Indian Economy Quagmire and the Possible Solution

Hmmmmm .. A lot has been said and discussed about the world economy. What I would be doing in this article will not be any different. But to hell with it! When even innocuous  Indian Housewifes discuss the global economy in their Kitty Parties then why can’t me :)

 What this article tries to explore is the reason behind the impact of the global recession on the Indian economy.

Now, Indian economy  is not very dependent on exports and predominantly domestic in nature. Then why the hell are we affected in first place.

To start with let us understand why India had dramatic growth over the past 5-8 years :

1. Services sector which contributes to 58% of Indias GDP grew at breakneck pace. IT, Transport, Communications, Constructions, Hotel and Finance are the major contributors to the services sector. Each one of them grew at unprecedented speed, creating lakhs of jobs.

2. Huge capital inflows from foreign institutions in the form of FDI and FII provided the boost for Indian entrepreneurs to go ahead and invest in existing and new business to tap uncovered markets and increase their consumer base. The effect of the FII investments was seen in Indian Stock market where BSE index rocketed from 5000-7000 levels in 2004 to 21000 in 2008. 

( for those who donot know, the difference between FII and FDI is this :

FII – Foreign Institutional Investment :

They invest in an Indian company by buying the shares of that company from the stock exchange or through preferential allotment or some other means. But they do not have a direct say in the day to day operations of the company in which they invest

FDI – Foreign Direct Investment:

They invest in Indian company directly — like Vodafone (A UK Company) bought 74% in Hutch. In such an investment the Foreign company has an active role to play in the day to day operations and decision making of the company)

3. Other resons being increase in Industrial sector and  normal rainfalls and hence normal agricultural outputs.

The above factors the consumer confidence high and as a result consumption of all that was produced was high. People bought new homes, cars, refrigerators, tvs, acs, cd players, travelled, went out for dinner very often …. so on and so forth. Hence the cycle of consumer consuming and the producers producing was going on well and everything was Hunky Dory ….

Then what happened?

a.  The US housing market collapsed.

b. Lehman Brothers declared bankruptcy.

c. AIG was nationalised and was given the government bail out .

d. The big three : GM, Chrysler and Ford pleaded for government money.

e. Hundreds of US banks failed and companies like Citigroup had to ask for bailout by the US govt.

Now this brings us to another question .. what does all this have to do with India ? None of  Indian banks failed .. none of Indian companies asked for bail out money … None of Indian giants filed bankruptcy….. then why all this mayhem and screwed up economic data in India ?

The reason for this slowdown in Indian economy is :

 Unlike before 1991, India is linked to world economy in a big way . With the mother of world economy, the US, falling sick, it was inevitable for India not to catch cold, if not small pox. Export sector took a major hit and this led to slashing of jobs in export oriented sectors like IT and ITES. People became insecure of their jobs and stopped spending. No more tvs, cd players, designer chaddies, trendy watches, fast cars . This led to slowdown in the industrial sector and the domino effect continued to other major sectors. But what could have reduced the impact of this slowdown was a shrewd monetary policy by the RBI.

The RBI has been slashing the CRR, repo and reverse repo rates since October. But they have not been slashed enough for the banks to decrease their rates and start lending more. The interest rates were at 15% when they were at their peak, but the inflation then was 6 % , so the real cost of borrowing was 9%. Whereas, today the interest rates are 8-9% when the  inflation is below 1%, as a result the real rate of borrowing is still some where around 8 %. So where us the incentive for an average consumer to come out and buy goods from the market. One would happily park their money in a bank instead. Once the interest rates are further lowers, it would provide a the much needed incentive for the Indian consumers to go out and start spending again.

Major schools of Economic Thought

There are 4 major schools of economic thought present in the world today:

1. Marxist:

Marxist economic thought is based on the writings of Karl Marx and Friedrich Engels. They made popular the concept of communism and theorized that it has stages of evolution in a given country and follows a pattern. It starts with Slavery. The slavery then giving way to feudalism. Feudalism has a class struggle between the land lord and the serf. This leads to exit of feudalism and arrival of Capitalism. Capitalism has a class divide among the capitalists and the workers, in which the workers overthrow the capitalists to give way to Socialism. This socialistic society then eventually gives way to communism. I am always confused by the difference between socialism and communism, but have come to realise that there is a very fine but definitive difference between the two. I would be covering about this in a different blog altogether.

