Archive for the ‘economics’ Category

India on the move

This article was written by me for Sify.com on the event of the 60th birth anniversary of our nation. 6 years later we seem to be worse off than ever. Some part of the blame lies on the world financial crisis, but a large portion lies within lack of political will and business apathy.

Here is hoping that the next 6 years will see a robust change

 

2007 has been a momentous year for India. We have seen the stock markets rising and the dollar falling. Consumer spending and salary levels are never before heights. Today’s young Indian is earning a start salary that his father barely managed to before retiring.

India achieved 8.5% GDP growth in 2006, significantly expanding manufacturing. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Economic expansion has helped New Delhi continue to make progress in reducing its federal fiscal deficit. However, strong growth – more than 8 percent growth in each of the last three years (and over 9% in parts of the last year) – combined with easy consumer credit and a real estate boom is fuelling inflation concerns. The huge and growing population is the fundamental social, economic, and environmental problem. Here is a comparative picture of the growth of India’s GDP.

india graph

The 11th Plan

Sector              Growth rate                 Share of GDP
                          2002-07   1997-02     2002-07  1997-02

   Communications   15.0     17.14             2.3        1.7
   Manufacturing       9.82      3.68            16.7      15.3
   Agriculture            3.97     2.06             20.5      24.7

India is moving from an agricultural economy to a service economy surely but steadily. In relative terms, the decline of agriculture in the share of GDP from 24.7 to 20.5. That decline implies that services and manufacturing are gaining share and that implies that we are moving away from a subsistence economy to one in which we may have some hope of improving our lot.
Of course, as a developing economy, agriculture is the core of the economy.  If India is to ever develop. It is only very severely underdeveloped economies have high agricultural sector share of GDP. For instance Albania, Ethiopia, Mali, Nepal, Ghana — economies with agriculture accounting for a large share of the GDP. Australia, France, Germany, US — agriculture accounts for low single-digit shares of the GDP.

The Indian economy on the eve of the 11th Plan is in a much stronger position than it was a few years ago. After slowing down to an average growth rate of about 5.5% in the Ninth Plan period (1997-98 to 2001-02), it has accelerated in recent years and the average growth rate in the Tenth Plan period (2002-03 to 2006-07) is likely to be about 7%. This is below the Tenth Plan target of 8%, but it is the highest growth rate achieved in any plan period. While this performance reflects the strength of the economy in many areas, it is also true that large parts of our population are still living below the poverty line. The percentage of the population below the poverty line is declining, but only at a modest pace.  These problems are more severe in some states than in others, and in general they are especially severe in rural areas.

 

Oil- The master of the future

Petrol has dominated world economics for long and will continue to do so for the years to come. Oil has formed a large part of India forex outflow. It is however earning refining business which has been offsetting its import bills. In fact, during 2006-07, refined petroleum products formed the largest chunk of total exports overtaking the Gems and Jewellery sector.

The cost effectiveness of refining in India is drawing many global players here. This is because India is logistically well placed for refineries. Besides being a major market for crude oil and petroleum products, it adjoins major demand centres such as China. Also, crude oil from West Asia can easily be brought to refineries in India.

Of late, a number of players have evinced a keen interest in laying pipelines in the domestic market to supply gas to the consumers. For example, Gujarat State Petronet Ltd, a group company of the Gujarat State Petroleum Corporation, plans to connect all 25 districts of the state with 2,200-kilometre high pressure gas pipeline laid down across the state. Reliance will invest US$4 billion to lay a 1,386-kilometer pipeline from Andhra Pradesh to Gujarat. India is also one among the four countries which have the world’s richest gas hydrate reserves.

India ranks sixth in the world in terms of petroleum demand and by 2010, India is projected to replace South Korea and emerge as the fourth-largest consumer of energy, after the United States, China and Japan. The rising price of crude is of great concern to the growth of the Indian economy. India needs to step up its domestic exploration to produce substance instead of wisps of promise that it has been done till now.

