Saturday, October 27, 2012

Too Many for Too-Big-To-Fail Institutions

The Vickers Commission in the United Kingdom has advocated ring fencing of core banking activities and on the other hand The Volcker Rule in the United States prohibits banks from engaging in certain kind of investment activities.

These rules and regulations have come to fore after the loopholes in the banking sector were magnified during the sub-prime crises and the consensus on the implementation of these rules is still debatable. In the Vickers Commission, core activities of the bank like taking deposits from and making loans to individuals and small and medium sized organization would be “ring-fenced”. Some activities like trading, purchase of loans and securities, transactions outside the European Economic Area and with non ring-fenced banks would be prohibited. It is also stated that the ring-fenced entity would require more capital than advocated by the Basel 3 committee.

The Volker Rule attempts to limit banks’ exposure in certain investment activities like in hedge funds and private equity. Proprietary trading, which is banks trading on their own account is completely banned. Demise of Lehman Brothers and Bear Stearns is because of these trading acts. The Glass- Steagall Act that was repealed in 1999 had the rationale of keeping the investment banking separate from the commercial banking activity and now the new founded acts and rules are trying to advocate the same thought which was envisaged by Glass and Steagall long ago.

Sandy Weill, the former chairman of the Citigroup advocates the return of Glass-Steagall Act altogether and there are many academicians who are carrying Sandy’s point of view forward too. But the question here arises that by demarcating the commercial and investment activity of the bank can the big institutions survive? In today’s time where the customers don’t have much time to spare on different investment instruments to choose from and want everything on a single platter in a quick and organized manner, a simple commercial bank became a universal bank by providing one shop investment solutions coupled with core banking  to retain their customers.

But has this opportunity been over utilized by the bankers and has put on stake the security of investors’ money? But what can be the solution to this dilemma? Limiting the scope of the banks and raising the capital requirement won’t answer these questions appropriately. Multiple approaches are required to unearth the solution to these issues. Mr. Raghuram Rajan, CEA to GOI, advocates that setting limits on all trading assets or income can help the big institutions to be in the limits and so they can also manage the risk properly. Mr. TT Ram Mohan of IIM-A states that the problem is not the scope of activities carried out by the banks but the sheer bigness of these institutions that pose a challenge. If the size of bank’s asset to GDP is controlled and looked carefully upon then the risk can be mitigated in a better way.

Though many solutions by the eminent leaders of the world are advocated and discussed upon but the lag in adoption and implementation of certain rules and regulations can again pose a challenge for the financial sector because of the paucity of time and the anemic growth which the world is witnessing.
Acting fast and shielding the global economy from another financial headwind is the only solution.

  • Investopedia: Glass-Steagall Act
  • “How do we resolve the Too big to fail problem?” by Mr. TT Ram Mohan from IIM-A, EPW, September issue.

Tuesday, October 2, 2012

Combat ‘FDI’- Head On!!

There has been a great amount of hue and cry across the country regarding the approval of FDI (Fixed Direct Investment) in retail (in particular) as compared to the FDI in aviation and broadcasting. The small kirana stores are really scared that the entrance of Biggies like Walmart  Carrefour etc would snatch their daily earnings and hamper their survival. But that is not the case empirically, look at China where FDI in retail has been in existence for almost two decades now but still the penetration of the so called Biggies in the Business is hardly 20% of the entire organized retail sector. One of the CRISIL report suggests that even if  these big international players enter the domestic market they would not be able to capture more than 15% of the organized retail market. In short, the spectre of these big names taking away the business from the kirana stores is highly hypothetical.

Let’s be practical and analyze the situation, domestic organized retail sector witnessed some of the large brands getting established like Big Bazaar, Reliance retail or Pantaloons but none of them were able to sweep away the market off these kirana stores. Domestically their existence was not lethally harmful for these kirana stores. Their business was definitely dented but the reality is that still majority of people across the country has an ease to visit these kirana stores more as compared to the big domestic players.
Now as the government has approved and paved the way for the international players to enter the domestic market lets be a little pragmatic and consider the situation. As proved earlier that these retail chains can't suck the business out of these emotionally bonded kirana stores then why this hue and cry? Rather its an opportunity to streamline the business now, make it more operationally efficient, try and woo the customers with attractive prices and make the most of the market knowledge which these stores have and the big retailers don’t.

Competing with big players is not possible in terms of prices they offer but there are many advantages which these small domestic suppliers have and these biggies don't, like:
·        1. Kirana stores are in existence from many decades now and no one knows the pulse of the domestic market as better as they know.
·        2.  Accessibility of these stores is the biggest positive while the biggies have to have a big place outside the main city to avoid the high realty prices and rents.
·       3.   At the end of the day an emotional connect with the supplier acts as an adhesive for the kirana stores.

Though these big retail chains can dent the business of these domestic mom and pop stores a bit but definitely they can’t grab the market share which these kirana stores have.
Its an opportunity for these domestically loved kirana stores to revamp their business strategically, become more operationally perfect, stronger emotional connect with the customers is the need of the hour and better supply chain management would make these small outlets the biggest competitor of these international biggies.

