Euro Zone Crisis Muddle

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

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

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

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

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

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

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.