographies. But that would seem counter-intuitive when it argues at the same time that uneven development is an inescapable fact of life.

The report is likely to provoke debate, and its authors say that it is meant to be a starting point for discussion, not a final argument.

Certainly, India has seen that the cluster logic works for many industries (Tamil Nadu as an auto hub, Bangalore as an IT-driven city, and one-industry towns that dot the country like Moradabad and Tirupur).

More importantly, the country needs to figure out how to make its cities work better (the correct pricing of land and the development of mass transport are crucial, and on both points realisation is only slowly dawning on politicians and policymakers), how to finance urban development in a self-sustaining manner, and how to make the divisions between rich and poor more porous within a city so that habitations do not become completely stratified.

But there will also be debate about the changing nature of the city (de-industrialised, and service-driven), the drift to suburbia, the move to off-centre, campus-style office complexes, and what each of these means for concentration.

As with all World Development Reports, there is a set of tables that provide inter-country comparisons on some basic parameters.

India now figures about two-thirds of the way down the list of about 130 countries when it comes to per capita income (it used to be 16th from the bottom when the WDR first came out three decades ago, but there were fewer countries then), and just about scrapes into the category of 'lower-middle income' countries with per capita income of $950 (for 2007).

In total economic size, it is the smallest among the Bric economies, being fractionally behind Russia and Brazil. It therefore ranks 12th as an economy, 25th as an exporter, 20th as a recipient of foreign investment, and gets one dollar per capita as official aid (lower-middle income country average: $9). It has the fifth highest external debt, but that debt is just 15 per cent of GDP (low- and middle-income country average: 75 per cent).

And the maximum numbers of out-migrants in the world are from Mexico, China and India, followed in short order by Iran, Pakistan and Indonesia. On most millennium development goals, India is better than the low-income country average, but worse than the typical lower-middle income country figure.

And in case anyone is still in the mood for chest-thumping, India's per capita income is about one-eighth of the world average.

Source

Economic slowdown: Is the end in sight?

2009-03-16T19:34:00.002+05:30

The numbers for the Index of Industrial Production for January 2009, released Wednesday, are along broadly expected lines. The overall index dropped by 0.5 per cent from its level of January 2008, while the manufacturing component, accounting for about 80 per cent of the index, dropped by 0.8 per cent.
Along with the significant upward revision to the December numbers, which saw the estimated growth from December 2007 change from -2 per cent to -0.5 per cent, these relatively small negative numbers give the impression of a bottoming out of the decline. Indeed, they suggest that the stringent credit conditions that emerged in October, and contributed to the decline immediately afterwards, have begun to ease and producers are now using low input prices and interest rates to replenish depleted inventories. If this is the case, it is indeed good news for a beleaguered economy and its prospects for the year ahead.
However, the numbers need to be understood in greater detail, and must be interpreted with caution. In the first place, if these numbers were in fact a precursor to a bottoming out, they suggest that the transmission from policy action to economic response is lightning fast.
Monetary policy turned pro-growth in October. There was also a significant fiscal stimulus around the same time, as the government paid out a part of the arrears on account of the implementation of the Sixth Pay Commission recommendations. This, it appears, is having some impact.
The numbers for consumer durables production have shown an increase, though small, in contrast to the negative pattern seen for this category over the past few months. Perhaps government employees who received their arrears are doing the right thing by the economy and using them to buy new appliances. As the implementation spreads to state government and public enterprise employees, this suggests significant support to some sectors.
On the broader issue of transmission lags, though, the implied speed of the process raises some questions. Of particular interest is the surge in the industry segment machinery and equipment, which grew by 17.5 per cent over January 2008. This took the capital goods category to a growth rate of 15.4 per cent, completely against the grain of the past few months.
This number is, in fact, reminiscent of the investment boom of a couple of years ago. It would be greatly reassuring to policymakers and investors if machinery production were surging in the current environment. But, in the midst of all the news that is coming in from companies, banks and other players, it stretches credibility.
The aberration is even more striking when compared with the performance of other industry segments. Only five of the 17 showed positive growth. Metal products and transport equipment, both driven by the factors similar to machinery and equipment, declined by 4 per cent and 13.4 per cent, respectively, over January 2008. Cotton textiles declined by 8.5 per cent, as did sectors which have relatively high export content, like leather and leather products. Even food processing, typically seen as a relatively stable segment, declined by a huge 16.1 per cent.
In short, take away the machinery and equipment segment and the decline in the manufacturing sector would appear much more drastic. Quality and consistency issues apart, the conclusion that a bottom is being reached seems premature.

Source

Scam Inventors Handbook

2009-03-14T17:04:00.002+05:30

From a certain perspective, stockmarkets are sponsored programmes run by bulls, bears and competitors using and electronic media to manufacture scams in order to transfer wealth from small and marginal shareholders to the perpetrators of these rumor mills. By way only of illustration, between 20 January and 10 February, Educomp lost some Rs 1,800 crore of market capitalisation based on reports published in one newspaper. The previous day, 19 January, the market saw a 67 per cent jump in short sales of Educomp shares in the forward market. What happened is a text book example of a self-fulfilling prophecy that can be usefully duplicated in a quest for wealth in these depressing Satyam Scam tainted times. Here is how it is done.

Act One: Make a laundry list of allegations based on half truths and if this means tearing facts out of context, or ripping random facts out of annual accounts, so be it. Start circulating anonymous e-mails to all and sundry, ensuring at all times to pander to the Indian love of conspiracy and scandal in high places. This will start a small rumour mill. If experience is any guide, I am afraid this is going to pay only marginal dividend, but this will bring together a disparate group of antagonist interest who will now start collaborating through mails, responses to mails, blogs and party gossip. After all, everyone wants the world to know that he has the inside track and what better way to do it than to pretend you know more than the next punter. Eventually, this process will culminate in a much refined list of slander that distills the wisdom of a large population of contrarian minds. The masala has been prepared.

Act Two: Take a massive short sale position on your target’s shares. This is a blood sport, but the bout can only go one way, or at least for enough rounds for you to square your position. Now you are ready to go.

Act Three: Find a paper that will publish these conspiracy theories. Corruptible journalists are probably hard to find in respectable print media but journalists are under considerable pressure to find a big story and gather in some readership. Compulsions sometimes overtake judgement, even with the best of motives. Split the information in easy digestible packages and launch the first attack by trying to draw a parallel between the half truth data you have and an attention grabbing scam…like Satyam. It’s idiot proof: everyone will read anything that looks like Satyam whether or not they believe it and you will get your headlines.

Trust me, your target’s response will be laughable. They will try to visit the newspaper and they will produce reams of paper to show that its conclusions are not supported by admitted facts. What can a journalist do under such circumstances? Promptly admit it may be completely wrong and lose its credibility? Or politely accept the PR visit, smile, cooperate, ask for more data and publish another follow-on exposé the next day? The only bandwagon you can get off is one that isn’t moving.

Act Four: This is the tricky part. Your initial exposé isn’t going anywhere unless other papers and the electronic media pick it up. With a little luck, it is possible to get the press to reproduce 50-word briefs of the first news report. News TV may be easier to get to: scams real and unreal fit well into their sound bite format, and besides they have 24 hours to fill. A potential national scam is just so much more interesting than the wisdom of some halfwit godman in some nondescript town in western UP. I can bet you the 24x7 TV channel will soon have the journalist who ‘broke’ the story in a programme titled ‘Fist Fight’ or ‘Full Contact’ or similar featuring well-known talking head. TV presence brings fame and fame in today’s world feeds on itself: it brings public access and access is credibility. Suddenly, the story-breaking journalist is not so small: he is going to be seen, he is going to be heard, and his exposure will create its own momentum. German politician and Reich Minister of Propaganda in Nazi Germany (1933-45) Joseph Goebbels once said “a lie repeated often enough is truth”.

Be aware that the target can do nothing about this situation. Sure, the target’s management will hyper ventilate and ask a lawyer if they can sue for defamation. Yes, they will be told, offering a 20-year time frame to win a case based on provocation that will have done its damage in 20 days. The target will ask if it’s possible to get interim protection. Not really, they will be told, the freedom of the press is not to be lightly tampered with. The media circus will play on.

Act Five: It’s time to step it up. If the journalists don’t do it, get a small shareholders forum to aggressively approach ministers and bureaucrats: ask them what they are doing about the next Satyam. You know that extinct is the politician who will be seen defending someone accused of a scam in a public place for a non-commercial reason. You will be sure that you will get your ministerial statement promising a thorough investigation of the alleged scamster.

At this point, you should be good for payback. If the target’s shares are not yet in free fall, you are not out of tricks in your bag. You can still get someone to ask a question in Parliament. You know how that is done, or where were you between the summer of 2008 and Aaj Tak?

Do I believe that with wide publicity in the print and electronic media, a statement by the government that they will investigate and a question in Parliament, shareholders are still utterly implacable, watching the whole monkey circus with a placid sense of superior self belief? I don’t think so. You are going to have blood on the stockmarket floor and you can square your position pronto. It doesn’t matter what happens thereafter. Maybe the investigation draws a blank but by then no one will remember what started it all.

It does not hurt that since man was genetically engineered, none has appeared yet that was so clean he had nothing to hide. Gandhiji slept with some strange company and many of his kids didn’t dote on him so much. If something does come out in the investigation, you can gloat and say ‘I told you so’. If nothing comes out of it, you would be so busy counting your short sale earnings you won’t notice.

Source

Calling For Innovation ,Change in regulations can boost derivatives trading at NSE

2009-03-14T16:26:00.006+05:30

A falling stockmarket can have a positive side to it too. Traders, including individual investors, have increased participation in a segment of the derivatives market that until recently was insignificant: index options. But the absence of a bouquet of products compared to other international derivatives markets has limited its scope. Currently, the equity derivatives market is the only financial market in the country where there is enough regulatory scope to enhance innovativeness in the products offered to the market players and investors.

Since February 2008, the share of trading in index options, predominantly options on S&P CNX Nifty 50 index (Nifty), has risen about four times. Interestingly, this has come about at the cost of the Indian speculator’s favourite: futures in individual stocks, where the traded value has more than halved (see ‘Emerging Trend’).

The downward movement in stock futures has shifted traders’ attention to options contracts, which are less risky than naked futures if one is buying a put or a call option. “Since a year when equity markets have been on a slide, traders have found that it is difficult to gauge the market movement, and find themselves quickly out of the game,” says Gurudatta Dhanokar, head strategist of derivatives at Almondz Global Securities. “So, they have preferred to dabble in buying options, particularly index options, where they know their maximum losses upfront.”

In options trading, the price paid is the market-determined premium. If one buys a call option on Nifty that has a strike price of 2,500, one pays just the premium amount (say 25). If the Nifty goes down by over 25 points the call option buyer’s loss will still be restricted to the 25 premium as he cannot exercise his loss-making option on expiry.

Index options contracts are also the most active equity derivatives contracts the world over. Eurex, Euronext Liffe, Korea Exchange, Australian ASX Derivatives Exchange, Hong Kong Exchanges, Borsa Italiana and Brazilian Bovespa are among the largest equity derivatives exchanges. Their combined notional turnover in 2008 (till November), according to the World Federation of Exchanges, in index options was the highest at $42.9 trillion, followed by that in index futures at $13 trillion, in stock options at $3.4 trillion and in stock futures at $1.1 trillion.

Time To Move Forward
With Nifty options and futures turnover overtaking that of stocks derivatives, NSE should seriously think of aligning with world trends to keep the growth momentum going. NSE faces tough competition from Singapore Exchange (SGX) in Nifty futures (see ‘Early Bird’, BW, 5 January 2009). “Because of the October 2007 restrictions on foreign investors’ participation through structured products on onshore Nifty futures and options, the market has moved to Singapore’s dollar-denominated Nifty futures,” says Vipul Dalal, country head of Mumbai-based Elara Securities, a subsidiary of London-based Elara Capital. Dalal points out that the turnover in SGX’s Nifty futures contracts has grown multiple times in the past 17 months and is near to overtaking the onshore Nifty futures turnover.
BW learns from sources that NSE is ready to compete with SGX if given a level-playing field in terms of product design and removing restrictions on foreign participation. “Big banks and hedge funds build synthetic hedges around the US dollar-denominated SGX-listed Nifty futures and that business can come into India if regulations allow it,” says Dalal. This can happen if Sebi moves fast on giving approvals to NSE’s proposals.

