31.10.2008

• Assam witnesses the worst ever bomb blasts in its history
• About 66 people were killed and over 470 injured on Thursday as 13 near-simultaneous blasts ripped through Guwahati and three other towns.
  
• The first explosion went off at around 11.15 am in Guwahati and was followed by blasts in Kokrajhar, Bongaigaon and Barpeta in lower Assam.
• As usual there were acrimonious reactions from all political parties. While ULFA (United Liberation Front of Assam), the most active terrorist outfit from Assam has denied involvement, it is suspected that it could be the handiwork of HUJI (Harkat-ul-Jihad-al Islami) militants from Bangladesh.
  
• What are the options that the G20 have before them to tackle the current financial crisis?
• Ensuring greater levels of consumption within China to keep the Chinese economy’s demand for exports from the rest of the world strong, making it the engine of growth the world needs.
• Making the present day forex hoarders -- notably China, the Gulf countries, ASEAN etc., -- switch a portion of their reserves from US treasuries to other countries/currencies so that the dollar's strength can be calibrated to ensure that US can start exporting goods and services again; which have become very uncompetitive in view of the abnormal strength of the currency.
• A direct intervention in the US housing market -- through coordinated policies that would encourage investment there by individuals as well as REIT (Real Estate Investment Trusts) -- to create a win-win situation of getting dirt cheap houses in US and also perking up their demand.
• With the forex reserves at the command of the G20, it is possible that the above measures can be implemented. But will G20 bite?
• Factors that are negatively impacting the domestic aviation sector
  
• Heavy taxation on ATF (Aviation Turbine Fuel). States in India are levying sales tax of 25% to 32% on ATF.
  
• It is not just the high tax but the base rate of the ATF that is being offered by the oil companies is double the international price of fuel at current rates.
• Very high charges for any aircraft related activity. For instance, the landing charges in India are the highest in the world.
• The infrastructure limitations in terms of runways are an economic drain on airlines. Every minute of delay in landing, costs a fortune at current ATF rates.
• An emerging nexus between politicians and the aviation sector employees, as has been demonstrated in the recent Jet Airways employee dismissal issue.
• Why was India facing a liquidity crisis? Liquidity was tight due to a combination of local and global factors:
• Dollar sales by the central bank to stem the rupee's slide following strong foreign fund outflows from the battered stock market.
• Tax payments by corporates shifted funds out of the system and into the government's account. Planned government spending had also not materialised, and this usually passes into the banking system.
• Unscheduled borrowing by the government.
• Risk aversion of financial intermediaries to lend, particularly to mutual funds facing redemption pressures.
• Here is an inventory of the measures taken by Indian authorities to face the liquidity crisis:
• Overnight cash rates have eased to 6.90/7.00, well below the central bank's main lending rate of 9 per cent and down from 10.00 per cent on Wednesday and 23 per cent last Friday.
• Banks' cash reserve requirement (CRR), the proportion of deposits banks must keep in reserve, cut by 250 basis points over past week to 6.5 per cent, its lowest in a year. Measure to infuse one trillion rupees ($20.6 bn) into the banking system.
  
• Authorities have provided Rs 250 billion to lending institutions as part of farm loan waiver plan.
  Central bank introduced special 14-day repo auction to enable banks to meet liquidity requirements of mutual funds. It will hold the special repo every day until an allocated 200 billion rupees has been used.
  
• Central bank has also relaxed rules to allow commercial banks to accept certificate of deposits held by mutual funds as collateral.
  
• It has introduced an afternoon liquidity adjustment facility -- a repo or reverse repo -- to infuse or absorb cash, in addition to its usual morning one.
  
• It has temporarily let banks use some of their regulatory bond reserves, held under the Statutory Liquidity Ratio, as collateral for extra cash.
  
• Banks can also use more of their regulatory bond reserves as collateral to meet liquidity needs of mutual funds.
  
• Government eased rules for some foreign borrowings by companies, while the stock market regulator relaxed rules for indirect investments by foreign institutions in stocks via participatory notes.
  
• Central bank to sell dollars directly to oil companies in exchange for oil bonds. Move expected to stem rapid fall of rupee.
  
• Central bank raises interest rate ceiling on local and foreign currency deposits by overseas Indians to attract inflows.
  
• Cap on foreign fund investments in corporate bonds raised to $6 billion from $3 billion also to attract inflows.
  
• Government to provide finance to banks to help them raise their capital adequacy ratio to 12 percent. Details not yet finalised.
• Falling inflation doesn't make news?
• Inflation is now at 10.68%; but seems to be not catching the attention it deserves.
• There were times when all of us worried about even a one basis point raise in inflation figures. How curious can life be!
  
• US economy shrinks
• The U.S. economy shrank at a 0.3 percent annual rate in the third quarter. While the data was not as bad as economists had expected, it was still the sharpest contraction in the United States in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.
• We have read about the DMIC corridor for quite some time. Time to look at it again from a different perspective; especially in view of the bad necessity now to pump in money into infrastructure development as a measure of shoring up the economy.
• This is a very good article that gives its details very well.
• Indian airlines move to the transaction fee format from the present commission format of selling their tickets
• All major Indian carriers—Air India, Jet Airways and Kingfisher Airlines—will move from a ‘commission’ format to a ‘transaction fee’ format from Friday night.
  
• The critical difference between ‘commission’ and ‘transaction fee’ is that while the former was being deducted by the travel agent from the airline, the latter will be paid by the customer to the travel agent. The transaction fee will be a part of the price of the ticket. It will be collected by airlines and handed over to the travel agent. While the travel agent had the flexibility to waive off or reduce the commission percentage, the transaction fee will be fixed and mandatory. Of course, for tickets booked directly, the transaction fee will not be applicable.
• Anand and Chess Oscars
• Vishwanathan Anand is the first non-Russian to win the coveted Chess Oscar five times.
  
• The Chess Oscar is conducted every year by the Russian magazine 64 and the winner is elected from a poll involving the most respected chess writers, journalists and critics from over 50 countries.
• At last some good news on the cricketing front
• VVS Laxman and Gautam Gambhir had scored double centuries and put India in commanding position in the first Test against visiting Australia.
• Let us hope they will not fritter these gains away.

30.10.2008

• We return after a long Diwali holiday.
• The initial two day holiday got extended till yesterday. Hope all of you had a memorable Diwali.
• A lot happened during these days; we keep a mental note.
  
• Global action on tackling the financial crisis
• US Fed cut its funds rate -- the rate banks charge on overnight loans -- by 0.5%. It now stands at 1%. This rate was last seen in 2003-04. The cut marked the second half point reduction in the funds rate this month. The earlier rate cut was on October 8.
• Many countries are resorting to rate cuts (a.k.a monetary easing) in the hope that it will perk up demand and ameliorate the deteriorating economic conditions.
• China has reduced rates from 6.93% to 6.66%. Norway reduced the rate to 4.75% (by 0.5%). Britain and European Central Bank are expected to announce similar rate cuts this week or the next.
• Pakistan in the throes of a double whammy
• While it is facing a possible default on servicing its external loans, internally it is being pounded by lawlessness as well as nature.
• With Saudi Arabia, the US and a few other countries refusing to come to its financial aid, it was left nowhere to go but the IMF for helping it tide over its current financial troubles by seeking about $3.4 bn aid.
• Nature played havoc with it by killing almost 170 people in the worst ever quake that it has seen in recent times. The quake occurred in the Pak-Afghan border and has rendered about 15,000 homeless.
• Wavesecure makes waves
• It is an innovative software made on shoe string budget that has Nokia hooked to it.
• The software is made by Varun Chatterji, a Lucknow boy that studied in Singapore. He teamed up along with two of his friends to form a start up called TenSecure.
  