So a message to all the kirana stores, national and international retail chains: Face D Intense competition (FDI) and Finally Deliver the Inevitable (FDI) and that inevitable is to deliver the right product at the right price for the right customer. Because at the end of the day – “Customer is King”.  

Wednesday, September 12, 2012

ESM – The Savior?

Finally a gargantuan obstacle has been overshadowed for the survival of the Eurozone by the German Constitutional Court as it delivered a momentous decision with far reaching implications for the euro’s future by ratifying the bailout fund and budget pact. Germany was the only country in the 17-nation euro zone that had to ratify the European Stability Mechanism (ESM), which was meant to erect a 700 billion-euro firewall against the spread of the three-year-old sovereign debt crisis.1

Rejecting injunction requests from 37,000 plaintiffs seeking to block the ESM and a separate pact on new budget rules, the court set two main conditions for the treaties to go ahead.2

It said German liability in the rescue fund must be limited to 190 billion euros, the share set out in the current ESM treaty, and that any increase in that amount would require prior approval by the Bundestag lower house of parliament.3

Now as the firewall has been erected and ratified, will ESM be the facility which would bailout and bring back the financial stability of the beleaguered zone? Many analysts believe that the 700 billion-euro firewall won’t be enough for the European sustainability. It might delay the essential fiscal consolidation restructuring but it cannot eradicate the viability of it. Though the corpus of the mechanism might help the debt stricken countries like Spain and Italy to make a comeback in terms of financial stability but the sustainability of the present contagion i.e. Percentage of Debt to GDP ratio (which is alarmingly high) is still a major concern.

Creation of sustainable banking structure across the union, capping extravagant expenditure and rather utilizing the easily availability of monetary resources in asset creation, generating more employable options and benchmarking the wage rates to the Asian peers can raise hope to curb this financial malady. Strong conviction across the union leaders and trade opportunity creation by the developed partners for the developing ones can substantiate the 700 billion-euro injection.

Though ESM would surely resurrect the mood of revival in the Eurozone but the political collaboration among the countries is also of an utmost importance for the economic survival of the monetary union. Only if the political willingness moves in tandem with the economic affirmation this European Stability Mechanism ratification would be justified.

And as it is quoted by Andy Warhol, an American artist  “The idea of waiting for something makes it more exciting” and so it would be really interesting to see how this ‘stimulus package’ is used? And will this mechanism mark the political and economic resurrection of European Union once again?

 2 & 3 -

Sunday, September 9, 2012

Captive Competitiveness

It has been uttered, noted, depicted and even analyzed that the domestic economy is really dented by the recession and its negative effects are now palpable across the industries. The results are: Flat corporate earnings, weak top and bottom line, plummet in exports and expanding twin deficits. In short a hard recession hit financials are really worrisome. But still in this tough financial environment where nothing seems to be soaring up except the Inflation, there is one financial value which is growing at an abnormal speed. 

From some few thousands of crore of rupees to lakhs of crore of rupees (and its recession proof too) that is the financial value of scams in our country. From 2G to Coalgate - Indian National Rupee amounting to – 1860000000000 (don’t get astonished by the zeros added to the figure because that is the reality) is what our exchequer lost because of the Coal allocation scam which was unearthed by the CAG report a fortnight back. We as the citizens are now so much used to these gargantuan monetary figures that indifference has seeped deep within us.

But one peculiar thing which was highlighted by the CAG is that the Coal mining scam is even bigger and shoddier than the infamous 2G scam, where at least some of the benefits were passed on to the final consumers in the form of increased competition and lower call charges. But that was not the case with unused coal blocks, which did not increase availability of coal, or lower the price of power or steel.
The CAG report narrates how the government favored and benefitted private players through its policies. The report says that coal fields in the period 2004-2009 were allocated to private entities instead of being auctioned. The Prime Minister’s Office has also been bought under scrutiny as it delayed introducing the process of competitive bidding, though cleared by the Law and Justice Ministry. The report also states that mining was undertaken only in 28 out of the 86 captive coal blocks that were scheduled to take up production, and they failed to produce even half of what was targeted from those blocks.

There are many questions which comes to my mind after reading about the issue – Why was the competitive bidding policy was wrapped in obscurity? Why did the end users’ benefits were not considered while allocating captive blocks? And even if nepotism was at peak during allocation, still there was no fundamental change in the authentic usage of blocks, why? When the democratic process is brutally murdered it endangers the sovereignty of the state and this is what is happening today and not only the sovereignty is at risk but the Mother Nature’s appalling misuse is also a major concern.

Lastly, in order to restore the democratic fundamentals of the states these blocks and captive mines should be re-allocated only through the process of transparent competitive bidding. Or simply it should be handed over to Coal India. The government has been pushed to the limits, having even considered a vote of confidence, as the Opposition stalls the proceedings of Parliament. The mood of the nation inclines towards a mid-term poll, and the ruling coalition is well aware of this fact. Many key UPA allies can be seen actively preparing for mid-term polls and may even be ready to ditch the Congress and form a Third Front should the NDA fail to produce substantial numbers in the polls.