Tapping OTC Market
The demand for structured products demand also connects to trading volumes taking place in the wholesale market, or over-the-counter (OTC) market. Internationally, New York Mercantile Exchange (NYMEX) and NYSE Euronext Liffe are actively tapping the OTC equity derivatives market in the US and Europe, respectively. In 2004, Liffe realised that equity derivatives volumes in Europe were shifting away from the exchanges and estimated that about 80 per cent of it was happening through OTC market. In OTC market, the International Swaps and Derivatives Association had offered support to attract investment banks and funds to do derivatives OTC.

“But we saw that as an opportunity to do the exact opposite — to get them on to exchange-traded platform,” says Fraser Cowie, executive director of trans-Atlantic business development at London-headquartered Liffe division of NYSE Euronext.

In early 2005, Liffe introduced a single clearing platform, Bclear, for OTC trades in equity options spanning across 13 European markets. “Here, we don’t match trades but you book the trade and get it reported and cleared through us,” says Cowie. “The cost of processing is kept low.” Cowie believes the exchange-traded platform and OTC platform have a positive effect on liquidity on each other, because of the increased visibility of OTC trades. The trading volume in OTC equity derivatives on Liffe was €783 billion (about Rs 52,24,900 crore) during the 14 month between January 2008 to February 2009 compared to the exchange-traded turnover of €2,357 billion.

The Liffe model can be replicated in India. “Wherever humanly possible, the derivatives trades should be exchange-traded, but where OTC trades occur, they should be routed through a central clearing counterparty,” says Ajay Shah, senior fellow at the Delhi-based Institute of Public Policy and Research. “A clearing corporation will collect margins and ensure there is no mess if a Bear Stearns collapse-like scenario occurs,” says Shah.

In equities, OTC trades scenario is only felt in terms of attracting the overseas OTC trades structured around a Nifty futures or a NSE/BSE-listed stock. For it to become a reality, Sebi will have to amend the Securities and Contract Regulation Act to allow derivatives trades to take place outside the exchanges.

Minor tinkering of existing products can help. Physical settlement of stock derivatives, instead of cash-settled contracts can help arbitrageurs and hedgers. The equity derivatives market is the only financial market in the country where the trading volume counts among the top 5-10 markets in the world. But to stay there, Sebi needs to broaden its regulatory framework for market-demanded products and features.

Source

Blame economists, not economics

2009-03-14T11:26:00.001+05:30

Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks - at least those used in advanced courses - are fine.
As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. Rightly so: economists have plenty to answer for.
It was economists who legitimised and popularised the view that unfettered finance was a boon to society. They spoke with near unanimity when it came to the 'dangers of government over-regulation.' Their technical expertise -- or what seemed like it at the time -- gave them a privileged position as opinion makers, as well as access to the corridors of power.
Very few among them (notable exceptions including Nouriel Roubini and Robert Shiller) raised alarm bells about the crisis to come. Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. On Keynesian fiscal stimulus, economists' views range from 'absolutely essential' to 'ineffective and harmful.'
On re-regulating finance, there are plenty of good ideas, but little convergence. From the near-consensus on the virtues of a finance-centric model of the world, the economics profession has moved to a near-total absence of consensus on what ought to be done.
So is economics in need of a major shake-up? Should we burn our existing textbooks and rewrite them from scratch?
Actually, no. Without recourse to the economist's toolkit, we cannot even begin to make sense of the current crisis.
Why, for example, did China's decision to accumulate foreign reserves result in a mortgage lender in Ohio taking excessive risks? If your answer does not use elements from behavioural economics, agency theory, information economics, and international economics, among others, it is likely to remain seriously incomplete.
The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.
They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks -- at least those used in advanced courses -- are fine.
Non-economists tend to think of economics as a discipline that idolises markets and a narrow concept of (allocative) efficiency. If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter.
But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture.
Labour economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity. Trade economists study the implications of globalisation on inequality within and across countries. Finance theorists have written reams on the consequences of the failure of the 'efficient markets' hypothesis.
Open-economy macroeconomists examine the instabilities of international finance. Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better.
Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigour.
Sadly, in view of today's needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.
Economics is really a toolkit with multiple models -- each a different, stylised representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation.
Economics' richness has not been reflected in public debate because economists have taken far too much license.
Instead of presenting menus of options and listing the relevant trade-offs -- which is what economics is about -- economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favouring one set of social arrangements over others.
Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they 'empower the barbarians.'
No economist can be entirely sure that his preferred model is correct. But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required.
Paradoxically, then, the current disarray within the profession is perhaps a better reflection of the profession's true value added than its previous misleading consensus. Economics can at best clarify the choices for policymakers; it cannot make those choices for them.
When economists disagree, the world gets exposed to legitimate differences of views on how the economy operates. It is when they agree too much that the public should beware.
Source

Surviving a bear market

2009-03-10T20:01:00.000+05:30

Though there is no clear definition of a bear market, in India such phases have lasted anywhere from 56 weeks to 84 weeks, with the market losing between 41% and 57% from the peak levels. Here are some ways to survive the meltdown.
Non-equity investments
With equity losing steam, investors are looking to park their money in cash, fixed deposits and real estate. Among these, cash is the favoured option despite the low returns that it offers. Though some may look at gold as an alternate investment, it does not have any correlation with equities and should be an investment irrespective of the direction the market takes. Here is what the non-equity options offer and the things that one must keep in mind while investing in them.
Cash
Safe haven in short term.
Returns from cash and cash equivalents are very low.
Cash funds are generally safe, but during the credit crunch of 2008, even they felt the heat.
Remember
Falling interest rates affect returns.
Cash funds carry a credit risk.
Rising inflation reduces the value of the cash holding.
Property
Falling interest rates mean cheaper borrowing.
Rentals provide steady source of income.
Less risky than equities, but more risky than FDs.
Remember
Property prices could be as volatile as equities.
High prices mean that rental yields are very low.
Difficult to sell quickly.
Fixed deposits
Low-risk option.
Provide steady source of income.
Diverse options and maturities:
- Govt bonds, bank or corporate FDs
- Short-, medium- and long-term
Remember
If interest rates rise, investor loses out.
It's best to invest in bonds of varying terms.
There's a credit risk if bank or company goes bust.
Inflation eats into the value of investment.
Equity investing strategy in bear markets
Having suffered heavy losses in stocks, many investors want to keep off equities. But there are ways in which you can invest in stocks with minimal risk. Investing in dividend yield stocks, defensive sectors and funds with holdings across market capitalisations can help make money in a volatile market.
Dividend yield stocks
Depressed share prices push up dividend yields.
Dividends can compensate for the fall in share prices.
The dividend yield acts as a cushion, preventing the share price to fall beyond a point.
Remember
Dividends and payout ratio are not guaranteed.
Very high dividend yield could be because the share price has been beaten down.
Rising interest rates make bonds more attractive because they carry less risk.
Defensive sectors
Some sectors fare better during bear markets:
-Utilities
-Pharmaceutical
-Oil companies
-FMCG, tobacco manufacturers
Utility companies pay generous dividends, which help sustain share prices.
Remember
Most sectors tend to move in cycles.
Sectoral funds allow focused diversification. But understand a fund's objectives before investing.
For instance, a pharma fund could be investing in risky bio-tech companies.
Five alerts to detect bear market bottom:
1. Cash is king: At the bottom of a bear market, everyone agrees that cash is the best place for your money. Even fund managers hold stacks of cash. This money eventually enters the market, starting the next bull run.
2. Value is easy to find: PE ratios will be near historical lows. The average dividend yield will be high and share prices may be lower than book value. On 1 Jan 2003, the Sensex PE was 14.7, when the index was at 3,390.
3. Falling interest rates: Interest rates usually start falling at the end of a bear market. Lower interest rates eventually revive economic activity.
4. IPO drought: There are very few new issues (IPOs) at the bottom of the bear markets. Promoters prefer to wait for the market sentiment to revive before they go public in order to get a higher value for their companies.
5. Liquidity increases: Broad money supply tends to increase at the turn of the bear market. Money is the lifeblood of the economy. Increased supply tends to push up asset prices.

Source

Recession to last till 2010-end

2009-03-10T16:56:00.001+05:30

Be it living rooms or public transport, the one question that's on top of everyone's mind is the magnitude of the economic crisis and how long it will last. Some of these queries were answered on Friday by Nouriel Roubini, a leading economic forecaster and Prof. of Economics at NYU's Stern School of Business, at the India Today Conclave 2009.

Roubini, who had predicted the collapse of the US housing market and global recession three years ago, believes that all's still not well with the world economy even though the US has been in recession since the end of 2007. But unlike most other recessions, this one will be a protracted one, which is slated to last for a good 36 months.

With the world's largest financial institutions having collapsed last year, the world's financial system has suffered a cardiac arrest and the global economy is in a semi-comatose state. Despite billions of dollars being spent via stimulus and economic packages, the health of financial institutions is not getting better because US economic losses have touched almost $3.6 trillion, he said.

According to him, while the good news is that the International Monetary Fund is committed to not letting other large financial institutions go the Lehman Brothers way, the bad news is that the credit losses are so huge that it will be rather difficult for any upswing to result in a credible turnaround anytime soon. At present, $1.43 trillion will be required to recapitalise the ailing banking sector of the US, he said.

And if the policy responses are not coordinated and cohesive, the recession could well be L-shaped in nature and the pain could be protracted. The slowdown in emerging economies like China, Korea and India has conclusively proved that the decoupling theory is humbug. The world today is connected by trade, capital and financial channels. This is evident from the slowdown of both the capital and trade flows in these emerging economies. No wonder, their growth has declined from 7 per cent to 3 per cent; these countries have hard-landed already.

Roubini said if retail consumption is falling then corporates are saving cash and thereby curtailing capital expenditure and production. Consequently, job losses are mounting and people are not spending in fear. This has resulted in a vicious cycle and to end this, a collective response from the governments is required.

And if this was not bad enough, Roubini said that even if there is a recovery 12-18 months down the line, it will be warped by the supply side shocks. Commodity producers like oil producing countries have already cut down production. So expect oil prices to touch $100 as soon as the world economy begins to turn around. The only thing that can save the day is prudent and timely action by governments.
Source

There is nothing like recession , its just Rajnikanth started to save money

2009-03-09T13:06:00.001+05:30

Rajnikant Special
Rajanikanth makes onions cry.
Rajanikanth can delete the Recycling Bin.
Ghosts are actually caused by Rajanikanth killing people faster than Death can process them.

Rajanikanth can strangle you with a cordless phone.

Rajanikanth can play the violin...... ...with a piano.

When Rajanikanth enters a room, he doesn't turn the lights on,......... .... he turns the dark off.

When Rajanikanth looks in a mirror the mirror shatters, because not even glass is stupid enough to get in between Rajanikanth and Rajanikanth.

Brett Favre can throw a football over 50 yards. Rajanikanth can throw Brett Favre even further.

Rajanikanth does not know where you live, but he knows where you will die.

Bullets dodge Rajanikanth.

A Handicap parking sign does not signify that this spot is for handicapped people. It is actually in fact a warning, that the spot belongs to Rajanikanth and that you will be handicapped if you park there.

Rajanikanth' calendar goes straight from March 31st to April 2nd, no one fools Rajanikanth.

If you spell Rajanikanth wrong on Google it doesn't say, "Did you mean Rajanikanth?" It simply replies, "Run while you still have the chance."

Once a cobra bit Rajanikanth' leg. After five days of excruciating pain, the cobra died.

When Rajanikanth gives you the finger, he's telling you how many seconds you have left to live.

Rajanikanth can kill two stones with one bird.

Rajanikanth was once on Celebrity Wheel of Fortune and was the first to spin. The next 29 minutes of the show consisted of everyone standing around awkwardly, waiting for the wheel to stop.

Leading hand sanitizers claim they can kill 99.9 percent of germs. Rajanikanth can kill 100 percent of whatever he wants.

There is no such thing as global warming. Rajanikanth was cold, so he turned the sun up.
Rajanikanth can set ants on fire with a magnifying glass. At night.

It takes Rajanikanth 20 minutes to watch 60 Minutes.

Rajanikanth once shot down a German fighter plane with his finger, by yelling, "Bang!"

In an average living room there are 1,242 objects Rajanikanth could use to kill you, including the room itself.

Rajanikanth got his drivers license at the age of 16 Seconds.

With the rising cost of gasoline, Rajanikanth is beginning to worry about his drinking habit.

