Business World

Euro Zone Crisis Muddle

2011-11-28T09:02:00.000-08:00

Euro Zone crisis has become nauseating, as it never tends to leave the theme of ‘A EU country asking help, ECB – EU leaders meeting, recovery package announced subject to stringent conditions on the debtor, then again a renewed cry of help, markets gone jittery, protests in the beleaguered country and again the next round of insane meetings.’ Last 2 years will bear testimony to it. However, the gyst of the whole story still beats the thinkers who keep on exploring means to lengthen the crisis.

Actually the whole saga is not Martian theory; it is well-known to these people that the whole concept of a single EU with a common currency-Euro is an impractical idea which can’t sustain for long. A unified politico-economic bloc demands a level-playing ground sans any country-biased approach, but which also goes against the very basic tenet and proclivity of human, social or national aggrandizement at the cost of others. To ask nations not to look ahead without pulling others with them is a far-fetched requirement at this point of our evolution.

As pointed by the magazine The Economist too, EU was formed more out of expediency than sagacity. Greece was admitted without having the requisite GDP-debt servicing ratio, tight financial conditions, prudent economic policies etc even at the time of its joining the EU. On the other hand too, many countries had to go unnecessary roll-over to pass the Euro requirements. The newly joined states, esp. Baltic states, are finding it difficult to meet them, even though they wish to adopt Euro.

In a nutshell, the individuality of a nation is suffering, and it is prudent now to let go the nations their way, should they desire so. There is no point in taking Greek people to the gallows for just the sustenance of this crazy idea. For the time being though, let Greece default partially, restructure its debts, French-German banks absorb some of these losses, and ECB put enough weight behind to sustain the Euro. That could be the ideal balanced way right now to get out of the quagmire.

But will the power-wielders, read Germany, France etc, listen, no matter what the lesser EU countries and the rest of the world are going through.

India's Inflation-Food for thought

2011-01-14T07:37:00.000-08:00

India’s aam aadmi is reeling, this time more, due to inflated prices of most essential items. The food prices have skyrocketed, esp. the onion proving to be the jeweled condiment of food now for the people. But this was coming, for a long time, and as usual, the power wielders at the Center had turned a blind eye towards it.

See, economics is a wicked play, in essence, between supply and demand. Harmony between supply and demand is de rigueur for the effective functioning of the economy. Inflation and deflation both are delicate acts of it, and even a slight alteration in them puts the economy in topsy-turvy. An inflation of around 3% is considered good, if not ideal.

So, that brings us to the Indian situation then? Should India continue to be on its path of so-called economic proliferation, while also being negligent towards common man’s needs? While the optimists say, both economic and inclusive growths are possible and it is the government’s apathy that is not letting it happen. I concur with this, but I also feel economic growth has temporal component, and it can’t happen overnight. Like everything else, economy needs sound fundamentals. I would like to touch upon both the aspects: ideal economy’s path and government’s role to lay that.

India is the 2nd most populous country (1.2 billion), and despite government’s best efforts, pun intended, it will be home to around 1.7 billion by 2070 when the population is supposed to get stabilized (As per National Population Policy (NPP), 2000). By the way, this is revised estimate by NPP, as the original plan was to get population stabilized to 1.45 billion by 2045. So, considering the flagrant lack of target-meeting initiative and zeal of NPP, I assume that India’s population will only get stabilized after reaching 2 billion. So, we have to feed 1.2 billion now and sometime later, about 2 billion people. Not only feed, we will have to provide them clothes, houses, infrastructure and as their income grows, recreation, tourism, industries, power etc. So, you can gauge the demand that is in front of us.

How do we confront this demand? We can grow well in one sector, say services, as software is already showing its growth potential. After all, Japan, Singapore etc are manufacturing or services economies only and they have boomed on those sectors only. Here is where we make the basic mistake of not realising that India is much different from them. India is still an agricultural country; 66% people depend on it directly or indirectly. And food is what, as stated above, we need first. We need to augment our agricultural sector. Green Revolution, after 1966, did help in making us self-sufficient in foodgrains, esp. wheat and rice. But the other items, vegetables, fruits, pulses, edible oils etc remained untouched. Our demands are increasing though, so self-sufficiency in even food grains won’t remain for long. The demand is for 4% annual growth in agriculture, but it has sadly been around 1% only in the last 10 years. It is a damning record, and self-immolating effort. I acknowledge that the work is arduous, as we can’t increase our agriculture land (51% of our total land which is already the largest share in the world), but this also shows we have room for improvement. If we sow this land with the maximum productivity, as in US, China etc, we can achieve the target. But it needs big initiatives. I was heartened to see a plan for Second Green Revolution in Eastern India in this year’s budget but hardly any work has been done there; instead there has been the signed deal to buy Lockheed Martin’s C130 and GlobeMaster’s 17J aircrafts. Ah! The worse part is there is a similar story for all the priority sectors of India.