Excerpts from news-opinion and Indian

Monday, August 13, 2012

The Currency Enigma

The epicenter of the recent recession is undoubtedly the United States of America but this financial contagion affected the entire world in different magnitudes.  In Europe, the crisis led to the other crisis which impacted them in a real hard way and it is now becoming extremely tough for them to come out of this situation, on the other hand the developing countries combated the American crises comfortably but the impact on their financial health is quite palpable and deplorable. BRICS definitely need a life supporting system for survival at this point of time in terms of rapid public investment, more employability and steep reduction in deficits but for all of it to happen the emerging economies has to reign in the depreciation of their currencies.

And in the mean time after the American sovereign’s downgrade it was somewhat nice to predict that the capital flow in emerging economies was inevitable and which would boost the financial health of the countries, a perplexing situation emerged which led the global investors to flock into the (USA- where it all started) US dollar, which was considered as a safe haven and the other currencies depreciated rapidly.

This was a stark reminder of the grim reality confronting the world – the lack of a credible alternative to the US dollar even as the fundamentals of the US economy are no longer as strong as earlier. Though because of immense liquidity of markets in dollar assets, the depth of the markets in dollar assets that results in tight bid ask ratio and wide-spread availability of derivatives to hedge dollar exchange-rate risk, proves that US dollar is the currency superpower but there are many economists who believe that the dollar’s hegemony wont sustain for long from now on. “The Economist” has recently estimated that USA has lost ten years of economic progress because of the Great Recession meaning that its economy is back to where it was in 2002. And secondly “Triffin Dilemma” has become acute for USA with an urgent need to curb its twin deficits.
It is likely that the US Dollar will no longer enjoy a pre-eminent status but will share it with other currencies. The Australian Dollar, the Canadian Dollar, the Swiss Franc and the Scandinavian currencies have all attracted safe haven flows in recent years with central banks increasingly diversifying their foreign exchange reserves into these currencies\assets. But by far the most serious challenge to the dollar today is posed by the Chinese Renminbi.

China has taken several strategic steps to promote international use of its currency. Entering into currency swap arrangements with several developing countries in Asia and Africa. In April 2011 China led BRICS initiative to establish mutual lines of credit in local currencies to protect intra-BRICS trade from foreign exchange risk. Trade settlement is only one of the steps in internationalizing the Renminbi. In January 2011, Bank of China started offering Renminbi deposit accounts in New York and also took steps that included in approving the use of Renminbi for FDI in China.

Though China is trying its best to make its currency the next internationally accepted currency but it fails to meet several criteria normally required of a reserve currency such as full convertibility, deep and liquid bond markets and secure legal structure in the country.

This shows that the stage is now set for the emergence of multi-currency based global financial system with several currencies competing for dominance and no single currency having the overwhelming status enjoyed by the US Dollar since World War II. 

  • ·         Article - Currency Conundrum in “The Indian Banker”,  June 2012 by Mr.Radha Syam Ratho.
  • ·         Article on Shadow Currency by Mohi-uddin,

Sunday, July 29, 2012

MSME - A Behemoth in Making

India did recover from the crises of 2008 in a very impressive manner but this stint of speedy recovery didn't last for long. The invariably long stint of India’s growth story (GDP growth of 8-9%) as perceived by many was not the reality. But the fact was that the period of 2003-08 was considered now as an aberration and the real GDP growth forecast is around 5-6% from now on.

Now macroeconomic and financial stability is being pursued following the global crisis in India. But recovery from recession following financial crises takes much longer due to the overhang of debt because high leverage is almost invariably the cause of all the financial crises. Hence, the pace of recovery from the current crisis is very slow and uncertain. In this scenario, a strengthened and more resilient Micro, Small and Medium Enterprises (MSME) sector would aid in economic recovery and add greater stability to the system.

Inclusive growth is being accorded very high priority and is being assiduously pursued by the policy makers through financial inclusion, financial literacy and consumer protection initiatives. MSMEs are not only envisaged to be major beneficiaries of these efforts but are also expected to facilitate financial inclusion. MSMEs have a critical role to play in enhancing our export competitiveness given their very significant share in exports.

Several institutions have been structured like Industrial Development Bank of India (IDBI), Small Industrial Development Bank of India (SIDBI), national Bank for Agriculture and Rural Development (NABARD), Export Import Bank of India (EXIM Bank), State Finance Corporation (SFC)s, State Industrial Development Corporation (SIDC)s, National Small Industries Corporation (NSIC), etc. has enabled necessary institutional support to MSMEs for meeting their credit needs. Inclusion of credit to MSMEs as a part of priority sector lending has increased the scope of this industry to contribute a bigger chunk in the country’s GDP pie.