• What his software basically does is registering the mobile number of any SIM card placed in a stolen mobile phone. It would register call logs and SMS logs made or received by that stolen phone. A simple SMS would wipe out all sensitive data present on the stolen phone.
• Microsoft unveils Windows 7 plans
• Humbled (?) by Vista's bad performance -- it's a memory hogger, slowed down computers with features that most of us never use or access -- Microsoft announced plans of releasing Windows 7 by 2010.
• As usual it reeled out all the normal mumbo jumbo: 'fully compatible with all relevant devices and applications', 'without a mouse', 'faster boot up times', 'updated task bar' and 'a new look' etc.
• These are all phrases that we should get used to. Any and every software manufacturer will keep mouthing these things whenever they come up with newer versions of their software; but it is time which will tell whether or not they have lived up to their promise.
  
• But we need not be so despondent about every software including Windows. There will surely be some cool features that we develop a liking for. Let's hope Windows 7 will have more of them this time round.
  
• "Clawback" policies gaining currency
• With many a big corporate eating humble pie in the ongoing global financial turmoil, clawback policies have started gaining currency.
• More firms are banning top brass from ill-gotten pay when there are questions over executive conduct or the accuracy of financial results. These 'clawback' policies allow the firms to recoup portions of executive pay in the event of financial restatements, unethical conduct or other reasons.
• These policies do not generally require CEOs and others to forfeit all their compensation. Instead, they target things like cash bonuses as well as stock options, restricted shares and shares granted for meeting various performance goals.
• Increased credit card spends do not draw cheer from financiers
• The month of September has reportedly seen a jump of about 20% in credit card spends all across the country. Instead of rejoicing, the credit card companies are reportedly a worried lot today. This is because they fear that the defaults will be on the rise. As it is, the industry suffers about 9 to 12% default rate.
• Look at why credit card spends are on the rise:
• Usually the month of September signals commencement of the festive season and hence a rise in spends.
• Rising inflation and interest rates have left lower disposable incomes in the hands of consumers.
  
• The liquidity crisis has led to a rise in credit card spends because people would like to hoard cash; even if temporarily.
• Are the subprime loans to be blamed for the present global financial crisis?
• If you have been following this blog during the last six months or so, I am sure you would answer it in the negative.
• But many of you who didn't and those that are just starting to get an idea of the crisis, may think otherwise.
• What is to be blamed is the securitization of the subprime loans and the attendant regulatory failure.
  
• Take a look at this subtle distinction being very finely explained by TT Ram Mohan in his article today.
  

25.10.2008

• Mayhem on the stock markets across the globe
• It is not just the BSE Sensex and Nifty which have tanked. There is a secular bearish trend in all markets across the globe. Oil, gold, copper are falling on fears of a slowdown in global economy.
• Normally we see that people flocking to gold when stocks perform badly and vice-versa. But that is what is seen missing in this phase right now. The liquidity and market making capabilities of the yen carry trades are drying up because of the rise of the yen against the dollar to a 13 year high.
• It is situations like these that can rightly be classified as vicious cycles -- one news while feeding on others, feeds others and we end up with a vortex which sucks up everybody.
• Take a look at how cheap are respectable stocks available today. Instead of listing the bad performers, ET had to present a graph showing the number of falls range-wise.
• How much of our big business families worth now?
• Take a look at this graphic which shows the billions that our business families have lost in the current downturn.
  
• What should you do in such times?
• Depends on how gutsy or cautious minded and how deep pocketed you are. If you have deep pockets, this is the best time to make investments; even if your investments are faring poorly right now. Because the average cost of your investments will drastically come down and your portfolio will present an opportunity for you to exit or make a killing at the earliest signs of a bull rise.
• If you are not deep pocketed, but are not in dire need of money that you have invested; just grin and bear with it. Times will change -- in a year to year and a half period. Let no further falls in the market affect you. People in this category should not be singing "Singh is King" instead they should be singing "Cash is King".
• Look at what ET adivces:
• Put money in FDs before banks start cutting rates. Park some in savings accounts. It does not make sense to discontinue periodic investments in pension funds and SIPs. Gold and other precious metals may further fall, so wait before you buy. Don't sell shares in a panic. If you invest small amounts in stocks, don’t look at the scrip price for 2 years.
• Many of us might not have heard about vishi or kurie schemes. What are they?
• Vishis are community saving schemes popularly known as Kuries outside Gujarat. Small unregistered chit funds also go by this name.
• Did RBI's credit policy make a difference?
• To me it feels like the policy announcement lost its relevance in the mayhem. Perhaps many of us may feel so. But take a look at this ET editorial, which gives a more seasoned analysis on the policy announcement. I agree with it fully.
  
• You know why I like ET editorials? They give you such an excellent analysis of the macroeonomic situation which rarely comes from other sources. Perhaps it is their ETIG (ET Intelligence Group) which gives them tremendous number crunching strength.
  
• We have been closely watching the global economic scenario for the last couple of years. We have been following the scene right from the earliest signs of the appearance of the subprime crisis which led to the present situation. We suspected that it will have a negative impact on Indian markets. The IIP figures for August were seen as a blip, aberration or outright miscalculations. Take a look at this excerpt from today's editorial. It explains you how the sowdown is for real.
• Macroeconomic indicators such as index of industrial production (IIP) have long been suggesting a downward trend although advance corporate tax numbers mislead on the gravity of the situation. The IIP numbers for August 2008 (1.3% y-o-y) came as a shocker, leading to suggestions that data was faulty. But the 3.8% (y-o-y) decline in excise duty collected in September confirms that what was earlier seen to be a slowdown affecting the interest rate sensitive sectors such as realty and automobile and allied industries had begun to hurt others, including the consumer goods companies. If the global environment does not improve in the medium term, capital goods companies may see orders dry up. Faced with higher cost of funds and longer payback period, businesses are bound to revisit their expansion plans and even delay execution of projects that are in the pipeline. Clearly, investors should be prepared for the worst — single digit growth in corporate earnings.
• But all the same keep looking for signs of 'no-slowdown' like the rural demand. Demand in rural and semi-urban areas has managed to delink itself from the financial crisis. As a result, products that have a rural focus—like bottom-end twowheelers, entry-level cars and utility vehicles as well as lower-end gizmos—are all doing well.
• An explanation of how regulation can affect the cost of doing business
• By and large, regulators are a conservative lot and tend to favour caution over liberal growth. Thus, in India we have seen the facilitation by regulators of a high capital financial system while alternatives with lower capital requirements are either limited to government ownership, as in the case of the regional rural banks, or disallowed altogether in the insurance sector. The result is a financial system that is skewed towards the needs of the largely urban, organised economy while smaller and more informal enterprises do not enjoy the same access to the formal system. The net result is a far higher cost of doing business for small and informal enterprise than would occur in a more liberal regulatory regime.

24.10.2008

• India may allow UK law firms to set up shop
• INDIA may allow UK-based law firms to practise here, provided the UK government permits their Indian counterparts to obtain work visas in the legal space there. This would come as a breather to UK-based law majors.
• The move would be path-breaking, as the Bar Council of India (BCI), which has been against allowing market access in the legal domain, has backed the proposal. Sources said the BCI has indicated that it may consider the matter on a country-specific basis, provided there is a quid pro quo arrangement. Both the UK and Indian governments are keen to pave the way for two-way movement of legal eagles. Once an agreement is finalised with the UK, the BCI may be urged to open the gates for other countries too on a reciprocal basis.
• What are the strategies and policy actions that are needed to strengthen manufacturing sector in the current financial turmoil?
  