What can the Government do? First, the long-term plan, as blatantly made obvious by the inflation, should be to achieve self-sufficiency in maximum food items, and also be guarded against any natural impediments. We can’t be a food-exporting country, so efforts to raise certain agro sectors to cater to exports are futile and unwise. This is a strong statement, but all these policies, viz. National Horticulture Policy, Agro-Export Zones etc are wrongly dreamt on exporting theme. While the indigenous items like tea, coffee, spices should be exported, I fail to realize why cotton, which is not even of good quality as per world standards, is grown so much and exported, not fulfilling the home demands of textile industries even. We need to prioritize our crop diversification so that we are able to feed our people and supply our industries.

Second, the procurement, issue and distribution management should be given a total overhaul. The whole system is a shambles, even if put mildly. More on it in the next blog.

Third, the monetary policy, controlled by RBI, should be aligned more to control this inflation. This is not going to be a long-term and that effective solution, but it can at least put a break on the cascading effect. I am waiting for the mid-quarterly review to be done by RBI on 25th Jan. RBI should increase the interest rates; let the FIIs and big investors pull out their money, and let the Sensex fall. It is needed.

Finally, this economic growth story of India might sound fanciful to the foreigners and even the natives. But no country can override its own people. Let us not be in so much hurry to attract money and sector in every sector, even our basics our not good. In my earlier blog, I had highlighted the importance of money generation in general and Indian exports in particular. The idea still remains; only thing needed is a little re-jig of our focus and little show of patience.

Indian Trade-A Glance

2011-01-08T08:25:00.000-08:00

A country which is not economically sound can’t be socially and politically sound. However much one might want to contend it, one can’t disprove it. A strong economy gives a country the chance to utilize money for social upliftment and political sagacity. While the reverse too is true, and for some, a far more correct theory, its practicality and efficacy to bring the results in an appreciable time is questionable.

For bringing economic prosperity, integration with the world is a must, especially in the current scenario. While I appreciate the ideals behind the closed-door socialist philosophy, I can’t help wondering that it tries to negate its own social emancipation motive by cutting off from the world, emphasizing on a fanciful all self-sustaining economy. No country has the means and capacity to produce everything, and is needed by and will need other countries for goods and services.

While India’s share in world trade was around 22% (the same as that of US now) during 1750s, it gradually decreased to less than 2% at the time of independence in 1947, much of which can be attributed to the economic decadence and exploitation perpetrated by the British regime. Even after independence though, India, drugged by the opiate of socialism, so-assiduously espoused by Pandit Nehru and his colleagues, never attempted to integrate with the world market. Our external trade continued to plummet and it reached its nadir of 0.53% world-share in 1991. With other factors also included, it necessitated a radical shift in our economic polity. The LPG - liberalisation, privatization and globalization concept was then adopted by the government. Since then our trade has increased and right now it stands at around 1.65%. While the absolute figure of around $165 billion of export and $291 billion of import in the financial year of 2009-10 might give a better factual information, I am more interested in the world-share figure, as it reflects our trading capability vis-à-vis other countries’.

Our Prime Minister, Dr Manmohan Singh, has rightly advocated that the country can’t be built on the butter-mountain of subsidies and ilk; it should be integrated better with the world to bring in not only money but also capital, technology, knowledge and interest from outside. National Trade Policy (2009-2014) states two main things, among several. The target of reaching $200 billion in exports by 2010 -11 is the first (Going by current trends, it should be achieved), and the second of doubling exports share by 2014 by having a CAGR of 15%. I would be keeping an eye on the latter.

