Biz and Eco

F-Grade

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi:

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Original Article

Rating agency Standard and Poor’s (S&P) said there is a significant chance of cutting India’s credit rating in the future. “There is 1 in 3 likelihood of India downgrade in the next 24 months,” S&P’s Kimeng Tan told CNBC-TV18.

S&P roiled domestic markets in April when it cut India’s sovereign outlook to “negative”, putting at risk the country’s current rating of “BBB-“, the lowest investment-grade rating by the agency. India is the only Asia Pacific (APAC) nation to see negative outlook for the Eurozone instability, S&P pointed out.

Also, it feels Eurozone instability is still a risk to APAC sovereign ratings.

This comes even though the government had raised the price of heavily subsidised diesel last month to rein in its fiscal deficit and fight the threat of becoming the first of the big emerging economies to be downgraded to junk. The long-awaited decision follows intense pressure on Prime Minister Manmohan Singh to plug one of the biggest drains on the treasury. The UPA government is also grappling with a sluggish economy and a slump in investment.

S&P believes India downgrade likely if growth prospects dim, external position deteriorates, political climate worsens or fiscal reforms slow. “The implementation of announced reforms remains a key,” Tan said adding, the outlook may be revised to stable if reforms implemented, investment climate stabilises and structural fiscal gap issues are addressed.

Tan said the agency sees India FY13 current account deficit at 3.5% and the fiscal deficit at 6% of the GDP. “Expect the RBI to remain cautious in conducting the monetary policy,” he said.

Downplaying the possible downgrade, Prime Minister’s Economic Advisory Council chairman C Rangarajan said the S&P warning is “exaggerated”. However, he assured that actions are being taken to control fiscal deficit. He expects the WPI inflation to be around 7% in March

Explanation

Sovereign Rating refers to the outlook of a country’s (sovereign) ability to meet its financial obligations (both domestic and international). Sovereign Credit ratings give a very good picture to both a current investor and a future investor about the risk he faces with investing in a particular country

Companies like S&P, Moddy’s, Fitch etc. analyze the economic and political environment in a country and give ratings. Ratings range from AAA to D with intermediate levels like BBB+, BBB and BBB-. Fitch gave a BBB- & negative outlook, Moody’s a Baa3 & stable and S&P a BBB- & negative. For an entire list of rating’s country wise look up Wikipedia

When a country receives a negative rating it implies that the risk of investing in the country is higher- and is seen as a big roadblock for a country’s growth. A positive rating something that India enjoyed for quite some time before the downgrade implies that the country has a favourable investment and political climate, and it acts as a great boost for trade, markets, manufacturing and investment.

What are Junk Bonds?

India being downgraded further could prove disastrous, and as of now there is 1 in a 3 likelihood or a 33.33% chance of a downgrade in the next 24 months. A further downgrade would take India to BB and a ‘junk bond’ status. A junk bond is one which is ‘not worthy of investment’ and one which has a higher risk of default. Being assigned a junk status is one of the worst blows for a country as it sends out a signal to an investor that ‘this country might default on its obligations and might need a bailout- your money if you choose to invest here might not be safe’. To give you a idea of what the junk status does to an economy- On 27 April 2010, the Greek debt rating was decreased to “junk” status by S&P amidst fears of default by the Greek Government. Portugal followed with a downgrade in its rating to ‘junk’. The political turmoil and aversion of investors in both the countries give a good picture about the effect of a ‘junk status’ on a country.

The Eurozone crisis has affected economies around including China and India and is also an attributable reason.