2. Keynesian:

Keynesian Philosophy is named after John Maynard Keynes. He theorised, after a thorough study of the economies, that Total Demand and Total Supply can set forth an aggregated view of economic variables. He proposed that free markets cannot balance supply and demand, implying there would always be either excess demand or excess supply, leading to high inflation or high unemployment. According to him government intervention was required to maintain this balance through tight regulatory and other measures. It argues that government spending is the best tool to fight high unemployment and get an economy out of its troubles. It further implies that High inflation and High Unemployment cannot occur simultaneously. But this theory was seriously challenged during the 1970s when the Bretton Woods system collapsed and it was followed be a period of high inflation and high unemployment. It was during that time “Monetarist” school of thought proposed by Milton Friedman gained popularity and caught the fancy of economists the world over.

3. Monetarist:

This school of thought is best represented by Milton Friedman and his followers. They conformed with the Keynesian macro approach but lay the emphasis not on spending so much as on the supply of money, and were hence called monetarists. According to monetarists, the supply of money in an economy is what controls the inflation and not the government spending. If the supply of currency in an economy is high, that would lead to inflation, where as the other way round would lead to deflation. According to Milton, monetary measures taken by the central banker can control an economy firmly and hence not allow it to fall into recession. But this theory was not true when it came to economic recovery after the 2000 dot com bubble went bust. The monetary measures could bear no fruits for almost all 3 years. The current recession futher weakens this approach, where majot economies in the world are reverting back to Keynesian measures to control their downward spiralling economies.

4. Austrian:

The Austrian School of Economics is a tiny group of libertarians at war with mainstream economics. They reject even the scientific method that mainstream economists use, preferring to use instead a pre-scientific approach that shuns real-world data and is based purely on logical assumptions. But this is the very method that thousands of religions use when they argue their opposing beliefs, and the fact that the world has thousands of religions proves the fallibility of this approach. Academia has generally ignored the Austrian School, and the only reason it continues to exist is because it is financed by wealthy business donors on the far right. The movement does not exist on its own scholarly merits.

The “Door Knock” Theory

It is very difficult to categorize something as complex as Human Beings. The complexity of any problem is a direct function of the number of variables in the problem. And when it comes to human character, to identify the variables in itself is a daunting task. So how can one categorize Humans. I think we can.

First let us define the task of “Categorizing Humans”.

The classification of any object starts usually by identifying the unique characteristics which make one object in a category different from another object within the same category. Keeping aside the physical differences which keep changing and hence are not credible, it is what that object is really made up of which defines what its true identity is. When it comes to humans its our mind which defines us. But there is no way one can read others mind. But there are ways in which the mind manifests it self to others, and this manifestation is in the form of behavior.

A persons behaviour speaks more about his/her mind in more ways than what the person actually speaks. The behavior in turn varies to such great extent under different circumstances that many a times one gets surprised at ones own behavior.  But irrespective of how new or old the situation he/she faces, a persons behavior and hence his nature can be classified into 4 types:

1. PROACTIVE:

They are go getter’s and always try to create opportunities for themselves. They are very aware of their responsibilities, and always try and fulfill them in the best possible manner. Another common characteristic of proactive people is that they are very much aware of their strong and weak points and hence have the ability to leverage on their strong points and work on their weak points. More often than not they succeed in reaching their goals by making maximum of their potential.These kind of people do not wait for opportunities to come striking at their door.

2. Active:

Active people are again aware of themselves and try and utilize every opportunity to the fullest, but they restrict themselves to their work and their individual concerns. Unlike Proactive people who would not only focus on their work but also are aware of the world around them. Active people tend to focus only on their work not realizing the importance of being aware of what others are doing, because at some level that would definitely effect their work . These are the kind of people who wait for opportunity to knock at their door and then act on it.

