Everyday Economics

Will bringing black money back help India?

2012-06-09T13:12:00.000+01:00

Nowadays there is a big hue and cry over bringing back black money stashed in Swiss bank accounts. Looks a no-brainer to get this money back where it really deserves to be. However, is it really that simple? Specially the economics part of it?

Won't it devalue INR and the big flush into the market create inflation? Are we prepared for this? Perhaps not. How is it any different from printing more INR domestically? Some very interesting questions indeed raised on Linkedin.

Surely for me the biggest benefit of bringing back black money would be the identification of account holders from which money would be siphoned off. It's important to identify and punish the culprits. But what about the economics of this activity? It will not be easy to stop Rupee from devaluating untill and unless money is put into appropriate (value generating) activities. So it's very important how do we bring it back to India.

The good thing about the black money stashed abroad is that it's in USD (I doubt it to be in Euro) and not INR. It can simply become part of our foreign reserves. This takes the pressure off INR and domestic inflation. Now forex can be used to fund costly oil imports but I will come to it later as there is an even safer way of using forex (from the point of view of INR devaluation and domestic inflation). Excess Forex can be used as soverign fund to invest in foreign assets thus avoiding any conversion to INR and no direct issue of inflation.

Forex can otherwise be used to fund imports which still shouldn't have a direct impact on INR and domestic inflation. Our oil and gas PSUs, the biggest importers, will be cushioned from the foreign exchange fluctuations as the Gov. would be able to fund them from gov. treasury. Bigger forex will also give RBI greater muscle to flex in the money market. However, under normal circumstances if the black money is coverted to INR without much thought behind it then it will surely cause INR devaluation and domestic inflation.

Personally, I would be more concerned about domestic inflation rather than INR devaluation because if we can control inflation then INR devaluation will be short lived. Now, how will that be achieved? You are trying to increase money supply without calls to inflation. Well, it can be achieved (in a perfect world with honest and competent leaders and beureaucrats). If there is enough infrastructure (of businesses and entrpreneurs) waiting for injection of capital to convert it into products and services worth more than the capital that has been injected then inflation will be averted and the growth in economy will ultimately support the INR. Thus the capacity of domestic businesses should determine at what rate should the black money be injected into the market and ideally the gov. should help the businesses to build the apetite for the capital beforehand (through conducive policies, support for MSMEs, etc, etc).

Now getting back to other half of the question. Why can't it be done by printing more INR? Well, surely, you will appreciate that the first two ways that I suggested wouldn't be possible through printing INR as the option of forex will not be there. What if we want to inject more money in the economy? Well, again it can be done but it will cause serious inflation if not done in the way suggested in para 5. If done without putting in much thought behind it, although it will not directly impact exchange rate but exchage rate will be affected indirectly through inflation. Also, practically we will have to look into the national account statements to account for the pritning of money. US, for example, prints it frequently but it reflects in its foregn debt (ultimately, the printed money has to come from domestic funds or foreign funds or currency devaluation) But US can do it because it has a global currrency (without much effect on exchange rate). It is not easy for other countries to copy it without jeopardising their currency and that is why central banks around the world have such a critical role to play (balancing between domestic money supply and exchange rate).

I hope Baba Ramdev has a plan in place on what to do when he succeeds to get the black money back :) Of course he doesn't have one but he is smart enough to know that no black money is coming back and thus he is happy till his political ambitions is getting the right support through this cause!

Why Japan is able to sustain massive debts while Greece and Italy can't?

2012-06-09T12:36:00.001+01:00

This is another interesting question I came across on Linkedin. The question touched upon two topics:

1. Why is Japan in massive debt in spite of a hard working, technologically strong economy?

2. More importantly, why Japan doesn't seem to be in that much pain as compared to Greece or Italy who are facing a similar debt (or even lower debt levels?

Why is Japanese gov. in debt? Simple and easy answer: Japanese Gov. is in debt because they have spent more than what they have collected in taxes.

Why has that been so? Multiple reasons but few of the popularly known ones are: years of stagflation and the "lost decade" (and gov. spending to support the economy), demographics (decreasing working force and increasing pressure of non-earning old age pop.), and relatively strong Yen.

But how come they are more comfortable than some of the other European countries with big debts? One of the primary reasons cited for Japanese lost decade and deflation is not that they didn't work hard enough but because they didn't consume as much and saved a lot.

The massive domestic savings meant that the Japanese gov. could take all that public debt from domestic funds (national savings) and thus their debt is all domestic debt (debt in Yen, domestic currency) rather than foreign debt (debt in foreign currency) as in the case of European nations. European countries didn’t enjoy the luxury of domestic savings!

The problem with Greece or Italy is that when they have to pay their debt they have to convert Euro in to some foreign currency which has negative impact on Euro and they do not have control over Euro as any other country would have on their currency. So Greece or Italy can’t pay off their debt at the expense of their currency (although it’s not that straight forward) as compared to some other nations like Brazil with control over their domestic currency. Individual European nations have very limited control over their monetary policy.

Note: Japan will not have this problem at all as their debt is primarily domestic (in Yen). Japanese Gov. don’t have a problem in paying off their loan and particularly the interest as they can simply print more yen.

Of course it will affect Japanese interest rate and exchange rate but it can be managed and at least they have greater control over it. So they can hold off any panic from their debtors for a longer duration. The same principle actually applies to US as well who have been able to hold off the debtors from panicking for all this while because of the status of USD as the international currency! So the foreign debts of the USA are also in USD! (local currency) :)

Hope you found this helpful but in case you have any queries please feel free to drop me a note.

Rupee breaches the $56 mark (23/05/12) Why?

2012-05-24T23:38:00.004+01:00

Rupee is on a slide and it's sliding fast against all major currencies. This is particularly interesting asnot so long ago (Aug'11) Rs was $45 and RBI was pressured to intervene and sell $ in the open market to relieve the exporters. Looks like we are at the other half of the cycle and it's for RBI to intervene again, albeit this time from the other direction. (I personally don't support the role of central bank as exchange rate stabilizer).

Any ways looking at the sliding Rupee I would like to focus on few things which could have had worked together in past few months to manifest what we are witnessing today.

