The Sunny Side of Climate Change - Hindu Business Line Op-ed

By Adhvith Dhuddu.
(Op-ed as appeared in the Hindu Business Line on December 8th, 2009)

In the US, discussions about climate change are often partisan and impassioned. While the Democrats, who control Congress and the White House, largely accept the potentially insidious consequences of climate change, Republicans continue to deny the climate change phenomena. I mention this political bickering about climate change in the US because, as they struggle to reach a consensus on this volatile issue, we in India have largely accepted that climate change is something to confront, but have perceived it as a threat to our economy rather than an opportunity.

Make use of forex reserves - Mint-WSJ Op-ed

By, Adhvith Dhuddu
(As appeared in Mint-WSJ on Sept 14th, 2009)

RBI’s primary use of forex reserves is twofold: As an emergency fund in case of a fiscal crisis or food crisis, and to help mitigate any significant volatility in the rupee

Recently, surpassing $2 trillion, China’s foreign exchange (forex) reserves make up close to one quarter of the total reserves in the global economy. Though a pittance compared with China’s reserves, India’s forex reserves have grown healthily over the last decade and a half and are in many ways a reflection of our success as an economy. With close to $260 billion—approximately 25% of our gross domestic product (GDP)—in forex reserves, our coffers are extremely well padded to tackle a crisis. But what’s disappointing is the Reserve Bank of India’s (RBI) reluctance to deploy these funds in creative and resourceful ways.

In his book, Making Globalization Work (2007), Nobel Prize winning economist Joseph Stiglitz dedicates a whole chapter to explaining how the global reserve system should be reformed for the greater good of the world economy. After analysing how Asian countries have accumulated significant reserves following the Asian financial crisis, Stiglitz says: “The money put into reserves is money that could be contributing to global aggregate demand; it could be used to stimulate the global economy. Instead of spending the money on consumption or investing the money, governments simply lock it up.”

Fuss over private education

One of the main functions of the government should be to marry human capital with physical capital

By, D. Muralidhar

As appeared in Mint

Any developing country has a short supply of financial resources to provide even basic amenities. Though the current Indian government has been claiming to be a welfare one, the basic requirements of millions of people continue to be unmet.

Most of the developing countries are endowed with a large human capital, but any forward-looking government should leverage this capital in an efficient way. One of the main functions of the government should be to marry human capital with physical capital. This has to be done so that the country’s resources can be leveraged in the most optimal way. This transformation can occur only if human capital possesses sufficient education. The mercenary zeal of private enterprise can accelerate the process.

There is a marked shift in the demography of our country. The exponential growth of population in the band of 5-20-year-olds demands exponential investments in education. This has primarily not materialized due to the continuous demand on limited government resources for other purposes. In fact, government resources will never be enough. So there is an urgent need for the government to accept this reality and formulate policies for channelling private capital into this crucial sector.

It is relevant to draw a parallel with China here. The present Chinese population is what the Indian population will be in 2020-25. Apart from the various measures China adopted to augment continuous growth, education and skill development received a tremendous fillip. India must do the same.

The historical mindset of the Indian is to expect the government to undertake the responsibility of education. However, as incomes are inching up, paying for education is slowly gaining acceptance. The government must complement this change of mindset by freeing the education sector and allowing private capital. Private capital, by definition, smells profitable opportunities and gushes in; the pace of change is very brisk, thus gaining valuable time.

Having accepted the need for private capital in education, the next question posed by the naysayers is about cost, quality and control. We must start with a premise that some education is better than no education. As private capital flows in, many of these issues get sorted by simple market forces.

Education must be considered as any other amenity, without attaching any baggage. Factors such as reservations, source of capital, merit and beneficiaries should be kept out of the discussion in a country where millions have no access to basic education. We hear of many engineering colleges shutting down programmes in rural areas due to student shortages arising out of lack of infrastructure, teaching staff and other facilities.

So benchmarking must be done not against other countries, cultures, or systems, but against our own needs. This has to be the only yardstick to improve the availability of education.

Education being a part of the Concurrent List in the Constitution, Union and state governments must act as catalysts rather than controllers. The statements made by human resource development minister Kapil Sibal are indicative of the shift in the policy approach. But it’s not just the Centre: States that are progressive in their outlook on education will steal a march over others. Like private schools, states can also compete to get the best.

Having already lost decades, India has a long distance to cover. No further time should be lost; changes must be effected on a war footing. The only way out of this quandary is to use private resources with attractive policy incentives. The present inclination of the states to attract investment in industry should become a model to attract investments in education. Enlightened state governments can also leverage their demographic advantage.

D. Muralidhar is on the board of governors at the Indian Institute of Management, Bangalore, and member of the Planning Commission, government of Karnataka.

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India’s infrastructure woes

2009 AUGUST 6

As appeared in the Hamara Congrees site. Click here to visit Hamara Congress

- by guest contributor ADHVITH DHUDDU

The political and bureaucratic classes of India have finally manned up to accept the dilapidating state of our infrastructure. With all the right noises coming out of a rejuvenated Congress led UPA, the big question now is how words, plans and promises are translated to concrete action with long lasting impact. The Achilles Heel for policy decisions taken in India is the poor implementation of objectives, inefficient use of allocated resources and a lack of accountability. Whether its funds earmarked for rural food schemes or urban development of roads, capital often drips out unaccounted, from the leaky pipelines. What is originally envisioned by lawmakers and policy wonks seldom materializes on the ground.