The Forex concerns

In recent days the rupee-dollar exchange rate has been, on average, Rs 39.3 per dollar. A year ago it was 44.7. This means that the rupee has appreciated against the dollar by 13.7% in the last year. Put differently, for an Indian the average price of all American goods has fallen by 13.7% and, for Americans, goods from India have become more expensive.

Over the last year virtually all major currencies have been appreciating vis-à-vis the US dollar. The euro rose by 14.7%, the pound by 10.4%; the Canadian dollar by 23%, Sweden’s kroner by 13.7% – the same as the Indian rupee. Vis-a-vis all major currencies, outside of the US dollar, the rupee has changed very little. It is due to our high dollar exposure of our exports (especially software exports which has been driving the economy to a high) that the fall of the dollar has become a cause of concern.

The 3-D Advanage

As Mr Anand G Mahindra, Vice-Chairman and Managing Director, Mahindra and Mahindra, India said in a seminar, he reposed faith in the 3D advantages of India, Democracy, Demography and Durability. Democracy is a prerequisite to a healthy society, polity and economy. India’s demographic advantage is that it has the highest number of people in the working age group and this is going to continue for some time. Durability stems from the fact that India is a peaceful and stable nation despite many internal disturbances. He said that India has the second largest Muslim population in the world peacefully coexisting with the Hindu majority.

Some facts to chew on

  • India is the world’s fourth-largest economy.
  • By 2034, India will be the most populous country on Earth, with 1.6 billion people.
  • India’s middle class is already larger than the entire population of the United States.
  • One out of three of the world’s malnourished children live in India.
  • India is home to the biggest youth population on earth: 600 million people are under the age of 25.
  • India just edged past the United States to become the second-most-preferred destination for foreign direct investment after China.
  • In 1991, Indians purchased 150,000 automobiles; in 2007, they are estimated to purchase 10 million.
  • By 2008, India’s total pool of qualified graduates will be more than twice as large as China’s.
  • By 2015, an estimated 3.5 million white-collar U.S. jobs will be offshored.
  • India is the largest arms importer in the developing world.
  • American corporations expect to earn $20 to $40 billion from the civilian nuclear agreement with India.
  • In 2007, there are 2.2 million Indian Americans, a number expected to double every decade.
  • Twenty-nine percent of India’s population speaks English – that’s 350 million people.

The Investment Demons

The twin demons of fear and greed can destroy the soundest of investment strategies.  No we are not on a moralistic religious talk here. We are taking of two all pervading invaders who destroy our investments.

Be satisfied – aim higher – two contrary ideas which are drilled into the Indian psyche. Both of them are at a constant battle. The virtue of being satisfied with little has been drilled into us and yet very contrarily, we also taught to aim higher. To seek more than what we have, to be the best.

In the investing world, one often hears about the consensus between value investing and growth investing. And although understanding these two strategies is fundamental to building a personal investment strategy, we are often swayed by ‘hot tips’ and ‘insider information’ that can change our life. All the common sense and fundamentals analysis flies out of the mind replaced by greed – shinning and inviting.

 invest

Greed Governs

Most of us have a desire to acquire as much wealth as possible in the shortest amount of time and why not? Unfortunately this may take us to the level of being imprudent in our investment decisions.

This get-rich-quick  attitude makes it hard to maintain gains and keep to a strict investment plan over the long term.

Beat the greed

Any prudent investment approach should contain some form of an exit strategy; simply put how you plan on getting out of the stock you hold.

This would be one way to avoid greed, have a set price at which you intend on selling the stock, WALK AWAY with the money in your pocket and move on to the next investment. It sounds like a simple doable idea but one tends to ignore this essential strategy when the market is on the upswing. Holding on for a little higher returns may often cost us too much.

Fear Festers

When stocks suffer large losses for a sustained period, the overall market and the individual investor can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy.

Fear can make you take panicked decisions which do not match with your long term investment strategy. Getting swept up in the prevailing fear of the overall market by switching to low-risk, low-return investments can set you back by years in your financial planning.