The Government of India has taken a number of measures to revitalize the MSME sector such as:
·         Approval of the public procurement policy (PPP) that envisages procurement of a minimum of 20% of annual purchases of goods and services from Micro and Small enterprises by the Central Ministries/Departments/PSUs
·          Permission to set up stock exchange/ trading platform for SMEs by recognized stock exchanges
·         Conducting skill development programmes for development of self employment opportunities as well as wage employment opportunities in the country and
·          Adoption of cluster approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of MSEs in the country.

In spite of the Government’s efforts the extent of financial exclusion in the MSME sector is very high. As only 5 to 10% of MSMEs are covered by institutional funding, there is a need to bridge the huge gap through enabling policies. Banks and financial institutions need to support the MSMEs in their need for finance. Some of them could grow into large corporates and potential MNCs in future.

If this sector is provided the right financial support and is entrusted with more responsibility of providing economic stability then it would play a very critical role in the economic development given its contribution in employment generation, export competitiveness and, more importantly, entrepreneurial development. As MSMEs are spread across the length and breadth of the country and have a strong presence in rural areas, their growth also leads to more balanced and sustainable development and eases pressure on urban infrastructure.

So I feel that right support at the right time to the right sector would definitely reap benefits for the nation and this time is absolutely perfect to provide impetus to this sector which would contribute magnanimously to the country’s GDP in the near future.

Excerpts from:
  • Small is still beautiful and competitive - Reflection on growth of MSMEs in India - Address by Shri Anand Sinha, DD, RBI.

Sunday, June 24, 2012

Rampant Liquidity is not the Solution

Central Banks around the world are pumping liquidity in their respective economies to stave off the global economy’s recent softening and to prevent the catastrophic situation which has gazed in the eyes of the world leaders courageously.

To revive the economies around the world the prime banks are trying their best to ease the situation by twisting their operations as done by the Federal Bank of Unites States, Open Market Operations undertaken by the Reserve Bank of India, European Central Bank’s bailout proceedings, monetary easing by the Chinese counterparts or the Swiss and Danes printing money as a means of defending their currency targets, each prime lender to the economy is trying to resurrect its economy deftly.

Will just an injection of liquidity in the crucial sectors create a difference? As far as the last half a decade is concerned, the Quantitative Easings or the Stimuli provided by the governments around the world were just short term solutions. And it is echoed in the global economy that the long term prospect of all the major economies is under the suspect. Take a classic example of India: There has been drought of reforms in the economy since 1990s and this is a major concern in the market. Corporates crave for lower cost of funds and liquidity in the market, which can not only be possible by the OMOs or by unexpected rate cuts but it can only be possible through gigantic reforms which are now a must in the country. Fundamental issues like Foreign Direct Investment in Retail and Aviation has to given a green signal, Infrastructural fast tracking system has to be made robust and the government borrowing finances has to be restructured for giving this economy the required push and to pause the free fall of Indian National Rupee.

Similarly in China the manufacturing growth is plummeting, the PMI data is weak and decline in the global demand is a cause of worry. On the west, Euro Zone survived with the Greece’s elections but the stability of the union is still in doubt. The monetary union don not stand on the fundamentally strong fiscal pillars which is making the survival difficult for the group of countries. And bailouts are not the solutions to the complex issues.

Federal Bank of USA has also extended the Operation Twist (after 2 QEs) till this calendar year end but economy is still growing at a worrisome rate.

All the above mentioned facts highlight the urgency of fiscal consolidation. The government around the world has to take gutsy steps, bring in reforms and infuse positivity in the market to affirm the investors about their safe investments. Even if there are plethoras of more Easings or OMOs planned, the economy won’t stand on its own until the sustainability is assured through prominent reforms. And that is a must now for survival of the global as well as the domestic markets.

Thursday, June 7, 2012

India the Next Greece?

An Italian bank's boss recounts a joke of two hikers picnicking when a bear appears. When one laces up his boots to run, his friend scoffs that he can’t outrun a bear. The shod hiker retorts that it is not the bear he needs to outrun, merely his fellow hiker. “We’re sitting at the picnic with our boots still on,” says the bank boss.

As the ‘Grexit’ scenario looks inevitable, banks and investors have already started taking precautions by pulling out their money from the fragile markets like Portugal, Ireland, Italy, Greece and Spain. Spain and Italy have alone lost foreign bank deposits of about €45 billion and €100 billion respectively from their peaks. On the other hand sales of government bonds by foreigners and capital flight is probably equal to about 10% of GDP in those countries. So the sound of credit crunching can be heard in these countries loud and clear.

Though there are many prominent differences between India and Europe in their economic structures but still there are two apparent similarities with Europe which brings to fore the riskiness of the present volatile economic situation. First is the India’s debt to GDP ratio which has already been unacceptably high, declared by the international financial standards and the soaring Fiscal deficit coupled with the bloated Current Account deficit. And the second similarity lies with the large presence of international investors and creditors which not only increases the volatility but also causes economic instability because the sudden influx and exodus of these investors shocks the economic momentum and leaves it gasping.