One cannot simply blame the Eurozone, and one can argue that a far bigger reason has been the inward policies that are driving the Indian economy. Deficit or the amount the country owes depends on the a country’s policies. The current set of policies are not able to curb deficit and ‘in fact are allowing it to keep on rising’. With lack of political and economic reforms the situation will only deteriorate. From an When a country’s economic situation and policies are analyzed, a couple of important factors (Among others) that are looked into are

– Risk that the government itself might default on its obligations
– risk of need for governmental interference and intervention for external (foreign currency) obligations
– ability of the monetary structure to support banks and financial channels during a crisis and outlook on the local financial structure (like banks)

S&P said that India’ sovereign ratings outlook can be revised back to stable, if the government goes ahead with steps to reduce structural fiscal deficits, improve the investment climate, and increase growth prospects. Raising the price of diesel and capping the number of cylinders was a step towards decreasing the deficit. With opening up FDI in sectors like aviation, retail, insurance in principal allowing foreign companies to invest is yet another step in opening up the economy and improving its financial health. The Central Bank of India is under immense pressure and is monitoring the economy very closely. The recent reforms have been promising but not enough, and more reforms are needed.

A deficit of 6% is a big deal, and for India to return to a stable rating more fiscal reforms would be needed.

fdi in retai

By Pradyut Hande:

The Indian Retail sector has witnessed a gradual albeit steady metamorphosis over the last decade alone. Despite the myriad advances over the years, the sector continues to remain highly fragmented; still primarily dominated by the unorganized segment — the quintessential traditional family run stores. Although there has been a steady deviation from this paradigm, causing the share of the organized segment to grow on a per diem basis especially in urban India, the fragmented and piece-meal nature of the market, amongst other correlated factors, has disallowed the sector to realize its holistic growth potential. However, off late, large scale domestic retailers who continue to astutely learn from their former debacles; are looking to individually embark and embrace a carefully calibrated long term strategy in their quest to dramatically transform the retailing landscape in the country. Despite the numerous obstacles that existing players and new market entrants have to deal with, the Indian retail market bristles with abundant promise.

After months of dithering, the Manmohan Singh led UPA-II Government threw caution to the wind, shed its ineffable garb of “policy stasis”, rumbled out of its ineffectual leadership position and finally green lit 100% and 51% FDI in single brand and multi-brand retail respectively in September, 2012. Here is examining the prevalent market realities and how this move will potentially impact the Indian market, consumers and economy.

Market Realities

According to the Global Retail Development Index (GRDI) report published by the leading US based consulting group, AT Kearney in June 2011, India is the third most attractive retail market for global retailers among the 30 largest emerging markets. The report also highlights the well documented fact that organized retail constitutes a mere 5% of the total annual revenues generated, hence, providing a tremendous window of opportunity for both domestic and international retailers to tap into a burgeoning albeit fragmented market. The sector is poised for rapid growth and is pegged to be worth US$ 535 billion by 2013, with organized retail’s share increasing to 10%. Robust economic progression, ever increasing disposable incomes, greater availability of personal credit and a growing vehicular population that facilitates easier mobility are a clutch of factors that will fuel further sectoral growth. Despite the increasing levels of disposable incomes, both in rural and urban India, 75% of the country’s population earns less than US$ 2 per day. However, that is a figure that is unlikely to deter foreign retailers. The dominating presence of the unorganized segment, a burgeoning youth demographic more receptive to Western lifestyles and ideologies and the low levels of market penetration in various categories and retail formats; especially in the Tier II and Tier III cities; makes the Indian retail scene all the more attractive.

The retail sector is currently worth around US$ 450 billion and accounts for 22% of the GDP. It also contributes a healthy 8% to the country’s employment. Domestic “power players” like the Future Group, Reliance and Tata (Trent) amongst others; continue to adopt a high scalability strategy and are increasingly experimenting with new formats that are gaining greater acceptance with an ever evolving and perceptive consumer. A slew of hypermarkets, supermarkets, departmental, convenience and specialty stores are rapidly replacing the traditional mom-and-pop kirana stores; raising grave concerns regarding their profitable existence in the long term.

FDI in Multi-Brand Retail — Two Sides to a Tale

Foreign Direct Investment (FDI) in the retail sector has always been a contentious issue owing to the socio-political risks associated with it. However, at a time when the country attempts to counter sluggish growth, falling productivity, rising inflation, unemployment and a consequently weakening currency; the Government has taken the right decision to finally allow 51% FDI in multi-brand retail as part of its larger reformatory agenda; thus, shedding its garb of recalcitrance and embracing the next phase of economic liberalization. This move will now open the doors to global retailers such as WalMart, Carrefour and Metro AG who until now were operating cash-and-carry outlets in the country.