1. After strong first few months of FII investment in 2012 we are now seeing a dip. The FII investment in the debt market saw net outflow of Rs. 6500+ Crore in the month of March and another ~Rs. 4000 Crore withdrawn in April'12. Similarly, FIIs withdrew from Indian equity in the tune of over Rs.1000Crore in the month of April and their net investment is in negative in the month of May. All this selling has put tremendous pressure on Rupee.

2. Oil, India's biggest import, saw its prices increase again to $100+ level and remained so till end of April'12 which has again put Rs under pressure.

I believe these are the two important factors for the recent drop in Rs. exchange rate. However, there can be other reasons as well including:

1. Inflation: Gov. has struggled to put prices under control and continued periods of high inflation is bound to put pressure on the exchange rate.

2. RBI has been forced to loosen monetary policy but at inflation still at 7+% plus recent hike in petrol prices can push the inflation up again eroding the value of investors.

3. As the aftermath of financial crisis refuses to subside and in the wake of rekindled Greece crisis investors are looking for safer bets.

What comes first money or demand?

2012-03-07T12:59:00.001+00:00

I recently came across a question on Linkedin regarding the relationship between money and demand.
"What comes first money or demand? Did we not see money creating demand in some of the profound turnarounds of the biggest economies since the turn of this century?"

I think demand should precede money. However, since the beginning of 2000 this has been proven incorrect by the biggest economies of the world (US/EU). Greenspan's (in?)famous decision to parcel out monies to households to prop up demand and lift the economy from recession actually succeeded. This simply fails the idea of demand preceding money. So is this old school notion incorrect?

Perhaps not. We need to take a step back and analyse this activity in global perspective and not in isolated US economy. What we have seen recently is a special case of loosening monetary policy to create demand. This demand actually helped economies to resurrect because someone, somewhere (outside) was producing to meet this demand. Had it not been the case, Greenspan's idea would have triggered inflation and nothing else.
This is one explanation but this is still incomplete.

We need to take another step back.
The whole idea of Greenspan printing money worked because US$ bill is an asset which has a demand in the rest of the world. It's the demand of US$ globally that allowed Greenspan to produce more of it and it was exchanged for cheaper products from rest of the world.
Say a country like India or Uganda can't even dream of such turnarounds during recession as they might end up like Asian tigers in the 90s. Perhaps also, it is partially the reason why EU is not able to sustain the same monetary policy for as long as US has been able to (evident of Euro still has a far way to go to replace USD as a global currency).

Thus the demand has always reigned supreme and will be so in times to come.

Tourism can be the key to Portugal’s economic recovery

2011-01-04T00:44:00.000+00:00

After Greece, Portugal can be the next big prey of the recent recession. What new can Portugal do at this stage? How can it push its GDP?

GDP = C + I + G + X – M, how can Portugal play around with this equation to increase the GDP?

The challenges in front of Portugal are

1. Portugal’s public debt is 77% of GDP (2009) and external debt is a whopping 223% of GDP (2009). In these circumstances there is no easy way of spurring the economy through Government spending or Government investment.

2. Gross national saving has gone below 10% of GDP which shows unavailability of domestic saving for investment.

3. Devaluing their currency to boost export is not an option.

4. With stringent labour laws it’s hard to see productivity rising in near future.

Thus it is clear that it’s hard to find more money for domestic investment either from household or from the Government. The challenges don’t end here. Even if Portuguese start saving more and Government gets a relief package from EU, the next question would be where to invest. Where should the Government be spending money?

The usual suspects may not be the ideal options. For example, Portugal’s road density is already amongst the highest in the world (Length of motorway per capita; Portugal: 249.3, USA: 253.05; 2006 OECD data). Portugal fairs well in most of the other such development parameters. Thus, starting new infrastructure projects may not bring desired results, although they can bring inflation over time (Read point #5 here to understand why). Portuguese households are saving less and consuming more. Domestic production hasn’t been able to keep pace with consumption, which has resulted in a trade deficit which stands at € 1.6bn today. So giving more money in the hands of consumer will not solve the problem as the money can just end up increasing the value of imports, exactly the way it has happened in the USA. In the age of open economy the increasing domestic demand can very well be satiated with foreign imports, thus not doing enough to spur up the domestic industries.

Perhaps I am pointing towards the simple sounding way of doing something about the factors of production in order to ensure that the domestic industry create more goods and services. However, these factors are either too constrained (Land for obvious reason, Labour due to unfavourable but popular labour laws, Capital due to the challenges described above) or take a long time and effort to start showing results (Labour and Enterprise). Also, two or three of these factors must work together to show desired results.

So what can be done now? The question is still unanswered. While increasing domestic production will need both capital and time, where can the Government focus in the mean time to avoid slumping further down?

The answer lies in exploring the Balance of Payment Accounts, specifically the foreign savings or savings of rest of the world.

When your total domestic savings is not enough to meet your domestic investment, then the savings of the Rest of the World needs to flow in. So the first thing is clear, the current state Portugal is in, it needs to get money from Rest of the World. Now, the rest of the world can pay for 2 things

1. Portugal’s export

2. Portugal’s domestic investment

As briefly discussed above, boosting export would mean increasing productivity and reducing cost and it may take a longer time. Second way is to get the Rest of the World invest in Portuguese economy. Again a tricky option keeping the current economic situation in mind where Portuguese economy is said to be looking straight down the barrel.

Well, there is another simple and straight forward way of attracting the foreign savings. Specifically the household savings of rest of the world and that is through tourism. This can be one simple straight forward way to ensure that the savings of rest of the world’s comes to your country. Portugal surely has a rich historical heritage and numerous breathtaking natural views to attract savers (people) from all around the globe. This is one area which must be focused by the Portuguese Government at this moment.

There are parts of developing world which are getting richer by the day with increasing disposable income. There is scope for Portugal to place itself amongst the top tourist destinations in the world and in the process firmly plant themselves in the radar of tourists looking for new destinations. Tourism not only brings foreign capital to fund domestic investments but also helps create direct employment and supports multiple other industries indirectly. Thus it can be an ideal sector for initial investment the Government can look for in order to ensure a healthy flow of fund.

I hope the Portuguese government sees the potential in this sector and provide the backing this industry deserves. This could be the first realistic step towards a sustainable recovery.