The composition of trade also needs to be altered for the better returns to be achieved in exports. Right now, India is a big exporter of iron ore to steel making companies of China, Japan and Korea. Our steel making industries instead can utilize these and augment themselves in productivity, provided they are willing to expand their capacity. Similarly, there is a big scope of getting an even bigger market of cotton, jute and wool textiles, even though India doesn’t produce top-quality raw materials for these. There is a great demand for even not-so-good-quality fabric in many African nations. Also, pharmaceutical products exports could be given a bigger push, if the issues of generic drug making capability of India are sorted out with other countries, especially those of European Union. Engineering industries have been the biggest success story of Indian industry, as they have not only met the domestic demands, but also contributed a lot to the exports. I would like to see these industrial units, viz. BHEL, HMT etc, to expand their capacity, striving to reach the top positions in the world. Jems and Jewelleries industry of India has a unique story of its own. Not a substantial producer of raw or coarse jems & jewelleries itself, India imports these raw materials, and then works (polishing, integrating, finishing) on these to export them back to different markets. And this segment as such has become the top exported individual sector for India. Brilliant. Moving on to services, IT industry is the real success story of India. The total Indian exports in IT reached $50 billion, showing a stupendous annual growth of more than 20% over the last few years. It can, I am saying, reaching $200 billion in the next five. For that, TCS, Infosys, Wipro etc will have to aim at becoming a household global company like IBM, HP, Microsoft etc. But it is possible, fingers crossed.

Indian imports constitute chiefly of fuel (petroleum,oil and lubricants -POL), and fertilizers, paper, chemicals, edible oils, pulses etc. We can’t do much about POL products, as we really are deprived of significant oil deposits. Oil imports constitue 75% of our total oil demands, and hence oil imports have had a significantly high percentage (around 33%) in our imports sectoral distribution for a long time. We should continue our efforts though to explore potential on-shore and off-shore deposits . Also we need to pursue other options of power and electricity , which include New and Renewable Sources. While continuing to hold good and improving relations with our traditional oil exporters (Saudi Arabia, Iran, Kuwait, Russia etc), we need to expand our relations with other nations too, more so in the vicinity. So, the recently pursued talks with Myanmar and Central Asian countries are a huge welcome. Natural gas supply needs to be augmented. The TAPI pipeline deal, recently signed, is a wonderful example of how mutually beneficial deals can help everyone. In a nutshell, our whole energy supply question needs a separate broad and holistic view, which should include all the parameters and players involved. On the non-POL import items, I would like to see India making a sincere effort to establish new fertilizer plants. India, being an agro-based country, can’t afford to import fertilizers on throwaway prices.

The rising imports have been quite distressing for Indian trade figures. Already the Trade Deficit has topped $100 billion, and even the Current Account Deficit (which includes the invisibles and net investment) has become negative of late (around $10 billion or 3.5% of GDP). It is not alarming yet, as the investments from abroad (FDI, FII, loans, aids and grants etc) have kept the Balance of Payments (BoP) favourable. But sooner than later, we will have to address the rising Trade Deficit question. Both the approaches of checking import bills and increasing exports will have to be pursued.

India’s role in global economic bodies, viz WTO, World Bank, IMF etc too will play an important part in defining our trade growth. While WTO envisages an ideal free-for-all world, its vision is far away from reality. But still its role in bringing the countries to at least more than a semblance of common policies in world trade can’t be overlooked. Right now it regulates good, services and IPR related exchanges amongst the countries. While India have gained in Services sector, there is a simultaneous pressure on it to open its Agricultural and NAMA (Non-Agricultural Market Access) Sectors. Similarly there are issues with Drugs licenses, concerning IPR issues. It would be beneficial if things are sorted out without jeopardizing India’s interests. But prospects look bleak at least in near future. So, the recent bilateral trade deals signed by India with regional blocs and individual countries are a great step towards proliferating the trade dynamics. India-ASEAN FTA, India-Korea CEPA, India-Singapore CECA, the proposed India-EU FTA, India-Japan CECA, India-Thailand CECA, India-Malaysia CECA etc have potentials to do a world of good.

There have been apprehensions raised in some quarters about the damaging effects of these intrusions into the domestic market. For example, there was a grave concern raised by Kerala coconut and rubber industry people about their products viability against those of S-E Asian nations, once India-ASEAN FTA came into force. While concerns like these are not unfounded, the newly-brought competition has the potential to improve the product, service and delivery quality also. The issues need to be resolved, not rejected.

I fully back the world bandwagon on which India, esp. its economy, has ridden. The efforts should now indeed be to accelerate it to the requisite level.

A sabbatical of sorts

2010-07-26T10:22:00.000-07:00

There could be nothing more frustrating or annoying than giving up on your one-of-the-most likened things. For the last 5-6 months, my blogging had to endure a test of wait amidst all the frentic and sapping schedule of my life. Even after putting a resolve every now and then to get back to it, I was unable to devote much or rather any time to it. And sorrily, I won’t be able to give any time in future too, for at least 4-5 months.