Anyone would accept that a government cannot and should not function with profit as their motive; it’s just irresponsible and immoral. But an ironical observation here is the excellent accountability evident in every public-private partnership project with little or no leakage of funds. When private players are stakeholders with profit as their goal, accountability and responsibility reappears like magic. Government at all levels needs to take notice of this and try to replicate successful practices enforced in these partnerships. But delving into the critical infrastructure needs, one can easily identify many areas where long overdue development and improvement is needed.

Electricity (residential and industrial): India is replete with inefficient and outdated electric grids, a fatigued electricity transmission network and mediocre rural penetration. A lot of progress has been made in the power sector but its insufficient compared to what is required. Our archaic power transmission and dissemination methods contribute to huge losses in power, increased cost and needs desperate modernization. In many big metros, electricity is not a major concern as uninterrupted supply is somewhat reliable but rural areas continue to suffer as power generation and transmission still lags demand and power theft is rampant.

Industries bear the brunt of this problem as their costs surge and margins become slender. Manufacturing is a critical sector in any economy and its success depends heavily on how well the state abets them with uninterrupted and affordable electricity. Unfortunately many industrialists have shifted expansion plans abroad, and foreign players have scratched India off the list citing unreliable and expensive power as the deterrent.

Our government needs to recognize the tremendous benefits of having cheap, uninterrupted and reliable electricity. If the Congress led UPA can achieve this, it can usher in a new era of manufacturing in India as international players will relocate their bases to leverage inexpensive power with all the other advantages we already posses, i.e. affordable labor, language, technical skills, a growing market, etc.

Roads and highways: It’s a pity that the previous government’s brainchild and the NDA initiated Golden Quadrilateral (GQ) project was not pursued with rigor since 2004. This is why it’s important to leave political affiliations at the door when important national infrastructure issues are deliberated. The sluggish progress was evident after the NDA was voted out of power, which is disappointing.

Although the project is nearing its completion, tremendous amount of investment is required to maintain and expand the GQ and our complete highway network. Close scrutiny is required for all highway and road projects as contractors often try to make a quick buck by using cheap and low quality materials. Roads and highway networks need to be built for the future, keeping in mind the ever rising vehicular population and increasing dependence on highways for transporting goods.

Internet and broadband: Internet connectivity, broadband penetration and IT saturation is pivotal to the success of any nation in the 21st century. If India’s vision is to be a superpower in the coming decades, we need to equip our rural and urban population with the ability to leverage the internet in the most optimal way. Trying to win in this century without the internet is like trying to win a 21st century war with pitchforks and knives.

The internet is a productivity multiplier and the sooner it’s embraced by the population the better for the country. With this in mind, it’s disappointing to note that the rural penetration of computers and internet is poor and internet infrastructure in the urban areas requires extensive upgrading. Besides providing top quality IT infrastructure, tremendous investment is also required in training our rural masses.

City planning: There’s little talk about this in the mainstream media, but urban infrastructure planning is pivotal to the success of any large city. Many of our metros don’t even have up to date maps of sewage, drainage and sanitation lines, and rely on outdated maps for water and electricity lines. This often results in little or no coordination between different departments when roads are dug up for various reasons. Planning when it comes to the rural areas is downright appalling, as millions in villages still struggle to get basic sanitation facilities, good drinking water and electricity.

Infrastructure now: And for those still unconvinced about investing in infrastructure, here’s what a new, improved and modern India will look like: we can boast of efficient resource consumption, better capital utilization, soaring productivity which will lead to a higher GDP and incomes, accelerated growth, smart and agile supply chains for industries, faster movement of goods and equipment across the country, elimination of slack in the system, affordable travel for all, a highly educated population, an efficient marketplace, soaring foreign investments, and a country where superior infrastructure becomes so commonplace that citizens will finally focus on their jobs and stop complaining about the massive lags presently inherent in the system.

Our guest blogger Adhvith Dhuddu writes regularly for various publications in India and US about the economy and politics. He blogs regularly at www.AdhvithDhuddu.com and can be contacted at adhvithd@gmail.com.

Online link to this article: Click here

UPA 1.0 Vs. UPA 2.0: LEFT REALLY LEFT OUT?

By Adhvith Dhuddu

You don’t need a rocket scientist to decipher the capital markets’ vicious reaction to our FM’s highly anticipated budget. With expectations sky high, which were reflected in the May 18^th jumbo rallies, our FM under delivered on numerous aspects disappointing many stakeholders. Whether its investors, industrialists or the aam admi, but for the scattered green shoots, the broad strokes painted in the budget lacked the transformational and reformist tone that was required of Mr. Mukherjee. After the Left was left out, and the UPA launched its revamped 2.0 version; the towering expectations of a reformist UPA have been put to rest, at least temporarily.

The budget’s indifferent tone coupled with an unenthusiastic reception leaves one wondering if the Left was just a scapegoat in UPA 1.0 from ‘04 to ‘09. It’s imperative that the electorate ask this question because change has not come when the people demanded it. Voters couldn’t have sent a stronger message than by voting out the left parties who were vociferously obstructionist in nature, gleefully blocking every reform oriented policy initiative.