The square root of Rajanikanth is pain. Do not try to square Rajanikanth, the result is death.

When you say "no one's perfect", Rajanikanth takes this as a personal insult.

there is nothing like recession , its just rajnikanth started to save money

Bear market to end soon !!!

2009-03-01T13:23:00.001+05:30

Did I catch you on that ? are you expecting someone would be able to predict that for everyone ?
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.

Source

Dalal Street losing Rs 100 cr every 5 minutes

2009-03-01T12:10:00.000+05:30

After a whopping loss of over Rs 40,00,000 crore in 2008, the stock market is continuing its free fall and investors have lost an average of Rs 100 crore in every five minutes of trade in first two months of 2009.
Cumulatively, the total investors' wealth has got eroded by about Rs 2,82,000 crore so far this year.
However, the meltdown has been less severe so far this year, as compared to 2008 when an average of Rs 100 crore was wiped off in just two minutes of trade, as per an analysis of stock market losses during 2008 and first two months of 2009.
During 2008, the total investors' wealth, measured in terms of cumulative market capitalisation of all the listed companies, plummeted from close to Rs 72,00,000 crore to about Rs 31,00,000 crore.
So far in 2009, the investors' wealth on Indian bourses has gone further down to about Rs 28,60,000 crore, as per the current market value of the listed companies.
There were a total of 246 trading sessions in 2008, while so far in 2009 trades have been conducted on 39 days.
Taking into account a trading session of five hours and 35 minutes every day (markets open at 0955 hours and close at 1530 hours), an average of Rs 20 crore has been lost in every minute of trade so far this year.
This average was, however, more than double at Rs 50 crore in every minute of trade in 2008.
In terms of Sensex movement, the benchmark index has lost more than 750 points in first two months of 2009. During the entire 2008, the Sensex plummeted by more than 10,000 points.
However, if we take into account the price-earnings ratio, the Indian market seems to have become a bit more expensive in the first two months of 2009. It had become cheaper by more than half during 2008 by this measure.
The price-earnings ratio of the Sensex currently stands at 12.82, which is higher than 12.16 at the beginning of the year. However, it had fallen sharply during 2008 from 26.94 at the end of the previous year.
Source

It’s an emotional recession

2009-03-01T10:39:00.003+05:30

An illiterate old man in Mumbai runs a brisk trade selling pakoras at a busy intersection. He never watches TV and cannot read, but is smart enough to push his sales with clever pricing options. As his profits increase, he branches out into other snacks, recruits support staff and even begins delivering to nearby homes. At some point of time, he manages to save enough money to open up a small shop.
One day, the old man’s welleducated son—thanks to his father’s hard work, he’s enrolled in a local management programme—asks his father, “Dad, aren’t you aware of this thing called the meltdown?” “No,” the father replies, “but tell me about it.” The son quickly runs through the recent chain of events: subprime fiasco, bank failures, global recession, slowdown in India, decline in exports, car sales and a whole host of other things that are too complicated for the old man to digest. But he gets the drift. Businesswise, things are getting bad. The father immediately cuts down on the variety of snacks and reduces staff. Fewer people stop by to eat. Sales drop rapidly. The father gradually looses enthusiasm for the business and closes shop.
Some of the details in this madeup story are perhaps improbable— who, for instance, doesn’t watch television in India?—but the basic premise gives a very coherent picture of the psychology of consumers and business owners today. Much like consumers who were caught in severe financial meltdowns such as the Great Depression of the 1930s in the US, or the Asian meltdown in the late ’90s—a serious crisis of confidence is now gripping Indian consumers who are spending less in the face of economic uncertainty. This is grim news for businesses that have had to contend with a steep drop in sales and are now forced to shut shops and fire employees. Problem is, when fewer goods are produced, less income is generated, further decreasing spending ability as well as consumer confidence, thereby worsening the situation in a deadly, never ending vortex.
Following swiftly on the heels of the US, India is going through a crisis of consumption. Though the rate of consumption growth had almost tripled through the past few decades—from only 3 per cent a year in 1970-71 to 8.5 per cent in 2007-08—a deceleration in this growth is almost certain in the current year .
Naturally, this cutback in consumption is putting people on edge. “I am suffering from Recession Depression,” complains a top investment banker who says that he can’t remember the last time he closed a deal. “Forget cabs, five-star hotels and lavish office lunches, I’m carrying tiffin,” he complains. The slowdown has meant fewer trips to his hair salon and a resolute avoidance of end-of-the-season discount purchases. Clearly, this banker has lost his sense of job security and his appetite for shopping.
Other professionals across the spectrum seem to echo these woes. “I have been dithering for a while now on my much-delayed car change,” says Shariff Khan, an auto engineer-manager in Pune. For the last five years, head hunters badgered Khan with offers, which he gave little time or attention to. Then came the slowdown, and in early February, Khan decided to spruce up his resume, the first time in a decade. He also activated his dormant IIM Ahmedabad and IIT Delhi alumni networks. “You never know,” says Khan. This sudden loss of job security seems to be sweeping the corporate landscape in India. “Unless you’re sure you won’t lose your job over the next 3-4 quarters, you’re not going to buy a new house or car,” says Siddhartha Roy, Chief Economist, Tata Group. Psychologist and author Judith M. Bardwick calls this a psychological recession, “an emotional state in which people feel extremely vulnerable and afraid for their future.”
So, how exactly are people saving to get them through these bleak times? The BT Demand Survey shows that out-of-town travel and outside-of-home food is what people are cutting back the most on. An increasing number of puband-bar goers have downtraded to cafes. Spending on clothes, footwear and celebrations have shrunk, too. Footfalls—which is not the same as buyers—for Shoppers Stop during April-September 2008 were up just 1 per cent. Thirty-year-old Parul Ahluwalia, a private bank executive, is restricting her wedding celebrations to two days instead of three. One of the ceremonies is now to be held at a temple. “Though I may be able to keep my job, there surely won’t be a bonus,” says Ahluwalia.
This hesitation to spend is causing serious pain for businesses. A BT-CII producers’ survey shows just how bad the news is. Demand has shrunk for 90 cent of the respondents in the survey. Nearly 70 per cent rated lack of consumer confidence as the biggest economic problem today—several notches above credit unavailability. “Less than half the inquiries are converting into sales,” rues Rajiv Mitra, official spokesperson for the second-largest car maker Hyundai, although he says that the company has fared better than its peers. Sales are down at all price points for the car maker. “The big real estate developers used to be big buyers but we aren’t seeing them any more,” says Manishi Sanwal, GM, Louis Vuitton Moët Hennessy Watch & Jewellery India. The luxury product maker isn’t too alarmed yet, but admits that the small and medium entrepreneurs aren’t flocking to its outlets any more.
Consequently, companies are making some painful decisions. Ramesh Srinivasan, Executive Director, KPMG, says that companies are cancelling new product launches and cutting back on expansion plans. Retail chains, for instance, are shutting down stores. “It’s no longer wait-and-watch, but cancel,” he says. “An economy that was expanding at 10 per cent growth now has to adjust to 5 per cent growth,” says Subir Gokarn, Chief Economist, S&P, India. Latest available data on capital expenditures from the CMIE indicate that for June-September ’08, as many as 45 investment projects worth Rs 42,700 crore were abandoned or shelved, 20 more than the same period last year.
Cutbacks in production and consumption mean that offices have become stingier. The handset allowance for all of B.K Modi Group’s mid-level officers is down from Rs 10,000 a year to Rs 3,000. “Foreign magazines were disconbt tinued about the same time toilet paper was withdrawn and the joke was that the office didn’t want them misused,” says Ramanathan Bhat, a mid-level employee at a Bangalorebased CA firm. An unforeseen consequence of all of this is a rise in office politics; bosses are getting bossier. “Would you believe, I bumped into my arch rival at the shrink’s last weekend,” says a senior manager of an export house. Turns out, acute insecurity and sleep loss are the common diagnoses for both since only one will keep his job.
So, who looks like they’re doing okay? Rural and semiurban India seem to be immune to the “won’t-spend” virus. Sales of electronics, especially colour TV sets and soaps and shampoos, continue to remain healthy. “Newer markets beyond the top 35 cities are booming for us,” says Ruchika Batra, official spokesperson for Samsung Electronics.
The urban poor, however, are just as vulnerable as the upwardly mobile classes. 23-year-old Ravi Yadav, a flower-garland seller in Old Delhi, took home unsold flowers every single day in January. Gulabi, a 28-year-old sex worker in Mumbai’s red-light area of Kamtipura, where hourly rates go up to Rs 3,000 says: “The amount of work has doubled but rates have halved.”
Ultimately, this dangerous whirlpool effect of a consumption drop leading to a supply slide—and therefore more layoffs and more economic pain—can become a crippling, vicious spin cycle. This is where the government’s stimulus package can become vital bridges between short-term economic uncertainties and longer-term prosperity . Still, stimulus packages can only do so much. For a quick recovery, consumers need to put aside apocalyptic visions of the future, and go out and do what they’ve been best at so far—spend money.

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Satyam buyer may face three-year lock-in: Report

2009-02-28T12:05:00.000+05:30

Beleaguered software firm Satyam Computer Services' government-appointed board is considering the option of imposing a three-year lock-in clause while making a preferential allotment to a strategic investor, a newspaper report said on Saturday.
The aim was to discourage frivolous buyers, the report in Economic Times said.
"One option is to have a three-year lock-in on 26 per cent of the preferential allotment of shares to be made to a strategic investor," the report said, quoting an unidentified source privy to the development.
Current regulations by markets watchdog Securities and Exchange Board of India (SEBI) stipulate a one-year lock in for preferential issues.
Satyam's board is meeting in Hyderabad during the day to discuss client and staff issues.
Later, the board will also meet with its investment bankers Goldman Sachs and Avendus Advisors to discuss options for a strategic investor in the company.
Satyam board member and veteran banker Deepak Parekh has said details and criteria for prospective bidders would be finalised next week.
On Thursday, India's Company Law Board approved a request from the software company to raise its authorised share base and induct a strategic investor.
In an order the Law Board said the induction of the strategic investor must be carried out through a competitive price bid auction and Satyam could issue preferential shares at par or at a premium.
Meanwhile, chairman of the government-appointed board, Kiran Karnik, was quoted in the Financial Express on Saturday as saying: "Irrespective of the number of suitors, we would certainly give some basic financial information to them."
But detailed information on the finances would not be given as re-stating the company accounts would take some time, the paper said.
Potential suitors that have declared an interest include India's top engineering and construction firm Larsen & Toubro, Spice Group and the Hinduja Group.
NYSE-listed Satyam has been struggling for survival since January 7 when its founder and chairman Ramalinga Raju quit after revealing that profits had been overstated for years and assets falsified.
More clients quit
Separately, the Economic Times paper said that Satyam's two major clients Coca-Cola and GlaxoSmithKline have exited the company.
The paper said outsourcer Cognizant Technology Solutions would get the $35 million GSK contract, while Capgemini has bagged the $100 million, seven-year Coca Cola project.
"We would not like to comment on individual clients," a spokesman for Cognizant said.
Last week, Cognizant's chief executive had said that it was in talks with a handful of Satyam's customers, who had approached them. The paper said Capgemini confirmed that it had bagged the order.
Source

Rupee at historic low; why is it falling?

