No sign of deflation

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.

Indian Economy: High Inflation, Slowing Growth – an Indian Economy of Gloom?

Some Indians believe that India is protected from many of the economic hardships felt by other nations around the world. The country’s strong domestic economy and lack of reliance on Western nations means that it can shield itself from external hardships to a certain extent. That extent may have just been reached, however. With inflation reaching 12.44% in August of 2008, almost triple what it was a year before and the highest in 13 years, India suddenly seems just as susceptible to financial troubles as the rest of the world . Couple inflation with shortages of food and the picture becomes worse. Even with record grain production in the 2007-2008 season, the increased demand means an overall shortage. "Despite the recent upward trend in food grains production, India's food security remains an area of concern," the Prime Minister's Economic Advisory Council (EAC) said in its economic guidance for 2008-2009. This gloomy message was echoed in the EAC’s more recent growth forecast, which was cut from 9.1% to 7.7% for 2009, weak by Indian standards. Developed nations can afford lower growth rates, with fewer people suffering from poverty and higher GDP levels. Much as with China and the other emerging economies, India needs high growth rates so that better conditions can trickle down to the hundreds of millions still living subsistence lives. It could be argued that the need is more pressing in India, however, as democracy tends to amplify unhappiness. Indeed, Indian newspapers recently have been filled with gloomy pronouncements about the economy and the government. Contributing to this negative sentiment are the credit crunch and oil prices. In an effort to protect its citizens, the Indian government has absorbed much of this oil-price-rise, and has taken a hit in its trade, with a widening deficit. India is an import-dependent economy, which means by nature it would have a deficit. It produces almost none of its own oil which can be a major budget worry when energy prices get out of hand. In fact, in early 2007, Prime Minister Singh asked Ali al-Naimi, Saudi Oil Minister, to help stabilize the oil market and to help keep prices at a level developing countries like India could manage. As we all know, that is easier said than done. And with elections coming up soon, the government is dishing out incentives including 21% salary hikes across five million government employees, plus more than $15 billion in aid for struggling farmers. These incentives have a feel-good factor but do nothing to help the country’s economic position. Meanwhile the elections themselves are a massive undertaking, involving more than 670 million people and quite a bit of expense. Put it all together and you have a growing costs, a widening deficit and slowing growth – plenty of cause, many would argue, for a bit of gloom. Nevertheless, a growth of nearly 8% per year, consistently, would mean doubling the economy in just over a decade. And if India could sustain this growth rate until 2015, the Indian economy would surpass those of Italy, France, and the UK by 2015, and those of Germany, Japan and the US by 2050. Only China would be mightier at that point. In fact, when we look at growth rates over the last five years, 7.7% growth would be just over the average of 7,35%:

Year GDP

2003 4.3%

2004 8.3%

2005 6.2%

2006 8.4%

2007 9.2%

2008 7.7%

Although there are plenty of reasons to be gloomy right now, the future continues to hold a lot of promise for India.

Santos de la Raya, EconomyWatch.com

Inflation: India Inc feels the sting

Rising interest rates are forcing companies, big and small, to either defer projects, go slow on expansions or raise money from alternative sources.
For instance, Mumbai-based steel-maker JSW has reduced the scope of its steel project in Bengal and has decided to implement the project in phases. In the first phase, it will set up a pellet and coal beneficiation plant (in three years by 2011), which will cost Rs 4,000 crore against Rs 15,000 crore for the entire project.
"In the first phase, we will focus on the raw material side, get the coal linkages to produce pellets and sell them in the market,'' said JSW CFO Seshagiri Rao.
Higher interest rates will also pull down margins on all projects as most term loans, like in home loans, are on floating rates.
Infrastructure developers in road, port, power or airport projects are also feeling the heat of rising rates, especially if these projects are on a build-operate-transfer (BOT) basis and the loan is on variable interest rates.
Take BOT road projects, for which the interest risk lies with the developer. Four months ago, banks were charging 11-12 per cent (higher in the case of a fixed rate loan); now the interest rate has gone up to 14 per cent. "With inflation at 13 per cent, I expect interest rates to go up 1-1.5 percentage points more," said Praveen Sood, CFO, HCC Ltd, a Mumbai-based construction firm.
Consider how interest costs will impact HCC's Badarpur elevated flyover project in Delhi it won four weeks back. The project will cost Rs 550 crore, including an engineering procurement construction (EPC) cost of Rs 494 crore and interest during construction (IDC) of Rs 56 crore. With interest rates going up, not only will the IDC go up but HCC will have to bear higher interest rates on servicing the entire debt of, say, Rs 380 crore.
It won't be able to recover the higher interest costs as the toll on the road project is fixed for the concession period. The EPC cost could go up. As a result, HCC will take a hit on its internal rate of return from 16 to 17 per cent to 13 per cent.
Returns will also be squeezed on several power plants and port projects (like Mundra) that are being set up or operated on a merchant basis.
But not all projects and players will be affected. "It will hurt us marginally if we are exposed on the variable interest rates and cannot pass on the interest rates increases in non-regulated part of the businesses,'' said GVK CFO Isaac George.