• Look at the following suggestions from the National Manufacturing Competitive Council headed by V. Krishnamurthy:
• First, the repo rate could be cut further by another 50 basis points to 7.5%, as cost of credit has been impacting the growth and investment prospects of the manufacturing sector.
  
• Second, the CRR could be brought back to the levels of 5% as it was 18 months ago. This would be particularly useful to meet the rollover and credit demand for the next six months, which is likely to be $40 billion.
  
• Third, there is the need to shield the most vulnerable in the industry — the SME sector. A corpus may be set up for lending to SMEs, as they will be disproportionately hurt by the non-availability of credit.
  
• Fourth, to assist exporters, EXIM Bank could be allowed to borrow foreign exchange from the Reserve Bank out of the foreign exchange reserves as is done in Korea and China.
  
• Fifth, this is the opportune time to relax the FDI caps, in sectors like insurance to help increase flow of foreign exchange.
  
• Sixth, removal of the caps on NRE and FCNR(B) deposits could also help shore up foreign exchange liquidity.
  
• And finally, a fund could be set up to inject some buoyancy and depth in the Indian capital markets, so that manufacturing companies looking to raise capital can do so effectively. The fund could be from the RBI’s own forex reserves where $7-8 billion could be set aside to invest in Indian assets in the market.
• Fall in crude prices revives the clamour for reducing petro prices
• While crude prices have slid to about $61 per barrel now from a high of $147 per barrel in July, the fact is that our Oil Marketing Companies (OMCs) still make humungous losses on sale of petro prodcuts. In addition to this, the rupee has depreciated by about 25%, effectively offsetting the benefit of the drop in crude oil prices.
  
• According to public sector OMCs, they are still losing Rs 2.41 per litre on petrol, Rs 6.42 per litre on diesel, Rs 28.07 per litre on PDS kerosene and Rs 332.14 per cylinder on LPG.
  
• According to the revised estimate, OMCs’ total under-recovery — losses due to selling fuel below cost — would be Rs 1,47,486 crore in 2008-09.
• "True Colours" and Monkeygate affair
• What are these? Sports fans -- especially the cricket lovers -- might know about them.
• True Colours is the autobiography of Adam Gilchrist, former wicket keeper of Australia.
• Monkeygate affair refers to the incident wherein Harbhajan Singh was accused of using racial slurs during the Sydney Test.
• The negative comments made by Gilchrist in his autobiography against Sachin Tendulkar can make the book controversial and perhaps ensure its commercial success.

23.10.2008

• How many in India have invested in stock markets?
• Household savings invested in shares and debentures are less than 2% of India’s gross output and only about 10% of household financial savings.
• How does a falling stock market affect the economy as a whole?
• Afalling stock market makes it difficult for companies to raise fresh capital by way of equity. Such a market dries up domestic liquidity and blocks access to foreign debt as well.
• Fear of further losses on Indian stocks forces foreign investors on our bourses to sell out and repatriate their money. When they buy dollars and take their money out, they reduce domestic liquidity and depreciate the currency.
• How would rupee depreciation hurt domestic liquidity?
  
• Unwarranted depreciation of the rupee will hurt domestic liquidity in three ways. Few fresh external loans would be contracted. External loans accounted for over Rs 80,000 crore last fiscal.
  
• Indian companies that have to roll over their existing foreign loans would take rupee loans in India, convert the money into dollars and take out this money. This would suck out liquidity and further depreciate the rupee.
  
• A declining rupee would make the Indian stock and debt markets unattractive for fresh foreign flows. The return in dollars on their investment would be the rupee rate of return less the rate of depreciation of the rupee. All the government’s plans to bump up domestic liquidity by allowing greater FII flows into the domestic market for corporate as well as government debt would come unstuck.
• ECB (External Commercial Borrowing) norms relaxed
• With a view to help the corporates overcome the liquidity crunch the government has relaxed the ECB regime.
  
• The revised rules provide for companies to pay a higher interest of upto 500 bps (5%) over the six-month LIBOR (London Inter Bank Offer Rate) on external commercial borrowings (ECBs).
  
• Companies can bring in the proceeds immediately and can also use dollar borrowings for rupee expenditure. ECBs up to $500 million per borrower per financial year would be permitted for rupee expenditure or foreign currency expenditure for permissible end-uses under the automatic route. The norm of a minimum average maturity period of seven years for ECBs of more than $100 million for rupee capital expenditure by borrowers in the infrastructure sector has been dispensed with.
• For the fiscal ended March 31,2008, Indian corporates had made overseas borrowings of $ 30.95 billion. This is as against borrowings of $25.35 billion in the previous fiscal. In the current fiscal, between April and August, corporates had borrowed $8.12 billion.
• We may not after meet the fiscal and revenue deficit targets. Admits the finance minister.
• As per the Budget estimates, the government should reduce fiscal deficit — excess of total expenditure over total income, excluding market borrowing — to 3% of GDP and revenue deficit — difference between the current expenditure and current receipts — to 1% of gross domestic product.
• The Fiscal Responsibility & Budget Management (FRBM) Act mandates the government to cut fiscal deficit to 3% of GDP by 2008-09, or 0.3% every year. The Act also mandated scrapping revenue deficit by 2008-09.
• By August, the government’s fiscal deficit had touched 87.7% of the fiscal target while revenue deficit has exceeded the target by 77.4%.
  
• Mr Chidambaram admitted that all states have fared better than the Centre in terms of reducing fiscal and revenue deficits. The combined fiscal deficit of all states stood at 2.7% by March 2008, well below the 3% target. States together have a revenue surplus of 0.56%.
• A look at banking statistics for a bird's eye view of the lending and deposit scenario
  
• Loans given by banks rose by Rs 64,937 crore to Rs 26,07,404 crore during the fortnight ended October 10, deposits raised went up only Rs 27,221 crore to Rs 34,69,359 crore. Investments in government bonds, on the other hand, dipped Rs 6,324 crore to Rs 9,80,916 crore.
• A look at government's initiatives for improving higher education in the country:
• The government will create 12 Central universities, adding to the existing 18. Rs. 3,280 crore (about $73 million) has been allocated from the budget for this. It announced that it would create 30 “world-class” universities, eight new Indian Institutes of Technology (IITs), and seven Indian Institutes of Management (IIMs) in the coming five years. Other plans include enhancing the salaries of college and university academics — by as much as 70 per cent.
• But none of India’s 348 universities is ranked among the top 100 in the world.
• Take a look at this very good article that gives a glimpse of the challenges being faced by higher education in India and what needs to be done before spending money on it.
  

22.10.2008

• Chandrayaan I launch successful
• What a thrill it gives! Had stayed glued to the TV for about 45 minutes from 5.45 AM to 6.30 AM today watching this launch. It was a perfect launch. Sri. Madhavan Nairand his team of scientists deserve to be appreciated for their efforts. They have done us all proud.
  
• Chandrayaan-1 is the first Indian Mission to the Moon devoted to high-resolution remote sensing of the lunar surface features in visible, near infrared, X-ray and low energy gamma ray regions.
  The mission is expected to unravel the mysteries about the origin and evolution of solar system in general and that of the moon in particular.
• Launched into a Geostationary Transfer Orbit (GTO) by its PSLV-C11 launch vehicle, the satellite's onboard liquid apogee motor (LAM) will be fired to take it to the lunar orbit - 387,000 km from earth - around November 8.
  Once the 1,380-kg Chandrayaan gets near the moon its speed will be reduced to enable the gravity of the moon to capture it into an elliptical orbit.
  At the earliest possible opportunity Chandrayaan will drop its Moon Impact Probe (MIP) which will land on the moon's soil carrying India's flag, among many scientific instruments. After that, the spacecraft will also activate its cameras and other instruments on board.
  Chandrayaan will orbit the moon for two years. It carries 11 experimental payloads, five Indian and six from the European Space Agency (3), the US (2) and Bulgarian Academy of Sciences (1).
  The project is expected to prepare a three-dimensional atlas of the moon and prospect its surface for natural resources, including uranium, a coveted fuel for nuclear power plants, according to the Indian Space Research Organization.
  