The primary culprit of this budget was the lack of details which the markets debunked almost immediately, sending the major indexes into deep red. So how can one accurately answer that question? Very simple, let’s explore if any major policy measure that the left would have blocked has been implemented.

FDI in banking, retail and insurance: Something that the Left parties vehemently opposed, fearing that outside competition would be detrimental to local industries. With the Left gone, there were high expectations that deregulation in these sectors would be initiated. But no concrete details were given in this segment.

PSU disinvestment: Another area that the Left strongly opposed believing the classic communist view that government is the best institution to run an industry. The prospect of moving forward here was very high as many analysts expected cash flows from PSU disinvestments to help pad the fiscal deficit. But again, besides a brief mention, little details were imparted in the FM’s speech.

Fuel Policy: Everyone’s aware of how the Left consistently voiced their irrational criticisms when fuel prices were hiked even a rupee or two. This budget was a golden opportunity for our FM to introduce sweeping policies to incentivize efficient use fuel, to encourage alternate energy companies, or to tax high polluters, all of which would’ve drawn the Left’s criticism. He could have leveraged this tremendous opportunity to provide an energy vision for India but failed to deliver from the pulpit.

Although these are just a few areas where UPA 2.0 could have initiated reforms, it clearly reflects the lack of political will to make bold moves in this opportune environment. While it’s true that the stock market is not the ideal barometer to measure the budget’s outcome, one has to pay attention to the markets as it was biggest post-budget drop in Indian history. Not only is it disappointing to realize that the Left was a scapegoat in UPA 1.0, but it’s also unfortunate to watch the Congress continue along the lines of UPA 1.0, lacking the ability to make bold moves, devoid of the required political will.

Also, few have dared to ask one tough question: What if we do stimulate, sending the fiscal deficit to 6.8 percent or higher (adding off-balance sheet items amplifies the deficit), and growth is still at moderate levels between 6-7 percent? That situation could be severely precarious for the Indian economy as the FM will then have to tackle a rising fiscal deficit, moderate growth, diminished receipts and India could fall prey to credit downgrades by international rating agencies. This outcome, which could be extremely detrimental to the economy, is very likely as the FM’s plan is a conditional one. A condition that growth will creep back into the Indian economy and the world economy will slowly pick up momentum.

I ask this question because although bold moves are required in this environment, it cannot be at the cost of fiscal prudence. Claiming that more money in the hands of the consumer will lead to higher spending is valid if you are in the United States, but the mindset of the Indian is to save more and spend only moderately. Given the gloomy environment, more individuals will be looking to pad their own bank accounts not someone else’s.

Overall this Budget is a relative disappointment because the FM has failed to capitalize on newfound popularity of the Congress party. A bird’s eye view of the budget lacked the needed lucidity in many reform areas, skipped the concerns about delivery mechanisms, has been blithe about FRBM targets, and was devoid of any visionary message or statement for the next five years of UPA 2.0

(The author is an asset manager and professional trader.)

UNION BUDGET 2009: July 6th 2009.

Commenting on the Union Budget just before D-day on 5th July, 2009.

Some points made:

1. Given the gloomy state of the global economy, the Union Budget should be presented with growth as the primary aim.

2. Although our fiscal deficit is expected to rise as rural schemes and various subsidies weigh on India Inc's balance sheet, the growth imperative must not be sacrificed just to keep the deficit numbers in check. Of course, if the fiscal deficit gets out of hand, India could face a credit downgrade, but that is not very likely in the near future.

3. IT has been a source of growth for the last decade, and this would not be the best time to eliminate tax incentives in place as the US and UK (big markets for IT) are in a recessionary environment. Uncertainty on the 10A extension must be cleared out and IT companies must be given 1-2 more years of tax exemption.

A BUDGET FOR YOUNG INDIA

By Adhvith Dhuddu

(Op-ed as appeared in Business Line Hindu)

There is much talk and anticipation surrounding the rejuvenated UPA’s interim budget expected in early July. While everyone’s discussing tax slabs, agricultural subsidies and fiscal discipline, it’s equally important that our Finance Minister focuses on presenting a budget with Young India in mind.

The demographics of our country calls for such progressive policies and young Indians have high expectations from a UPA that is partially spearheaded by Mr Rahul Gandhi and his young brigade. After all, young voters were crucial to the UPA’s thumping victory.

The 5 Es affecting young India are Education, Employment, Entrepreneurship, Environment and Energy.

Employment: Given the gloomy state of employment, tackling the labour problem first could mitigate fears of a prolonged slowdown with high unemployment. Thousands of graduates are added to an already strong Indian workforce each year, and if hiring does not gain momentum soon, it could be a source of problem for the Government.

The Finance Minister should consider providing temporary tax incentive to certain labour-intensive sectors (such as retail and manufacturing) which can have an immediate impact and alleviate some pain. But decisive and far-reaching action is needed soon or we could see many unemployed and disgruntled young graduates.

Education: The HRD Ministry has been asleep at the wheel for the last five years, adopting regressive policies when it comes to education reform. Caste and class have taken centre-stage for too long, overshadowing merit. Aimlessly increasing allocations and earmarking crores for more institutes will not ensure quality unless the ineffective command-and-control structure is comprehensively revamped.