GVK will be hurt in a few road and power projects (like 464 mW Gautami Power Project) for which the loans carry variable interest rates. In some other projects, it has fixed the rate on loans at a lower rate for five years or in power projects that are on a cost-plus formula, for which higher costs will be absorbed in a pass-through in tariff. In airports too, higher costs will be passed through in aeronautical revenues.

Smaller companies are equally stretched. Take Mumbai-based Ratnaraj Diamonds, a diamond exporter that started selling solitaires through jewellers. Encouraged by its success at home, it was planning to double production capacity in 2008 and ramp up stock levels 10 to 15 times.

Now, it has decided to scale back its plans. It has deferred buying a new laser-cutting machine which costs Rs 40 lakh to Rs 50 lakh and partially cut the planned increase in its stock levels. Shailen Mehta, the firm's CEO, said his cost of funds has gone up by 3 per cent.

In Delhi, Rajat Tuli and Rahul Anand are having a hard time fighting the slowdown in the market. The young promoters of Happily Unmarried, which sells fun lifestyle gifts, had big plans for 2008. They wanted to triple their sales by doubling the number of products and adding 11 more shops this year.

Against that, they could manage to do just add four shops. The promoters have been relying on personal loans, at 14 to 16 per cent, to fund their business and has just started getting some short-term business loans, but at 18 to 19 per cent. "Given these rates, it doesn't make sense to borrow and grow the business. So, we are selling 5 per cent equity to private investors,'' said Tuli.

Bangalore-based Aron Universal, a manufacturer of fluorescent pigments and inks used in products with fluorescent colours, was planning to triple production and corner a third of the Rs 350-crore market for these niche products.

"With interest rates at 14.75 per cent, we are going slow on our expansion and trying to generate the funds from alternate sources like shareholders or private investors," said CEO Shailesh Patel.

The battle against inflation is clearly hurting corporate India; if interest rates go up further, there could more pain.
http://www.rediff.com/money/2008/aug/19infla.htm