Undoubtedly there are external factors which have impacted the domestic economy to a large extent but it should also not be forgotten that the government failed to protect the economy from these shocks through its inaction. Even when confronted with the low growth, the government tends to adopts austerity measures that trap the country in a recession. And this is what happened in Europe and so it can also become a reality for India.

Paul Krugman in his latest article in a leading newspaper describes this situation by saying that the economy is a unit where one’s spending becomes the other’s income and vice-versa. So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls and it worsens the debt problem.

The way out of this vicious cycle as clarified by economists is to expand the spending and find other alternative way to address inflation or balance of payments difficulties which can only be possible if the government takes on the challenges head on at least now in these dire situations.

Friday, May 25, 2012

Clogged Connectivity

The Telecom Regulatory Authority of India (TRAI) and Department of telecommunication (DoT) it seems are in race to fill the exchequer by quoting higher reserve prices to auction spectrum than each other. Trai benchmarked 2G spectrum rates by keeping 3G auction price as their base price and came up with a figure of INR 3,622 crore per megahertz (MHz) for pan India license.

The figure discovered by the authorities would have been justified if the players involved in 3G spectrum auction would have been profitable after the purchase of spectrum, rather the players are finding it difficult to recover the cost through the operations as the 3G is still expensive for a middle men to use it for daily purpose and on the other hand taking 3G prices as the benchmark is also not justified because the scarcity of spectrum soared up the prices during auction. So to use the same standards or even higher prices for the ordinary 2G voice bandwidth would be a mistake, resulting in many companies dropping out of the auction and the rest would hike the tariffs which would definitely choke the development and spread of wireless voice services in the country.

Government has an aim to connect the entire nation through affordable connectivity but if the proposed auction turns to reality then affordability would be an elusive dream. It is reported by leading operators that with proposed auction plans the prices would be up by almost 30 paise to 1 rupee per minute and that is a huge jump. In the last half a decade or so, this telecom sector was considered as a rising star for the country, contributing a significant pie in the GDP growth but if the bandwidth is auctioned at exorbitant reserve prices then the gain will be lost.

Comparing the Trai’s suggested rates with similar auction elsewhere is a bit surprising. In 2011,Germany, Sweden and France auctioned spectrum in the 800MHz band for 2G voice communication. These prices were $0.95 per person per MHz in Germany, $0.54 in Sweden and $0.90 in France. And in similar terms Trai’s proposed charges would be eight times that of Germany, 22 times of Sweden and more than 19 times the French charges. These are highly overpriced.

Now, DoT wants to set these charges 17% higher at around INR 4,245 crore per MHz for a pan India license. That’s gargantuan in nature and should not be encouraged to do so. Rather the government should auction the spectrum at a base price derived from 2001 rates, indexed to inflation and it will attract more participants which would lead to the right price discovery too. Because doing so would also keep the Telecom Industry alive and that is really imperative to remain connected.

Wednesday, April 25, 2012

GAAR – Ambiguity Persists

 Introduction of the a contentious  new tax proposal by the government, called the General Anti-Avoidance Rule, has dented the market sentiments and is likely to hurt foreign investments too.

The General Anti-Avoidance Rule was introduced with the objective to "counter aggressive tax avoidance schemes."  It empowers officials to deny the tax benefits on transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefit. It could also be used by the government to target participatory notes (P-Notes).  GAAR would also empower the tax authorities to overcome the Double Taxation Avoidance Agreement (DTAA) and deny the benefits of Tax Avoidance to the FIIs which route their investment through Mauritius which is a Tax Haven.

On the other hand, the Indian Government has reiterated many times that India is not a Tax Haven and would take cautious steps in consolidating this stance. The government has also stated that the double taxation avoidance treaty has been exploited by foreign investors, especially in the capital market, to avoid capital gains taxes in India but with GAAR they are bound to prove the substance of their business in Mauritius.

It is not only a domestic issue rather tax avoidance is of international concern now and several countries have either already codified GAAR in their tax statutes or are in the process of doing so.  GAAR has been a part of the tax code of Canada since 1988, Australia since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR (Specific Anti Avoidance Rule) in place to check abuse of tax treaties and transfer pricing.

But the lack of clear indication of how and on whom the GAAR would be imposed, this is what is spreading an alarming negative sentiment across the economy. Then the concern of treaty override needs to be handled carefully otherwise it would lead to violation of international convention. Analysts also feel that the timing of introduction of GAAR was not appropriate when the image of our country was reeling with negativity like policy paralysis, CAD and Fiscal Deficit.

So let’s wait and watch how the Finance Ministry would act on this ambiguous proposal.

Sunday, April 22, 2012

RBI’s Closed-Eye Bonanza?

In RBI’s annual monetary policy review meeting, a surprise was unfolded by the central bank:

·         With Repo Rate cut by 50 basis points (bps) after a long time.
·         Reverse Repo and Marginal Standing Facility was placed above and below by 100 bps.
·         MSP now stands at 2 percent of their outstanding Net Demand and Time Liabilities (NDTL) from 1 percent before.