Colleges and universities are not being allowed to make swift changes to meet 21st century requirements, and adding salt to our wounded education sector are laws that prohibit foreign universities, which are lining up to invest in India.

Mahatma Gandhi once said, “The youth of the nation is the salt of the country.” Our HRD Ministry’s inability to act is driving away thousands of talented and passionate students to other countries for graduate and postgraduate studies. If the Congress-led UPA is smart, it will enact extensive education reforms to leverage the favourable demographics of this country.

Entrepreneurship: A lot is said about the transformational reforms in 1991 that vaulted India into the global arena. But what Mr Manmohan Singh and his team did then was very simple: they provided an extremely conducive environment for entrepreneurship, which led to expansion in industries, innovation, employment, an enriched population and an active electorate.

The time is ripe for another entrepreneurial revolution, and policies favouring it. Even today corruption is rampant, capital is expensive, contracts are arduous to enforce and it’s tough setting up an enterprise. India ranks a dismal 122 out of 181 in the ease of doing business report published by the World Bank. The reforms in 1991 have shown us the right way; right policies today can foster entrepreneurship in a young population that will be the employers and employees of the future.

Energy: Energy consumption by individuals and industries is set to soar to unprecedented levels in the coming decades. Whether it is petrol, diesel, LPG or kerosene, it is critical to secure our energy future. Protecting and strengthening energy infrastructure is primary but, simultaneously, energy generating capabilities must be expanded. The Government should create a positive environment with sops for renewable energy projects and companies. Instead of choosing wind energy over solar or hydroelectric power over ethanol, we should adopt an all-of-the-above approach and promote all renewable energy companies.

The West has realised this and is rigorously trying to expand renewable sources of energy. We should create an energy infrastructure that is home-grown and self-sustaining. This issue is at the heart of every young Indian’s priorities, as energy shortages and rising prices loom ahead in the absence of long-term energy policies.

Environment: Although it may appear inconsequential at present, we will only be cursing ourselves (and our previous governments) in 2030 and 2040 if we fail to formulate and enforce concrete environmental regulations. India has experienced rapid industrialisation in the last 15 years and the pace is expected to increase in the coming decades.

The least we can do is leave the coming generations a clean and green environment. As Thomas Friedman points out in his book Hot Flat and Crowded, the 21st century will belong to leaders in Energy Technology. Energy and environment are strongly correlated and can be addressed through an all-of-the-above approach to renewable non-polluting energy.

With the right kind of policy focus, the Government can whet the youth’s appetite and simultaneously put the nation on the fast track to growth.

(The author is an asset manager and professional trader)

ONLINE LINK TO THIS ARTICLE: CLICK HERE

NEWS-9 COMMENTRY ON BANGALORE'S INFRASTRUCTURE WOES

On news-9 (June 4th 2009) commenting on the Bangalore's infrastructure woes and why the BBMP is unprepared even after years of experience that monsoons and rains severely affect roads, drains and activity in Bangalore.

I AM URGING ALL BANGALOREANS TO GO ONLINE AND SIGN THIS PETITION TO BE SENT TO THE BBMP. GO ONLINE, READ THE PETITION AND SIGN IT: CLICK HERE

ONLINE LINK TO THE PETITION: http://www.PetitionOnline.com/BBMP2009/petition.html

THE MORE PEOPLE THAT SIGN THE PETITION, THE MORE POWERFUL THE MESSAGE. LET IT BE DIFFERENT THIS TIME, AND LET US ALL TAKE A FEW MINUTES OUT OF OUR BUSY SCHEDULES AND FORWARD THIS PETITION LINK TO PEACE LOVING BANGALOREANS SO THAT OUR VOICE IS HERD LOUD AND CLEAR. SO PLEASE FORWARD THIS LINK TO MORE CONCERNED BANGALOREANS TO SEND A CLEAR MESSAGE TO THE BBMP. 

Dont forget to add your comments!

COMMENTRY ON NEWS-9: THE DILAPIDATING STATE OF BANGALORE'S INFRUSTRUCTURE 

I was on News-9 today (June 2nd 2009) commenting on the dilapidating state of infrastructure in Bangalore. Recently rains captured the life of 6 year old Abhishek, which was extremely tragic and absolutely unacceptable. The BBMP, or the primary organization responsible for this lapse was caught napping at the wheel. Their top officials were not even ready to appear in front of the media to apologize. Here are some points that I made. 

1. LACK OF PLANNING: Unfortunately Bangalore (and many metros in India) do not even have updated underground maps of drains and sewage systems, which is very disappointing. It's the responsibility Bruhat Bengaluru Mahanagara Palike or BBMP to get on this job immediately so that search and rescue operations can go on smoothly in times of emergency. 

2. NO EXCLUSIVE SEARCH AND RESUCE TEAMS FOR EMERGENCIES: The BBMP has no team who is assigned solely to emergencies like this, which is again very sad. It's the duty of organizations like BBMP is to have top quality search and rescue teams with world class equipment, after all they are using our tax money!

3. BBMP recently took out half page and quarter page ads boasting how they had record tax collection --- WHERE'S ALL THAT MONEY GOING IF THEY CANNOT PROVIDE THE CITIZENS OF BANGALORE SOME BASIC AMENITIES!