• With this India has become the 6th country that has launched a Moon probe. The others are: the US, former Soviet Union, European Space Agency, China and Japan.
• The Chandrayaan-1 mission has a budget of $86 million, almost half the cost of China’s Chang’e 1 mission ($187 million) and just about a fifth of Japan’s Kayuga ($480 million), both in 2007. India is also planning to launch a manned space mission in 2014, and follow it up with a manned lunar mission in 2020, four years before China.
  
• The cost of launching a kilo of payload into space is reported to be $30,000 globally. But India's PSLV is stated to have brought it down to about $8,000 to $10,000 range.
• This is a very good graphic about the launch.
  
• Interest rates may be reduced by our banks
• Many commercial banks are reported to be planning to cut home loan rates by about 50 basis points after RBI cut the repo rate.
• So how much could your EMI be on your home loan? Look at this graphic.
• MNS Chief Raj Thackeray arrested; but has the government played into his hands?
• That Raj Thackeray is a very seasoned politician who can set the political agenda for at least one state in India is by now very clear. By throwing a gauntlet at the government that too when the Parliament is in session, he has not only forced the government to arrest him but has also stolen the political agenda. The arrest itself cannot by any stretch be extended beyond a couple of days at best; because the legal process will take care of bringing him out of the jail. But he forced even his patriarch, the bigger Thackeray to come out in support of him in the Parliament.
• Ah, what an articulation from today's ET editorial in this regard! Sample this:
• Raj Thackeray’s evanescent success — if it can be called that — in politicising his agenda through the grammar of violence, and perversely striking an emotional chord with the local electorate, is a direct fallout of the Congress bankruptcy in understanding regional sentiments.
• Unemployment is a(n) opportunistic politician’s consummate bedfellow and Thackeray has only stepped into the cracks ignored by both the Congress and Shiv Sena.
• How could the current financial turmoil help India in its nuclear ambitions?
  
• The ongoing financial crisis ensures that there will be a softening of the international civilian nuclear market as countries ditch plans to set up new nuclear plants. The current situation would force many advanced countries to scale down plans to expand the civilian nuclear sector creating favourable conditions for India to source fuel and uranium from the international market.
  
• What distinguishes US from the rest?
• Read this report and you will see why. In brief, what it says is that the US has not only made TCS open a 200 acre facility there, but has also started wooing Infosys and other big companies from other sectors to set up shop there. Their governing structures have the ability or the vision to come down from the perch or take a u-turn in times of need. It is this characteristic which will make it weather many a storm including the current financial crisis.
  
• US announces one more bailout
• THE Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds (Mutual funds that invest solely in money market instruments - short-term debt instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds) beset by redemptions. The initiative is the third government effort to aid money-market funds, which in stable times are a key source of financing for banks and companies. The new program is called the Money Market Investor Funding Facility, and officials said it’s intended as a backstop for money-market mutual funds to use as needed to meet redemptions.
• Our realty sector needs to learn lessons about the bottom of the pyramid
• With a slowdown staring in their face, demand evaporating for their high end houses, and left holding lot of inventory in their hands, the realtors are a worried lot these days. Look at two facts which today's ET gives: The top 20% of urban households had an average annual per capita income of only Rs 48,517. And taxpayers with more than Rs 10 lakh annual earnings number only about 1.5 lakh. In such a scenario it is the masses (that is those who are in need of ~1000 sft living spaces) that the sector should be looking at for making a profit by meeting their demand. They will now learn it the hard way. Time for them to recap the teachings of Md. Yunus and CK Prahlad.
• I am sure you would have read about Noam Chomski at one time or the other. Didn't do it? Then it is time you did so. Do so here. I know some of you refuse to do it. For those of you, here is one concept that the genius has propounded that is worth our attention.
  
• One of the things that he is very well known is for his propaganda model. The propaganda model is a theory advanced by him along with Edward S. Herman that alleges systemic biases in the mass media and seeks to explain them in terms of structural economic causes. First presented in their 1988 book "Manufacturing Consent: The Political Economy of the Mass Media", the model views the private media as businesses selling a product — readers and audiences (rather than news) — to other businesses (advertisers).
  
• In today's ET we have an excellent article written by Ram Puniyani explaining about Naom Chomski's theory. An excerpt:
• He theorised as to how the US administration creates consent of the broad layers of population for its acts of aggression. The perceptions which were drilled into popular psyche related to the dangers of communism, while attacking the emergent nation state of Vietnam in yesteryears or weapons of mass destruction (WMDs) in Iraq in recent times. By the time such propaganda starts getting questioned, the mainstream US propaganda becomes part of popular consciousness and too large to be countered by the sceptics and its opponents. Manufacturing consent is achieved through various mechanisms, the major of that being the media. And by the time the state version starts getting challenged the ‘goal’ of the state is achieved. So even if the critics prove that there were no WMDs, the goal of controlling the oil wells is over. Even if some sections question the veracity of the version of 9/11, Afghanistan is in its pocket.
  
• Looks so correct know?

21.10.2008

• Repo rate cut by 1% to 8%
• With a view to give a fillip to the economy, the RBI has cut the repo rate - the rate at which banks borrow from RBI — by one percentage point to 8%. This marks the beginning of a dovish monetary policy, with inflation becoming less of a concern. RBI had last cut interest rate in 2004.
• How will the rate cut positively impact the economy? Why will it lower the home loan rates? To know answers to questions like these, take a look at today's ET in the class-room column. It explains very well.
• I welcome this move by the RBI. I have long been a votary of low cost economy. It is only with lower interest rates that we get a low cost economy.
• China slows down, even as the US measures another stimulus package
• Reports are that the US is considering another economic stimulus package, considering that its economy will stay in a recession mode for the next few quarters. China's growth also has taken a beating; though it still is an enviable figure of 9%. Look at this graphic .
  
• India-Pakistan to open a trade route after 60 years!
• The Srinagar - Muzaffarabad road route will be opened today between the two countries after 60 years. Muzaffarabad is actually Indian territory but it is in PoK - Pakistan occupied Kashmir.
• A very good article on exchange rate management by Ashima Goyal. Some excerpts for us:
  
• THE exchange rate has three effects.
  
• First, on the real sector: trade, demand and therefore on output. So the real exchange should not deviate from competitive levels.
  
• Second, on inflation — appreciation alleviates temporary commodity price shocks coming from food, oil and other intermediate inputs, for which passthrough of border prices is high. Such an appreciation is in line with the monetary policy stance of raising interest rates under high inflation, but it lowers the required rise in interest rates.
  
• Third, a flexible exchange rate contributes to stability in the external sector, by decreasing the likelihood of a currency crisis.
• It was just yesterday that we noted something about CAG lamenting about not having enough teeth and wanting more. We note some more of his views on an important topic of interest.
  
• The CAG is reportedly contemplating a move to accrual based accounting from cash based system for the country.
• Do you know the difference between the two systems?
• Cash-basis accounting is a method of bookkeeping that records financial events based on cash flows and cash position. Revenue is recognized when cash is received and expense is recognized when cash is paid.
  
• Accrual-basis accounting records financial events based on economic activity rather than financial activity. Under accrual accounting, revenue is recorded when it is earned and realized, regardless of when actual payment is received. Similarly, expenses are “matched” regardless of when they are actually paid.
  