2009-02-28T09:55:00.000+05:30

The Indian rupee on Friday depreciated to an all-time low of 50.69 against the US dollar in early trade on continued capital outflow by foreign funds and increased dollar demand from importers.
At the Interbank Foreign Exchange (Forex) market, the domestic currency was quoted at 50.69 against the dollar, down 23 paise from its previous day's close.
Dealers said concerns of capital outflows by funds and increased demand for dollar from importers caused the rupee to weaken. They added that the dollar's gains against other major currencies also weighed on the domestic currency.
So what are the other reasons for the fall of the Indian currency?
Higher crude oil prices too have weighed in on sentiment. Oil refiners are amongst the biggest dollar buyers in the Indian currency market and the demand especially is at the high towards the end of a month as they make the payments for their imports.
Even a dip in the inflation figure did not help the rupee rise slightly. Inflation declined to about a 15-month low of 3.36 per cent mainly due to fall in the prices food articles like fruit and vegetables, pulses, and some manufactured items, raising hopes of cuts in the key policy rates by the Reserve Bank of India.
Meanwhile, the outlook downgrade by rating agency Standard & Poor's too has increased the risk of further depreciation of the rupee in the near term. S&P cut its outlook on India's long-term sovereign credit rating to negative from stable on Tuesday, citing worsening government finances, which could raise firms' overseas borrowing costs and weaken the rupee.
Morgan Stanley has predicted that the rupee could test 52-53 levels in the next 4 to 6 months on balance of payments pressures.
Demand for rupees, simultaneously, has dipped because capital inflows are down. The American sub-prime crisis that shook the global financial markets has seen unprecedented bailouts and infusion of dollars into the US economy.
This infusion has been at a cost of many an emerging market, from where funds have been pulled out to plough back into America.
India has been one of the worst hit countries on this count, as foreign funds took flight, thereby making dollars scarce. The sudden and colossal demand for the US greenback has seen it strengthen, while the rupee's exchange rate has depreciated dramatically during the same period.
India's stock market regulator, the Securities and Exchange Board of India, has said that foreign investors sold more Indian shares than they bought.
Global funds are said to have sold Indian shares to the tune of over $12 billion more than they have bought during the last few months year.
As demand for dollars from importers increased and the US Treasury poured in hundreds of billions of dollars into the floundering US economy to bail out drowning financial giants, the Indian market saw an outflow of a huge amount of dollars leading to a spurt in the dollar price against the rupee.
The growing Indian trade deficit and the large fiscal deficit are also contributing to the fall of the rupee. The demand-supply balance and the fundamentals are against the rupee.
One more reason for the fall of the rupee, as propounded by some economists, is the overseas non-deliverable forward (NDF) market that is not sanctioned by the Reserve Bank of India.
An NDF is a non-deliverable forward contract where financial institutions buy forward dollars (that is, they book dollars now for delivery at a predetermined future date) in the Indian market and at the same time sell a similar amount of dollars in an overseas market -- or vice-versa -- so that on the delivery date they make a profit or loss, which is the difference between both the rates.
The recruitment process for these jobs is expected to start soon.
How can India control the value of the rupee in the international market?
The Reserve Bank of India can sell dollars in the open market to bring down the value of the US greenback, albeit slightly.
Normally, the RBI uses its Monetary Policy to defend the rupee's value. Short-term interest rates changes do impact the value of the rupee against other currencies. But, the RBI has mostly used the policy to stabilise internal conditions, like steps to control rising inflation.
However, if the Indian stock markets boom -- like they did in 2007 -- more global funds would begin to invest in India thereby strengthening the rupee as the demand for the dollar in the local markets drops.
What has the RBI done?
The Reserve Bank of India is closely monitoring the developments in the global as well as domestic financial markets and stands ready to take such pre-emptive action as may be necessary to contain excess volatility in the domestic financial markets.
In order to alleviate these transient pressures which are related largely to external developments, the RBI has decided to take the following measures:
(a) Forex Market
In the light of current developments in the foreign exchange markets, as on some previous occasions, the Reserve Bank will continue to sell foreign exchange (US dollar) through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps. The Reserve Bank would either sell the foreign exchange directly or advise the bank concerned to buy it in the market. All the transactions by the Reserve Bank will be at the prevailing market rates and as per market practice.
(b) Interest Rates on FCNR (B) Deposits
Currently, the interest rate ceiling on FCNR (B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 75 basis points for the respective foreign currencies. In view of the prevailing market conditions, it has been decided: to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates minus 25 basis points; and to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 50 basis points.
But why do currency values fluctuate?
There are many participants in any foreign exchange market. These entities -- like banks, corporations, brokers, even individuals -- buy and sell currencies everyday.
Here too the universal economic law of demand and supply is applicable: when there are more buyers for a currency than sellers, its exchange rate rises.
Similarly, when there are more sellers of a particular currency than buyers, its exchange rate in the global markets will fall. This does not mean people no longer want money; it only means that people prefer to keep their wealth in some other form or another currency.

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The world's 10 freest economies

2009-02-27T21:04:00.005+05:30

The level of economic freedom in the world has continued to grow over the last year, with 83 economies representing every region posting gains in the 15th annual Index of Economic Freedom, says a study jointly done by The Heritage Foundation and The Wall Street Journal.
And what are free economies? Well, economies classified as 'free' or 'mostly free' do a much better job in promoting human development, reducing poverty and protecting the environment. According to the study, economic freedom is strongly related to good economic performance.
Per capita incomes are much higher in countries that are economically free, says the study. Economies rated 'free' or 'mostly free' in the 2009 Index enjoy incomes that are more than double the average levels in all other countries, it adds.
The ten components of economic freedom are: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labour freedom. So which are the world's freest economies?
India
India ranks 123rd out of 179 countries in the list; and in placed under the category 'mostly unfree'. India's economic freedom score is 54.4.
The study says India continues to move forward slowly with market-oriented economic reforms. It highlights that India had achieved a growth of about 8 per cent over the past five years, and is a leader in information technology and business process outsourcing. It scores on government size, labour freedom, and property rights.
India could improve in business freedom, trade freedom, financial freedom, investment freedom, and freedom from corruption.
Foreign investment is overly regulated, and the judicial system is burdened by backlogs.
Public debt and fiscal deficit also continues to grow. Starting a business takes an average of 30 days in India. Corruption is rampant in India.
The tax rates are high. Inflation is moderately high, averaging 6.1 percent between 2005 and 2007.
Hong Kong
Hong Kong's economic freedom score is 90, making it the freest economy in the 2009 Index. The study sees improvement in fiscal, trade and business freedom.
Hong Kong is known for its openness to global trade and investment.
The study highlights the entrepreneurial activity in Hong Kong which leads to such prosperity.
One of the world's leading financial hubs, the country is known for transparent and efficient regulation of banking and financial services.
Hong Kong's tax rates are among the lowest in the world. Business regulation is straightforward, and the labour market is flexible.
Starting a business takes less than half the world average of 38 days. Inflation is low, averaging 1.9 per cent between 2005 and 2007.
Property rights are protected by an independent judiciary, says the The Heritage Foundation study.
GDP (PPP): $267.8 billion
Singapore
Singapore's economic freedom score is 87.1, making its economy the 2nd freest in the 2009 Index.
The index highlights Singapore's openness to global trade and investment.
The economy has seen a consistent growth rate averaging over 6 per cent in recent years. Singapore has an ideal business environment and high level of entrepreneurial activity.
Regulations are good and promote business. Commercial operations are conducted with transparency and speed. Corruption hardly exists in Singapore. Starting a business takes four days in Singapore.
Inflation is low, averaging 1.7 per cent between 2005 and 2007.
GDP (PPP): $200.5 billion
Australia
With economic freedom score of 82.6, Australia is the 3rd freest in the 2009 Index. Australia scores high in almost all of the 10 'economic freedoms'.
Monetary stability, openness to global trade, competitive financial and investment environment are the highlights of Australia's strong economy.
Property rights are well protected, businesses enjoy flexibility in their licensing, regulation, and employment practices. Starting a business takes only two days.
Australia has a moderate corporate tax rate. Inflation stands at an average of 2.7 per cent between 2005 and 2007. Corruption is minimal.
GDP (PPP): $735.9 billion
Ireland
Ireland is the 4th freest in the 2009 Index with a economic freedom score of 82.2. Ireland's economy is open to global trade and investment.
It has an efficient business environment, attract huge foreign investment. Ireland scores high on financial freedom and freedom from corruption.
Financial markets are transparent. Property rights are protected by an efficient, independent judiciary. The corporate tax rate is a competitive 12.5 per cent.
Starting a business takes an average of 13 days in Ireland. Inflation stands at a low of 2.8 per cent between 2005 and 2007.
GDP (PPP): $171.9 billion
New Zealand
New Zealand, one of the most prosperous economies comes at the fifth position with an economic freedom score of 82.
The economic liberalisation in the 1980s and 1990s had deregulated its economy.
New Zealand's economy gets its boost from the agricultural sector, a strong manufacturing base and booming tourist industry.
Starting a business is very easy here, it just takes a day! Inflation is at 2.7 per cent between 2005 and 2007. However, New Zealand has high tax rates.
GDP (PPP): $106.8 billion
United States
The world's largest economy is ranked 6th in terms of economic freedom with a score of 80.7.
The US economy strength lies in business freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labour freedom.
The regulatory and legal framework boosts entrepreneurship. Financial markets are open to foreign competition and are dynamic and modern.
The judiciary is independent and of high quality. The economy lags in fiscal freedom and government size. Corporate and personal taxes are high. But starting a business takes only six days.
Inflation is low, averaging 3.0 per cent between 2005 and 2007.
GDP (PPP): $13.2 trillion
Canada
Canada scores very high in eight of the 10 'economic freedoms'.
It leads in business freedom, property rights, and freedom from corruption. The process for conducting a business is transparent and offers a good environment for entrepreneurial activity.
Canada lags behind the world average only in size and expense of government. Canada has elaborate social and welfare state programs that raise government's expenses.
Starting a business takes an average of five days, Canada has moderate tax rates. Inflation is low, averaging 2.1 per cent between 2004 and 2006.
GDP (PPP): $1.2 trillion
Denmark
Denmark is the 8th freest economy in the 2009 Index. With a economic freedom score of 79.6, Denmark scores high on eight of the 10 components of economic freedom.
The economy is open to foreign investment and trade. The regulations are transparent and efficient. Denmark also has an efficient and independent judiciary.
While the corporate tax rate is one of the lowest among members of the European Union, personal income taxes are very high, and the overall tax burden is significant, states the study.
There are few state-owned industries, but government spending equals over 50 percent of GDP. Starting a business takes an average of six days. Inflation is low, averaging 1.8 per cent between 2005 and 2007.
GDP (PPP): $194.0 billion
Switzerland
One of the world's richest and most investment-friendly nations, Switzerland has a economic freedom score of 79.4, making its economy the 9th freest in the 2009 Index.
Switzerland has one of the most competitive and flexible economies in the world. It boasts of an efficient business environment and high entrepreneurial activity.
The labour market is flexible. Switzerland has highly developed and well-regulated financial institutions. The economy is open to foreign investment and restriction apply only to few sectors.
The judiciary is independent and reliable. Starting a business takes 20 days here. Inflation is very low, averaging 0.9 per cent between 2005 and 2007
GDP (PPP): $278.6 billion
United Kingdom
The United Kingdom's economic freedom score is 79, making its economy the 10th freest in the 2009 Index. The economy is open to global trade and investment.
It scores very high on investment freedom, financial freedom, property rights, business freedom, freedom from corruption, labour freedom and trade freedom.
The average tariff rate is low and regulation is efficient. There are few restrictions on foreign investment. The financial system is well developed and the judiciary is independent and reliable.
Property rights are well enforced and contracts are secure. The UK ranks below the world average only in fiscal freedom and government size.
The disadvantage here is the high income tax. Starting a business takes 13 days. Inflation is low, averaging 2.3 per cent between 2005 and 2007.