I AM URGING ALL BANGALOREANS TO GO ONLINE AND SIGN THIS PETITION TO BE SENT TO THE BBMP. GO ONLINE, READ THE PETITION AND SIGN IT: CLICK HERE

ONLINE LINK TO THE PETITION: http://www.PetitionOnline.com/BBMP2009/petition.html

THE MORE PEOPLE THAT SIGN THE PETITION, THE MORE POWERFUL THE MESSAGE. LET IT BE DIFFERENT THIS TIME, AND LET US ALL TAKE A FEW MINUTES OUT OF YOUR BUSY SCHEDULE AND FORWARD THIS PETITION LINK TO PEACE LOVING BANGALOREANS SO THAT THEIR VOICE IS HERD LOUD AND CLEAR. SO PLEASE FORWARD THIS LINK TO MORE CONCERNED BANGALOREANS TO SEND A CLEAR MESSAGE TO THE BBMP. 

Don't forget to add your comments!

From Public Gallery

From Public Gallery

From Public Gallery

TV 9 INTERVIEW: COMMENTING ON THE IT SECTOR SLOWDOWN IN INDIA

I was recently interviewed by TV9 news (a local news channel) and gave my opinion on the slowdown in the IT sector, and how it's interrelated with the slump in the US economy. The main points discussed are breifly given here. 

1. The main sectors affected in the US during this recession are: financial services, insurance, brokerage and banking. Companies in these sectors outsource a significant amount of activities to Indian and other IT companies. Therefore the slowdown has affected their IT spending numbers leading to depressed revenues and profits. 

2. IT budgets in many mutli-national companies like Citi, JP Morgan, etc. have been slashed leading to lower IT capital spending. This again affects Indian IT firms. In FY 2009, tech spend in the US declined by 9 percent and in FY 2010, the outlook is not very sanguine either, as tech spend might stay the same or decrease marginally. 

3. IT budgets in Indian companies too have taken a hit. They grew at a healthy pace by 13-14 percent in FY 2008, and might grow only at 4-5 percent in FY 2009. IT budgets in the coming financial year might either stay constant or just grow marginally. 

4. IT spending is usually divided into essentail and non-essential IT spending. Essential IT spend usually consists of 60-70 percent of the IT budget, which has been steady. It's the non-essential IT spend that had declined. 

5. As a result, many Indian IT firms are accepting contracts at a lesser price.Projects that were usually done at a certian price, are being accepted at 10-15 percent less. 

From Public Gallery

From Public Gallery

From Public Gallery

How Wall Street’s crisis affects the Indian economy
By, Adhvith Dhuddu

Wall Street’s landscape and the face of the US economy changed dramatically in the past few months. It’s famously known that when the US sneezes, the world gets a cold, and it’s looking ominously similar this time around. Despite the resilience and growing strength of the Indian economy, these changes will significantly affect Indian business, trade and commerce. It’s also becoming clear that our economy is in fact intertwined with the world economy and has not decoupled with the US economy in any way.

Risky leveraging by investment banks and a slump in the real estate markets in US were the root causes of this quandary which put the financial system in peril. In the last few years, the ability to leverage gave institutions on Wall Street access to ample capital and increased their risk appetite (which increased fund flows to emerging markets). Momentum built up in leveraging was felt across the globe as capital was pumped continuously into emerging markets and unconventional assets. But this financial fallout and recent government intervention has forced many firms to deleverage and use cash conservatively. The ability to raise $600 million with $20 million collateral (1:30 leverage) is a thing of the past and this will drastically impact capital inflows to India. We will see a significant slowdown in foreign capital inflows and foreign direct investment as a direct effect of deleveraging, inaccessibility to new capital and higher cost of credit in the US and Europe.

It’s extremely important to recognize that the accelerated growth in our economy was driven significantly by foreign investments, which are sure to dry up in the short to medium term. Not because India is a less attractive investment destination, but because of insufficient capital and inability to leverage available capital. When investment banks, hedge funds and high net worth individuals could borrow $1 billion with only $50 million in collateral (1:20 leverage), the $1 billion could be distributed to India, China, Brazil and Middle East into equity, real estate, commodities and fixed income assets. But when the amount available is only $50 million (no leverage) or $250 million (1:5 leverage), any amount of distribution to emerging markets and asset classes translates to less capital inflows into India and other emerging markets. This credit crunch, or more appropriately, “capital crunch,” forces us to realize that there is less capital available for disposal around the world.

Consequences of this fallout will be far reaching and be felt in emerging markets at least temporarily. The US is a consumer driven economy (70 percent of GDP) fueled by credit and buoyed by cheap imports; Asian economies that export heavily to the US will feel the pain as spending slows down and credit gets expensive. Here in India and in Bangalore, IT bellwethers, who garnered major portions of their business from financial companies, could feel the brunt when US corporations delay IT spending plans. Financial firms are struggling to capitalize even their daily chores, so this environment will undoubtedly create less spending and reserved capital expenditure plans.