Apart from countering the aforementioned concerns and infuse renewed vigour in the economy, greater FDI in retail will offer myriad multilateral benefits. The consumers would have the luxury of choosing from a wider spectrum of products available at affordable prices and also enjoy internationally standardized retailing experiences. The farmers and suppliers are sure to benefit as they can demand better prices for their produce and supplies. The facilitatory role played by the wily middlemen will be grossly minimized and functionary intermediaries may have to exit the picture altogether.

They say that the supply chain is the heart and soul of a retail business…and it is with prudent reason that they say that! The Indian retail sector is presently hounded by a flawed and floundering supply chain that has caused humungous monetary losses to all domestic players in the business, both big and small. Coupled with gross mismanagement and an inherent inability to address these deficiencies, the supply chain remains the retail sector’s weakest link. Bereft of a sound supply chain system, dogged by managerial and logistical impediments and the absence of proper cold storage facilities and warehouses; the sector incurs losses to the tune of over US$ 1 trillion annually. With FDI now being permitted, these global retailers will bring a wealth of experience, technical knowhow, processes and patented structures that will result in the development of more streamlined and efficient supply chains and distribution networks. Also, the mandatory stipulated 50% initial capital investment the establishment and development of efficient back-end structures and processes would serve to strengthen the sector exponentially.

The domestic players will face stiff competition and many of them are now looking to enter into strategic alliances with these global giants in order to safeguard and further their interests and protect their margins. This will also aid in their own evolution as they seek to implement proactive strategies and best practices to establish stronger and more robust supply chains. At the end of the day, it is about delivering value to the consumer and ensuring a veritable level of customer satisfaction. An efficient supply chain, seamlessly integrated into a holistic retail business mainframe, goes a long way in doing just that.

Despite the multiple advantages accruing from the Government’s decision, there are fears that the traditional kirana stores stand to lose the most in the wake of the purported market entry of international players. The fact is that although their financial interests will take a hit to a certain extent, the “shopping culture and mentality” of the lower-middle and middle class Indian consumer coupled with their location advantage will ensure that the kirana stores remain an integral part of the Indian retail scenario for the next few years. Many believe that the widely propounded theory that the “entry of big fish will kill small fry” is a myth and there is ample scope for growth for both segments. In the face of these vociferous concerns, the Government ought to explore the feasibility of introducing a Shopping Mall Regulation Act in order to protect the interests of the small-scale domestic retailers. The objective ought to be to strike a healthy balance whilst instituting a phased transition towards a more organised setup.

One Giant Leap for Indian “Retail-kind”

Retail is capital intensive sector and the increased availability of funds coupled with the imminent presence of foreign players promises to add a whole new dimension to the sector. Retailers ought to take cognizance of the fact that both back-end and front-end operations require investment and hence, need to be developed in a manner commensurate with their overall business operations. Our policy makers finally appear to be waking from their “decision-making reverie” and have most certainly taken a leap in the right direction. However, the road ahead is paved with greater challenges, for both existing and potential market players alike. Only time will tell who rises to the occasion, adapts to the new market realities, galvanizes its supply chains, leverages its core competencies and successfully counters its competitors in a hyper-competitive sector that is the Indian Retail arena!

Indian-Stock-markets

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal

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Original Article

Stock markets are likely to witness volatile trading in the coming week in view of industrial output and inflation data that are lined up for release, according to experts.

That apart, there are indications that the government may hike fuel prices impacting market sentiment.

While stock markets may open on a bullish note following European Central Bank’s announcing last week a bond-buying plan to revive euro-zone’s ailing economies, key triggers for domestic markets in the form of IIP numbers and inflation data will appear from the middle of the week.

July’s industrial output data will be released on September 12, and August headline inflation figure on September 14.

While slowdown in economic growth has made investors cautious, inflation remains above the comfort level of the government as well as the Reserve Bank, keeping interest rates high.