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Solving a global crisis

2009-02-25T09:55:00.000+05:30

IMFRestarting the global economy through a widening of the US external deficit is not the best way forward.
The world saw a crisis coming. Just not this one. The widening US external deficit and the growing surpluses in China, Japan and other countries reflected major global imbalances that would eventually wreak havoc on the world. Some analysts predicted that the world would grow tired of funding the US deficit, causing the dollar to plunge, long-term rates on treasurys to skyrocket, and the US to go into a tailspin, bringing down the world.
A crisis did finally occur, but neither the dollar nor US treasurys tanked, yet things got really nasty anyway. The initial response to the crisis saw an unprecedented injection of liquidity by the Federal Reserve that was designed to normalize credit markets, but which others feared would cause inflation. Neither took place. Instead, things got worse.
So, what seems to be the problem? The best interpretation is that the 2008 aggravation of the crisis was triggered by major equity losses in key financial intermediaries, associated with a moderate correction in asset prices. These losses caused a rise in counter-party risk, triggering a major disintermediation process as investors fled towards safer assets. In the process, financial links were broken and spending collapsed precipitously.
During the previous boom years, the financial industry had become more concentrated (in terms of the number of players), more leveraged, and more globally diversified (in terms of assets), so that problems in the main players would be systemically large and have global impact.
So, what seems to be the game plan for dealing with the crisis? The investors’ flight to quality means that those issuing the safe assets are left as the sole remaining super-borrowers. These super-borrowers—the US and Japan, mainly—are the only ones left to re-establish financial links and rewire the system. Up to now, this has had two legs: propping up aggregate demand directly through fiscal reflation, and recapitalizing the banking system.
In the US, the recapitalization and reflation is planned mainly for the domestic economy. But the solution, to be effective, should also have a global character. Restarting the global economy through a widening of the US external deficit is not the best way forward.
A more sustainable alternative is to use the super-borrower capacity to reflate the global economy and to re-establish financial links globally. This can be done in several ways. First, multilateral development banks should be recapitalized—by issuing guarantees in the form of callable capital—allowing them to raise funds in global capital markets to lend to the developing world.
This would allow developing countries to compensate for the lost access to private markets. Loans should be disbursed quickly and conditional only on an ex- ante assessment of the soundness of their macro stance. They should be made in an amount sufficient to prevent the inefficient, pro-cyclical contractionary fiscal adjustment that is being caused by the lack of access to finance. Part of the capital raised could be invested in a diversified portfolio of private emerging market assets to provide for this asset class—what Ben Bernanke is doing to the US variety.
With this strategy, a global fiscal reflation can take place by preventing inefficient cutbacks in the countries shut out of finance because of the global crisis instead of relying solely on expansion in the structurally weak US fiscal position. Second, IMF should also be recapitalized so as to make sure that it has more than enough funds to help reconnect countries to finance.
The goal should be to convince countries that are currently hoarding large amounts of international reserves as insurance against future crisis that they need not sit on so much liquidity because they will have ample access to contingent funds if needed. This will allow countries to adopt policies that are more supportive of a global reflation effort.
If capital markets are impaired, the global and regional international institutions need to step up to a much bigger plate than is currently being envisioned.
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Oil for money, China style

2009-02-24T09:55:00.001+05:30

Oil deal between China and Brazil’s Petrobras and Russia’s Rosneft and Transneft, ensure supply of oil for China in exchange for liberal amounts of money to help develop hydrocarbon finds in the two countries.
What happens when cash-strapped oil companies and cash-rich countries meet? It doesn’t take much imagination to realize that innovative deal-making is the likely result.
The cash-rich country in question is China and the companies in adversity are Brazil’s Petrobras and Russia’s Rosneft and Transneft. The deals will ensure supply of oil over the next two decades for China in exchange for liberal amounts of money to help develop hydrocarbon finds in the two countries. What is interesting about these deals is that they are not only about securing oil rights, but that they make innovative use of adverse economic conditions to advance China’s long-term interests.
As reported by the Financial Times, China signed a landmark deal with Brazil’s state-owned oil company, Petrobras, on Thursday. Under the deal, Petrobras will get $10 billion to develop oil finds and, in exchange, will supply 100,000-160,000 barrels of oil a day to Unipec Asia, a subsidiary of China Petroleum and Chemical Corp. (Sinopec). It will also supply oil to another Chinese company, PetroChina.
Last week, on Tuesday, China Development Bank signed a $25 billion deal with Russian oil company Rosneft and monopoly oil pipeline operator Transneft for supply of oil from east Siberian oilfields.
These deals are innovative, for they solve two problems in one go. On the one hand, they provide cash to companies that otherwise have few options to secure it from global financial markets. On the other, they secure hydrocarbon resources for China by a different route. Instead of such resources being bid up in a competitive process with many players trying to garner them, the deals have occurred in a barter-like fashion.
To be sure, this sort of deal-making is unusual. More than anything else, it requires a virtual freeze in the world’s financial markets so that efficient allocation of resources becomes difficult, if not impossible.
At the same time, the equation was completed by China’s future needs. China’s actions are consistent with its medium and long-term energy security requirements. In 2006, its reserves-to-production (RPR) ratio for oil stood at 11.6 years. In 2007, this dipped slightly to 11.34 years. Thus, it makes good sense for China to firm up supply contracts of the kind it signed with Brazil and Russia. These will ensure that it faces no discontinuity or demand-supply mismatch in the years to come.
The question to be asked is why India, which also has a tidy pile of cash, did not make use of this opportunity as China did.
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Globalization 2.0 in peril

2009-02-23T13:46:00.003+05:30

Statements by world leaders strongly advocating open trade every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic.
Several Italian towns ban the sale of kebabs and other foreign food in an attempt to make Italians eat Italian. British workers at their country’s third largest oil refinery go on strike because foreign labour is being used for new construction at the refinery site. Spain is promising to pay immigrants to pack up and head home.
And then there is the more well-known case of the US, where the new economic stimulus package announced by the Barack Obama administration has controversial provisions to buy and employ American.
The war of words between the US and China on how the latter manages its currency, the use of higher tariffs by many countries to protect powerful industries such as steel, bailouts of select companies, the rise in trade disputes—all point to the disturbing fact that protectionist pressures are welling up in many parts of a recession-stricken world.
Note that most of these cases are from the rich countries rather than the poor. Some 25 years after the US and its allies pulled most countries into the global trading system and brought in the second golden era of globalization—the first ended with World War I—it is the original proponents of Globalization 2.0 who are busy trying to protect domestic interests.
It is reassuring that most world leaders continue to swear by open trade. The finance ministers of the Group of Seven (G-7) nations met earlier this month and promised to fight the growing threat from economic nationalism. The larger group of 20 (G-20)—which includes India—made similar promises when it met in the middle of November.
However, that the world’s leaders see the need to make such statements every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic. Declining capital flows and the withdrawal of shaky global banks back to their home bases are other warning signs.
The theoretical case against protectionism is clear: Free trade allows countries to specialize in activities where they have a comparative advantage. For all their famed disagreements, most economists concur that open borders for the movements of goods and services are far better than tariff walls that protect inefficient producers.
If the US, for example, insists on the use of expensive American rather than cheap Chinese steel to build a bridge, it is short-changing one set of citizens to help another.
The empirical case is clear as well: Countries with open borders usually grow faster than those that build barriers to trade. Also, it is widely accepted that the protectionism of the 1930s worsened the Great Depression. It is unlikely that the old mistakes will be repeated, though we may see milder forms of the protectionist affliction in the coming months.
The problem now is slightly complicated. Say, country A decides to spend hundreds of billions of dollars to support a weak economy. A large part of this money will naturally go into the coffers of the companies and individuals who get this money. They spend part of it and that gets the economy rolling again—or at least that is what the fiscal stimulus crowd fervently hopes.
But not all the money that a government pours in stays in the country. Some of it leaks out when domestic companies and consumers import stuff from country B. So, the fiscal stimulus in country A partly helps prop up export demand in country B. It is also likely that the fiscal stimulus in the latter helps the former.
What if country B decides not to spend too much money, either out of conviction or because it already has high levels of deficits and public debt? It benefits from what the government of country A is spending, but does not return the favour.
It is in such cases that country A may be tempted to slip in trade-destroying policies that insist on local buying and employing.
Avoiding these traps will require international coordination, where countries agree to keep borders open and spend in unison.
But that will be easier said than done. Recession, unemployment and bankruptcies will almost inevitably make voters put pressure on politicians to protect domestic interests. Some of it could manifest in ugly xenophobia—do not eat kebabs, do not employ Indian techies. This is going to be a tug-of-war worth watching.
What about India? We have undoubtedly benefited from globalization. Growth picked up after the 1991 reforms and poverty levels have declined. The fear of the outside world has subsided as national confidence has grown. For all their posing while in opposition, no major political formation in India has tried to roll back economic reforms.
Yet, let us not be surprised if the old swadeshi warriors polish their armour and step into the battle with renewed vigour this election season.
Source

Global financial crisis: The 'culprits'

2009-02-18T18:55:00.000+05:30

The financial crisis continues to jolt the world's most developed economies.
Many companies have declared bankruptcy in the United States, millions of jobs are being lost and the government has the mounting challenge of reviving the economy.
The crisis, that has also rendered so many people homeless, certainly did not happen overnight. So who is responsible for it?
Time magazine has a listed some people who have been blamed for this gargantuan crisis.
Time names former Federal Reserve chairman Alan Greenspan and former US Presidents George W Bush and Bill Clinton in the list. Meet the other key players who have been blamed.
Christopher Cox
Christopher Cox was the 28th chairman of the Securities and Exchange Commission. He was a 17-year Republican member of the United States House of Representatives, and member of the White House staff in the administration of President Ronald Reagan. Prior to this, he was a practicing attorney, teacher, and an entrepreneur.
Today, he hits the Time magazine's list of people blamed for the financial crisis mainly because of the SEC's inability to enforce stricter norms against fraudulent companies.
The SEC also failed to detect Bernard Madoff's $50ibillion Ponzi scheme. So the SEC's role in the financial crisis has been questioned. Many feel that the SEC failed to act when the financial companies were involved in huge financial irregularities
Angelo Mozilo
Angelo R Mozilo was the co-founder and chief executive officer of Countrywide Financial until July 1, 2008. He started the company in 1969.
The company soon grew to become one of the biggest mortgage lenders in the US. Countrywide was listed on the New York Stock Exchange in 1984. They granted huge loans to borrowers without verifying their repayment abilities.
Promoting risky loans, the company played a crucial role in huge subprime mortgage crisis. Finally, this led to the collapse of the company. The company was subsequently taken over by the Bank of America. CNN named Mozilo as one of the 'Ten Most Wanted: Culprits' of the 2008 financial collapse in the United States.
Joe Cassano
Joe Cassano's introduction of credit-default swaps led to a financial crisis at AIG. AIG offered insurance protection to buyers against losses on debts and loans of borrowers, amounting to $447 billion.
The housing crisis led to a fall in value of the assets insured. After the company lost $11 billion, Cassano quit in February 2008. Cassano faces lawsuit for cheating investors who suffered huge losses due to the company's downfall.
The American government finally granted $150 billion to revive the insurance company. PricewaterhouseCoopers, who audited AIG said there were discrepancies in financial reporting at Cassano's division. Cassano is blamed for leading AIG to bankruptcy.
Franklin Raines
Franklin Raines was the former chairman and chief executive officer of the Federal National Mortgage Association, commonly known as Fannie Mae.
Fannie Mae's mission was to ensure more people get the opportunity to buy homes. Franklin Raines, started a programme in 1999 to issue bank loans to individuals with low incomes and eased norms on loans to enable more people benefit from the programme.
Many feel that the plan of offering easy credit to home buyers who were not creditworthy led to the subprime mortgage crisis.
Phil Gramm
Phil Gramm was former Senator of Texas and John McCain's former economic adviser. He left the campaign in July 2008 after his comments on recession came in for much criticism.
He had said, the 'US become a nation of whiners' and the nation is in a 'mental recession'. His comments during the campaign became an issue.
In his response, Barack Obama, stated, "America already has one De Phil. We don't need another one when it comes to the economy."
Some economists believe that the 1999 legislation put forward by by Gramm and signed by President Clinton - the Gramm-Leach-Bliley Act -- was also responsible for the 2007 subprime mortgage crisis and the global economic crisis.
The Act is most widely known for repealing portions of the Glass-Steagall Act, which had regulated the financial services industry.
Kathleen Corbet
Kathleen Corbet served as president at Standard & Poor's. She was held responsible for giving top AAA rating to collateralised debt obligations (CDOs).
Collateralized debt obligations are a type of asset-backed security and structured credit product. CDOs have become an important funding vehicle for fixed-income assets.
Dick Fuld
Richard Fuld hit the headlines when he sold a $14 million Florida house to his wife for $100. Many see this as a move to protect the house from future legal action against him.
Fuld joined Lehman Brothers in 1969 after giving up his career as an air force pilot. He turned around the fortunes of the company after he took over but soon risky mortgages backfired.
He ignored warnings from experts on several issues. He refused to talk to buyers and finally the company had to declare bankruptcy. Fuld earned about $45 million in 2007.
From the years 1993 to 2007, he is said to have received nearly half a billion dollars in total compensation. CNN named Fuld as one of the 'Ten Most Wanted: Culprits of the Collapse'.
Ian McCarthy
Ian McCarthy is the president and chief executive Officer of Beazer Homes March 1994. Beazer is in trouble with the Federal Bureau of Investigation (FBI), Department of Housing and Urban Development and IRS investigating cases related to employees of its mortgage unit violated regulations, says the Time magazine.
Bernard Madoff
Bernard Madoff, former chairman of the Nasdaq stock exchange founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 and was its chairman until December 11, 2008.
He was charged for committing the largest investor fraud.
Bernard Madoff, a former chairman of the Nasdaq exchange, was arrested for running a $50-billion Ponzi scheme. His operation is said to be the largest Ponzi scheme in history.
He is under house arrest until his indictment, which is likely by mid-March 2009.
Herb and Marion Sandler
Herb Sandler together with his wife Marion Sandler purchased Golden West Savings and Loan in Oakland California and created Golden West Financial Corp, the parent company of World Savings Bank.
It was one of the largest S&Ls in the US with assets of almost $80 billion and deposits of $46 billion as of 30 November 2003. In the early 1980s, the Sandlers' World Savings Bank became the first to sell a tricky home loan called the option ARM.
They offered ways to cut down on early payments with misleading advertisements. The couple made a whopping $2.3 billion when they sold their bank to Wachovia in 2006. But losses on World Savings' loan portfolio led to the downfall of Wachovia, which was sold in 2008 to Wells Fargo.
Source

Stock Up On Essentials Of Equity Before Buying Stocks

2009-02-17T09:55:00.000+05:30

Thinking of investing in stocks? Make sure you have the right attitude and know how to go about it. Here are some tips you must consider before trying your hand.
So you've made up your mind to invest in the stock market. Having overcome initial inhibitions, you're now looking to become a millionaire overnight. After all, if your friend A or your cousin B could do it, why not you?
For investment-innocents, here's a shocker: It is not where you invest your money, but how you invest it that decides the profits. That is to say, stocks are only as good as the investor; they respond to the individual's abilities and acumen. In that sense, stocks are quite distinct from consumer durables. You can reasonably expect a washing machine to perform as well for you as for your neighbour, but that is not the case for stocks, which are a different breed altogether.
So, instead of investment tips, here are some attitude tips.