3. REACTIVE:

More than half the people around fall in this category. As the name clearly suggests these people need someone to actually tell them to act when the time is right. Either out of laziness or out of habit, they tend to wait till the water reaches the neck and then act. It is very difficult for these people to do something substantial on their own and they always need some one to push them and make them realise what their potential is. These are the kind of people who would not only wait for an opportunity to strike at their door, but would also expect some one to open the door.

4. Inactive:

Hmmmmmmm …… Now what can one say about them. They are the least productive of all. No amount of motivation and encouragement can get them out of their dormancy. They are the kind of people who would do nothing when an opportunity strikes at their door, and when a person is trying to open the door for them, they would stop him/her from doing so because that would disturb their sleep

So which category do you belong to ?

me? As of now………………. REACTIVE …….

Few International News updates

Sudan

International Criminal Court in its judgment recently has convicted Omar-Al Bashar, the president of  Sudan, of crimes against Humanity.  ICC has no police or military force of its own. The people incriminated by this court are bound to be arrested if found in the signatories of the Rome treaty where ICC was setup. There are 108 signatories of this treaty, but Sudan is not one of them. So until and unless the president steps out of the safe havens in Sudan, which he is least likely to, it is virtually impossible to imprison him. It came as a surprise to me to know that USA is not a signatory of the Rome Treaty. I dont know the reason yet, but once I know I will be updating it in the blog. Meanwhile the Sudan government keeps targetting the civilian population in Darfur.

UK Economy

The banks in Britain are going through very tenuous times. The central bank there has further reduced the ir base rates to 0.5% now. This seems to be the last measure it could take to reduce rates and infuse liquidity in the market. The UK economy has taken a huge hit with the recent events around the globe. Since no further measures can be taken on the interest rates front, the central bank there is crossing the Rubicon and trying to break some unconventional grounds. It is trying to pratice “Quantative Easing”, by buying the private assets such as commercial paper. By doing so, it is trying to infuse liquidity in the market. But many fear that this might lead to inflation, which under these circumstances would act like the last nail in the coffin. But there nothing much the baks there can really do. Giving this is a shot is not a bad option in wake of the current economic scenario prevailing accross the globe.

Demographic Dividend

David Loom brought to light the other wise completely unknown phenomenon of “Demographic Dividend”. Many economists and analyst were unsure about the excellent growth in East Asia from the 60s to the 90s. Many of them attributed it as a miracle. But David Loom finally came up with an explanation which not only explained this  growth but also helped us analyse and understand the major reason for growth in any economy.

Traditionally the East Asian countries had high infant mortality rate. As a result there was also high fertility rate existing in these countries. But with better health facilities, the infant mortality rate declined and also the fertility rate. But there was a lag between the two. In short, it took some time for parents to realise that the children they gave birth to were now living longer and not dying as infants . Because of this lag, there was a surge in the population in these countries during the 60s and the first half of 7os. As a result of which there was a good number of young population during this time. A population which was much more productive and with the right policies followed by the government this young section could harness their complete potential and contribute to personal growth and in turn their countries economic growth.

This is known as Demographic Dividend, where in there was a large pool of young population which played instrumental role in a countries success. But it is not always that this demographic dividend turns out to be good for a countries economy. We have the example of Latin American countries, which had their Demographic Dividend in the 80s but could not completely harness it because of unstable political climate as a result of which they had to embrace socialist approach and hence have a stagnant or minimal growth.

India currently is going through this phase, and luckily for us it has not yet peaked.  If we are to make our mark in the world economy and be a force to reckon with, then this the time to act. The politicians of this country must understand this and make sure to bring in policies which help us utilise this golden opportunity to the fullest rather than cribbing and fighting over non-issues.