• Wikipedia gives an excellent brief on these two systems. Hardly takes 3 minutes for a read and recap. Do so here.
• The CAG feels that the move will lead to better transparency. It will bring out the assets and liabilities of the government clearly. With 21 states having already accepted the move, he expects the process to be complete in about 2-3 years.
• Some buzzwords (or should I say phrases?) that we need to recap in the context of the PM's stress on the need to evaluate the impact of government schemes to judge the real improvements brought about by them.
  
• With this, perhaps it will be a matter of time before we start hearing the CAG emphasizing 'impact audit' or 'social impact audit' or something similar.
• Performance Budgeting
  
• Performance budgeting consists of classifying government transactions into functions and programmes in relation to the government’s policy goals and objectives; establishing performance indicators for each programme or activity; and measuring the costs of these activities and the outputs delivered. The terms “performance budgeting” and “programme budgeting” are often used interchangeably, but programme budgeting can also be defined as a form of performance budgeting giving greater emphasis to the classification of programmes according to the government’s policy objectives and the needs of efficient resource allocation. A full system of performance budgeting is difficult to realise, in large part because of the high information requirements and complex management systems that are needed.
  
• Zero-based budgeting
  
• Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. Zero-based budgeting requires the budget request be justified in complete detail by each division manager starting from the zero-base. The zero-base is indifferent to whether the total budget is increasing or decreasing.
  The term "zero-based budgeting" is sometimes used in personal finance to describe the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. It would be more technically correct to refer to this practice as "active-balanced budgeting".
  
• Outcome budgeting
  
• Presenting the 2005-06 budget, the finance minister Chidambaram introduced the phrase 'outcome budgeting' into the financial lexicon. It is supposed to be a progress card on what various ministries and departments have done with the outlay announced in the annual budget.
  It is a performance measurement tool that helps in better service delivery; decision-making; evaluating programme performance and results; communicating programme goals; and improving programme effectiveness.
  The Outcome Budget is likely to comprise scheme- or project-wise outlays for all central ministries, departments and organisations listed against corresponding outcomes (measurable physical targets) to be achieved during the year.
  It measures the development outcomes of all government programmes. Which means that if you want to find out whether some money allocated for, say, the building of a school or a health centre has actually been given, you might be able to. It will also tell you if the money has been spent for the purpose it was sanctioned and the outcome of the fund-usage.
  The Outcome Budget, however, will not necessarily include information of targets already achieved.
  This method of monitoring flow of funds, implementation of schemes and the actual results of the usage of the money is followed by many countries.
• The CAG describes the move from performance based budgeting to zero based budgeting and then on to outcome budgeting as natural progression. Social impact budgeting or impact auditing would be more progress in the same line.

20.10.2008

• Indian realty sector in real trouble?
• With reports of some builders being unlikely to meet their interest payments to their financiers and because of this likelihood some banks and financiers asking the realtors to sell their inventory before it is too late, it looks like the realty sector is in for some hard times much earlier than anticipated.
• Coupled with this is another report that foreign funds which had committed equity investments in some of the projects are considering wriggling out of the deals.
• Banks and institutions have lent over Rs 75,000 crore to Indian builders. This does not include around Rs 25,000 crore worth of bonds and debt papers which mutual funds had bought. While the total value of land and properties held as collateral is more than the outstanding loan, it’s still cold comfort. If builders start defaulting in a big way, the lenders will be left holding huge tracts of land amid crashing property prices. All these present a frightening scenario of our sitting on a property bubble. Let's hope this will not happen.
  
• ET artists have an excellent knack of presenting these frightening scenarios in pictures. Look at it here.
• What are the measures that the government is contemplating to relax FDI norms?
• In these troubled times, when FIIs are perceived as taking away or likely to take away their money, liquidity constraints, the falling value of the rupee vis a vis the dollar, the government is reportedly stepping on the gas pedal to speed up reforms in FDI.
• This graphic gives a list of possible policy measures that are under consideration.
• EC announces J&K assembly election schedule
• Having been assured by seven states from the Hindi-speaking belt that they’d be willing to spare personnel for election duty in Jammu and Kashmir, the Election Commission on Sunday set in motion the exercise to elect a new assembly in the northern state as it announced a seven-phase polls, beginning November 17 and ending on December 24. The state had seen a four-phase polling six years ago.
• Mindful of security concerns and the importance of holding elections in the border state in the global arena, the EC decided to stagger the polls to seven phases (November 17, 23, 30, December 7, 13, 17 and 24). Areas which receive snowfall in the winters will see elections in the early phases, while the cities of Jammu and Srinagar will go to polls in the last phase. The counting of votes for all the 87 constituencies will be taken up on December 28.
• What is seigniorage?
  
• This term is with reference to RBI. The RBI’s profits are mainly the result of seigniorage. That means revenue derived from issuing currency.
• Language lesson: par for the course
• This an idiomatic expression.
  
• To be expected; normal; common; usual.
• eg: According to a government minister, the appointments are an attempt to signal a new culture within the banking system, one that is a break from the bonus-driven cowboy culture that had become par for the course during the past few years.
• India and the global financial crisis
• After a long time I wrote something in Discover It blog today. Take a look at it here. It is about why we are getting affected by the ongoing financial crisis even though we do not have any of the systemic problems that the originators of the crisis have.
  
• CAG wants more teeth
• The Comptroller and Auditor General of India will ask the Central government to legally enforce mandatory information disclosure norms by which various government departments and state agencies will be required to provide information to government auditors or face severe penalty. At present, the CAG cannot force government departments to give information under any law. Ironically, this is a right which even ordinary citizens enjoy under the RTI Act.
• Auditor generals across the world enjoy tremendous powers in accessing information, seizing assets and even instituting legal actions against those who do not oblige to requests for information. In the US, for example, the Government Accountability Organisation can institute an action in a district court against any federal department or agency for not giving access to its records, while the National Audit Office of China can freeze accounts and other activities of corrupt individuals and organisations. The CAG has presented different models existing in other countries to the government for adoption. It has also pointed out that in New Zealand, the auditor general can recover cost and expenses of evidence gathering from the public entity to which the evidence relates, while his counterpart in Australia can seek help from law enforcement agencies to seize books, records or assets.
• Once the suggestion of the CAG is accepted, the audit department also becomes one of those much sought after departments for civil services aspirants.

18.10.2008

• Sensex breaches the psychological mark of 10,000
  • The Sensex crashed to a low of 9,975.35 at close, down 606.14 points or close to 6%. The 50-share Nifty ended the day at 3074.35, down 194.95 points or 6% over the previous close.
    
  • In a market rattled by fears of a long recession and further global turbulence, the speculation on Dalal Street is how many corporates are likely to default, rather than which broker will go bust.
    
  • FIIs net sold over Rs 900 crore. Since January, they have pulled out over $10 billion.
• India's forex reserves take a beating
  • According to data released by the Reserve Bank of India, the total foreign exchange reserve including gold and SDR dipped to $274 billion during the week ended October 10, from $291.9 at the end of September. This is the third straight week that the forex stock pile has fallen with the slide in the last two weeks being specially severe.
  • The record fall is mainly due to heavy dollar sales by the central bank to stem the fall in the value of local currency.
  • India, the fourth largest holder of foreign exchange reserves in Asia after China, Japan, and Taiwan, has seen reserves sliding since the start of this fiscal year.
• On Indian corporate debt market
  • We have been noting from time to time that the corporate debt market is not well developed in India.
    