Countering fear

The best way to counter fear is to have a financial plan in place and keep the eye on the goal. It is also important to choose a suitable asset allocation mix.  The herd mentality will only help keep the head down and give grass to gaze.

‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.’ – Warren Buffet

Save money by cutting down your electric bills

Ever gasped at the huge electric bills that seem to climb up constantly. Your electricity bill is a recurring expense which could bring a substantial saving in your monthly budgeting.

Make a good choice in lighting

Lighting contributes to nearly 30% of the consumption of electricity and if we work at improving the lighting in our homes we can achieve a fair bit of energy efficiency.

Florescent light consumes much lower electricity than the bulb.  The newer innovation is Compact fluorescent lamps (CFL) which looks like a white bulb. They are long lasting and about 5-6 times more energy efficient than the regular light bulbs. Thus, using them in place of bulbs can result in substantial energy savings.

According to Bureau of Energy Efficiency (BEE) a 15-watt CFL produces the same amount of light as a 60-watt bulb.
BEE also rates CFLs with stars to show their energy efficiency. A 5 star rates CFL will gives out the best light per watt of electricity consumed.

Although a single CFL costs more initially, over the life of the bulb you actually save money. Here’s a comparison on the energy consumption to make you sit up and think before you buy a bulb again.

CFL Incandescent or Bulbs
Energy Input (watts) 13 60
Light Output (lumens) 810 830
Useful life (hours) 10,000 1,500
Electricity Used (kilowatt hours) 130 600

To make the most of the natural light available in your home, you need to know how to use it.

There are several ways to maximise your natural light. You can hang mirrors opposite windows. Take down unnecessary window dressings and replace with filmy materials, such as voile and muslin, to diffuse light. Trim trees or bushes that overshadow windows.

Cooling the bills

Cooling accounts for 11% of home energy usage, an Energy Star-rated cooling system can help reduce electric costs by hundreds of rupees. Don’t constantly move the thermostat up or down throughout the day because this wastes energy and money.

Consider setting the thermostat as high as comfortable in the summer.

Make sure your central air conditioning unit outside your home stays clean and free of debris.

Use ceiling fans to assist in cooling.  In the summer, blades should rotate counter-clockwise when viewed from below.

Make sure furniture and draperies are not blocking cooling outlets. Blocked outlets restrict air circulation, overwork the cooling equipment and increase operating costs.

The refrigerator

The refrigerator alone accounts for 7% of an average home’s total energy usage. What’s more, refrigeration efficiencies have come so far in recent years that anyone with a unit more than five years old should consider investing in a new refrigerator.

Defrost food in your refrigerator, this helps cool the refrigerator, easing energy requirements, and it is better for the food than defrosting in room temperature.  Keep refrigerator full so that it is cooling less open space (water jugs make good fillers).

This article has been written by me for MoneyLife magazine

Why did the government change its mind about the bail out?

Incase you have been wondering about the yoyo stand of the Americian Governement …I found an excellent post on Dani Rodrik’s weblog

Here it is

 

At first, pundits and analysts were left wondering why 228 representatives chose to “Just Say Nay”. After the eventual approval of the “bailout” (or “rescue”?) package, many have pointed to the tax provisions added by the Senate, or to the renewed persuasion efforts from political leaders, as explanations for the turnaround. But a closer look at the data helps us understand why some of the initially unconvinced were more persuadable than others: extreme ideological positions and the scope of the financial sector in home districts were the key factors.

Much was made of the political pressures faced by different representatives. Those who were most sensitive to their constituents’ antagonistic sentiments towards the bill because of electoral concerns were indeed more likely to reject it. We found that a member facing a competitive race was 30% more likely to say “Nay” than her colleague with a “safe” seat. Also, a member who was stepping down was almost 50% more likely to vote for the bill than a colleague with a seat to defend. But the reelection incentives did not seem to matter in explaining the change of heart: a representative in a “safe” seat who voted against the bill initially was not more likely to switch his vote than his threatened colleague.