Economic Terms

Greenshoe option:

This is an option provided to the underwritter to increase the number of shares to be sold on behalf of the issuer. Let me first tell what an UNDERWRITTER is . Suppose a company X wants to issue their shares in the market. They would first approach an underwritter to value their stock and buy the stock from them. Then this underwritter would sell this stock in the primary market to the institutional and retail investors. The underwritter gets a fees for undertaking this process. But there is an added risk involved too.  Incase all the shares promised to be sold by the underwritter donot get sold, then it is the obligation of the underwritter to buy those shares. Now coming back to the Greenshoe option. Greenshoe option gives the underwritter the power to issue additional shares in the market if it feels that there is an excess demand for the shares.

This is know as Greenshoe Option simply because of the fact that it was the GREENSHOE COMPANY which first came under any such agreement.

Thoughts !

Negative Voting:

I read this term in the news paper today and got curious about. Throughout the article, at no place did the writer mention what this term meant. It was taken for granted that the reader would know what the term means. I kind of felt offended because it is supposed to be a very popular term and I have no clue about it. Negative voting is the option given to the voter to not vote for any candidate in an election. One would wonder why would one want to vote in that case? This could be to raise ones voice to show that the voter has no faith in any of the candidates seeking to have the voters mandate. This makes sense intellectually and as a matter of principal. Currently a bench of supreme court is listening to an appeal to allow Negative voting in the upcoming elections.

Personally I feel in a country like India, negative voting does not make much sense. If we consider illiterate population in India, which is real abundant, it would be difficult to explain to them this particular option and its implications. Considering the literate population, I feel majority of them would be exercising this right and try to show their complete dissatisfaction with the current bunch of politicians. Our politicians are corrupt, they give a damn about the country and we donot have any leader who is commanding and has the trust of the nation. These are unwritten facts which every Indian is aware of, do we really need to spend hundreds of crores in elections to get this outcome … I dont think so.

Slumdog Millionaire .. a bridge to Hollywood?:

I am ecstatic at AR Rahmans two wins at the Oscars. But many news papers and articles are considering the multiple awards which slumdog has won as the bridge between the Bollywood and the Hollywood. I beg to differ. I agree slumdog has brought a lot of recognition to India, but let us put things into perspective. What kind of recognition has it brought to India from an average International viewers point of view:

1. India has great musical talent and AR Rahman is the Pinnacle of that.

2. India has got one of the best sound mixing engineers ( i think this is what they call the one who does sound mixing ) and Resul Pookutty is one of them.

3.  India has got a very talented bunch of actors.

————————————————————————– the fairly tale ends here —————-

4.  India has got possibly one of the biggest slums in the world.

5.  Religious Riots are very common in India.

6. Child prostitution is rampant.

7. Child abuse is a given.

8. Crime world is the only route one can take to come out of poverty.

9. All educated Indians work at call centers.

10. All call centers take for granted the calls they get and frequently lie to the callers.

11.  All tourists’ guides in India are thugs and give barely any true information about the artifacts they tell about to the foreign tourists.

From what I see this could only benefit the individuals who have been nominated or who have won these awards. To claim that this would form a bridge between the hollywood and the bollywood is what I would call audacious hope. Other than the first 3 factors mentioned, nothing else was Indian about the movie. The Director, the screenplay writer, the dialogue writer, the cinematographer, the producer ……………. The fact of the matter is, had this movie been made by an Indian production house with an Indian director,hollywood would have given a damn about it. forget getting 11 nominations it would not have  been nominated in the best foreign film category at least.

I know what i am telling might appear to be a very negative take on what is going on, but I feel somewhere every one is missing a point. We are celebrating the success of slumdog millionaire as if it is a proud moment in Indias history. But the fact of the matter is, once all the mayhem is subsided and sanity sets it, people would understand the amount of negative impact which the movie has made to India’s image abroad. With this movie winning 8 Oscars, I am sure millions of international viewers would be watching this movie. Imagine what image of India an average international viewer would have. I agree what movie has shown is a reality and don’t deny it. But what concerns me is that it is not the complete reality. There are a lot of positives to India as well. but forget showcasing that, there not a momentary glimpse of it in the movie.