  • Indian corporates are still captive to bank financing, in the absence of a functional bond market. Participation by the big boys — institutional investors — could give depth to the private debt market. Currently average volumes in the debt market are below Rs 500 crore a day. There are few products on offer.
• Sachin's test run score record
  • Sachin Tendulkar crossed Brian Lara’s record of 11,953 runs, the most aggregated in Test history by an individual batsman.
• National Integration Council
  • Jawaharlal Nehru, who was conscious of fissiparous tendencies in a diverse society, created the NIC in October 1962 with a view to bring all political opinions on a common platform to face the challenges to the unity of a diverse society.
• Food inflation inching to double digits
  • Year-on-year inflation in food articles is nearing double digits at 9.7% for the week ended October 4, more than double the 4.6% it had touched in the week ended August 30.
  • Remember the difference between 'headline inflation' and 'core inflation' in this context? We noted about it on 23rd August. Take a look at it here.
    
• Buzzwords worth remembering in the current crisis situation: de-coupling and deleveraging
  • De-coupling: What the gurus of finance essentially meant was that in the years to come, the engine of the world’s growth was going to be the emerging economies in general and the BRICs (Brazil, Russia, India and China) in particular. And even if the developed world slowed down, these countries would not be impacted and would just march ahead on their own.
  • Deleveraging: It refers to the reduction of financial instruments or borrowed capital previously used to increase the potential return of an investment. As part of this, firms may be seen disposing off assets which were built on borrowed capital.
• World's longest insect discovered
  • Nearly the length of a human arm, a stick bug from Borneo is the world’s longest insect, said British scientists.
  • The specimen was found by a local villager and handed to Malaysian amateur naturalist Datuk Chan Chew Lun in 1989, according to Philip Bragg. The insect was named Phobaeticus chani, or “Chan’s megastick,” in Mr. Chan’s honour.
  • Stick bugs, also known as phasmids, have some of the animal kingdom’s cleverest camouflage. Though some phasmids use noxious sprays or prickly spines to deter their predators, generally the bugs assume the shape of sticks and leaves to avoid drawing attention.

17.10.2008

• Today's headlines hold so much drama and emotion!
• Jet recalls its decision of firing 1900 staff even as Air India is reported to have offered leave to 15000 staff
  
• We have noted the decision of the Jet Airways to fire 1900 employees in the last couple of days and also how political parties immediately criticized the decision. But Jet Airways took a complete U-turn with an emotionally charged Chairman of the Jet Airways announcing at a press conference in Mumbai that every single employee of the Jet Airways family would be taken back.
• Even as the news of this u-turn is being digested, Air India is contemplating to introduce a voluntary leave scheme for all of its 15000 employees working in the non-operational areas. The proposed scheme will allow them to opt for a three to five year leave period without pay. Air India's loss for 2007-08 is pegged at Rs. 2,144 crores while its wage bill is at Rs. 6,500 crore.
• Ranbaxy Promoters at the receiving end; may have to cough up about Rs. 1000 crore as tax in the Daiichi deal
• We have noted about this issue sometime back in our blog. It was about 'bulk deals' and 'block deals'. Take a look at it here and also refer to our 14th June 2008 notes, to get a picture of the issue.
• Ranbaxy promoters approached SEBI seeking an exemption from the rules applicable to block deals. The promoters of Ranbaxy wanted SEBI to allow a block deal between them and Daiichi Sankyo in an off-market transaction for the sale of their 34.82% stake in Ranbaxy to Daiichi for a consideration of Rs. 737 per share even though the current market price of Ranbaxy is Rs. 266. Back in June this year, that was the negotiated price between Ranbaxy and Daiichi for stake sale. SEBI refused to give such a permission saying that it cannot be done for a single case.
  
• If the block deal has to be put through the stock exchange route, then the transaction will attract a capital gains tax of 10%, which with all the surcharges and others applicable will translate to about Rs. 1000 crore for the Ranbaxy promoters.
• RBI staff to be on strike on October 21. Why?
  
• The root of the matter is an internal circular issued by the central bank — at the behest of the finance ministry — to withdraw an updated pension scheme. According to the directive, RBI has withdrawn the updated pension scheme to pre-November 1997 retirees. The circular, among other things, implies a drastic reduction of pension to retired RBI employees in relation to that drawn by government retirees of comparable levels. What has irked RBI staff and officers is that the government diktat is being forced on the central bank despite the it having its own pool of funds to manage the pensions.
  
• RBI staffers are striking to ensure that basic pensions are updated after every revision of pay scales. Reportedly most members of the board except the then government representative (incidentally, the current RBI governor, D Subbarao) were not in favour of implementing the circular at a meeting held in mid-August.
• India-Sri Lanka CEPA
  
• The two countries concluded negotiations on CEPA (Comprehensive Economic Partnership Agreement), India’s second such agreement after Singapore, as early as July, but since then there has been no movement on signing the agreement. India has been waiting for the Rajapakse government to get Cabinet approval for CEPA before it approaches its own Cabinet.
• With Sri Lanka's current offensive against LTTE entering a decisive phase and some of the political parties back here in India taking strong objection to the offensive, the CEPA deal is on the back burner now.
• Something about organic farming
• What’s less known about it is that the formal organic movement has deep roots in India, and can even be considered to have been born here. Most histories of the organic movement credit the pioneering efforts of Sir Albert Howard, whose 1943 book, An Agricultural Testament is one of the founding texts. In it, Howard developed the idea of the soil as almost a living organism, in whose fertility lay the health of nations. The ideas he advanced in it, of the importance of humus, the organic matter in soil that is responsible for much of its fertility, and of the need to compost and spread waste material to renew humus, were popularised by admirers like Eve Balfour in UK who founded the Soil Association, the main UK organic organisation, and J I Rodale in the US, the founder of health-based magazines like Men’s Health.
• Those of you who are organic farming enthusiasts like me, can't afford to miss reading this piece that appeared in today's ET. The above noting is an excerpt from it.
• BTW, know anything about the Indore process of compost making? It is about collection and admixture of vegetable and animal wastes off the area farmed into heaps or pits, kept at a degree of moisture resembling that of a squeezed-out sponge, turned, and emerging finally at the end of a period of three months as a rich, crumbling compost, containing a wealth of plant nutrients and organisms essential for growth. (Excerpted from a book by Sir Albert Howard, who is credited as the inventor of this process.) Actually this process is what is used traditionally by our Indian agriculturists for ages. But it was popularized by Sir Albert Howard.
• Internet crime
• Internet crimes cost consumers and businesses $239 million in 2007, up 20% from the year before, according to US government data.
• World-wide daily count of zombie computers, which are infected with viruses and bent to malevolent purposes, doubled this month to 3,00,000 from 1,50,000 a year earlier.
• The average daily number of active bot-infected computers rose 17% to 61,940 from the first half of 2007 to the second, according to Symantec, the biggest maker of security software.

16.10.2008

• The RBI and Government give the much needed breather even as stock markets remained restless on global cues
  
• RBI cut the CRR by 1% to 6.5% to release about Rs. 40,000 crores into the system.
• Banks have also been given the leeway to borrow more by pledging 0.5 percentage point of their stipulated government bond holding for onlending to Mutual Funds which are facing heavy redemption pressures.
• Also, the limit on FII investment in corporate bonds has been doubled to $6 billion.
• The Centre has now advanced its spending by releasing Rs 25,000 crore to banks in the form of debt waivers to farmers. Coupled with the CRR cut this released about Rs. 65,000 crore into the system.
• Look at this graphic to get a good picture of the issue.
• On US Fed's bailouts and the legacy they left behind
• Look at this graphic which gives a very good picture of how US Fed's bailouts which are supposed to be temporary created lasting legacies.
  
• Oil touches new 13 month lows in world markets
• US crude fell $2.87 a barrel to $75.76 in afternoon trades, after hitting $74.62, the lowest since September 2007 and down nearly 50 percent since hitting a record over $147 in July. London Brent crude traded down $3.20 to $71.33 a barrel.
• This is good news for India.
  