Not only will this crisis dampen the mood of investors, but will send many of them into hibernation. A lot of wealth has been eroded in this financial crisis, and investors in the US are worried more about wealth preservation than wealth creation for now. More individuals and funds will look for steady returns with less volatility leading to more conventional and safe haven assets. A rush to quality will attract many investors to established economies like the US, UK and Japan. One argument is that companies in emerging markets are undervalued now and offer good bargains which should attract investors. But this is also true in developed markets where global giants like GE, Boeing and Microsoft are trading at extremely attractive PE ratios (Click Here: DOW 30 stocks with quotes, charts and key ratios like PE, EPS, etc). The only bright spot from a foreign investor’s perspective is the weak Indian currency. This is the only factor which could attract investors to India. The fall in the Rupee is a classic sign of foreign investors exiting India, at least temporarily. This decline doesn’t necessarily imply a weak Indian economy, but underscores the temporary rise in demand for the US dollar, as assets are sold all over the world and money is sent back to US to recapitalize banks and companies.

The drastic weakening of the Rupee (Click Here: US Dollar-Indian Rupee Chart) will be short lived as federal intervention and an increase in money supply will eventually dent the US dollar. The US dollar’s rise is temporary and is not being driven by a strong fundamental economy. Usually when any country around the world has a financial crisis, it’s cost of borrowing sky rockets, except for USA. When the US was in a full blown financial and economic crisis, the cost of borrowing for the US government was at an all time low, reflecting the raw power of the US, and the fact that humongous amounts of debt are transacted in US dollars.

Companies should incorporate this outlook into corporate plans and use this opportunity to rein in spending, accelerate cost cutting and optimize assets and resources in their organization. The future isn’t all that grim as a slower growth rate of 6-7 percent per annum is much better than no growth or negative GDP growth which the US has to confront soon. Many factors like increased local consumption, favorable demographics and a driven population will keep our economy and nation buoyant.

Online link to this article: Click Here

BAD TIMING AT THE WTO

The recent collapse of trade negotiations at the WTO received widespread scrutiny from economists, public servants and industrialists. Some praised our commerce Minister, Mr. Kamal Nath’s unwavering stance to protect the interest of the Indian farmer and others warned that this breakdown in talks could reignite a protectionist era in modern trade and commerce. But the unfortunate finale of the WTO talks shed light on various macroeconomic and geopolitical issues that converged to result in a collapse in negotiations.

A pivotal factor was the severe and unpredictable surge in food and energy prices putting many countries in uncomfortable territory at the negotiating table. No country, developed or developing, wanted drastic changes in import or export policies fearing a sudden inflow or outflow of essential commodities and hence fueling regional instability. Clearly the global macroeconomic environment created temporary disincentives which were reflected in the rigid and inflexible nature of some negotiators.

The US always enjoyed the kingmaker position at global trade talks, often overpowering their way to pro-US policies. Clearly, other nations did not appear to be at the mercy of US negotiators this time around and showed resolve, not giving in to their demands. This does not symbolize the decline of American influence but instead reflects the growing clout of the BRIC countries. Emerging economies no longer have to compromise and can confidently voice their concerns not fearing any severe backlash.

Prominent voices have highlighted that this outcome could be detrimental to expanding global trade because agricultural and farming sector presented the biggest trading opportunity ever to strengthen ties between countries. These opinions cannot be discounted and our officials should ensure this does not take place.

One has to realize that food/agricultural subsidies are the most complex and sensitive areas not only for India but every country at the WTO table. Farming and agriculture is the only sector where every single government has some subsidy program in place. For example, the Americans have enormous subsidies for corn growers, China has subsidies in place for rice farmers, many European countries have widespread subsidies, and our farmers also get significant aid from the government. For this simple reason, no government wanted to risk a backlash from their farming sector, forcing them to be extremely cautious in their decision making process.

Going forward the failure of these talks should not deter economies to negotiate again, but this time exchanging ideas at a smaller scale and taking it one step at a time can help. More bi-lateral and tri-lateral trade agreements should be formed before embarking on multinational trade agreements.

Federation of Karnataka Chamber of Commerce and Industry: April 2008 Issue
INFLATION’S LOOMING THREAT GOING FORWARD,
by Adhvith Dhuddu, Regular Columnist

The first four years of our Finance Minister’s term unfolded with buoyancy and resilient growth in most sectors. GDP grew handsomely, rising household incomes pleased the masses, corporate profits scaled new highs, the stock markets ventured into uncharted territory and prices across the board were relatively stable.

But the recent and sudden spike in prices exacerbated the looming inflationary threat and is creating jitters in the Finance Ministry, Commerce Ministry, RBI and more so at 7, Race Course Road, the PM’s Residence. Speculation about early elections is alive and well but even the regularly scheduled May 2009 elections could be marred with high inflation and outrageous price rises. This recent price rise is merely a preview of the agony faced by the electorate if appropriate measures are not taken to prevent further price rises and curtail inflation.

Recent measures taken during the damage-control mode seemed to have assuaged some pressures but pivotal factors which determine inflation (discussed below) are still at bay. Our FM, PM and RBI governor have vocally pledged that price stability

In a great nation like India, it is quite a pity when a starving family and has to make a choice between food and medicine when somewhere in the country food reserves in godowns are rotting.

is a high priority objective and are even willing to sacrifice growth to suppress inflation; a positive sign. But let’s examine what the FM has said before about inflation, price stability and monetary policy to measure him against his own benchmarks and analyze some root causes of inflation to tackle unfavorable price rises in the future.