A more crucial factor was ideology. While Republicans were indeed more likely to reject the bill, what mattered the most was how extreme the ideological positionof each representative was. This turned out to be the single best predictor of the “Nay” vote, and particularly so for Republicans: an extremely conservative representative – say, an ideological kin of Sen. Tom Coburn (R-OK), the most conservative of all senators – was about 60% more likely to cast a “Nay” vote than a fellow GOP representative, otherwise identical, who just happened to be as centrist as Sen. Olympia Snowe (R-ME).

What is more, ideology was also very important in understanding which representatives had a change of heart. Among those who initially voted against the bill, the more ideologically extreme were significantly less likely to change their votes in the second go-around. Only the less extreme among the extremists proved within the reach of persuasion.

The other crucial factor was the role of the financial sector. Congresspersons representing districts where the financial sector is a more prominent employerwere far more likely to vote for the package in the first round and, if at first voting against it, also to eventually change their minds. This suggests that those constituents who were particularly vulnerable to the rejection of the bill, and to the market reaction after the first vote, were indeed able to make their concerns heard. On the other hand, we could find no evidence that economic conditions such as the prevalence of subprime loans or the unemployment rate influenced voting patterns, indicating how much the current crisis has expanded far beyond local concerns about toxic mortgages in housing markets.

(Incidentally, members of the Black Caucus also played a role. They were indeed more likely to say “Nay” in the first vote, and those who did vote “Nay” were about 30% more likely to reverse their vote in the second round than other representatives – we leave it to the political junkies out there to explain this change.)

In sum, a closer look at the data suggests that the voting patterns were fairly predictable after all – the stunning rejection and the subsequent approval of the bailout package were two sides of a familiar political coin.

A historic week in September

Timeline of the week’s events in the face of the worst financial crisis since the Great Depression:

 

Sunday September 14, 2008

·    Frantic talks during the weekend fail as Paulson states that there will be no bailout for Lehman. The bank is dumped by potential suitors such as Barclays   and effectively allowed to go bankrupt.

·    Stocks expected to tumble Monday, threatening the start of the next leg of the bear market.

Monday September 15th

·    Lehman declares bankruptcy; serious risk of default on counterparty derivatives results in central banks pumping in $100 billion into the money markets, which follows the announcement of $70 billion on Sunday as they attempt to contain the impact of Lehman’s bankruptcy.

·    Bank of America  takeover of Merrill Lynch  for $50 billion, the world’s third-largest investment bank, to prevent a Lehman-style bankruptcy.

·    HBOS  Britain’s biggest mortgage bank, crashes 30% after being targeted by short-selling hedge funds that sought a similar fate for the bank as Northern Rock. I was probably one of the first to break the news of a hedge fund assault on the bank, as a similar attack of March this year was still fresh in my mind, and therefore had a head start on the scrambling mainstream media that only started to connect the pieces together some 24 hours later.

·    The world’s largest insurer, AIG , seeks bailout cash, with speculation that the insurer seeks a loan of between $30 billion and $75 billions from the Fed.

·    Stock markets crash; Dow Jones ends down 504 points.

Tuesday September 16

·    Money markets freeze with the interbank rate (LIBOR) jumping to 6.75% due to the extreme risk of counterparty default.

·    No U.S. interest rate cut, despite calls and speculation that the Fed could cut by as much as 50 basis points.

·    AIG, the world’s biggest insurer, is bailed by the Fed for an initial $85 billion for an 80% stake in the insurer.

·    Stocks bounce on AIG bailout; Dow Jones rallies 142 points.

Wednesday September 17

·    HBOS is taken over by Lloyds TSB   for £12 billion amidst a stock price crash of 66% in three days. The shotgun wedding was to prevent another Northern Rock-style collapse and nationalization, precisely the possibility warned of on Monday. My analysis called for restrictions on short-selling to give distressed financial institutions room to breathe.