It is all for a greater cause only; but I hope, I will come back more learned, energized and focused then.

So, it is an official sabbatical till then. Hope life continues to cherish all of us!

Union Budget, 2010

2010-03-02T06:48:00.000-08:00

The Union Finance Minister, Mr Pranab Mukherjee, presented the Budget for financial year, 2010-11, on 26th Feb. The economists endorsed it and so did the market. The newspapers and cyberspace were full of extracted portions which outlined the plans in various sectors. I too went through the full text of his speech, and it is indeed replete with many ambitious schemes and proposals.

As I had highlighted for last year’s budget, this budget too seems meant for people and rural areas, and that is why it scores for me again. Some of the salient points which stood out for me:-

• Investment in infrastructure constitutes 45% of the spending, and out of which, 25% is devoted to rural development. Infrastructure investment not only building brings development, but also gives employment to a score of people.
• UPA’s flagship programmes again got a sizable chunk, 37% to be exact. There are many programmes, viz NREGA, Bharat Nirma, Antodaya etc run by the government, and it is imperative that they get a constant and healthy allocation.
• There was raise in Excise duty from 8% to 10%, done in order to control the fiscal deficit. Though it will increase the price, but it is much needed to arrest the growing deficit.
• Fiscal deficit to be pegged at 5.5%, a big improvement, even by the recommendations of 13th Finance Commission.
• PSU disinvestments to raise the capital. As FM himself pointed out, disinvestment till now had not only brought the money, but also raised the companies’ performance and credibility.
• Plan to implement Goods and Services Tax (GST) and Direct Tax Code (DTC) by April 1, 2011. But I hope FM meets his commitment this time, after promising and failing to implement them this year itself.

There are many more such proposals, some actually florid in their design and promise. The budget nevertheless lacks in some features too:-
• Less attention to Education and Health. There are allocations but I always believe they should be tackled on a war footing, as we lag in these sectors by a big gap
• Reduced grant to Sports. Indifference to Cinema, Arts again.
• Lack of proposals to control price rise. Agriculture incentives are fine, but there should also be good laws against their misuse. Hoarding continues unabated; subsidies distribution thorough PDS is corrupted. It is time we increase the lawful measures to arrest the malpractice.

All in all, a good budget for the country. I know the price rise is an eyesore, but also a compulsion. Hopefully we can weather that.

The Concept of Global Currency

2009-11-22T12:31:00.000-08:00

I have always been intrigued by the concept of a super-currency. What if we use a single currency – say, a piece of paper, called Worldollar or Worlduro or Worldupee. My terms are eccentric, but the idea is not.

When I was a child, I used to ask this question: why can’t our nation print rupee notes in plenty if we need the money so badly? Not only I but many would have asked this innocent, even if daft, question. Upon thinking, it is not hard to guess why this is not feasible. The total combined physical wealth of the world is constant, and our currencies are mere indicators of that wealth. We could have easily measured that wealth in rice, wheat, iron, coal, oil, colleges, institutes, houses, hospitals etc of a nation. But needless to say, a currency is the simplest index of that.

But what about the relation between the currencies of two nations? How much should an Indian rupee measure against the US Dollar? Both are evaluating the physical wealth of their respective nations. But the catch point is they are using different yardsticks and also different lengths of the yardsticks to measure that wealth. A common denominator had to be found. And the economists found this common base in Gold. The yellow metal’s reference was famously called ‘the Gold Standard’ and simply meant that the country’s currency could be converted into Gold at a fixed exchange rate. Thus, the exchange rate between two currencies could be determined by the difference in their rates to an ounce of gold. Widely operated between 1875 and 1913, this system was the first formal step towards fixing the exchange rate. Apart from providing a simple fixed conversion scenario, it also guarded against inflation as nations printed their currencies vis-à-vis their gold reserves. But the concept was not without flaws. Even a small shift in gold reserves, like discovery of new gold mines, frantic sell of gold, could send the whole exchange topsy turvy. It was especially felt during the 2nd World War when there was a massive spending of gold by the Allied Powers.