Economist John Maynard Keynes said, “Inflation is a form of taxation which the public find hardest to evade and even the weakest government can enforce when it can enforce nothing else.” This invisible tax eats into the savings and incomes of the rich and poor alike, but impacts the lower rung more. In a developing economy like ours, the absence of a social security safety net and absence of income and employment insurance in the unorganized sector (which employs a significant portion of our population) severely aggravates the inflationary consequences for lower and lower-middle class families. The published inflation rate clouds the all important rate of increase in the price of basic food which affects the majority of our population. For example primary articles (which comprises 22 percent of the WPI and contains food articles) registered a growth of close to 9 percent at March end.

Many attribute the current spike in inflation to global externalities like widespread commodity price rise, supply shortages, demand increases, etc. This is true only to a certain extent as these trends have been in place for sometime (1-2 years). There are some reasons unique to India which is driving up inflation and needs to be tackled. Here are some of the fundamental macro issues causing inflation (and will continue to do so if they are not confronted).

1. Outrageous Money Supply: Going back the basics of inflation you learn that it is primarily caused by money supply issues. A continuous increase in money supply creates a situation where more and more money is chasing the same number of goods and services and this automatically drives up prices (irrespective of the supply-demand equation of the product). The importance of this characteristic cannot be stressed more because it has been the primary cause of high-inflation periods in recent economic history. USA (1973-1982), Germany

A continuous increase in money supply creates a situation where more and more money is chasing the same number of goods and services and this automatically drives up prices.

(during the 1970s) and Japan (1971-1980) experienced high inflation during the periods mentioned. All these were caused due to an increase in money supply and the central banks of all these economies had to drastically reduce money supply and increase interest rates to squeeze inflation out of the system.

Looking at the numbers from the recently released Annual Policy Statement 2008-09 from the RBI (abbreviated as RBI-APS-0809 for future references) proves the above point. According to the report, money supply (M3) increased by 20.7 percent in 2007-08, and 21.5 percent in 2006-07. Supply of money in the form of bank credit to the commercial sector increased 20.3 percent and 25.8 percent in the preceding two years respectively. All these increases are above the long term average rate of money supply growth in India. In fact later in the report RBI even acknowledges that, “money supply has risen above indicative projections,” and hence has decided to slow the printing presses. They plan to moderate monetary expansion (i.e. money supply) this time around only at 16.5-17 percent. The RBI deserves restrained applause because this is a step in the right direction and the problem is being tackled at its root. This is just the start and there should be a continued effort to control the supply of money, or we could see multi-year inflationary periods like the ones experienced by USA and Germany in the 1970s.

A common argument that is cited to support the increasing money supply numbers is the increase in net capital inflows. I will discuss this in detail later.

2. Inefficient Food Distribution Channels and Farming Techniques: Anyone blaming the supply-demand mismatch for recent price spurt in food articles needs to think twice before making that claim. The Ministry of Agriculture recently released numbers stating that, “total food grain production is expected to increase to an all-time high of 227.3 million tonnes in 2007-08 from 217.3 million tonnes in 2006-07.”

So, if the increasing disposable income of families is being reflected in the increased demand and supply of food is at record levels, why is it that food prices are going through the roof? It’s a simply because of horrendous and outright awful supply chain management and distribution techniques (or lack of them) that is driving up prices. The various middlemen coupled with rotting grains in the warehouse automatically decrease supply and increase the prices. No rain God, clearing of debts, increasing of fertilizers, giving free electricity or water, increasing/decreasing all sorts of taxes and duties, banning and placing limits, etc will solve this. It’s been tried repeatedly and has failed miserably. It’s pretty abysmal when our farmers are toiling hard in the fields only to see significant portions of their crop rot in godowns because of inefficient food and crop management.

In a great nation like India, it is quite a pity when a starving family and has to make a choice between food and medicine when somewhere in the country food reserves in godowns are rotting. We boast of churning out quality engineers, being home to IT behemoths and rich industrialists, but these are insignificant if we cannot feed our own people well. India’s food economy has to be strengthened and some basic steps like improving distribution channels, optimizing supply chains improving storage facilities must be undertaken. Knowing the unreliable nature of our government especially in the agricultural sector, the best way of doing this is to introduce competition. This should be a long term commitment and will eventually be undertaken when there is a crisis, like how the

Artificially keep the Indian Rupee (INR) undervalued vis-à-vis the USD by pumping in billions of dollars is analogous to pouring money into a bottomless pit for short term happiness. This flawed approach to undervalue the currency to improve growth is wrong and unsustainable in the long run.

foundations of our economy were reformed during a crisis. When a patient’s veins or arteries are clogged hampering the blood circulation, the doctor does not pump in oxygen, replace a leg or a hand, or improve the condition of the blood, he tries to open up the arteries first to improve blood flow and then tackle other issues. This is what needs to be done in the agricultural sector in India.

3. Misguided Currency Management: The misconception that a weak currency vis-à-vis the US dollar (USD) is good for Indian businesses because it serves as a backbone for export oriented businesses is widespread in India. The cheer leading from export oriented industries and export lobbies to artificially keep the Indian Rupee (INR) undervalued vis-à-vis the USD by pumping in billions of dollars is analogous to pouring money into a bottomless pit for short term happiness. This flawed approach to undervalue the currency to improve growth is wrong and unsustainable in the long run.