Don't commit large amounts of money or short-term money.
Even if you can afford to take risks, we suggest you don't commit large sums of money-at least not in the initial stages. It would be wiser to start with small amounts and increase your investments as your confidence and grasp of the markets grows. It is not easy to pick up the right stocks or keep track of them when you are starting out.
Also, don't break FDs to invest in rising markets.
Always invest the surplus, money for which you have no immediate plans. Equity, as an investment, carries in-built risk and volatility and investing short-term money may force you to quit at the wrong time.
Do be sceptical of self-proclaimed experts.
As an investment ingénue, stay away from self-proclaimed experts or overzealous advisers. The so-called 'hot tips' they offer to investors are largely short-term trading tips, which are very risky for a retail investor. Because the reaction time is limited, chances are you will end up losing wealth.
Similarly, TV gurus and the like are forever ready with "buy" recommendations; few, if any, come out with "sell" advisories for your advantage.
Further, expert recommendations often have vested interests. Recently, market regulator Securities and Exchange Board of India (Sebi) fined an expert for acting exactly contrary to his own recommendations. To curtail such rogue elements, the market regulator is planning a law to govern experts, who comment on the markets in the mass media.
Don't trade for short-term.
Short-term trading or day trading is very risky and not recommended for retail and small investors for two reasons. First, it requires lot of time, which small investors can rarely spare since it is not their primary business. Second, retail investors may not have the necessary skills and tools required for short-term and day trading. Do not try to time the markets: it's one of the most difficult things to do.
Invest long-term in fundamentally strong companies.
Our advice to retail investors is to invest long-term in fundamentally strong companies. Give your portfolio adequate time to grow. Do not panic in technical corrections. If you are invested in fundamentally strong companies, you are safe. We saw two sharp corrections in 2006, first in May-June and again in December. On both occasions, the market bounced back and crossed previous highs because the fundamentals were intact.
Don't ignore stock fundamentals.
There is no set formula for fundamental analysis. You have to study various indicators like sectoral growth, company growth-both top and bottomlines-and various ratios like price to earning ratio, price earning to growth, dividend yield, book value, price to book value, price to sales ratio, debt-equity ratio, return on capital employed, to name just a few.
If number-crunching is not your cup of tea, you must still investigate the nature, business and size of the company and its growth in the last three years-sales, profit and earning per share (EPS)-all of which are accessible on the websites of stock exchanges.
Do not be tempted to buy small caps and penny stocks.
The risk involved in small companies is huge, but higher risk may not necessarily lead to higher gain. That is not to say that you should ignore small companies completely, but at the same time you must have solid reasons for buying into them. And when you do, make sure they are only a small portion of your portfolio.
To be critical of media reports.
It's tempting, when you are just about beginning to follow the jargon, to buy into glowing media reports about corporates. But they could be misleading. For instance, you may read of a company setting up a new plant. Such announcements usually push up prices in anticipation of earning growth.
Before you join the queue for their stocks, you need to understand the cost benefit of the new plant. Ask yourself a few questions: where is the money coming from-equity or debt? If it's equity, how will it impact the EPS in the near future? If the source is debt, is the company in a position to leverage the increased debt? What will be the gestation period?
When will the earnings really start coming in?
What will be the return on capital employed?
Don't follow other investors blindly.
People often talk about their success in the stockmarket, rarely of their failures. Your friend may have made money in the past, but there's no guarantee he will continue to do so in future.
If, however, he offers to share his stocks research with you, welcome the opportunity. It will help you build your own research, but remember it is not a substitute for your own investigation.
Do stay away from a large number of stocks.
Investors generally hold a large number of stocks in the name of diversification. But this may not always be the case. Harry Markowitz, known as the Father of the Modern Portfolio, warned investors: "Holding securities that tend to move in concert with each other does not lower risk." A truly diversified portfolio, he said, comprises non-correlated asset classes that could provide the highest returns with the least amount of volatility.
If you are still looking to diversify within equity, do not go in for stocks of more companies than you can track regularly. Seven to 10 would be ideal, though, of course, this is a highly individual call. The biggest disadvantage of holding a large number of stocks is failing to quit at the right time.
Stocks are only as good as the investor-they respond to the individual's abilities and acumen
Source

Most cos see value erosion after merger & acquisition deals

2009-02-16T21:55:00.000+05:30

Of the 54 India companies involved in major (worth over $ 100 million) merger and acquisition deals – outbound, inbound and domestic – since 2005, only eight are doing well in the market.
The current stock prices of these eight are giving positive returns while all others are showing mark-to-market losses and negative returns.
According to a SMC Capital analysis, as of February 9 market prices of only two listed companies that had made acquisitions overseas were in the green. Three companies, which indulged in domestic M&A deals, have also shown mark-to-market profits. Three others that attracted inbound investments also reported positive returns.
Mr Jagannadham Thunuguntla, CEO & Equity Head of SMC Capital, told Business Line the study showed that though majority of the companies saw value erosion of their stocks, the stocks’ performance after the deals was not necessarily a comment on the impact of the events at the operational and fundamental levels. “It is only a reflection of the capital market performance of each stock,” he added.
It is amply borne out in case of BPCL and Videocon’s 50:50 joint venture deals in Brazil’s Encana.
The deals were closed in early 2008. The current MTM performances for BPCL and Videocon are found to be diametrically opposite. While BPCL has moved up 5.6 per cent, Videocon’s return is negative 78.68 per cent.
Acquisition of ACC stake by Holcim and Ambuja Cements by the same company also showed divergent results and underlined the complex relationship between fundamentals and market performance.
On the other hand, NTPC and GAIL, following the 50:50 joint venture deals in Ratnagiri Power, have managed to stay in the green, of course, with varying degrees.
Tata Motors, following the Jaguar-Land Rover deal, has lost 82.04 per cent, while Hindalco has witnessed 76.25 per cent value erosion in it stock after Novelis acquisition. Ranbaxy shed 72.76 per cent after Daichi-Sankyo took control of the company. Tata Steel has seen a 68.46 per cent decline in value since it grabbed Corus.
Seventeen companies, which received investments through deals involving $12,729.56 million in the past four years, have shown an average negative return of 43 per cent. Twenty-six major outbound M&A deals involving an investment outgo of $26661.47 million have clocked an average negative return of 60.24 per cent. The average MTM negative return for the 11 major domestic deals was 42.65 per cent.
The study showed that earlier deals (2005) showed a relatively better return than the deals done later. The total three-way investments (involved in all deals above $100 million) were worth $45 billion, which has eroded by 53 per cent, according to the survey.
“Fundamentals apart, this has raised questions about timing and aggressive valuations of the deals,” Mr Thunuguntla said.

Source

Full text of the budget speech

2009-02-16T18:52:00.002+05:30

Mr Speaker, Sir,

I rise to present the Interim Budget for 2009-10.
Five years ago the people of India had voted for change. In the words of our Prime Minister, Dr. Manmohan Singh, people had sought "a change in the manner in which this country is run, a change in the national priorities and a change in the processes and focus of the Government". The Common Minimum Programme of the United Progressive Alliance, built around 'Aam Aadmi', was a response to this call for change. As indicated by Shri P. Chidambaram in July 2004, this programme spelt out seven clear economic objectives:

a) Maintaining a growth rate of 7-8 per cent per year for a sustained period;

b) Providing universal access to quality basic education and health;

c) Generating gainful employment and promoting investment;

d) Assuring hundred days of employment to the breadwinner in each family at the minimum wage;

e) Focusing on agriculture, rural development and infrastructure;

f) Accelerating fiscal consolidation and reform; and

g) Ensuring higher and more efficient fiscal devolution.

As I present the sixth budget of the Government of the United Progressive Alliance which completes its tenure in a couple of months, I can say with confidence that every effort has been made by the government to deliver on the commitments made.
For the first four years of the UPA government, our policies ensured a dream run for the economy with Gross Domestic Product (GDP) recording increase of 7.5 per cent, 9.5 per cent, 9.7 per cent and 9 per cent from fiscal year 2004-05 to 2007-08. For the first time, the Indian economy showed sustained growth of over 9 per cent for three consecutive years. With per capita income growing at 7.4 per cent per annum, this represented the fastest ever improvement in living standards over a four year period.
During this period, the fiscal deficit came down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and the revenue deficit declined from 3.6 per cent to 1.1 per cent.
Investment and savings showed significant improvement. The domestic investment rate as a proportion of GDP increased from 27.6 per cent in 2003-04 to over 39 per cent in 2007-08. The gross domestic savings rate shot up from 29.8 per cent to 37.7 per cent during this period. The gross capital formation in agriculture as a proportion of agriculture GDP improved from 11.1 per cent in 2003-04 to 14.2 per cent in 2007-08
The buoyant growth of Government revenues facilitated fiscal consolidation as mandated in the FRBM Act. The tax to GDP ratio increased from 9.2 per cent in 2003-04 to 12.5 per cent in 2007-08 bringing us within striking distance of the target for fiscal correction. This also enhanced our capacity to raise resources internally to finance our growth at the rate of 9 per cent per annum during the Eleventh Five Year Plan.

All this would not have been possible without the guidance of UPA Chairperson, Smt. Sonia Gandhi, the inspiring leadership of Prime Minister, Dr. Manmohan Singh and the hard work put in by my predecessor, Shri P. Chidambaram.
Mr Speaker, Sir,
The growth drivers for this period were agriculture, services, manufacturing along with trade and construction. Hon'ble Members will agree with me that the real heroes of India's success story were our farmers. Through their hard work, they ensured "food security" for the country. With record procurement of 22.7 million tonnes of wheat and 28.5 million tonnes of rice for our Public Distribution System in 2008, our granaries are full. During this four year period, the annual growth rate of agriculture rose to 3.7 per cent. The production of foodgrains increased by about 10 million tonnes each year to reach an all time high of over 230 million tonnes in 2007-08. Despite a high base, the outlook for 2008-09 is encouraging with the country receiving normal rainfall during the agricultural season. Manufacturing, registered as well as unregistered, recorded a growth of 9.5 per cent per annum in the period 2004-05 to 2007-08. Similarly, communication and construction sectors grew at the rate of 26 per cent and 13.5 per cent per annum, respectively.
Though our growth is based largely on domestic efforts, foreign trade and capital inflows played a catalytic role. India's exports grew at an annual average growth rate of 26.4 per cent in US dollar terms during this period. Foreign trade increased from 23.7 per cent of GDP in 2003-04 to 35.5 per cent in 2007-08. The conscious policy to gradually integrate the Indian economy with the world, opened new opportunities for Indian corporates to build world scale plants and aim at global competitiveness.
In order to maintain a high GDP growth rate on a sustained basis with price stability, the Indian economy had to face two inter-related macro-economic challenges. These relate to capital inflows and global inflation. Profitable investment opportunities generated by high GDP growth attract foreign capital. In 2007-08, capital inflows spurted to an unprecedented 9 per cent of GDP, far in excess of current account financing requirements leading to large accumulation of reserves and build up of pressure on prices.
During 2008-09, international prices of many essential commodities particularly fuel oils, food and edible oils and metals rose to alarming levels. To cite just one example, the price of crude oil which was US $ 28 per barrel in 2003-04 shot up to US $ 147 per barrel in 2008. The sharp rise in global inflation, even with a moderated pass-through, put pressure on domestic prices. The WPI headline inflation shot up to nearly 13 per cent in the first week of August 2008. To ease supply side constraints, Government took a series of fiscal and administrative measures, in concert with monetary policy measures by the Reserve Bank of India. RBI raised the interest rates to mop up excess liquidity. This, in turn, had implications for the growth rate from the demand as well as supply side. These, along with easing of global price pressures, led to a decline in domestic prices with inflation rate falling to 4.4 per cent on January 31, 2009. We have weathered the crisis, but there is no room for complacency.