These major changes in the monetary policy really boosts RBI’s expected GDP growth rate of 7.3% in 2012-13 but the point to be contemplated upon is: Will this estimation turn out to be a reality? Many experts believe that monetary easing alone would not be sufficient to boost the growth projection. And it is absolutely correct because until our Fiscal deficit and Current Account deficit is not tamed the projected momentum is an elusive dream. This clearly points out the policy paralysis in which our system is currently entangled. Even in the recent budget there has not been an impressive reform to boost our economic condition.

On the other hand thought with persistent rate hikes by the RBI it has clearly succeeded in bringing the inflation under control but still there are Inflationary pressures, especially food inflation, have regained momentum and the upside risks have risen. In coming months, consumer goods and services inflation would also be adversely impacted due to indirect tax increases. Inflation declined temporarily after November 2011, but has remained stubborn at 6.9 per cent in the fourth quarter of 2011-12. Finally, coal and electricity prices are already being revised upwards and the process is likely to continue throughout the year. The wage-price spiral in India has strengthened since last year, because wages in the rural economy now rise in line with inflation, with inflation-linked wages under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) setting the floor. All these inflationary alarming bells can get louder if ignored.

External factors like demand from the Rest of the world has also been bearish, rising fuel prices and the world economic volatility has also applied brakes on the exports growth of our country and putting appreciative pressure on the rupee. Coupled with all these factors the slowdown in the investment has also been attributed for this tepid growth rate. Hence, for growth to revive, the investment climate, supported by appropriate policy reforms, will have to improve.

So it can be concluded that though RBI did its part by easing up of the monetary policy but still it cannot alone provide the required impetus to the economic momentum, it definitely needs government’s support to push the reforms ahead for prosperity and economic stability.

Thursday, April 5, 2012

Retrospective Amendment: Justified or Vindictive?

In 1965 while delivering a public lecture on The Indian Tax System, late Mr Nani Palkhivala, one of the most revered tax lawyer of India highlighted the uncertainty of the tax laws in the country and cited its unpredictable nature as one of the pernicious characteristic. Now in 2012, British chancellor of the exchequer George Osborne called for “greater predictability) in the Indian tax policies. Connecting the dots would help us to understand the issue now.
In Budget 2012-13, Finance Minister Pranab Mukherjee has proposed amending the Income Tax Act retrospectively from 1962 to bring under net overseas deals involving domestic assets. This would have a bearing on Vodafone which won the legal dispute in Supreme Court over Rs 11,000-crore tax claim raised on its USD 11-billion deal with Hutchison Essar in 2007. Now, the retroactive law threatens to upturn the court verdict.
Will this verdict be overthrown by the Government’s amendment in the law or will the Apex Court’s decision will be given supremacy? The question is not only confined to the inland domestic tax situation but with this amendment will the Foreign Investor’s investment in the country would also be impacted or will the sentiments get dented? This question is also extremely important to be thought upon.

Though the Government official justifies the step taken by the Finance Minister and also confirms that the amendment won’t affect the FDI inflows in the country, which is already under a great stress from the other parties’ objection. They also have a view that amendments in The Income Tax Law is normal process and happens every year, in 2007-08 budget, there were eight amendments in tax laws, five amendments in 2008-09, four in 2009-10 and eleven in 2010-11.

But on the other side there are views from the industry that such amendments would hamper the sentiments of the large business houses and their investment in the country. Mr Ashok Malik, a political commentator feels that “post facto laws are increasingly seen as immoral and vindictive. Today, with international capital flows intensifying, the rules of the game cannot be changed mid match”. If the amendment would have been for the future deals of the similar fashion then it would have been a completely different issue. But the present amendment can even rope in deals like Kraft Foods’ acquisition of Cadbury India, SABMiller’s purchase of Fosters etc, so that is why the present issue is getting more and more debatable.

Though the government would proceed with the present amendment made in the law but it should definitely take into consideration the present situation of our country. Today our nation requires a boost of reforms and financial stimulus in the key areas of the economy to continue to attract the foreign investors on the land which provides equal opportunities for everyone who pitches in for business and to move on the trajectory of 8% GDP growth rate. And through these changes in the law I somehow believe that the government on its own is creating a self defeating economic agenda which can negatively impact the long term prospects of the nation.

Friday, February 24, 2012

Unabated Euro-Zone Crisis

There is negativity surrounding the euro zone nowadays; huge sovereign debt, austerity measures on the roll, further taxes for the public and lowering of credit ratings of countries like Britain, Austria, France, Italy, Malta, Portugal, Slovakia and Slovenia by Moody, Standard & Poor and Fitch clearly highlights the damaging financial scenario for the block of nations. Presently only few countries like Germany, Norway, Sweden and Denmark are holding strong and keeping away from the negative ratings, rest all the other countries left are under a close watch by these agencies.