To reconstruct the economic world in the aftermath of World War II, the big minds sat in the now-famous Bretton Woods Conference in 1944. Amongst other things, they decided to fix the exchange rate of a currency to gold via the US Dollar. Thus, a new player, the US Dollar, was introduced and its conversion was fixed at $35/ounce. A national currency had to exchange with US Dollars which in turn was linked to Gold. In effect, the exchange rates were still linked to Gold. But it took a massive toll on US Dollars. Some countries, France in particular, started buying Gold from the US keeping its dollar reserves minimal. This led to a severe depletion of gold, notoriously called the ‘flight of gold’ in the US. Already under strain from the Vietnam War, President Richard Nixon decided to abrogate this system once and for all in 1971.

This led way to the ‘fiat currency’ or ‘free-floating currency’ where the currency is not linked to any physical commodity but the gauged value of the goods and services. While this system provides more flexibility to adapt to the current market situations, it also provides a basket case for illogical and manipulated rates. No wonders the market rates have seen so big fluctuations, leading to inflation, deflation, recession, economic crises, not experienced so frequently earlier.

That leads us to the question of a Universal Currency. Why can’t we then have a single currency to get around all this nonsense? It is easier thought than implemented. Each nation has its own sets of goods and services, and hence defined policies and guidelines aligned to its interests. No two countries can accept to use a single currency unless they both see their interests being served. See how long Euro has taken to be adopted. It unilaterally favoured the richer nations of EU at the expense of the newer joinees.

The closest we have managed to get as a super world-currency is the SDR (Special Drawing Right), conceived by International Monetary Fund (IMF) in 1969 and operating it since then. Not an actually practiced currency, SDR is a proportionate representation of the four major currencies : USD, Euro, Yen and GBP in the world. Each country has its quota of SDRs in the IMF fund, and these SDRs can be freely converted into usable currencies of the respective nations. Not surprisingly the richer founder nations gave themselves bigger quotas, and hence so much hype and hoopla made by the new economic giants, China and India, now to redress the balance in their favour.

It is not tough to see why this exchange between currencies will always remain a source of immense speculation and conflict. Every monetary system has/had its loopholes, and no individual or nation has left a chance to exploit that. Thus, the concept of a single currency, where the consensus of economic policies and intentions is monumental, will remain a chimera, at least in the near future where the times are even more uncertain.

Financial Statements

2009-08-17T18:51:00.000-07:00

Financial Statements are records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.

The three major Financial Statements are:-

Balance Sheet:-

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses.

Income Statement:-

A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense".

Cash Flow Statement:-

A cash flow statement or statement of cash flows shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.

The Budget of People

2009-07-07T12:13:00.000-07:00

There can never be a consensus on any issue; the Budget ’09 only emphasizes this point. Though I am not a Financial Expert, I am quite happy with the budget laid out by the Finance Minister, Mr Pranab Mukherjee. It is breathtaking, I would actually say.

For the first time in many recent years, it has actually tried to address the base issues, ie rural and infrastructure development, incorporating inclusive growth. Let the clamour about disinvestment of PSUs, increment of private share in various sectors, cheap credit availability to industries etc not befool us. These can’t be the spring boards for sustainable growth. We can’t have our industries, services viz IT, banking, insurance etc, grow without a concomitant growth in other sectors and areas: agriculture, rural infrastructure, education, health etc. These are mainly societal sectors, and hence tend to be neglected by the richer echelons, in order to generate quick moolah. But kudos to the government for coming to their rescue.

Just imagine if our rural sector has enough capital and spending power for Reliance Retails to be opened there; if the educational level reaches every nook and cranny for the Private Institutes to be lined up; if the Hospitals and Pharmacies make a beeline for the vast rural space. There is a whole lot market to be utilized, completely separate and in fact, dependable as opposed to the exotic foreign markets. But for that to happen, the rural sector will have to be uplifted. National Rural Employment Guarantee Scheme(NREGS), Food Security Act, Antodaya Gram Yogana, Bharat Nirman etc are not some sort of panacea, but they do aim to bridge the divide, provided they are carried out with sincerity and honesty. Let the economics percolate to every sector, and the capital will be generated. Let’s not fret over the 6.8% fiscal deficit bar set for this year.

It is not that the Budget didn’t look into the corporate sector. The unpopular Fringe Benefit Tax (FBT) is a goner. Corporate Tax is unaltered. Surcharge on Income Tax has been lifted. Basically, the Services and Industries have been asked to continue in the same ethos they have exhibited before. Now is the time for their neglected brethren to grow to their level.

I am sure in the next budgets, this so-called profligacy of money will be checked, and we can really see some money coming out of these investments. I would like to see some more schemes coming in Education, Health, Environment sectors too. That would be a perfect launch pad for the development of a just and healthy economy.