·    Gold as a safe haven soars by an historic one-day move of $85 following the news of the AIG nationalization and Lehman’s continuing impact on counterparties, with no end in sight to the crisis.

·    Russians shut down their exchanges, fearful of a similar collapse to that which followed the LTCM crisis a decade earlier.

·    Stock market slide resumes as the market lines up the next financial dominos to fall; investors fearful of capital losses dump financials, and the Dow Jones ends down 450 points.

Thursday September 18

·    Lloyds TSB takeover of HBOS confirmed for £12 billion ($21 billion) or £2.32 per share in an all-stock deal.

·    Central banks around the world flood the markets with over $250 billion more cash as the interbank market’s freeze sees the money market rate surge to above 6.75%.

·    Morgan Stanley the big investment bank to be targeted, with expectations of a merger with Wachovia 

·    U.K. FSA announces a ban on short-selling of financial stocks. I suggested this as a necessary move some 24 hours earlier. This and the central bank extra liquidity is seen as extremely bullish on a short-term basis at least, as short covering will lead to a strong rally as well as speculators jumping on the band wagon.

·    U.S. stocks soar in late trading following speculation of further restrictions on short-selling and a huge bailout. The Dow Jones ends up 410 points.

Friday September 19th

·    U.S. Treasury announces the mother of all bailouts – Stocks soar across the board on the intention to allocate an initial $700 billion and probably countless trillions more to buy up much of the financial sectors’ bad illiquid debt. The U.K. FTSE rockets higher by 8%.

·    The SEC also expands short-selling restrictions to 799 financial stocks, which contributes to the short-covering rally that leaves the Dow Jones up 369 points.

·    Washington expands the “mother of all bailouts” by guaranteeing money market funds that invest in high-risk instruments like commercial paper

Is your bank safe?

The Fed’s and other central banks’ action does not mean that all the banks have now been saved, as last week’s example of the world’s fourth-largest investment bank, Lehman, going bankrupt illustrates that literally many hundreds if not a thousand plus banks will go bust during the course of the worsening credit crisis, with all of the consequences for depositors. The following report by EWI presents a list of the 100 safest banks.

After all the money put in by the US government, the bailout plan is under scrutiny by FBI. The markets are still on a free fall and democracy as we know it had died. A new form of controlled democracy is on the rise.

Economics of Terrorism

The terrorist attacks on New Delhi in crowed market areas on a saturaday evening have chilled most Indian to the soul….we are all wondering – are our loved ones safe? Will we be next?

Here are some thoughts on how the econmics of terorism works

 

Terrorism specifically affects…

• Tourism

• Stock markets

• Trade:bilateral trade 4% 

• Insurancec costs rise, loss to insurers

• Oil markets: reduce Supply (Iraq); reduce Demand (London)

• Foreign direct investment

• Portfolio investment (size and composition)

• Saving and consumption 

• Investment 

• Utility: personal impact costs (life and property;disruption to production; fear and grief; injury; response costs, e.g. medical; etc.)

 

 

Terrorism beliefs

Terrorists are not desperately poor uneducated people from the Middle East. A surprisingly large share of them have college and even graduate degrees. Increasingly, they seem to be from Britain, like the shoe bomber Richard C. Reid and most of the suspects in the London Underground bombings and the liquid explosives plot.

This has left the public wondering, Why are some educated people from Western countries so prone to fanaticism? Before trying to answer that question, though, some economists argue that we need to think about what makes a successful terrorist and they warn against extrapolating from the terrorists we catch. It is a problem economists typically refer to as “selection bias.”

Most terrorists really are committed true believers, willing to die for their cause. Within the Muslim world, the researcher found a positive relationship between level of education and support for terrorism — the higher your level of education, the more likely you are to support terrorism against Western (including Israeli) targets. Suicide bombers also tended to be better educated than the average population. 

 

The economic impact of terrorism

The “impact” part of the attack is trivial from an economist’s point of view (sad, to be sure, and it involves such dicey moral and technical issues as how to value the loss of lives, but nonetheless trivial). 