The new data will provide key inputs for a decision on interest rates coming ahead of RBI’s monetary policy review on September 17, analysts said.

“Concerns over slowing growth and high level of inflation in the economy are expected to persist in the near-term. The Indian markets continue to take positive cues from global events in spite of the weak domestic economic and political environment,” Angel Broking said in a report.

It further said that RBI is unlikely to cut key rates in the mid-quarter review of the policy due next week since upside risks to inflation continue to persist.

Macroeconomic concerns may prompt investors to book profits at higher levels after a smart rally in the market last week, analysts said.

“It will not be easy to hold on to the gains amid growing concerns about the economy and the government’s ability to push through key reforms,” an expert said.

Besides, the government is widely expected to hike petrol, diesel, cooking gas and kerosene prices simultaneously in the coming week.

While the move will ease pressure on oil marketing companies, high crude oil prices remain a concern for the markets for the fear of fanning inflation.
On NSE index Nifty’s weekly outlook, Rakesh Goyal, Senior Vice President, Bonanza Portfolio, said: “For the coming week, if Nifty sustains above 5,350, likely upside target shall be 5,400-5,450. On the other hand, if it goes below the 5,300 level, further selling pressure is likely up to 5,280-5,250.”

On the global front, the Federal Open Market Committee (FOMC) will hold meeting on September 12-13 and markets will keenly await its outcome.

Explanation

Stock markets are public entity where trading of company stocks (shares) and securities at a given price happens. A bunch of people like regulators, investors, buyers, sellers, brokers constitute to the working of the financial market. Every country has its own bourse (stock market) where trading of stocks takes place. For example US has NYSE (its biggest stock market), India has Sensex, Nifty and MCX as the approved bourse for buying and selling of various stocks and commodities.

What is volatile trading?

Volatile trading refers to a situation of high frequency trading where price of a financial instrument varies greatly over a particular frame of time- basically the same stock exchanging hands — being bought and sold multiple times with a higher frequency. Volatile trading occurs during a variety of situations, and occurs on account of ‘important and substantial developments’. Both industrial output and inflation data are ‘substantial developments’ and have a great impact on markets. Analysts and investors scrutinize ‘developments’ and speculate market confidence and movement and make investment decisions on this basis. For eg., Positive news of any company, such as the government approving companies X infrastructure project, will raise its share price as analysts would look at this is a positive development.

Industrial output and inflation data are scheduled to be released next week, and given ‘their weight’ huge activity is predicted to occur on the market floor.

Industrial Output and Index of Industrial Production (IIP)

Index of Industrial Production (IIP) is an index which details out the growth of various sectors in an economy. Industrial production is an economic indicator registered on a monthly basis by an individual country. These figures are based on monthly production output of goods by factories, industries, mines etc. An increase in industrial output depicts a strong order book and demand in the market; and good positive business activity. A decrease in production depicts a fall in output and demand which is negative in the short term (of course the time frames of these definitions need to be understood. Here data is suggestive of a very small time frame which might be completely different in the long run). Increase and decrease of these numbers directly equate to investor confidence in the sector, companies, markets and economy; and impact the nature of trading

Inflation Data

Rise in price of goods and services is referred to as inflation over a period of time. The rise in prices can be translated to reduction in purchasing power as the same value of money can now buy fewer goods and services and this in turn also reduces demand. Inflation results in higher prices and triggers responses from Central Banks like ‘increase in borrowing rates’ without necessarily increasing the ‘value of the purchased commodity or service’- this means that cost of borrowing money for any endeavour will increase thus discouraging increased investment in an effort to slowdown the economy. In fact because of inflation people who compete in the global market are at a higher risk as foreign competitors/ producers do not necessarily have to adjust prices as per inflation. An example to explain inflation is price hike of petrol in India. Petrol in 2010 was Rs 55.8 and now it stands at Rs 75 a price hike of 36 %.