Brouhaha over AIG Bonus

2009-03-24T09:18:00.001-07:00

Everybody is crying hoarse over the payment of $180 million as annual bonus to the AIG employees. On first reading, every aggrieved mind in this recession would. Why should the sinners be awarded?

This ‘should’ is such a big question that it can’t be answered on a single logic. I too would say that the bonus should not have been given, more as a crisis time response than as a contractual obligation. The big financial people out there are not aloof from this world, and they know the impacts of this recession. They also know that most of this is the output of their incompetent work. So, shouldn’t have they as a goodwill gesture or anything like that, refused to take it? I am talking philosophy here, and it is not what market and capitalism were/are built on. “Make money when there is blood on the street”- the saying still rules the roost.

But it becomes hyperbolical when we start faulting each and every Wall Street Financial Institutes employee for the collective mistake done. I or you too could have been one of them, and not conscientious enough to refuse these perks. The problem lies with the top officials who decided to distribute this money, knowing fully in advance that they are receiving a lot of money (famously called tax-payers money) from the government. Their argument that the bright employees will leave the company for greener pastures doesn’t seem totally convincing in this acute time of job-slinging. The fault also lies with the US Treasure Secretary Tim Geithner for not ensuring this before or after doling out the money.

In fact, the fault lies with many people. I am in full nod with this article ‘Let’s penalize all Culprits‘ by Swaminathan Aiyar. Again it is more subjective than objective, but as said above, the question ‘should’ can’t be looked through a single perspective only.

Greed and Fear - The Market Story

2009-01-21T12:15:00.000-08:00

Market is human after all, for it won’t be market then. We might have devised quantitative and qualitative techniques to gauge, measure and predict it. But it still beats us, and it dupes us because it follows the two ever-insidious human traits: greed and fear.

Consider the market as a hill. On one side, we all are standing, looking up the ascent and wondering about its top. We all are looking at opportunities to scale the tortuous and steep path. But it takes an unfortunate incident, like 9/11, to create those opportunities by forcing the governments to act. In order to boost the sagging market in the aftermath of the incident, the government dishes out low interest rate, easy capital, higher leverage etc on everything. Every one of us joins the bandwagon. Financial institutions start doling out risky loans even to subprime candidates. To gain further, they amass liquidity by securitizing their assets. They start indulging in principal trading, putting their own money on risk. Investors on their part partake everything offered to them. New houses are bought; new stocks and bonds are secured; new investments in the fastest profit-yielding sectors are made. Prices rise, but who cares? Everyone is making money; everyone is ascending the hill to rise as high as he can. The prehensile tail of everyone has grown. Somehow one person, out of fatigue or boredom or may be anything, decides to rest, and looks back at the level field at the bottom. He starts wondering, “Is it worth it?” Some others join him, while the rest continue on their ascent. But the seed of fear is sown. Some start descending. The overproduced goods have now started producing lack of demand. Spending reduces. People start pulling out money from the market, and securing it instead for future bleak period. There is excess in every sector, but refusal to buy from the same-gracious customers. To keep themselves even, the companies start controlling their payroll, laying off people and plugging their dispensable expenses. Unemployment ensues; incomes drop; bank defaults happen. Bad debts are created in those very ambitious financial firms, and ultimately grow so big to force the firms to go bust. Every sector is affected, even if not directly or indirectly, then by the psychosis of fear. Everyone starts running down the same hill, he had once hankered to top. There is chaos; and we call this economic crisis.

Lovely story! And it has been repeated every now and then over the last century. But as said above, we all, including the market, are humans. As soon as we descend down the hill, we will be looking out for another hill and another set of opportunities. Again the same journey will take place, and there will be another writer retelling the same story.

Third-party and Comprehensive Insurance

2008-12-21T12:33:00.000-08:00

Third Party Insurance indemnifies vehicle owners and drivers who are legally liable for personal injury to any other road user in the event of a motor vehicle accident. Your TPI insurance will cover you for personal injury claims made against you by other road users such as drivers, passengers, pedestrians, cyclists, motorcyclists and pillion passengers. It is a compulsory form of insurance.

Comprehensive Insurance is a first party coverage. That means it also pays for damage to your vehicle that is caused by things such as a collision with an animal, theft, flood, glass damage. The other coverage that pays for damage to your car is called Collision Insurance. This pays for when you strike another object (a car, tree, pot hole). In order for your car to be properly covered, you should have both Collision and Comprehensive Insurances. But in general, both these coverages are treated as one. The state does not require either of these coverages - but if your car is financed, your finance company will require both.