Will higher taxes on financial firms fuel another crisis?

2010-10-09T14:10:00.003+01:00

Policy makers in the UK and Europe are contemplating higher taxes on financial firms anticipating that it will curb the kind of reckless financial creativity which is now widely recognised as one of the root causes of the recent crisis. The bankers’ prolonged over optimism not only triggered the crisis but now also has the whole population reeling under the austerity measures. An unfair situation? Hmmm... yes, according to many. But if this is the general belief then the representative of the people, our Gov., has to do something about it. The world should be made fair at least the population should feel so. Why should the bankers’ responsible for all the crisis get away with so little punishment and again get back to the hay days of high bonuses while the unemployment level still remains too high for comfort? A fair and popular decision should entail greater punishment for the bankers. The poor, the homeless, the jobless, the middle class working hard to make ends meet must not bear the brunt of the crisis. It should be the responsibility of the bankers who are responsible for the situation. I think the Gov. is doing just that. Higher taxes on financial firms. Sounds fair, makes the junta feel happy and vindicated.

So far so good. However, is this really a solution or just a popular step to please the voters? Or should I say it’s another popular step of a popular government to remain popular?

I am concerned about the effect of this decision on the banking industry. What happens when your cost increases? You invest in more profitable projects to survive. What happens when your cost of capital increases? Many projects which you could have undertaken earlier no longer impress you as you look for higher returns to counter your increased costs. Can we expect the same to happen in the financial industry? Will they focus on still higher returns to remain profitable to counter the effects of higher costs through taxes? I believe they will. But do we not believe in high risk high gain investments? Can we safely assume this policy to apply in majority of cases where chasing higher returns can result in higher risk taking? Let’s not be too optimistic thinking that there will be a sudden rise in low risk high gain projects which will counter the weight of higher taxes and keep the financial firms as profitable! Also, as Adam Smith said “If profits above a normal rate of return exist in any sector of the economy, other firms will enter these industries and force down returns at which no excess profits exist.” And well if we agree that higher gains often attract greater risks then aren’t we pushing financial firms towards greater risk taking, greater financial creativity and a greater chance of triggering another financial bubble? One counter argument could be that the financial firms would settle for lower profitability and would not chase high profit projects or would not create opportunities for higher profits. But do you really expect that to happen? Won’t the competitive market push for greater profits? I think they would. So is this another decision focussed on gaining popularity rather than a long term solution? I think it is. But thanks to democracy, popular decisions will keep defeating correct decisions.

India: Tackling recent surge in inflation... Circa Sep 2010

2010-09-21T01:39:00.004+01:00

This is just a continuation of my previous post in Dec 2009 Click Here

As feared in my previous post, the Indian Gov. has tried to hide its impotency against the rising food prices (and inflation in general) behind the innocuous step of monetary policy tightening. RBI has yet again raised the interest rate despite continued failure in taming inflation. But what can the Gov. do other then putting pressure on RBI to play with the monetary policy? Gov. has not done enough to meet the supply side challenges. In fact the food grains are rotting in the depots. The level of wastage is evident from the Supreme court's order to distribute food grain for free if Gov. can't store food grain (Click). This Gov. is trying to solve the supply side challenges through demand side tools.

Below is an excerpt from my previous post which throws more light on the subject.

"...
If you can’t prop up supply then reduce demand, sounds just right. However, I call it a pseudo solution as tightening monetary policy might not be an intelligent and effective way to tackle rising food prices.

First reason is the tools used for tightening monetary policy like interest rate, CRR, etc would take a very long time to actually affect drop in demand for food items. The trickle down effect is very slow as food lies far down the chain from where monetary policy starts taking effect.
Secondary reason is that the demand for food is still affected much more by consumption rather than investment. This coupled with the wide rich poor divide means that the major chunk of liquidity lies within the reach of rich few, who would not start eating more just because the cost of capital has gone down. Increased liquidity would have increased overall demand for food if the money would have reached the pockets of wider section of society, especially the ones who are consuming far less than a healthy diet. This is why a tightening of monetary policy may not bring in desired results, although it just might give a picture that the Government is at least doing “something”. Although this “something” will surely prove to be a serious blow to the much needed recovery process after the recent credit crunch.
Thus my request would be not to disturb the monetary policy...."

I believe that the Gov. has run out of all ideas as it shamelessly pursues the course of tightening monetary policy at the expense of our economy in order to fake a war against inflation...

Please read my earlier post below on the subject. (Click)

Reasons for time and cost overruns in capital projects

2010-05-02T01:30:00.000+01:00

In addition to the Challenges in front of Indian Infrastructure Sector here are some important points which I came across in an informative article from Institute of Defence Studies and Analysis.

Many studies have been conducted on capital intensive projects, bringing out a host of factors that cause delay at different stages of projects starting from pre-commissioning to implementation. The points mentioned below are typical reasons why we see delay in capital intensive infrastructure projects in India.

"Some of the important factors include changes in scope, alterations in design, delay in procurement of equipment, shortage of materials like cement, steel, explosives, etc., difficulties in transporting equipments to site, shortage of key personnel during the implementation stage, inadequacies in planning, problems in land acquisition and rehabilitation, climatic and environmental factors, lack of monitoring, contractual problems, poor performance of consultants, vendors and contractors, law and order problems, inadequate infrastructure support, etc. In addition to these factors, risk assessment at the stage of project implementation is required on a regular basis to take timely remedial action. "

Well, this post focussed on the operational side of challenges. Please do read my post on many other challenges being faced by the Indian Infrastructure Projects here.

Budget Deficit and Interest Rate

2010-05-01T20:02:00.004+01:00

Recently I came across a problem which questioned how a country can increase budget deficit (through Gov. Spending) without increasing the interest rate. It asked its readers to solve it using IS-LM model and figure out two ways of achieving it. Surely a pertinent question in today’s scenario when central banks have pumped in lot of liquidity in the market but are afraid of hiking/rising interest rates so as to keep the recovery on a smooth track.

Well, I would try not to use any model and still explain you the ways in which it can be achieved. But let’s first understand why increase in Gov. Spending (without proportional increase in Gov. Earning) leads to the rise in interest rate.