The crisis has taken toll on countries like Greece and Portugal in such an extent that now it is difficult to find solutions for their debt-empowered economy. There are strings of bailout packages which are being utilized in such a way that it would reduce their Debt-To-GDP ratio up to some extent to kick start their economies. But the things are not working; the austerity measures have almost crippled the public spending which resulted in an extremely slow paced growth for the union. These countries have to deal with high fiscal deficits and so dropping the growth momentum too.

Huge debt on these countries have raised obligations towards more interest payment and so the government spends less for the welfare of people, levy more taxes by expanding the tax payable population base and borrow more, which has great impact on the domestic companies. The crisis may even lead to fall in exports to the European countries crippling India’s total exports. 75% of these exports are from manufacturing sector which would impact the domestic industrial production too. As slowdown will affect exports, it can lead to an increase in the already high India’s current account deficit. Further, the stock markets can witness a slowdown in funds from this region as the Foreign Institutional Investors and ECB would require funds to meet their own capital requirements and obligations back home.

So, all these factors clearly highlight the interdependency of one country over another and signifies the crippling effect too. So if the Euro Zone crisis is not solved early it would have a chain reaction which would not only engulf the European countries but also could have serious impact on the developing countries like India.

Though still a positive for India is that it is trying its best of becoming a self sufficient country in all the aspects, barring Oil & Gas, and is not primarily dependent on exports. Secondly, India has diversified its export portfolio in different geographical regions too which would definitely act as a cushion for the country in mitigating the adverse impacts borne out of this crisis.

Sunday, February 12, 2012

The Fear of Reliance on DEBT !!!!

The Reserve Bank of India’s third quarter 2011-12 review of Macroeconomic and Monetary Developments released on January 23, 2012 assessed that risk aversion in the global financial markets has slacked the pace of capital flows to India and if the pace of FDI inflows does not pick up and FII equity inflows follow their decelerating trend then the CAD (Current Account Deficit) may have to be financed through debt flows in the coming quarters.

As per one of the report by RBI, during calendar year 2011 as a whole, foreign debt inflows amounted to $8.65 billion, out of which almost half of it came in December. And in the same calendar year it is said to have recorded a net outflow of equity investment of almost $357 million. On one side there is a recent revival of FII inflows largely in the debt instrument and on the other there has been a collapse of foreign portfolio investment flows, leading to an overall fall in the external investment in equity. But with burgeoning CAD the conclusion arrived that India has to increase its reliance on debt creating flows to finance its deficit.

Measures such as paving way for Qualified Foreign Investors (QFI) to invest directly in India’s equity market is an explanation by the UPA government to establish the fact that it is countering the formed view of “policy paralysis” and boosting again the positivity in the market.  But they are also driven by the need to reverse the slowdown in inflows of foreign portfolio investment. The decline in FII inflows has been attributed to the development abroad, which required FII to book their profits in India and repatriate their funds to meet commitments or cover losses at home.

One danger is that though the government is trying with different measures to infuse positivity in the market by allowing direct access to equity markets but still it becomes difficult or rather impossible for Indian regulators to fully rein in these global players and impose conditions on their financing, trading and accounting practices, controlling unbridled speculation required by them to be regulated at the point of origin. And, if such investors do come in the Indian market then it would be with the intent of reaping capital gains through short term trades.
Thus to make this measure successful it would mark a transition towards allowing a more speculative base of such players in the market but defending that aspect on the ground that it would help to reduce the dependence on debt is indeed questionable.

Tuesday, January 31, 2012

MFI’s New Stance of Survival

Plummeting profits, huge operational costs, accumulation of losses and many more negative sentiments are now considered as synonyms when we come across any news regarding the Micro Finance Institutions and SKS Micro Finance takes the lead in this down slope trend. But to stay afloat, microfinance promoters are now sailing into new lending areas: from cycles to phones to gold and houses. This throws up a whole new set of challenges for them as well as for regulators.

About 70 to 80% of commercial funds for MFIs come from banks and much of this is priority sector lending which are 2-3 percentage points cheaper than the normal bank loans. And certain limits of these funds are bound to be lended as microfinance, that is why as per RBI rules clearly states that if more than 15% of the loans are lended for non-microfinance portion then these sectors will become ineligible for these cheaper funds. So it becomes a challenge for the promoters to follow the rules as well as to keep churning profits which are already strained that is why now they have focused on other strategy of tweaking products and operations.

In the way the new loans are delivered, there are three differences from the way MFIs operated:
·         One, the loans are larger,
·         Two, they are being directly given to the individuals, not through groups, who bore initial responsibility of checking credit-worthiness and repayments and
·         They are for asset purchases backed by collateral.