• But why did the prices fall? The fear that the deepening economic slowdown will cut into already weakening demand. Slumping demand in the United States and other developed economies, as well as a flight of investors out of oil and into safer havens, has sent oil tumbling from July’s record.
• How does P-Note stock lending help the bears?
• SEBI has focused on the issue of FIIs helping hedge funds to go short on Indian stocks, as this has a double whammy effect. The way it happens is that a hedge fund, wanting to short an Indian stock, approaches an FII which had bought the stock and is currently holding it on behalf of a P-Note investor. Under the deal, the stock is sold and the money that is pulled out of India is given to the hedge fund. The P-Note holder may or may not be aware of this transaction, and continues to hold the P-Notes. When the P-Note holder wants to sell the stock, the FII asks the hedge fund to return the stock by buying back from the market.
  
• Why does the hedge fund engage in such shorting? Because the interest it pays to the FII on providing funds is just 1% whereas it gets about 4 to 5% in international markets in the current scenario. According to market circles, shares to the tune of more than $3 billion have been lent through this route in recent months.
• What does the FII gain here? Interest income without attracting regulatory glare.
• What's the double whammy here? Indian stocks get hammered in our markets; thus bringing lot of volatility to the markets. Secondly, such transactions bring unnecessary volatility to the price of the rupee also.
  
• Jet Airlines fires 1900 employees and invites the wrath of the MNS and the Left parties
• With a view to curtail the runaway costs, Jet Airlines has given the pink slips to 1900 employees. This has given an opportunity for political parties who said that this termination is inhuman and that Jet's flights will not be allowed to land / take off from Mumbai unless these employees are reinstated.
• But with the Indian airline industry facing a combined loss of about Rs. 8,000 crores for FY 2008-09, it has to be seen how this issue will be resolved.
• For a small state that Goa is, look at how it is getting into limelight for the wrong reasons!
• For its idyllic beaches and small footprint, it ought to have been touted as one of India's leisurely destinations. But alas, it is attracting lot of negative press of late.
• Look at this piece which reels off the crime among / supported by elected representatives.
• Government establishes a panel to settle Press Note 1 disputes
• You might remember about Press Note 1. It was formulated in 2005 to dilute an earlier government provision called Press Note 18, which stipulated that the foreign company had to furnish a NOC (No Objection Certificate) from an Indian partner if it planned to set up a wholly-owned subsidiary even in an allied field. Press Note 1 has restricted the need for an NOC to the same activity only.
• The NOC condition is applicable for JVs set up before Jan 2005 for which FIPB clearance is needed
  
• FIPB (Foreign Investment Promotion Board) feels foreign companies have started bypassing India due to PN-1 related delays
  
• The govt’s intention to scrap Press Note 1 was opposed by domestic players. The finance ministry has set up a committee comprising officials from department of industrial policy and promotion (DIPP), foreign investment promotion board (FIPB) and the commerce department to look into the cases and check whether the dispensation of PN-1 invoked by the Indian JV partners stands ground.
• Arvind Adiga wins Man Booker prize for this year
• For his book "The White Tiger." It is about a Bangalore businessman writing letters to China’s PM, narrating the story of his life about how a migrant rickshaw-puller’s son smashed his way through the barriers of class and caste to make it big.
  
• The Chennai-born Adiga is the fifth Indian to win the Booker. Remember the others?
• V S Naipaul (1971) "In a Free State"
  
• Salman Rushdie (1981) "Midnight's Children"
  
• Arundhati Roy (1997) "The God of Small Things"
  
• Kiran Desai (2006) "The Inheritance of Loss"
• After studying literature at Oxford, Adiga started his career by writing articles for the Wall Street Journal and Money. He then joined TIME magazine and wrote about the transformation of the Indian economy in the era of globalised outsourcing, and its impact on lifestyles not just in the metros but tier-2 cities like Mangalore where he went to school. Then he became a freelancer and wrote this book, which fetched him the Booker.
• Want to get a background about Man Booker prize? Get it here.

15.10.2008

• The triumph of communism?
• Reports that USA has drastically altered its plans from merely buying sticky mortgage assets, for which there are no takers, to a direct infusion of $250 bn capital into thousands of banks' stocks makes me wonder whether it is the triumph of socialism. Even in UK the contours of the bail out plan that has been announced are becoming clearer by the day. They show that the government there too is buying preference shares in the banks to shore up their capital. It would be interesting to see what capitalism's theorists have to say now. What kind of laissez faire is this? The very things that the West has preached against over time to the emerging and developing economies, are now being indulged in by them.
  
• Treasury secretary Henry Paulson has reportedly urged the banks to use the funds to spur economic growth, rather than hoard it. The deal entails that these banks will have to cap executive pay and “golden parachute” payments made to CEOs.
• What is meant by 'golden parachute' payments in the above note?
• A golden parachute is a non-contractual agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits. They are designed to reduce perverse incentives.
• Why is the bail out package announced by the US likely to fail in achieving its purpose?
• In an op-ed piece in today's ET H. Chander writes the following:
• The bail out fails to recognise the nature and the extent of the problem, its geographies and the number of entities affected by the crisis. By now, reams of newsprint have been used to write that the crisis is not confined to mortgages, rather it stems from the paying/buying capacities of the users of loans and may get extended to retail loans. It may even spur credit card defaults.
• Firstly, EESA authorises the Treasury Secretary to establish Troubled Asset Relief Program (TARP) to buy troubled assets from any financial institution. Troubled asset means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability and any other financial instrument purchase of which would achieve the same purpose. The problem with this is that it’s called TARP, while it should have been Troubled Assets Stabilisation Program (TASP). The troubled financial institutions need capital and not relief which would not shore up their capital and the relief to the entire system comes from the stabilisation of the troubled assets and not from foreclosures.
  
• Secondly, the term financial institution means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the US or any state.
  The implications of these two terms constitute the second reason for which the package might fail. The economists have already established that most of the troubled financial institutions are unlikely to get the much-needed capital from this package excepting those who had made aggressive provisions against the troubled assets. Further, due to the inclusive nature of the definition of the term financial institution , the amount might get distributed to hundreds or thousands institutions thus not benefiting the system.
  
• When or how did the Bretton Woods system got crippled?
• It came about when in the sixties, in the wake of Vietnam war, the US started running huge trade deficits. If it tried to correct the balance of payment situation, it would result in serious liquidity crisis at home. And if it allowed the deficit to continue, the international community would lose their confidence in the dollar as the reserve currency and clamour for converting their dollar reserves into gold. Under the huge post-war burden, as deficits continued to mount and the dollar continued to lose its sheen, the US reneged on the Bretton Woods agreement, by unilaterally dumping the convertibility of the dollar into gold, ending the exchange rate regime agreed to at Bretton Woods. In effect, the regulation of global financial order has been crippled ever since under the financial muscle of the US, making it the biggest beneficiary of this lack of global regulation.
• Deposit cover to be doubled
• With a view to infuse more confidence in the country's banking system, the Government is contemplating increasing the maximum limit for deposit insurance cover from Rs. 1 lk to Rs. 2 lk.
• What is deposit insurance? All those deposits of Rs. 1 lk (now proposed to be raised to Rs. 2 lk) and below now with the banks, are insured against a bank going bust. So even if the bank fails, the depositor will get his money because the deposit is insured with DICGC.
  
• Deposit Insurance and Credit Guarantee Corporation (DICGC) is the nodal body working under RBI to oversee deposit insurance activity in the country. Deposits with all scheduled commercial banks, co-operative banks and regional rural banks are insured. All banks have to pay a certain premium to the Council to get their deposits covered. The increase in cap to Rs 2 lakh is also likely to increase the outgo of the banks on account of higher premium allocation for deposit insurance.
  