Ok so before we go on to understand money supply let’s first understand what is money. Just as “light” exhibits properties of both wave as well as particle, similarly money exhibits two basic properties of “mode of exchange” as well as a “commodity”. There is a limited supply of money in an economy and interest rate is the cost of obtaining/purchasing the money. You might draw some parallel with cost of capital which takes into account the interest rate at which capital is borrowed. Money, just like any other commodity experiences forces of supply and demand. In very simplified terms, when the central bank prints new currency notes, supply of money in the economy increases. Similarly, when say businesses try to borrow from domestic market, demand for money/capital increases. There are many more similar cases. We can imagine it as a central pool of fund and businesses, governments, individuals, all draw funds from this pool. Businesses need capital to expand, invest, etc government needs loan when they can’t meet their expenses through their earnings and individuals needs a share of the pool too to say buy houses, for education, investment, etc. When the overall demand on this pool of fund increases, just like any other commodity, the price of money goes up or cost of capital goes up or the interest that you pay to obtain the money goes up. When the government runs a budget deficit, they need to get the money from somewhere to meet its expenses. This money again comes from the limited fund available in the pool thus increasing the demand to borrow from the pool. This is what happens in a free market economy where government doesn’t artificially try to fix interest rates. The supply and demand of money determines the interest rate.

In countries like India which doesn’t follow free market economy in its purest form, a similar thing happens but with an intervention from central bank. An increasing budget deficit resulting from increased government spending is soon followed by increased money supply in the market and thus increased inflation. Then the central bank intervenes with string of measures including hike in the interest rate to increase the cost of money and also increase of CRR to soak up the extra money pumped in earlier to boost the market. But either way increasing budget deficit results in increasing interest rates.

Now how can hike in interest rate be avoided while still taking care of the budget deficit? Thus we are talking of a scenario when the increasing demand due to increased gov. borrowing doesn’t increase the cost of money.

Well one simple way is to increase the supply of money to match the demand. Central bank can print more money to finance the deficit. The challenge faced in this path is printing fresh money increase inflationary pressure and after a while governments need to alter the interest rate, CRR, etc as explained above which for example, Indian government does too often.

Well, what is the other way of getting the money for the government without adding pressure on the local pool of funds? Of course in a global economy when you don’t want to borrow from local savings, borrow from the savings of rest of the world. So the government borrows from abroad. The challenges faced are

1. 1. Upward pressure on the local currency thus hampering exports.

2. 2. Exchange rate risks which has the potential of repeating the East Asian crisis of the 90s.

Thus, managing budget deficit while avoiding interest rate hike is possible but the solutions come with caveats attached. Clearly none of the solutions can sustain prolonged period of deficit. Well, perhaps that is the reason why budget deficits need much more cautious approach. This becomes increasingly paramount when governments need expansionary fiscal policy to fight recession. The process of recovery through gov. spending especially becomes tough when you see economies entering recession with an already high budget deficit. This is what happened to Greece in the recent crisis and they were not left with any room to manoeuvre their fiscal policy as they already had huge external debt being used to finance their budget deficit.

This is really a hot topic of discussion today and I would love to see your comments.

UK Budget Deficit

2010-04-05T23:30:00.007+01:00

I recently wrote an answer/comment on the burgeoning UK budget deficit and what can be done about it. You can have a look at Ning or Guradian .

Or click the read more button below to read the post here and also to see the pdf of the image shown above.

UK, like most other recession hit nations of the western world is witnessing burgeoning budget deficit. There is a big question on how to reduce it. Budget deficit can be reduced either through cut in expenditure or increase in revenue. Let's look at spending cuts first.

Actually it is easy for everybody to say that gov. spending needs a cut but pinpointing the cut is always a difficult task.

Commenting on areas suitable for cut requires much more study but there are couple of straight inferences. Guardian has provided this wonderful graphics to study UK's gov. expenditure. Click here to download a pdf of the graphic shown above. Here are few areas where there can be spend cuts.

1. The 4th largest spend bubble representing "Her Majesty's Treasury" which saw a momentous growth of 49891% over 2007-08 went into saving collapsing banks and other financial institutions during the financial crisis. It is expected to reduce sharply in coming year, thanks to upbeat results posted by most of the commercial banks. Banks have in fact also started to pay the debt back to the government which is a healthy sign.

2. Department of Health representing GBP 109bn spend is itself an obese. Gov. needs to look into the health of the health dept. McKinsey advised the gov. in Sep 09 to cut 10% of the staff over the next 5 years. However, the Department of Health rejected the advice saying many services needed more staff, not fewer. Both were right at their own place. While NHS desperately needs more skilled, experienced medical staff (doctors, surgeons, experts) as pointed out by the Health dept. , McKinsey advised cuts on low skilled clinical and admin posts.

In fact you don't need to be at McKinsey to witness the lousy nature of admin staff working at most of the medical centres in UK. At least my experience around London has been pathetic to say the least.

Perhaps it s high time gov. takes stock of the performance of NHS staff and help develop a more balanced health care system where both private and public players have equal participation.

3. Though, I am not in favour of this but defence spending is likely to go down in the coming year. With almost all the partners of war against Afghanistan and Iraq suffering from the financial crisis, the pressure is high to cut the spending on these wars.

Moving on to increasing gov. receipts. One advantage for Britain is that it's not part of the Euro zone. Thus it can allow the sterling to depreciate to boost export. In fact if you notice, there has been unending announcements by UK gov. that spend cut is needed. However, there has not been any major step in the direction. (I appreciate that !) In fact, now all the decisions on spend cut have been officially postponed till post election. Of course with a prediction of hung parliament, these tough decisions would be postponed further. That's actually not all that bad. Sometimes, in a thriving capitalist economy, lazy gov. is a good gov.! On the other hand sterling is down 24% on a trade-weighted basis since August 2007. This can give a boost to country's export. Britain needs to realize that it is still the world's 6th largest manufacturer. The much hyped financial sector even at its peak contributed 8% to the GDP in comparison to 12% by manufacturing. Surely, manufacturing has been neglected for long in Britain in terms of gov. impetus, private investment and also a high exchange rate (before 2007 since sterling started to tumble).