A promoter of one of the MFI from the north clearly states his intention when he says “We will now be looking for people with monthly salaries. Not the moong phali - walas (peanut sellers)”.But this poses a grave risk for the priority sector funds being used for other purposes.
All these years, the microfinance industry promoted itself as a potent means to pull people out of poverty but now, in its bid to survive, the industry is looking beyond the poor. Is this mission drift?
Different promoters have different view: Ujjivan’s founder, Samit Ghosh thinks, “If you start focusing on middle-income households, the focus on the target customer base gets diffused” but if you listen to what Vasudevan of Equitas says “Our mission is how to improve the quality of life for clients who were not able to access the formal financial sector till now. That doesn’t change”
Now as the MFIs are looking to diversify, so the question arises are they doing so out of duress or do they actually see an opportunity to help the poor in the same old way but with different products? This is the question which can be only answered as the time passes. So let’s wait and watch.

Wednesday, January 11, 2012

“Need for Robust Fundamentals

“India must not obsess with how fast its economy is growing and instead pay more attention to its human development indicators which are worse than even that of Bangladesh”
                                                               -Amartya Sen (Nobel Laureate)
Day in day out, all the national newspapers, journals, magazines, web portals etc are talking about the international economic situation, its palpable effects on the Indian economy, its survival chances and the cushion factors to avoid the major international impact on the domestic markets. It’s all about growth rates, inflation figure, purchasing power figures, GDP numbers and more economic numbers. But does a country’s overall growth depends only on economic numbers? Can a country prosper only with one section of society flourishing at a greater speed than the other? And can the economy only depend upon the production rates or the inflation rates? An assertive NO is the answer to all the above questions.

To make a country move on the right path of progress there are many factors other than the economic figures that play a vital role i.e. The Human Development and the societal gains. It has been starkly mentioned by Mr. Amartya Sen that just running behind the 8-9% growth rate won’t make India’s image in the world more superior until its economic factors pushes the human development and the societal factors in the same direction.
We as a nation are bound to break the unenviable record of the most densely populated country of the world and we also feel proud to cherish the demographic dividend which our country would benefit from in the coming future but this can only be possible if the entire population has the basic demands of food, shelter, clothing and education within their reach. And towards this direction the incumbent government has formulated The Food Security Bill which would definitely help the poor for the basic intake of the nutrition and in order to avoid the appalling malnutrition data which shows the backwardness of our human development factor.

Though in the Human Development Index we are growing at a good pace but still there is a daunting task which needs to be addressed. The literacy rate directed towards the Millennium Goal looks elusive. The rate of unemployment is also on a rise coupled with lack of sufficient shelter and food for the 1.2 billion plus countrymen. If the government pays a little more attention towards these aspects and tries to break the reform paralysis, then the magical economic figure of 8-9% growth rate of GDP can be achieved without much effort. These underlying factors’ growth is the real reason for an economy to boom.

So be it 6.9% or 9% GDP growth rate, it would not matter much if the real underlying factors are not given enough space to grow. Let the economy stand on the robust fundamentals.

Tuesday, January 3, 2012

D.St – At the Absolute Bottom?

3 January, 2011 – 20561 and now on 23 December, 2011 – 15738, that is our Sensex’s performance.
3 January, 2011 – 13454 and now on 23 December, 2011 – 9629, that is the Bankex’s fall.
The above mentioned data forces us to contemplate that has the Dalal Street reached close to its bottom, will it ever go deep down even further and even if it recovers then will it be able to last its surge for a period of time?
After a year which investors would definitely want to forget as index plummets almost 21% over its position earlier, the financial gurus are making comments that the markets are close to bottom but not out of woods yet. They still have a view that index would hover in and around the 16k and 17k mark. Though it is very difficult to indicate the mark on the exact bottom but through Price to Earnings ratio things become clearer.
Concerns about lower economic growth, policy paralysis, lack of investors’ confidence, burgeoning fiscal deficit, surging oil prices and lower industrial production clearly breaks the growing trajectory’s flow and rather retards the growth. And when Sensex and Dalal Street are the topics of discussion then sentiment plays pivotal role and with so many speed breakers sentiments are inevitably negative.
A report by ING Investment Management suggests that for FY12, fiscal deficit could rise to 5.7% of GDP as compared to 5.1% of GDP in FY11. Corporate earnings could slow down further, given the slower economic growth, which means there could be more downgrades from analysts in 2012.
And it is not only the domestic lack of growth which pulls the trajectory down but the global economic scenario which is glooming too plays a great role in this negativity. Be it USA or Europe, both being our largest exporters are severely hit by the downturn. This directly impacts our production system and indirectly our growth too. 1991 reforms if played a positive role in making our country a global contender of being a super power, then it also glued us with the direct impacts of the global negativity.
OPPORTUNITY- D St on the lowest level is also an opportunity for the investors for bottom fishing which gives them a chance to buy stocks which have fallen much below their actual level. These stocks are expected to bounce back as the time moves on and the markets improve, as this is the best strategy in the bear markets. Also investors can eye upon the beaten down sectors like automobiles and banking, which has the ability to come back sharply if the central bank cut rates in the upcoming quarters.
Since the markets are close to a bottom, it still opens a viable option to invest in for the future events. Now markets even when down offers opportunities, it’s the investors who need to smell the right one and keep the sentiment positive.