10 calculations to know

10 calculations to know
Sunil Dhawan, Outlook Money
Managing money can involve calculations to understand the worth of an investment. To arrive at a result, calculations can be done in a different way or by using a different formula.
Even the same formula can be used differently to arrive at a certain result. Here are a few commonly used money management formulas. Use an excel sheet to do these.
1. Compound Interest
I want to take a loan of Rs 1 lakh to buy a used car. How much will the car cost me at an annual interest rate of 8 per cent for four years?
The compound interest formula can be used here to calculate the final cost, which would include the loan amount and the interest paid. The amount that is actually paid for Rs 1 lakh is Rs 1,36,048.90. The total amount of interest charged for borrowing Rs 1 lakh is Rs 36,048.90.
Formula: Future value = P(1 + R)^N
Type in: =100000(1+8%)^4 and hit enter. P: amount borrowed; R: rate of interest; N: time in years.
Also used for: Calculating the maturity value on lumpsum investment (bank fixed deposits and National Savings Certificate, for example) over a fixed period at a certain rate of interest.
2. Compound Annualised Growth Rate
I had invested Rs 1 lakh in a mutual fund five years back at an NAV of Rs 20. Now the NAV is Rs 70. How should I calculate my returns on an annual basis?
Compound annualised growth rate (CAGR) will be used here to calculate the growth over a period of time. The gain of Rs 50 over five years on the initial NAV of Rs 20 is a simple return of 250 per cent (50/20 * 100). However, it should not be construed as 50 per cent average return over five years.
Formula: CAGR = {[(M/I)^(1/N)] � 1} * 100
Type in: =(((70/20)^(1/5))-1)*100 and hit enter. M: maturity value; I: initial value; N: time in years. CAGR here is 28.47%.
Also used for: Calculating the annualised returns on a lumpsum investment in shares.
3. Internal Rate of Return
I paid Rs 18,572 every year on a moneyback insurance policy bought 20 years back. Every fifth year, I received Rs 40,000 back and Rs 4.5 lakh on maturity. What was my rate of return?
The internal rate of return (IRR) has to be calculated here. It is the interest rate accrued on an investment that has outflows and inflows at the same regular periods.
In the excel page type Rs 18,572 as a negative figure (-18572), as it is an outflow, in the first cell. Paste the same figure till the twentieth cell.
Then, as every fifth year has an inflow of Rs 40,000, type in Rs 21,428 (40,000-18,572) in every fifth cell. In the twentieth cell, type in �18572. In the twenty first cell, type in Rs 4,50,000, which is the maturity value of the policy.
Then click on the cell below it and type: = IRR(A1:A21) and hit enter.
5.28% will show in the cell. This is your internal rate of return.
Also used for: Calculating returns on insurance endowment policies.
4. XIRR
I bought 500 shares on 1 January 2007 at Rs 220, 100 shares on 10 January at Rs 185 and 50 shares at Rs 165 on 18 May 2008. On 21 June 2008, I sold off all the 650 shares at Rs 655. What is the return on my investment?
XIRR is used to determine the IRR when the outflows and inflows are at different periods. Calculation is similar to IRR's. Transaction date is mentioned on the left of the transaction.
In an excel sheet type out the data from the top most cell as shown here. Outflows figures are in negative and inflows in positive. In the cell below with the figure 4,25,750, type out
=XIRR (B1:B4,A1:A4)*100
Hit enter. The cell will show 122.95%, the total return on investment.
Also used for: Calculating MF returns, especially SIP, or that for unit-linked insurance plans.
5. Post-Tax Return
My father wants a bank FD at 10 per cent return for five years. He pays income tax. What will be the returns?
The post-tax return has to be calculated here. The idea is to know the final returns on a fully taxable income. Interest income from the bank is taxed as per your tax slab.
Formula: ROI � (ROI * TR)=Post-tax return
Type in: =10 � (10 * 30.9%) and hit enter. You will get 6.91%
ROI: rate of interest; TR: tax rate (depends on tax slab)
Also used for: Calculating post-tax returns of national savings certificates, post-office time deposits, and Senior Citizens' Savings Scheme.
6. Pre-Tax Yield
My brother says that the investment in public provident fund (PPF), which gives 8 per cent, is the best. Isn't 8 per cent a low rate of return?
An investment's pre-tax yield tells us if its return is high or low. The return on PPF (8 per cent) is tax-free. Also, this has to compared with returns of a taxable income to estimate its worth. For someone paying a tax of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present, there is no fixed, safe and assured-return option that has 11.57 per cent return and a post-tax return comparable to PPF's 8 per cent.
Formula: Pre-tax yield = ROI / (100-TR)*100
Type in: =8/(100-30.9)*100 and hit enter. You will get 11.57%. ROI: rate of interest, TR: tax rate, (depends on tax slab)
Also used for: Calculating the yield on an Employees' Provident Fund or any other tax-free instrument.
7. Inflation
My family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will I need 20 years hence with the same expenses?
The required amount can be calculated using the standard future value formula. Inflation means that over a period of time, you need more money to fund the same expense.
Formula: Required amt.=Present amt. *(1+inflation) ^no. of years
Type in: =50000*(1+5% or .05)^20 and hit enter. You will get Rs 1,32,664 as the answer, which is the required amount.
Also used for: Calculating maturity value on an investment.
8. Purchasing Power
My family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will be the purchasing value of that amount after 20 years?
Inflation increases the amount you need to spend to fetch the same article and in a way reduces the purchasing power of the rupee. Here, Rs 50,000 after 20 years at an inflation of 5 per cent will be able to buy goods worth Rs 18,844 only.
Formula: Reduced amt.= Present amt. / (1 + inflation) ^no. of yrs
Type in: =50000/(1+5%)^20 and hit enter. You will get Rs 18,844, which is the reduced amount.
9. Real Rate of Return
My father wants to make a one-year bank FD at 9 per cent. On maturity, he says, the capital will be preserved and he would get assured return on it.
It is true that fixed deposit is safe and gives assured returns. However, after adjusting for inflation, the real rate of return can be negative.
Formula: Real rate of return=[(1+ROR)/(1+i)-1]*100
Type in: =((1+9%)/(1+11%)-1)*100 and hit enter. -1.8% is the real rate of return. ROR: Rate of return per annum; i: rate of inflation (11 per cent here).
10. Doubling, Tripling of Money
I can get 12 per cent return on my equity investments. In how many years can I double or even triple my money?
Formula: No. of years to double = 72/expected return
Type in: =72/12 and hit enter. You will get 6 years. For tripling, type in: =114/12 and hit enter. You will get 9.5 years. For quadrupling, type in: =144/12 and hit enter to get 12 years.