Thus my overall suggestion would be to keep the exchange rate competitive, put some weight behind export as suggested here. Keep making promises on expenditure cuts, the way you have been doing without showing any substantial cut. The continued public spending will support domestic industry and domestic demand while promises and strong show of intent for spend cut will reduce the risk of a rally against sterling (at least for as long as it can). In spite of the big areas needing spend cut, you can wait and watch the Financial stability bubble (Biggest part of the spend on "Her Majesty's Treasury") go down without any tough political decision thus keeping the critics quiet for some more time :) Help the industry to cover the budget deficit if you are not prepared to take tough decisions on spending cuts on NHS (National Health Services) and DWP (Department for Work and Pensions)!

http://bhasker-siddharth.blogspot.com/

FT.com / Commodities - Steel prices set to soar after iron ore deal

2010-03-31T10:17:00.003+01:00

In line with the my post on Challenges before Indian Infrastructure Industry, the high and continued demand for steel from developing countries specially China has brought about a momentous change in the way steel industry buys its most important raw material, iron ore.

Below is the link and excerpt from the article published in FT on 31st March 10.

FT.com / Commodities - Steel prices set to soar after iron ore deal: "Steel prices set to soar after iron ore deal.....

The deal by Vale of Brazil and Anglo-AustralianBHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market....

The balance of pricing power has shifted in the miners’ favour due to the emergence of China as a voracious consumer over the past 10 years....

The new price system will lift the cost of iron ore to Asian steelmakers to about $110-$120 a tonne during the April-June period, up between 80 and 100 per cent from the $60 level at which the 2009-10 annual contracts were settled....

The steelmakers said they would compensate for the increase in raw materials costs by raising steel prices by up to a third. Some companies have already raised their prices in anticipation of the move in iron ore. The cost of the benchmark hot rolled coil steel is likely to hit $725-$750 a tonne by the end of next quarter, up from $550 in January. It traded as low as $380 a tonne last year...."

Infrastructure bonds finally

2010-03-23T13:56:00.003+00:00

In one of my previous posts, I explained the challenges in front of Indian infrastructure sector where I pointed out the difficulties faced due to the absence of strong corporate bond market in India.

Thankfully, the FM has now come up with the idea of opening the bond market to Indian infrastructure corporates (Public as well as Private players). Read more about it here.

Software Product Pricing

2010-03-04T14:52:00.001+00:00

Here is an informative article on software product pricing.

http://www.pragmaticmarketing.com/publications/topics/02/0208ds/?searchterm=pricing

Below are couple of links from Linkedin where the issue was discussed.

Linkedin 1

Linkedin 2

India: Tackling recent surge in inflation

2009-12-20T01:12:00.021+00:00

We are witnessing a surge in inflation (in India) and this time the soaring numbers are reflecting the CPI. It would be interesting to see how the government tackles the situation.

The inflation figures are soaring due to rise in prices of food items, primarily potato (136%), pulses (40%), onion (15.4%) and wheat (14%). Supply side constraint has been sighted as the primary reason behind this recent surge. It’s true keeping in mind the draughts and floods that we have faced this year. To add to this, we have a completely unregulated part of supply chain between farmers and retailers where the final mark up at which the consumers pay can go over 500%!

You will get plethora of information describing the current situation on the internet. I wanted to discuss what lies ahead. We now have two primary challenges

1. Supply side constraints

2. Artificial price hike due to unreasonable mark-ups and hoarding

And a pseudo challenge of increased money supply (I will explain later why I call it pseudo challenge).

This one is a special case of inflation where we are witnessing unprecedented rise in food prices. Let’s first keep the artificial price hike aside because it’s an unchartered territory for our Government and surely the Government is incapable of handling the enormity of this challenge. Thus fixing this one is a long shot and let’s not expect this to happen for now.

The second and the pseudo way I believe is monetary policy. If you can’t prop up supply then reduce demand, sounds just right. However, I call it a pseudo solution as tightening monetary policy might not be an intelligent and effective way to tackle rising food prices.

Secondary reason is that the demand for food is still affected much more by consumption rather than investment. This coupled with the wide rich poor divide means that the major chunk of liquidity lies within the reach of rich few, who would not start eating more just because the cost of capital has gone down. Increased liquidity would have increased overall demand for food if the money would have reached the pockets of wider section of society, especially the ones who are consuming far less than a healthy diet. This is why a tightening of monetary policy may not bring in desired results, although it just might give a picture that the Government is at least doing “something”. Although this “something” will surely prove to be a serious blow to the much needed recovery process after the recent credit crunch.

Thus my request would be not to disturb the monetary policy.

Let’s now turn to supply side constraint. The Government nowadays doesn’t shy away from importing food stocks to relieve the pressure on domestic supply. It shows dual benefit, on one hand it strengthens the supply and on the other hand it also forces the hoarders to release stocks due to downward pressure on prices. However, this time the solution would be a bit more tricky. This is due to recent surge in world food commodity prices. Prices of wheat, maize, sugar, et al have witnessed rise in prices. Shortage of supply of sugar from Brazil has pushed sugar prices to touch its 28 yr high. Import decision from India would further put pressure on world prices. Thus import would be expensive for India.

http://www.indexmundi.com/commodities/?commodity=food-price-index

Sorry, I am not suggesting any perfect solution but it would really be interesting to see the next steps. Also, it would again pose fresh questions on our self sufficiency in terms of food produce.

Is it time to let the INR float freely and appreciate rather than pegging against USD? Have a look here to read more about this http://bhasker-siddharth.blogspot.com/2009/08/american-recession-fuelling-domestic.html

Challenges in front of Indian Infrastructure Sector

2009-11-12T15:47:00.004+00:00

India infrastructure: big ambitions, big potential, big money, little happening. This is what I feel, sums up, what's happening in the Indian infrastructure sector. Government's extended enthusiasm about the sector hasn't been able to get the big infrastructure projects moving. There are lot of PPP projects coming up but what's going wrong? Many Infrastructure and Power shares are seeing constant ups and downs in the market. What is keeping the big money away? Surely the private investor is upbeat on the sector and so is Indian mutual fund. But the big money from western FIIs and Pension funds doesn't seem to have embraced the sector gladly.

I believe that there are few sore issues which needs to be taken care of so that the Indian infrastructure sector can be put on fast track asap.