I agree that advocating an absolutely hands-off approach could be detrimental and make our currency extremely volatile creating ripples in the economy. Instead there should be a slow process of decontrolling currency valuation to allow the market forces to operate with relative freedom and enable price discovery. Another option is to allow the value of the INR vis-à-vis the USD to rise faster.

Besides helping the fight against inflation a strong local currency is beneficial in other ways. A stronger INR will automatically reduce food exports, keeping more food at home, hence increasing supply. Our strong currency will also increase imports

There should be a slow process of decontrolling currency valuation to allow the market forces to operate with relative freedom and enable price discovery.

of food because the same currency can now buy more hence increasing supply again. The government can then refrain from the ancient and unsuccessful policies of raising and lowering duties, banning and limiting stocks, etc. The increased purchasing power of the INR will be able to buy more products for the same amount of money. All this will automatically reduce inflation because of an immediate increase in supply and stronger currency being able to purchase more. There are some caveats associated with this technique but if executed with precision, it can work well.

Coming back to the argument that money supply should grow to support net capital inflows, we can see how a stronger currency can solve this too. According to RBI-APS-0809, “net capital inflows surged by 172 per cent to $81.9 billion during April-December 2007,” requiring the RBI to increase the supply of Indian Rupees. In lay man’s terms, over the last few years the demand for our currency has gone up but that strength is not reflected completely at the current price of our currency. Its common sense that demand for a certain product increases in the financial markets when the market perceives it to be undervalued and slowly reduces when the market thinks the price is fair.

But, in the case of the Indian Rupee, because the value of the currency has been artificially suppressed, the demand for it doesn’t seem to go away. The government ends up fighting a battle on two fronts: it has to continue to keep the Indian Rupee undervalued (to help exporters) by pumping money, but also try to decrease the demand for

Increasing the currency’s strength will mean less money needs to be printed to support net capital inflows, less money needs to be printed to support artificial currency valuation and less money needs to be printed as the purchasing power of our currency increases, eventually also helping tame inflation.

the currency so that market forces don’t overwhelm governmental force suppressing the price of the Indian Rupee. Finally the government has to continue printing more money to support the required payments to keep the INR undervalued. As capital inflows increase, as demand for local investment increases, and in general as the demand for INR increases it should be reflected in the currency, but it is not. So allowing the currency to strengthen will automatically relive the pressure to continue increasing money supply at high rates. Increasing the currency’s strength will mean less money needs to be printed to support net capital inflows, less money needs to be printed to support artificial currency valuation and less money needs to be printed as the purchasing power of our currency increases, eventually also helping tame inflation.

Consider this practical case: A year ago the central bank was making a valiant effort to keep the Rupee at 44-45 levels (vis-à-vis the USD), but eventually gave in when they were overwhelmed by market forces (and also the rising cost of suppressing the INR) and stepped back to allow a 10-15 percent appreciation of the Rupee to 39-40 levels. What about the approximately $120 billion pumped in to keep the Rupee at 44-45 level? It’s gone, wasted and will never come back (i.e. being held in USD denominated assets); in fact its value has now decreased because the US dollar has depreciated vis-à-vis the Rupee (imagine if this money could be used in more productive ways). History has shown repeatedly that as an economy strengthens, over the long run the value of its currency will rise. It is basically pointless to continue pumping money continuously to keep the currency at an artificial level. Think of the same situation two years from now when our government will again struggle to keep the Rupee at the 39-40 level by pumping in money and again give up to let it rise to the 35-36 level. With the democratization of finance and integration of financial markets over the globe it will become increasingly difficult and expensive to control currency values.

4. Flawed analysis that banning exports, tweaking import/export duties, fixing stocks levels, etc will solve the inflation problem: For some reason, our politicians and bureaucrats don’t seem to understand that these temporary tweaks will not solve inflationary issues in the long run. Generally, a complete scrap of import or export duties is good, but banning any kind of exports or imports, mandating stock levels, etc is unacceptable in a capitalistic and forward looking economy like India and is synonymous to going one step forward and two steps back.

On monetary policy, the FM said a few years ago that, “Unless we bring the fiscal deficit down to 3 per cent or below, we cannot gain mastery over inflation.” The finance ministry along with the RBI has worked diligently to achieve this number and have to be given credit for their efforts. On last count, the Gross Fiscal Deficit (GFD) for 2007-08 constituted 3.1 percent of GDP (from RBI’s Annual Policy Statement 2008-09). A significant assist from increased tax revenue cannot be denied and definitely contributed to this achievement.

There is another crucial reason that inflation needs to be brought under control. High inflation rates usually results in an ultra-low or negative net savings

But our Finance Minister certainly deserves credit for his ability to be able to balance the demands from the left and the right, the aam admi and the corporations, the public and the private sectors.

rate. According to our own Finance Minister, “High inflation and a negative return for depositors/savers make for an explosive combination, when key elections are round the corner.” (November 2^nd, 2003). Let’s see how our captain navigates this ship going forward.

It’s a relatively stress free job to analyze numbers, rely on theories and suggest remedies for the problems facing the economy right now. But our Finance Minister certainly deserves credit for his ability to be able to balance the demands from the left and the right, the aam admi and the corporations, the public and the private sectors and still manage to keep India’s growth intact and its flag fluttering proudly in the sky.