Performance Review Revisited

2008-12-01T11:12:00.000-08:00

This was forwarded to me a few days back. It is very interesting and thoughtful. I would reserve my comments for the end.

Employee "A" in a company walked up to his manager and asked what my job is for the day? The manager took "A" to the bank of a river and asked him to cross the river and reach the other side of the bank. "A" completed this task successfully and reported back to the manager about the completion of the task assigned. The manager smiled and said "GOOD JOB"

Next day Employee "B" reported to the same manager and asked him the job for the day. The manager assigned the same task as above to this person also. The Employee "B' before starting the task saw Employee "C" struggling in the river to reach the other side of the bank. He realized "C" has the same task. Now "B" not only crossed the river but also helped "C" to cross the river. "B" reported back to the manager and the manager smiled and said "VERY GOOD JOB"

The following day Employee "Q" reported to the same manager and asked him the job for the day. The manager assigned the same task again. Employee "Q" before starting the work did some home work and realized "A", "B" & "C" all has done this task before. He met them and understood how they performed. He realized that there is a need for a guide and training for doing this task. He sat first and wrote down the procedure for crossing the river, he documented the common mistakes people made, and tricks to do the task efficiently and effortlessly. Using the methodology he had written down he crossed the river and reported back to the manager along with documented procedure and training material. The manger said "Q" you have done an "EXCELLENT JOB".

The following day Employee "O' reported to the manager and asked him the job for the day. The manager assigned the same task again. "O" studied the procedure written down by "Q" and sat and thought about the whole task. He realized company is spending lot of money in getting this task completed. He decided not to cross the river, but sat and designed and implemented a bridge across the river and went back to his manager and said, "You no longer need to assign this task to any one". The manager smiled and said "Outstanding job 'O'. I am very proud of you."

What is the difference between A, B, Q & O????????

Many a times in life we get tasks to be done at home, at office, at play. Most of us end up doing what is expected out of us. Do we feel happy? Most probably yes. We would be often disappointed when the recognition is not meeting our expectation.

Let us compare ourselves with "B". Helping some one else the problem often improves our own skills. There is an old proverb (I do not know the author) "learn to teach and teach to learn". From a company point of view "B" has demonstrated much better skills than "A" since one more task for the company is completed.

"Q" created knowledge base for the team. More often than not, we do the task assigned to us without checking history. Learning from other's mistake is the best way to improve efficiency. This knowledge creation for the team is of immense help. Re-usability reduces cost there by increases productivity of the team. "Q" demonstrated good "team-player" skills,

Now to the outstanding person, "O" made the task irrelevant; he created a Permanent Asset to the team. If you notice B, Q and O all have demonstrated "team performance" over an above individual performance; they have also demonstrated a very invaluable characteristic known as "INITIATIVE".

Initiative pays of everywhere whether at work or at personal life. If you have initiative you will succeed. Initiative is a continual process and it never ends. This is because this year's achievement is next year's task. You cannot use the same success story every year. The story provides an instance of performance, where as measurement needs to be spread across at least 6-12 months. Consequently performance should be consistent and evenly spread. Out-of-Box thinkers are always premium and that is what every one constantly looks out for. Initiative, Out-of-Box thinking and commitment are the stepping stone to success. Initiative should be life long. Think of out of the box.

It is a wonderful essay on the levels of thinking of an employee, or a person in general. But I feel it lacks a bit in subjectivity. A person can become 'O', only if he has been a successful 'A','B' and 'Q'. So, all are worthful and are doing a good job, some better than others, but until and unless 'B' is made to believe that 'O' has a higher prospect of success in life, he is not going to take the first step. That realization for B should not come in monetary terms, but rather in motivational terms. This is where the challenge for both employees and managers lie. Quite often in life, failure begets success, but here success should beget even more success. This is a very hard motivation to attain or give. But as said above too, this is what separates 'O' from 'B'.

Microcredit-a credit in itself

2008-06-19T14:42:00.000-07:00

A few days back, I read a wonderful article on ‘Microcredit’. I just had a little idea of this concept and that too, was known after Mohammed Younis of Bangladesh got Nobel Prize for this revolutionary idea in 2006. As the name suggests, it is lending a small loan to the people, but the catch-point is that the borrowers are generally poor people deemed unfit for loan-credit by the established money-lenders, viz commercial banks, institutions etc. Furthermore, the borrowers don’t have to deposit any collateral or securities.