1. Dilly Dally attitude of government which ensures unending delays along with the corrupt governance model especially at the grass root level.

2. Absence of strong long term debt market in India. Corporate bond market is almost non-existent (specially compared to domestic stock market or int'l bond market). Indian banks are the only funding source which anyway charge very high interest rates and come with many more strings attached. Any ways Indian Banking sector is not the most revered one in the world.

3. Infrastructure projects need long term loans, for which insurance and pension funds are extremely suitable. If we can't tap the western insurance and pension funds then we can use our own domestic insurance and pension funds. However, they are not developed enough. Also, they need to be opened up further to attract foreign funds. LIC might need to play a decisive role in the infrastructure projects in India which in turn needs a hell lot of money today.

4. India is competing with the likes of China, Korea and Brazil for infrastructure related funds. While India plans to spend $500 bn on infra. projects from 2007-2012, China has already come up with a plan of over $550 bn investment in infrastructure projects just to fight the recession. According to some estimates China might be investing over $5000 bn in next 2 decades. So the competition to get the funds is likely to remain high in years to come.

5. If funds are such a big problem then why can't Indian government just print money and pay for it. The problem is not only the high budget deficit and high public debt that we are already running in order to fight the recession. More importantly the very nature of infrastructure projects which takes years to start paying the benefits would mean inflation. No matter how the money comes, the gestation period of infra projects would mean calls to inflation in short term. Infra projects anyways take a long time to complete and still longer in India. The time required has to be tightened. This would require minimum gov. intervention, minimum red tapism, increased transparency, consistent flow of fund and last but not the least, latest technology. Latest technology would again require FDI flowing in.

So quite a bit of challenges to face.

Please feel free to post your views, comments, criticism, appreciation. I would be happy to explain/discuss any part of the article if need be.

Mobile Marketing: Potential or Pain?

2009-11-09T18:06:00.003+00:00

Mobile advertising has off late gathered lot of intellectual discussion. Some see it as a great potential and others treat it as a pain in the a***. Mobile advertising today, as I know, mainly comes in the form of SMS (Text Message/Multimedia Message). I am keeping the advts. which a user sees while browsing internet through his mobile phone separate from this. A quick look at Wikipedia suggests that worldwide, over 90% of mobile marketing is done through SMS.

I personally feel that mobile advertising has one of the biggest nuisance value as compared to other conventional mode of advertising. I would request readers to pour in their views and correct my opinion.

Well, in case of TV advt. I switch on my TV to watch my favourite show and attached with it comes few advt. which I see during the breaks. Thus, I don't switch on my TV to watch Advertisements!

I pick up my favourite news paper to read the latest news/articles/opinions and while browsing through the pages I get to see some advertisements. Again, I didn't pick the newspapers to check the advertisements!

Let's take the case of web advertising as well, and there also I go to my favourite website to browse it and I see few ads while browsing through my favourite website. Thus, the ads come with my favourite website which has some helpful content for me. I didn't go on internet to see ads.

You can apply a similar logic for hoardings, banners, etc which you see on your way. You usually don't go somewhere to check the hoardings or banners.

Based on the above cases, I can say that advertisements seem to be accepted when they come along with something which is useful to us or asked by us. We usually "make an effort" to see/do things which we like to do or are important for us. Advertisement comes along with them in the process. Thus we don't "make an effort" particularly to see an advt.

This basic principle is not respected my mobile advertising. The very idea that advt. is being sent through SMS/text message, implies that it needs to be read/seen asap. This is what you do when you get any sms. That is why you get a ping/alert whenever the message arrives. SMS with advt. comes as an interrupt. But usually an unwanted interrupt. Then the user "makes an effort" to pull out his mobile phone from his pocket/bag and pushes few buttons and goes on to read the advertisement! So all the effort purely to read an ad! not good... What comes along with something you wanted is still ok. But ads in this form irritates the user.

There is another advertising medium which suffers from similar problem. Ads in an e-mail. Why doesn't it work? Well, it again breaks the fundamental rule where the user makes an effort to open a mail and read it without getting what he actually created his e-mail account for. This still has a lesser effect as he at least signed into his e-mail account to check his own mails, thereby some of his effort went into something which he more legitimately wanted. Still advertising of this form has now taken a derogatory name called "SPAM". Have you ever thought why an ad in news paper or during the commercial break in TV shows are not called SPAM or any such similar word?

If the fate of e-mail ads is such then think of the effect that mobile advertising is likely to create in the user's mind. It's awful.

So I would say that if you are looking to advertise and especially through a mass media then try to embed/bundle your ads with something more legitimately asked for by the user. The challenge is to embed the ad so seamlessly that the ad should be able to attract the attention of the user if he is interested in it but if he is not, the ad should not spoil the user experience of using the medium.

Mobile media surely needs to be tapped. Today, mobile phones outnumber TV sets by over 2 to 1, internet users by nearly 3 to 1, and the total laptop and desktop PC population by over 4 to 1 (Source: Wiki). Also, the mobile media, unlike TV, Newspaper or Radio, is a two way media. It remains to be seen when marketers would be able to effectively start tapping the vast potential of mobile marketing.

Role of Fiscal and Monetary policy: American context (Part 2)

2009-09-22T14:33:00.008+01:00

Welcome to part 2. (Click here to read the first part) I will begin this part with the modern panacea for recession. Loosen monetary policy, let your currency depreciate boost your export and plough back out of recession.

This looks efficient as well as effective in most cases. Although the sanity of increasing liquidity in the market was not suggested to the Asian tigers or the Argentinean government during the crisis, still it is now a well established fact to do so in order to fight recession. However, it might not give its usual results when we look at America.

The USA is a net importer with huge trade deficit and USD is the global trade currency. Many other countries are dependent hugely on trade with the USA and also dependent on the value of USD. This has propelled most of the developing countries to maintain the value of their domestic currency against dollar to keep them competitive in the export market and also to prevent losing the value of their forex reserves. These nations which include the likes of China, Russia and India, have chosen domestic inflation over stronger local currency (Click here to better understand this phenomenon). Another factor which plays a role in keeping the dollar strong against other currency is that US lies in the centre of today’s mono polar world. Thus no major economy across the world stays untouched from US recessions. You can see on the graph how Euro area follows US GDP growth rate.