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What is a vote-on-account?

2009-02-16T09:55:00.000+05:30

With the elections around the corner, the government will not be presenting a full Budget this year. Instead, acting Finance Minister Pranab Mukherjee will present an interim Budget on February 16. He will then present a 'vote-on-account,' which will allow the country's financial business to be transacted until the next government is in place.
So what is a vote-on-account?
In a nutshell, it is a finance minister's statement to seek Parliament's approval of the obligatory expenditure that the government has to incur for the first three or four months of a financial year.
Apart from this, there are also the revised estimates of the expenditure incurred by the government during the financial year that is coming to an end. These estimates provide an assessment of how efficiently the government has spent its resources. There are also the revised estimates of government revenue from different sources.
If I wanted a more detailed explanation?
Here goes. . . The Indian Constitution says that all revenues received by the Union government and the loans raised by it are to be put into the Consolidated Fund of India. This does not include anything that is put into a Contingency Fund.
Since Parliament is not able to vote the entire budget before the beginning of the new financial year (like now, with elections round the corner), it is necessary to keep enough money at the government's disposal to allow it to run the administration of the country.
When the government needs to withdraw any money from the Consolidated Fund of India to cover its expenditure (especially when elections are underway and a caretaker government is in place), it has to seek first approval from Parliament.
A special provision is, therefore, made for a vote-on-account by which the government obtains the vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year.
This sanction of Parliament for withdrawal of money from the Consolidated Fund of India to meet the government's expenses is generally known as a vote-on-account.
Without passage of the vote-on-account before March 31 (the end of the financial year) in Parliament, the government will not have been able to draw money from the Consolidated Fund of India for government expenditure from April 1.
If there are no external reasons, like an election or a caretaker government in the saddle, does a vote-on-account take place?
Yes, it does. Actually, a vote-on-account takes place very year.
While the Budget is presented on the last day of February every year, it takes a couple of months before the Budget is actually passed by both houses of Parliament. Once of the reasons for this is that Parliament adjourns the winter session before meeting again during the summer session, when the Budget is passed after modifications, if necessary.
Parliamentary scrutiny of the financial proposals and the passage of the Budget is normally not completed until the second week of May, well after the commencement of the new fiscal year.
So, the government presents a vote-on-account, estimating the expenditure for the first few months of the fiscal year, which is approved by Parliament. These expenses are then debited to the Consolidated Fund of India
That's clear enough. But what is the Consolidated Fund of India?
Well, the government of India collects funds by way of taxation like income tax, central excise, custom, land revenue (tax revenues). It also receives money from other sources (these are basically non-tax revenues that include businesses and facilities run by the government) like the railways, posts, transport, etc.
All this money is credited into the Consolidated Fund.
Similarly, all loans raised by government by issue of public notifications, treasury bills (internal debt) and loans obtained from foreign governments and international monetary institutions (external debt) and all money received by government by way of interest repayment of loans it has made are also credited into this fund.
All expenditure incurred by the government for the conduct of its business, including repayment of internal and external debt and release of loans to the state/ union territory governments for various purposes is debited against this fund.
Money can be spent through this fund only if authorised by Parliament.
The Consolidated Fund was set up under Article 266 (1) of the Constitution of India.
And the Contingency Fund?
This is in the nature of an imprest. Put simply, this means if you start the month with Rs 100 in the fund and spend Rs 90 during the month, that Rs 90 will be replaced to bring the amount in the fund back to Rs 100. In this example, the maximum amount of money that can be spent Rs 100. You can only spend what you have and you are only given back what you spend, in this case Rs 90.
The Contingency Fund is kept at the disposal of the President of India to enable the government to meet unforeseen expenditure, which cannot wait for approval from Parliament.
The money is to be used to provide immediate relief to victims of natural calamities and also to implement any new policy decision taken by the Government pending its approval by Parliament.
In all such cases, after Parliament meets, a bill is presented indicating the total expenditure to be incurred on the scheme/ project during the current financial year. After Parliament votes on the bill, the money already spent out of the Contingency Fund is recouped by debiting the expenditure to the Consolidated Fund of India.
The Contingency Fund was set up under Article 267 of the Constitution of India. The corpus of this fund is Rs 50 crores (Rs 500 million).
Here's something I should have asked earlier.
What is the Budget?
The Budget is a statement of the financial position of an administration for a definite period of time based on the estimates of expenditures during the period and proposals for financing them. A full budget thus spells out both the manner in which the money is to be spent and how it is to be raised.
Are a vote-on-account and an interim Budget the same?
No. While a vote-on-account deals only with the expenditure side of the government's budget, an interim Budget is a complete set of accounts, including both expenditure and receipts.
Why is a vote-on-account sometimes presented instead of an interim Budget?
A government typically opts for a vote-on-account, as it is regarded improper for an outgoing government to impose on its successor changes that may or may not be acceptable to the incoming government.
Technically, it is not necessary for a government to present a vote-on-account in an election year. But a full Budget just before the elections makes a mockery of the whole exercise.
Also, when the new government comes into place, it will need a couple of months before it presents its Budget. Until then, one of the first orders of business for the new administration is to get a vote-on-account passed to keep the country's financial wheels running.
Can the finance minister make policy statements while presenting the vote-on-account?
Barring any announcement on taxation, the finance minister's speech before seeking Parliament's approval of the vote-on-account can contain his intentions on economic policy. He can give indications of what he would like to do if given an opportunity to return to Parliament as finance minister after the elections.
For example, when former finance minister Yashwant Sinha presented the vote-on account in 1991, he announced the Chandra Shekhar government's plan to divest government equity in public sector undertakings
For how long can a vote-on-account be in force?
Normally, the vote-on-account is taken for two months only. But during election year or when it is anticipated that the main Demands and Appropriation Bill will take longer time than two months, the vote-on-account may be for a period exceeding two months.
Typically this period does not exceed six months, as that is the maximum gap possible between two sittings of Parliament.
Normally a vote-on-account is in operation till the full Budget is passed.
What is the Demands and Appropriation Bill?
After a general discussion on the Budget, Parliament is adjourned for a fixed period. During this period, the demands for grants of various ministries/ departments are considered by concerned standing committees. The standing committee, consisting of 45 members (30 from Lok Sabha and 15 from Rajya Sabha), are required to make their reports within a specified period.
Then, Parliament meets to discuss and vote on these demands. The voting procedure is popularly known as 'guillotine.' The Lok Sabha has the power to assent to or refuse to give assent to any demand or even to reduce the amount of grant sought by the government.
After this, the government introduces the Appropriation Bill. The Appropriation Bill is intended to give authority to the government to incur expenditure from and out of the Consolidated Fund of India.
What were some of the unusual (election- or crisis-related) vote-on-accounts presented in the last few decades?
The defence scam (in a sting operation, BJP leader Bangaru Laxman was captured, on hidden camera accepting a bribe for a defence deal) that rocked India on March 13, 2001, shook Parliament. As Opposition parties demanded the resignation of the ruling NDA government, the passage of the Budget got stalled.
Finally, the Congress and other Opposition parties had agreed to co-operate in passing the vote-on-account and Parliament approved the vote-on-account (allowing the government to withdraw a fixed amount for payment of salaries and other government expenditure from the Consolidated Fund till July) on March 21. Otherwise, the government would have been financially paralyzed from April 1.
Here are some of the others:
The 1980s saw only one vote-on-account presented by R Venkataraman.
The 1990s wree witness to three votes-on-account, reflecting the politically turbulent times:
March 1991: Vote-on-account as Chandrashekhar government falls after Congress withdraws support.
February 1996: Vote-on-account as general elections are called.
February 1998: Vote-on-account as Gujral government falls.
In February 2004, after presenting an interim Budget, finance minister Jaswant Singh presented the vote-on-account, as general elections were called.
Source

Their money is our money

2009-02-15T22:35:00.002+05:30

By laying down that a company is either Indian or foreign depending on who owns 51 per cent of it and gets to appoint its board of directors, the government saves itself the tedium of determining whether an Indian joint venture's parents, or grand-parents, are one-eighth, or one-sixteenth, foreign. Where much of this circuitous 'grand-fathering' has taken place, in telecommunications, for instance, more room has been cleared for foreign direct investment (FDI).
At a fundamental level, however, ignoring proportionate indirect foreign investment makes sector FDI caps, ranging from 26 per cent in media companies to 74 per cent in telecom firms, redundant. Any Indian company can now funnel any amount of foreign money into any industry that is not a public monopoly.
This is a paradigm shift. Our policy on foreign capital has been easing ever so gradually since India opened up to the world in 1991.
This despite the fact that we save less than we invest and import more than we export. These two gaps, adding up to nearly 6 per cent of the GDP, have per force to be bridged by money from abroad.
India dips into a $1.5 trillion pool of FDI and hopes to draw in $35 billion in 2008-09, a target likely to be wide of the mark in this season of financial turmoil. At 18th place in a league of FDI destinations, a thicket of restrictions keeps multinationals away from the fastest growing emerging economy apart from China.
The economic case for more FDI is incontestable. The strategic argument is trickier.
If foreign capital can accompany an Indian company everywhere, the only way the government can effectively keep FDI out of sectors it deems sensitive is by shutting out all private capital. Public monopolies would be an unfortunate throwback after nearly two decades of privatisation, and patently impossible in sectors like the media.
Breathtaking in its simplicity, the redefining of FDI solves a big issue but throws up another equally big question. The guidelines that follow this week's announcement must address both.

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HAPPY VALENTINE'S DAY

2009-02-14T07:30:00.000+05:30

Budget or a vote on account?

2009-02-13T14:25:00.000+05:30

It’s frustrating that just when the economy needs attention, the electoral process requires that not much be done.
Articles 112-116 of the Constitution spell out the measures required to enact Bills relating to the financial expenditure of the Union government. Importantly, Article 112 requires that the President shall cause the annual financial statement (AFS)—containing the receipts and expenditure from the consolidated fund of India for that year—to be laid before Parliament, and the subsequent Articles describe the contents as well as the procedure for getting these estimates passed.
Article 116.1(a) permits that pending the process in Articles 113 and 114, Parliament may authorize in advance the passing of expenditure relating to part of the financial year and this is described as vote on account.
Normally, budgets for the ensuing year are presented at the end of February, and since the approval of Parliament under Article 112 relates to the current year, the passage of the budget happens after 1 April. Meanwhile, a vote on account under 116.1(a) passed before 31 March enables the government to carry on business until the Finance Bill is passed.
In an election year such as this one, the government does not present the full budget—first, since the passage of the budget will have to happen after 1 April, when elections would already have been notified, and second, since the new government should have the opportunity of deciding the allocation of receipts and the source of revenues. In 2004, 1998, 1996, 1991, etc., the outgoing governments presented votes on account to Parliament, and the full budget was taken up by the new government in office. In 1999, Parliament by unanimous consent approved the passage of the budget even after the government had lost its majority in April, as the budget had already been presented on 28 February, before the government fell, and debated upon.
There is some confusion in the media on whether the Bill to be presented to Parliament would be for a vote on account, a budget or an interim budget. A budget normally includes new schemes and new taxation proposals, or the doing away of taxes. Changes in income tax have to be enacted as law, while changes in customs and duties are by notification. Announcements of new programmes and expenditure have also to be approved by the government in that financial year. It does appear, therefore, that the government would be constrained to approve expenditure to continue in the same manner as the current year through a vote on account for some months until the elections are over and the new AFS can be prepared.
The debate is over whether the government can announce new schemes and programmes or notify changes in tariff in direct or indirect taxes. There is certainly the temptation that, given the impending elections, some major programme announcement be made or some tariff concessions be announced. While customs and excise duties can be changed at any time—parliamentary approval is not required—changes in other taxes cannot be attempted, for it would require the Finance Bill to be passed. Similarly, announcements are fine but any expenditure for new schemes will have to form part of the new AFS, which can be approved only after 1 April. Hence programme announcements, if any, would not have budgetary allocations, and the Election Commission may well frown on such pre-budget announcements.
This is perhaps the reason that a slew of off-budget announcements has been made. The reduction in prices of petrol, diesel and LPG, and the cosmetic reduction in home loan rates announced by State Bank of India are some recent examples.
The promise by the deputy chairman of the Planning Commission (supposedly a non-political appointment) in Davos that there would be only a vote on account, but that there would be lots of goodies in the new budget if the United Progressive Alliance comes to power, is a bit in poor taste but proves that the government is wary of making too many announcements at this time and would like to nibble away at concessions that will not attract the chief election commissioner’s attention.
The problem with this political tightrope walk is that the economy urgently needs attention. It is now clear that the promises of the earlier finance minister that India would be unaffected by global events were quite false, and also that the enormous liquidity that has been pumped into the economy is not reaching those who need it. The next few months will be the worst of the downturn, with job losses, slowing production and disarray in the financial markets. Simultaneously, the fiscal deficit is growing to unacceptable levels, state finances are starting to get stretched and the room available for correction is being reduced. It should be frustrating for policymakers that just when the economy needs very close attention, the election process will require that not much be done.
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Confusion amid a crisis