Well, there is nothing like free-lunch in this world. And, unless you are doing charity, there is no point or motive in giving money with a great doubt over it ever coming back. Microcredit institutions were/are brave enough to fight this skepticism and in the end, have largely been successful. Small loans, some as low as $10, are given to people to start a new business or enterprise to generate income for them. The people in want of money generally know what money is like, and so, more often than not, with the help of credit institutions, have been successful in not only starting and running their small businesses, but also repaying in time. The peer pressure of the borrowers also helps in utilizing the money properly and returning it on time. The credit institutions have been smart enough to select women only as the borrowers since they are more money-savvy and diligent.

The above is not such a grandiose and novel idea, but it is just a reaffirmation of the theory that output can only occur if there is an input. Most of the people in our country and other poor countries suffer because they don’t have enough money to start with. Even if they have and invest it somewhere, they don’t have any guard against failure. Then the vicious cycle of debt, high interest money-borrowing, further debt, pressure, suicide etc gets built up. ‘Microcredit’ theory has tried to break this.

It has gained more credence and popularity in the last few years. In fact, I found one site too, Kiva, which does this type of micro-financing. There is another one called ‘Microplace’. People have been so fascinated by this idea that they consider it the most potent way to alleviate poverty. Add me to the list too.

The current food crisis

2008-06-03T02:33:00.000-07:00

I would start off with a famous quote by Mahatma Gandhi, “ There is enough in this world to feed everyone” We have always stood by its truism, but struggled to make this a reality.

The current food crisis highlights our indifferent and lost approach to it for a long time. As per various reports, the current increase in prices is attributed to the rising living standards of people in the developing countries, use of more bio-fuels and lack of concomitant investment done in agricultural sector. Each has its contribution, but the third reason is more important for me. Whenever there was a need, we pushed for newer and ingenious ways to produce more crops, viz Green Revolution in India during late 1960s. But in relatively happier times, there has not been a similar approach adopted.

Taking India’s case specifically, it is quite glaring that amounts given in subsidy are almost thrice than those put in investment. Subsidies on fertilisers, water supplies, pesticides etc and minimum support price on crops, are quick-fix sops which if overdone prove detrimental in the long run. Imagine if India would have invested the subsidy amounts more pragmatically.

Similar cases of imprudent methods adopted by other countries are galore. The nations are nevertheless sitting at the HeadQuarters of FAO (Food and Agricultural Association), Rome this week to discuss the crisis. The emphasis is going to be the ways to increase investment, and reduce the disparity in the restrictions imposed on agricultural trade in the developed and developing nations. Let’s hope they come out with decisive decisions.

How is the Sensex calculated?

2008-05-16T10:59:00.001-07:00

Courtesy: www.rediff.com

For the premier Bombay Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called The Stock Exchange, Mumbai by paying a princely amount of Re 1.

Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market.

Sensex is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, Sensex is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.

The base year of Sensex is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology. (See below: Explanation with an example)

Due to is wide acceptance amongst the Indian investors; Sensex is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Small wonder, the Sensex has over the years become one of the most prominent brands in the country.

The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The Sensex captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through Sensex.

Sensex Calculation Methodology:-

Sensex is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

The base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.

The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.

Dollex-30 :-

BSE also calculates a dollar-linked version of Sensex and historical values of this index are available since its inception.

Understanding Free-float Methodology :-

Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market.

It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.

In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and Bankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sensex becomes the third index in India to be based on the globally accepted Free-float Methodology.

Example:-

Suppose the Index consists of only 2 stocks: Stock A and Stock B.

Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.

Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.

Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).

Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).

So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.

Thus the value of the index today is = 296,000 x 100/60,000 = 493.33

This is how the Sensex is calculated.

The factor 100/60000 is called index divisor.

The 30 Sensex stocks are:

ACC, Ambuja Cements, Bajaj Auto, BHEL, Bharti Airtel , Cipla, DLF, Grasim Industries , HDFC , HDFC Bank, Hindalco Industries , Hindustan Lever , ICICI Bank , Infosys ITC, Larsen & Toubro, Mahindra & Mahindra, Maruti Udyog , NTPC, ONGC , Ranbaxy Laboratories , Reliance Communications , Reliance Energy , Reliance Industries , Satyam Computer Services , State Bank of India , Tata Consultancy Services , Tata Motors , Tata Steel , and Wipro .