What this means for the US economy is that when monetary policy is loosen in times of recession, USD doesn’t lose as much value as expected and thus US gains no particular advantage in the export market. Thus US gets no better at successfully targeting the foreign demand and it rather needs to prop up domestic demand to recover from recession. In the first part we talked about the interaction of domestic demand and expansionary monetary policy where there is an emergence of a catch 22 situation. (Are we seeing a similar phenomenon now? When there is liquidity in market and the proof is asset prices are increasing, stock market all over the world is on their way up, Gold is at its all time high; though the queue outside employment offices in US isn’t decreasing at the same rate, which emphasises that money available is being invested in assets rather than production.)

The democrats in US are currently using a mix of fiscal and monetary policy to provide stimulus to the economy. But the majority money till now has gone into saving the collapsing financial system which in turn used the money to write off bad debts. The road from here on would need a script for creating more jobs and stimulating demand. Let’s see what US does now, keeping in mind that USD hasn’t lost much against other major currencies. Will the expansionary monetary policy be used again or the fiscal policy will get its due? With interest rate already near 0% there is not much scope left here!

Role of Fiscal and Monetary policy: American context (Part 1)

2009-09-22T14:30:00.002+01:00

Hi friends,

I started off with the aim of exploring recessionary economics. I wanted to find out the different ways in which a recession is triggered and steps which can lead a nation out of it. But as I spent more time on it, the length and complexity of the scenarios to be considered kept increasing. I wanted to present a simple model which can explain different kinds of recession and give a clear picture of the phenomena which everybody can understand. But as I said earlier it’s now taking too much time. Let’s see when I complete it, if I complete it at all.

Right now I will give a quick over view of the role of fiscal and monetary policy and understand them in today’s context. I will also try to explore how they work in the American economic system.

We typically have two kinds of tools to bring changes in the economic condition of a country: fiscal policy and monetary policy. We use an expansionary fiscal/monetary policy to plough out of recession. Here is how they work and the basic difference between them.

Fiscal policy focuses on controlling the government spending in order to accelerate or retard economic growth. During recession, an expansionary fiscal policy is used which aims at increasing government spending to directly increase investment, employment and thus domestic demand. Expansionary fiscal policy is either financed through borrowing or tax increase.

Monetary policy aims at controlling the liquidity in the market to spur up or slow down the economy. It is implemented primarily through interest rate control (though there are other ways as well). Usually the central bank is responsible for fixing the interest rate. During recession, an expansionary monetary policy is implemented (easy money) which aims to bring down interest rate or make money cheaper. It is then expected that with cheaper money, the private sector will increase production, which will increase employment and then demand.

The effectiveness of the above tools depends a lot upon the source which triggered the recession, severity of the recession, objectives which the government/central bank is looking to achieve (like exchange rate stability, price stability, et al), financing options, how soon the results are desired, etc. Both got a validation and initial acceptance after the great depression. However, while recovery from the depression of 1933 saw the use of fiscal stimulus, the world today is seeing more of monetary policy being used to fight slumps in economy. There are various reasons for this

1. 1. Monetary policy is governed by independent central banks which don’t have to go through slow democratic process of fiscal policy and are thus implemented much more quickly.

2. 2. Shift in economic structure towards free market economy where government keeps off from influencing the market (laissez faire).

3. 3. Continued success of monetary policy to come out of previous slumps. In the last two slumps, US primarily used expansionary monetary policy to successfully come out of the slowdown triggered by IT bust and 9/11 attack in 2000-2001.

However, there is a catch with expansionary monetary policy. There is cheap money in the market which can be used by the producers but the consumption level is still low and unemployment is high. Cheap money alone is not sufficient for producers to increase supply. Producers don’t start increasing production without seeing a growth in demand.

Demand can come from two places, either domestic or foreign. Producers wouldn’t increase supply for the domestic market until there is a demand and consumers wouldn’t start spending unless they are employed back. This creates a tussle where private firms tread slowly resulting in slow progress. However, lower interest rate brings down the domestic currency and makes you more competitive in export market, thus giving the producers enough incentive to increase production to cater the foreign demand. This increase in production gradually increases the domestic employment level and then domestic demand. The process is simple and backed by top economists of our time. Loosen monetary policy, let your currency depreciate boost your export and plough back out of recession.

At this point I would like to stress upon the objective of creating demand. The ultimate objective of any recovery plan has to be the creation of demand (and not trade, inflation, employment, production, et al)which can then take care of production as well as employment. The importance of creating demand as the centre piece has to be understood and should be incorporated in policy decisions.

Continued in part 2.

Stocks, Gold or Treasuries?

2009-09-06T12:36:00.000+01:00

Hey frns... I see this question popping up quite a bit more frequently now as compared to couple of months back. Perhpas the liquidity boost given by central banks have started to reach the pockets of individuals.

Well I believe that the excess liquidity in the market will surely ensure low returns from treasuries.

How about gold and stocks... excess liquidty can chase either of the two...

Below is my take on the situation...

We are still not out of the recession... at this unpredictable juncture, a greater affinity to gold is more likely. Gold has always been a safer bet, a reliable bet and should attract the liquidity when the confidence in the market is still far from upbeat. Also, greater investment in gold will act as a hedge against inflation and thus would be a desirable outcome for central banks as well. Thus, during our journey up the economic curve as we move out of recession, gold should get higher proportion of investment. However, as the haze clears up and the economy looks upbeat, stocks would lead the race. As the confidence in the business returns, stocks will start outperforming gold.

I am sorry for this unstructured and badly written post but I hope you would be able to make some sense out of it.

Just to summarise:

1. I won't put my money on treasuries for now.

2. Gold will outperform stocks now. It will remain the same for approx 5-6 months in Western markets. In India, the period should be shorter to about 3-4 months.

3. Stocks take the lead perhaps arnd 6-8 months down the line in Western market. Indian market would start seeing better returns on stock compared to gold slightly earlier.

For people trading in Gold, it would be a good idea to invest in stocks in order to hedge against the fall in gold prices which shoud come as we start seeing a steady rise in stock prices. This, I believe is the clue. Yes, "steady" is a very vague term and evrybody will have a different definition for it. However, keeping this fact in mind can help you to minimize any loss or build upon your profits as the investment shifts from a safer gold to a higher return stocks...