2009-02-13T09:55:00.000+05:30

Even as bloggers are busy decoding depression, the real challenge now for India will be to maintain the national savings rate above 35% of GDP.
This is the high season for confusion about the state of the world economy. The pace at which world output is slowing has caught most economists—other than the most pessimistic members of the tribe—unawares.
Even the D-word is now getting an airing. Economics bloggers are busy trying to define what a depression really means. British Prime Minister Gordon Brown used the word to describe the state of the global economy in a speech last week; his media managers quickly moved into overdrive to dismiss his usage as a slip of the tongue. But then the chief of the International Monetary Fund announced on Monday that the rich nations are “already in depression”. This came just a few days after the multilateral lender said that the world economy was already at a standstill. Dominique Strauss-Kahn says that the IMF growth forecast could be cut once again: “The worst cannot be ruled out.”
The semantics and speeches aside, the big issue is whether the world economy is stumbling into a Japan-style decade of zero growth and deflation, and what this will mean for India.
The immediate pain is visible. The first official estimates of Indian economic growth have been pegged at a six-year low of 7.1%. That’s a far cry from the needless bravado earlier this fiscal year, when the then finance minister P. Chidambaram insisted that Indian growth would not be affected by the global crisis.
Most private sector economists expect the economy to perform worse than the government’s statistics office has initially estimated. The 21 professional forecasters polled by the Reserve Bank of India every quarter expect an average growth rate of 6.8% in the current fiscal year, against the 7.7% average estimate made in the previous survey.
The current slowdown—and the prospect that it will worsen—could reopen the old debate: At what rate can India sustainably grow in the medium term?
There have always been contentious debates on what drives economic growth in any country—use of more resources such as labour and capital, or a better use of resources through higher productivity? Barry Bosworth and Susan Collins, in a 2007 research paper on “growth accounting” for India and China, showed that of the output growth per worker in these two countries between 1978 and 2004, roughly half came from capital accumulation and the other half from higher productivity.
Ensuring that India maintains strong economic growth despite the obvious global problems will require coherent strategy from the Indian government—both this one and the next. The current focus seems to be throwing cash at every industry and major project that can make itself heard in the election season. Some of this may be inevitable in a boisterous democracy such as ours, but lobbying and rent seeking also play a part.
Analyses such as the one from Bosworth and Collins suggest that long-term policy should focus on two important issues: maintaining rates of savings and investment so that capital accumulation stays on track; and long-term reforms that will create incentives for Indians to take risks and work harder.
First, let’s consider savings and investments. The splendid boom that began five years ago and is now winding down was driven by both a benign global business climate as well as a huge increase in the national savings rate. The latter has shot up by around 12 percentage points since the beginning of this decade—and higher domestic savings have been able to support the higher investment rate that led to accelerating growth.
The real challenge now will be to maintain the national savings rate above 35% of gross domestic product (GDP). Most of the rise in the savings rate these past few years was because of healthier corporate balance sheets and lower government deficits. Both are likely to deteriorate in the current downturn. It is safe to guess that national savings have peaked for now and will decline as a proportion of national output. Irresponsible fiscal policy could pull it down to levels that make it difficult for India to grow above 6% a year. That is something the Indian government should avoid.
The second big challenge will be to boost productivity, through more open product markets, better infrastructure, a more educated and skilled workforce, and access to capital for both large and small businesses. The march out of poverty is essentially about raising output per worker—and productivity has a big role to play in this.
These are trying times for policymakers. And there is too much confusion right now for a coherent policy to emerge. But even as the government is busy fighting many small fires, it should not take its eyes off the larger issue—that the economy will keep growing rapidly only if investments stay on track and there are reforms to boost productivity per worker.
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Irrelevance of interim budgets

2009-02-12T13:09:00.000+05:30

Economic reforms have been extensively debated in this country for quite a few decades. Much before Manmohan Singh ushered in economic reforms in 1991, policymakers and economists within the government and outside began examining the appropriateness of opening up the economy and substituting discretionary policies with a transparent and rule-based policy regime.
It was from the 1980s that licensing controls began to be relaxed and a low-to-moderate tariff-based system began replacing quantitative curbs. This journey may have been slow because of the intense nature of the debate. On many occasions, therefore, policymakers have had to go back a step after having taken two steps forward. But never has there been any doubt on the trajectory of the direction of economic liberalisation.
The unprecedented balance of payments crisis and fiscal indiscipline in 1990 hastened the pace of reforms as it was felt that without those measures the country’s economy could have collapsed. Since then, it could be argued, economic reforms have gone beyond the purview of debates. Economic reforms have remained an article of faith for all the governments at the Centre in the last 18 years, irrespective of the political parties that formed them.
Legal reforms, too have gone through a similar phase. There have been debates on how comprehensively the country’s legal system could be made more efficient to deliver justice without delay. Our courts are clogged with cases and cannot deliver justice within a reasonable period of time. While a lot has been achieved by simplifying procedures in civil cases, by specifying rigid time frames to complete formalities before the cases can be argued, the use of information technology in the functioning of courts has begun to make a difference to litigants and lawyers alike.
Undoubtedly, the use of information technology can be even more widespread. But a small beginning has been made in the courts at least in some states. There are many states where nothing has changed and, hopefully, the current debate will result in some action there as well. But the fact that a debate on the need for legal reforms has started is a positive sign. As veteran policymakers will argue, starting a debate for a change is the first concrete step towards achieving the final goal of reforms.
As another session of Parliament is slated to start from tomorrow, questions are bound to surface also over the slow pace of reforms in our parliamentary procedures and convention. Till 1999, for instance, the Union Budget was always presented at 5 pm in the evening. There was no apparent logic except that this was the convention. It was a practice that dated back to the days of the British Raj. But the practice of presenting the budget at 5 pm was continued for 52 years even after independence and no finance minister or parliamentary affairs minister during those years thought of switching over to a different time that is logical from the Indian government’s point of view. It was left to Yashwant Sinha to take that decision and at around noon on February 27, 1999, he presented the budget for the following financial year.
What about the convention of interim budgets? Why should the finance minister of a government that is going to polls in a few weeks be allowed to wax eloquent on what the achievements were in the previous five years? Worse, why should he be given the opportunity to present some indirect tax changes to make some populist gestures? The legislative requirement of an interim budget is to let the government seek Parliament’s approval of its expenditure for a period of three to four months by when elections would be completed and a new government in place to present a regular budget. So, why not restrict the interim budget to only seeking Parliament’s approval for those expenditure allocations for different ministries? Why should the aura of an interim budget ornament an exercise that is mostly an attempt to woo the electorate to vote the ruling party back to power?
Even more unjustifiable is the presentation of interim railway budgets. On February 13, Lalu Prasad will present the interim budget for the railways. While doing so, he will beat his own drum on how well he has managed the Indian Railways and what more he wants to do in the coming financial year. But why should he be allowed to talk about his plans for the next year if a general election is to be held in a few weeks? Why can’t Lalu Prasad simply seek Parliament’s approval for the Indian Railways’ expenditure in the first four months of the coming financial year and let the new railway minister after the elections, whoever he or she may be, outline the grand plans for 2009-10?
Unfortunately, no debate questioning the relevance of interim budgets has begun in this country. Interim budgets are treated more as a parliamentary spectacle and an opportunity for ruling party politicians to take credit for their government’s achievements and announce some populist schemes. Till a debate starts, there is no hope of saving this country from the political gimmickry of interim budgets in the near future.

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The worst is yet to come

2009-02-12T09:55:00.000+05:30

Let's begin with some good news. Large companies with proven track records haven't disappointed the market. In fact, the third-quarter results of Reliance Industries, Infosys, ITC and ICICI Bank have been either along expected lines, or better than the Street's estimates. But that's not true for the rest of India Inc. The earnings of most mid- and small-cap companies have deteriorated alarmingly.
The net sales of 450 firms, which declared Q3 results till 23 January, have grown at a healthy 19.34% compared with the same quarter in the previous fiscal. But their net profits have fallen by 22.15% during the same period. The steep drop in profits is worrying because these companies registered a robust 40.29% growth in profits in the third quarter of 2007-8. The real problem is with the small and mid-sized firms, whose net profits in Q3 2008-9 have fallen by a massive 39%.
"Most large corporates haven't really disappointed us. The stress is more pronounced in case of midcap firms, where some of the results were worse than the already toneddown expectations," says Gaurav Dua, head of research, Sharekhan.
So, should you invest across stocks as the indices fall to attractive levels? Or should you look only at blue chips? To answer these questions, one needs to figure out what is likely to happen in the next few quarters.
The third quarter of 2008-9 was expected to be one of the weakest in recent years. By November 2008, analysts had scaled down their expectations and the markets had discounted the prices of most stocks. Profit margins were under pressure during Q2 due to inventory losses as most companies were saddled with raw materials purchased at the peak of the commodity cycle in July-August 2008.
Sadly, there may not be any respite in Q4. Reasons Dua: "Though some of the companies will begin to show relief on margins due to lower raw material costs, the demand environment will remain muted." This will happen because of several factors. Fragile sentiments, cash crunch and falling exports will take their toll on the Indian companies. As firms curtail investments, cut costs and reduce production, it will lead to a slump in economic activity.
"Industrial growth will slow down to 2.5% this year, against 9% in the previous fiscal. Given that the business confidence will remain low, the slowdown will spill over to 2009-10," predicts Anubhuti Sahay, associate economist at the Standard Chartered Bank.
In such a scenario, even sectors such as IT and banking, which were insulated from the drop in demand so far, can face problems. Commenting on the Q3 results, Wipro chairman Azim Premji said, "We are living in tough times; the macro-economic challenges are impacting businesses across segments." Both Infosys and Wipro have cut their annual guidance.
"The revenue visibility across companies appears to be, at best, limited to a quarter," says Abhiram Eleswarapu, analyst at BNP Paribas. Therefore, in the case of IT stocks, existing and potential investors need to wait and watch before taking investment decisions.
The same is true for banks, which posted an amazing profit growth of over 30% in Q3. But this is not likely to sustain. Moderate credit growth, lower interest rates on government bonds and rising NPAs will put pressure on earnings. "We foresee a slowdown in banks' earnings over the next few quarters as the G-Sec gains become muted," says Sonam Udasi, vice-president of research at Brics Securities.
Analysts say that despite low interest rates and the government's intention to trigger a demand-led growth cycle, the situation might improve only in the second half of 2009-10. "Once the impact of the interest rate cycle is passed on and firms begin to reduce their working capital requirement, the bottom line growth is expected to improve," says Sankaran Naren, CIO, equity, ICICI Prudential AMC.
Among sectors, while realty and commodities might slip, FMCG and pharma may continue with their growth story. Cash-rich companies with low or negligible debt are likely to outperform. "Investors should avoid aggressive or leveraged sectors, and focus on companies with excellent financial and operational management," concludes Naren.

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