• Deposit insurance was introduced in India in 1962, the second country in the world to introduce such a scheme after the United States, which had launched the scheme in 1933. The government had introduced deposit insurance to save the country’s banking system from crises-like situations. It was in 1960 that the failure of Laxmi Bank and the subsequent failure of the Palai Central Bank catalysed the introduction of deposit insurance in India.
• EC announces elections in five states
• CONTROL of five states is up for grabs with the Election Commission on Tuesday announcing the schedule of assembly elections. The election season, which stretches from November 14 to December 4 will see the electorate deciding on their choice to lead governments in Madhya Pradesh, Chhattisgarh, Rajasthan, Delhi and Mizoram.
• This graphic gives you enough details about these elections.
  
• How is it that the current financial crisis will not pose problems for the Indian IT sector? And what are the challenges that the Indian IT companies should be ready to face?
  
• When companies eventually emerge from the crisis they would start thinking of how to get their work done in a much more cost-efficient manner without compromising on quality. India still has all the ingredients to be the best offshore destination for IT services/BPO work requiring significant scale. As crisis situation starts wrapping up western organisations would look restructuring at a large scale. This will bring lot of opportunities and, given India’s reputation and credibility, there’s a big role to play for India’s IT sector. It is going to be a time of stock-taking and putting your house in order.
  
• The key challenges the Indian IT sector (and the Indian offshore service providers in particular) is facing are rising overall cost structure, paucity of skilled resources, over dependence on US geography and linearity in business model. It is high time the Indian IT sector put its house in order and took some concrete steps to effectively meet these challenges.
• The Hedge fund market
• There are reportedly about 3100 hedge funds worldwide managing about $1.9 trillion as of June 30, 2008.
  
• Many of the hedge funds are reportedly losing tonnes of money in the current financial meltdown. This year's investment losses may see almost a third of them closing in the next two years.
• Hedge funds are based on the premise of making money whether the markets rise or fall. But if recent performance of many of these funds is any indication, they won’t be able to collect performance fees, usually 20% of gains, while management fees, usually 2% of assets, will shrink.

14.10.2008

• Paul Krugman wins Economics Nobel
• Why does this news occupy such a top place in our blog? Not just because Economics and Finance are the subjects of our close scrutiny. Equally because he is one of those columnists whom we follow quite regularly. His pieces appear regularly in The Hindu.
• The Princeton University scholar and The New York Times columnist, won the Nobel economics prize on Monday for his analysis of how economies of scale can affect trade patterns and the location of economic activity. Besides his work as an economist at Princeton University in New Jersey, where he has been since 2000, Krugman also writes about politics and inequality in the US and other topics for The New York Times. He has also written for Foreign Affairs, the Harvard Business Review and Scientific American. He is credited with having predicted the East Asian crisis of 1997-98.
  
• The award, known as the Nobel Memorial Prize in Economic Sciences, is the last of the six Nobel prizes announced this year and is not one of the original Nobel. It was created in 1968 by the Swedish central bank in Alfred Nobel’s memory.
• Remember the other Nobel prizes for this year? They are here.
• Finance Minister's assurances on infusing liquidity seem to have been well received by the markets
  
• The reduction of CRR by the RBI coupled with some quick developments like the meeting of the Arun Ramanathan panel, reports about RBI Governor's meeting with the PM and an assurance from the FM that more measures will be taken to infuse liquidity into the system seem to have been well received by the markets. They calmed and made quick gains. Though the undertone remains one of cautious optimism, the markets will be calmed only when they perceive that there are no more surprises in store for them from the global financial crisis front. When will they draw that comfort is anybody's guess as of now.
• Even as this news is comforting, the IMF has estimated that the World economy will continue to shrink till 2010. Look at the projections made by it here.
• Look at one reason that is being cited for the market crash: super-leveraging.
• It is not just Lehman Brothers that was highly leveraged in waging its bets before it imploded.
• Players in our local market also are reportedly super-leveraged. What is meant by this? Look at this for an excellent explanation. Put simply it means that for every rupee of investment you are making, you are also raising about two rupees of debt to take positions in the market. If you are super-leveraged in a bearish market, it will work as long as it remains bearish and similarly, if you are super-leveraged in a bullish market, it will be to your advantage as long as it remains bullish. But once the market changes trend, it becomes very difficult for you to suddenly change your leverage. That is when you feel you are left in a cleft stick.
  
• PM's Economic Advisory Council
• It is headed by Suresh Tendulkar.
• We have been so accustomed to seeing Dr. Rangarajan's name attached with this post that it is easy for us to miss the present Chairman.
  
• Jet & Kingfisher announce an operational alliance!!
• Two of the fiercest rivals in the aviation sector have announced an unheard of operational alliance in a bid to cut costs and take advantage of synergies.
• The alliance includes sharing of codes on domestic and international flights, leveraging the joint network, joint fuel management, common ground handling, cross selling of flight inventories, network rationalisation, cross utilisation of crew, reciprocity in Jet Privilege and King Club programmes.
• Remember about code sharing? It is an agreement whereby airlines permit the use of their CRS code in the flight schedule displays of other airlines. Then what is a CRS code? It stands for Computer Reservation System code; and I think you can fairly guess what purpose it serves. CRS codes are one way of identifying places, usually stations. They were created to enable the booking of seat reservations by (station-based) computers.
  
• I guess all of you use mobile phones.
• There is something that you all should know about IMEI numbers. It is a unique number which identifies the handset that you are using. It comprises 14 digits plus a check digit in the format AABBBBBB-CCCCCC-D. Type *#06# on your mobile to know its IMEI number. If it has all zeroes or no zero it is invalid. That means it could be either a stolen set or a hacked set. In all probability your phone will not function now because DoT is mandating that every phone should necessarily have a genuine IMEI number.
  
• In case you lose your handset you can approach the network provider and inform him that you have lost your mobile phone and give him the IMEI number. He in turn is supposed to enlist this IMEI number in a registry called the EIR. It is a database of the IMEI numbers of blacklisted handsets.
  
• But I have recently been at the receiving end of the sloppy service given by AirTel. Their 121 service asked me to approach the nearest AirTel care centre. When I approached them, they said they don't know what is this IMEI number and didn't care less. Instead they proffered an advice that I should approach the handset manufacturer. When I approached the service station of the handset manufacturer he asked me to get in touch with the network service provider. Having thus been shunted from pillar to post, I just prayed and hoped that my daughter's stolen phone did not fall into the hands of some terrorist.
  
• Try approaching the police to lodge a complaint; suggested somebody. Knowing what would be the response of the police people; I just prayed and prayed. And still keep praying :-) The moral of the story? Don't ever lose your mobile. Better still, don't use a mobile.
  
• A very good article on the global asset bubble
  
• "Art of managing global asset bubble" by MK Venu in today's ET is a very good piece. It gives you quite a few snippets on the current financial crisis.
• Today's Perspectives column is a recommended read. One interesting straight forward answer about the pros and cons of liquidity is excerpted for you:
• Liquidity can have both favourable and unfavourable impact on the real economy. Excess liquidity can lead to higher money supply which can put pressure on inflation by creating excess demand. It can also lead to higher asset prices and might eventually lead to an asset bubble.
  
• Liquidity crunch, however, can deprive manufacturing, financial companies and other corporates the much-needed credit to meet expansion plans, working capital needs and regulatory requirements, which, in turn, might affect growth and lead to overall slowdown in the economy. Tight liquidity can also lead to higher shortterm rates and this can lead to a slowdown of growth. The latest soft IIP reading is attributed to some extent to higher interest rates, which is driven by tight liquidity.
  
• Thus, liquidity has to be adequate in the system, supporting growth without fueling inflation.