To understand terrorism we need to analyze its elements:

There are four elements in this definition:

(a)   the inducement of intimidation or fear;

(b)  the use, or threat of use, of extra-normal violence;

(c)   the premeditated character of such violence; and

(d)   the political objective.

 The last element – the political objective – is of particular interest because it requires that terrorists must reveal their identity and that they must communicate their demands.

 

Bombings are by far the preferred method of terror. The reason, once more, has to do with the cost of the action. Hostage taking is logistically more complex and operationally more risky than is bombing. Bombing is not only cheap for the terrorist but more costly to detect for government (far fewer communications available for interception for instance, making it harder to track down potential bombers). Once more, as theory predicts, a lower cost will attract more activity.

Terrorism is not a “crime of passion.” Contrary to public opinion, terrorists do not take lives indiscriminately. Instead, terrorists are rational: they take lives

deliberately, or else they use the threat of taking lives as a tool of negotiation to achieve their objectives at least-cost

Ike hits Texas’ Economy

 

North Texas may see a spike in the price of gasoline and supply shortages next week, depending on how hard Hurricane Ike hits Texas Gulf Coast refineries.

Ike has also halted imports and exports at the Port of Houston, air travel to Gulf Coast cities and rail service out of the region. – all critical to the Texas economy.

At an evening news conference, state officials estimated that the economic impact would reach $81 billion – and could creep up to $100 billion over the next 24 hours.

As the storm approached this week, at least nine Houston-area refineries evacuated workers and shut down. The nine, including refineries owned by Irving-based Exxon Mobil, BP and Shell, are responsible for refining 2.3 million barrels of oil per day.Flooding is a major concern with Ike as most of the refineries are on the water. Ike is expected to have a very large storm surge because of its size.

Even if flooding is not severe, it will take time to move employees back into the area.

Most important, experts said, the extent of damage to the power grid could determine how long refineries stay out of commission.

 

Shutdowns 

Meanwhile, other aspects of Texas infrastructure are facing shutdowns and slowdowns. The Port of Houston plans to shut down its cargo operations during the weekend, and air and rail travel out of the area are on hold.

Wal-Mart Stores Inc., the largest U.S. retailer, and Home Depot Inc., the second-largest, have major import facilities in Baytown.

Wal-Mart’s emergency management team senior operations manager, Bryan Koon, said Ike has been on the company’s radar for at least two weeks. Wal-Mart has diverted shipments to Los Angeles and Savannah, Ga., and some boats are holding at sea until the storm passes. This week, containers in port were moved to safer ground, he said.

 

 

 

Air travel 

Dallas-based Southwest Airlines Co., American Airlines and other airlines canceled flights to Houston and Corpus Christi.

Fort Worth-based Burlington Northern Santa Fe Railroad closed its Houston and Galveston operations Thursday, and it removed equipment from the areas expected to be hit by Ike.

Union Pacific Railroad removed 4,000 rail cars and 200 locomotives from areas expected to be affected by the hurricane.

 

Some Comments from http://www.huffingtonpost.com

Many citizens evacuated, some freely, some forced to leave the area. It cost $600 to $1,000 dollars to evacuate, lodged a couple days and return home. It is hard for some to imagine many of these people will be returning home not only to destruction, insurance issues and higher premiums but loss jobs and incomes as well. That adds to unemployment, benefit needs and financial problems like foreclosures and credit issues. They and my fellow residents are in my prayers. We have all struggled with destructive storms for the past couple months.

  Another one says
I’ve been working in the Houston refinery and chemical complex for most of my working life, and my dad did the same before me. If we get a 15+ foot storm surge up the Houston Ship Channel, it’s going to flood refineries, and that’s going to be an economic disaster. Those refineries are miles and miles of pipes, thousands of valves, tens of thousands of instruments and control system devices, and if that stuff goes under water, those places are out of business for months. Knock 25% of America’s refining capacity down for a month or so, and you’re going to be paying $7.00 a gallon for gas – if you can find it at all.