Hey pls do leave a comment if you think that my posts are not structured, not worded properly or you think that they don't properly explain the issues. I will try to improve them. I usually write them in a hurry and I end up with a not very smooth and lucid writeup.

American recession fuelling domestic inflation?

2009-08-24T09:25:00.002+01:00

American economy is influencing the world economy as never before and particularly the Asian developing nations which are increasingly becoming dependent on GDP growth fuelled by $ based trading. The present American recession pushed the US interest rate down to almost zero. However, the crisis didn't require similar cut back in interest rates for other economies. Though we saw strong measures to increase liquidity in developing nations. Why were the interest rates cut down so much and increased liquidity was ensured through various means. Why did it all happen and why in this large proportion? Was it only to fight liquidity crunch in the domestic market of developing nations? No, the reasons are not so simple. There was another very important factor playing a role. "Developing nations dependence on Dollar based world trade".

As lowering interest rates in US devalued the dollar, developing countries like India had to follow suite. Developing nations had to make a choice between stable exchange rate and domestic inflation. Most of the nations chose to maintain their currency against dollar rather than to maintain a stable domestic inflation rate. In doing so, almost every developing nation increased the flow of domestic currency in the local market, but this was done not only to fight credit crunch but to match the falling dollar as well. The extra bit of effort made to maintain the value of dollar cost the countries a recent surge in inflation.

Well, free market economy is all about choices. The developing economies chose to defend dollar to maintain their cost advantage but in the process stoked inflation which will anyways hurt export. The question is which would have hurt more? A weaker dollar or domestic inflation?

Please write in your views.

What to blame for the present economic crisis?

2009-08-20T14:43:00.005+01:00

It's an interesting question, specially because everybdy wants an answer and has an answer as well to this query. I would not put the blame on Financial innovation or American politics or Greed or Real estate crisis, etc etc... What we receive is often a result of what we choose, and we have chosen to follow a "similar to" free market economy model. Not a wrong choice but surely it comes with an inherent characteristic named *swing* which is responsible for 'almost cyclical' booms and bursts in the economy. Free market economy, though gives space to greed, profit motives, financial innovation, political adventurism, etc etc, still manages to provide an economic model which is good enough to be followed by the majority of the world. For me, the only downturn is the *swing* which needs to be controlled through appropriate policies. The swing needs to be attenuated through regulatory measures.

With the choice we have made, everything else which we have blamed so far is inevitable. Political adventurism, greed, booms, bursts, et al, have happened in past and will keep happening without control. The only controllable part is regulation which we failed to provide and thus should bear the blame for the crisis.

Check out these Economist ads!

2009-06-28T11:53:00.011+01:00

Inquisitive?

Reasons have nothing to do with age!

Management trainee, aged 42 :)

It's a connected world and we feel it...

My dad didn't n I have nothing of them all :(

What do you think are the top 6 issues concerning India?

2009-06-23T22:45:00.008+01:00

This is what I view as the top 6 issues concerning our nation(India) today. I want to base my opinion on some of the basic tenete on which i believe a healthy and progressive nation is based. These fundamental blocks for me are (in no particular order)

1. Free and Liberated minds

2. Healthy citizens

3. Leadership and vision to lead the nation

4. Justice to all

5. Peace and Harmony

6. Robust economy governed by fair and inclusive system

Keeping the above in mind, I would suggest the following issues which needs to tackled with urgency.

1. Education.

1.1 Need for bigger, better and more number of par excellence institutes of higher learning for science, commerce as well as arts.

1.2 Need Quality primary education for all

2. Health. Need Better health and sanitation facilities. Interestingly over 30% of doctors in the USA are Indians while we all know the plight of health in India!

3. Leadership. There is big void of strong leadership and a visionary in the political arena. In fact I wonder who in the long history of indian civilization could have played the role of such a leader. What's your opinion on this? Vallabh Bhai Patel? Ashoka? What kinda leader do you want to have for your country? Opinons welcome...

4. Courts. We need higher number of courts with a stronger machinery to monitor court proceedings. We have nearly 30 million cases pending in our courts! Justice is absolutely fundamental for the well being of citizens and nation.

5. Terrorism. Well I don't know how to deal with core fanatics who irrespctive of being educated or not, having a family or not, having a job or not, et al... behave in certain unacceptable ways. But many of their followers (who make d majority of the number) are not like them. But still they have enough "time" to get into other people's business rather than minding their own. Perhaps inclusive growth is one small step to styme the growth of such followers at least.

6. Tax System. Tax system is just one among many systems which plays a major role in the way our economy works. Our tax system is still incapabale of bringing tax evading companies/people to books. We lose billions of rupees every year because of it, thus creating a handicapped gov. with a burden of consistent budget deficit. Fixing the tax system can be the key to many other lingering issues which the gov. can't handle due to lack of resources. Overhaul and reforms in this field has to be a part of bigger effort to enlist citizens, companies (listed, unlisted, SME, etc, etc)... We need to bring every person (social security no.) , every transaction, every biz, to books at which we r way behind. Even small SMEs save crores of rupees every year by evading taxes! This is an aspect which has never been given enough importance. But we need to, sooner than later.

Your thoughts welcome... Pls write what in your opinion r the top issues being faced by India...

Future of 80/20 thumb rule?

2009-05-19T22:07:00.003+01:00

Check this thought provoking write up on the ever so famous 80/20 rule...

http://www.siliconindia.com/startupcity/index.php?arId=29&cat=1&pgid=1

Problems to think about...

2009-04-14T20:44:00.001+01:00

1. Why do we see so many religion based communal riots but not as many caste based riots?

2. Why are we repeatedly getting a hung parliament?

Is "hung parliament" a problem? Is there a defect in our democratic system?

If yes, then what is the core issue and how can we correct it?

If no, then how can a stable government be formed in a hung parliament?

Are such outcomes healthy for a democracy to thrive or is it a symptom of a faulty system? If its is a healthy outcome then how to make a stable gov. while still reaping the benefits of a true democracy albeit with a divided mandate.

3. Is Democracy or the "rule of majority" the best system possible?

Your comments invited...