Rising inflation would tend the Central Banks to increase short term borrowing rates to decrease available capital in the system; which translates to cash being more expensive for a business to borrow and use for investment. Inflation forecast can swing markets on either side.

But natural, industrial production and inflation data will inspire volatile trading. The country is in a precarious situation. As the global economy is under turmoil, positive steps like the ECB’s pledge to go on a bond-buying spree to tame a worsening economic situation are positive signs, but are contested by a weakening domestic market scenario. While the economy is slowing down inflation is still way above the benchmark for the RBI to reduce interest rates. Which means that even though the capital flows in the country and business investment is slumping, inflation levels is still quite high and the Central Bank cannot lower borrowing rates. The coming weeks will be extremely challenging for RBI and key reforms need to be pushed.

Mahindra & Mahindra XUV500 Sports Utility Vehicle Plant Visit

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Sangeet Agarwal:

The BRIC block has emerged as the economic power house of growth for the automotive industry through the last decade. What started as an exploration of new/extra markets for car sales in the early 90s has gone on to become the mainstream market of the new millennium. Supported by attractive macro-economic factors such as growing economic activity, urbanization, rising household incomes, developing credit markets and very low car density, the BRIC countries currently make up for the top 7 automotive markets globally.

Source: WSJ/Automotive World/ I H S global insight
The numbers presented in graph are in millions
Light vehicles: vehicles include both commercial and passenger segment with a Gross vehicle weight of less than 3500 kgs

China

Since the global financial crisis in 2008 the light vehicle sales in China have experienced an enormous average growth of above 40% until 2010. Also in the same year China overtook USA to become the world’s largest consumer of cars.

Although, in the recent years, the growth of light vehicles sales have come down, the market in first half of 2012 witnessed a modest growth of 2.2% over the same period last year. For the remaining period of 2012, the market is likely to see a similar trend, partly due to regulations like new vehicle registration limits, imposed in certain municipalities. Guangzhou has just become the fourth city in the country to initiate measures to curb the number of cars on its roads, following in the footsteps of Shanghai, Beijing and Guiyang. Even so, the light vehicle sales volume is expected to post a healthy growth of 8 % over last year standing at approx. 18.9 million units in calendar year 2012.

Brazil —

Brazil is currently the 4th largest automotive market in the world holding market share of approximately 4.5 % of global sales. In 2011, Brazil sold close to 3.42 million light vehicles and is estimated to grow by 2.6% for 2012 which may be an optimistic figure if 2012 half yearly sales are taken into consideration. However the past couple of months tell a different story having seen record sales. For July 2012, the sales of passenger cars and light trucks were around 22% higher than previous year, standing close to 3.5 lakh units. Factors contributing to this phenomenal growth included a cut on the tax on locally manufactured products, and the government’s move to lighten bank deposit requirements, in exchange for better terms on automotive loans.

India —

A market we are closest to, the Indian auto industry is likely to lead the remaining countries (Brazil, Russia & China) in terms of growth in 2012 vis a vis 2011. The first half of 2012 has seen India grow by 12.9% in light vehicle sales. A long list of new product launches lined up for this festive season will keep India’s growth engine chugging along.

Even though the market has experienced some beating in recent times due to high interest rates and the staggering petrol hike, India’s growth story of the automobile industry will remain intact. Huge investment announcements from multinational giants like Toyota, Mercedes towards India and countless others following suit will keep India’s incredible growth story a trending topic in the Automobile Industry.

Russia —

Russia may stand 4th among the BRIC but the growth in recent times have outpaced Brazil and China. In 2011, the sales of cars grew by an impressive 40% translating it to one of the fastest growing market in the world. The Scrappage scheme was seen as one of the major driver for Russia’s Growth Story. The Scrappage Scheme which gives a discount of 50,000 Rubles for a purchase of new car if a car more than 10 years old is recycled, is an example of innovative policy making by the Russian government. Vehicle Sales for 2012 is estimated to touch ~ 2.9 millions helping the market grow by 9% over the previous year.

crude palm oil 2

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal:

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Original Article

Crude palm oil up 1.95% on spot demand. Firm overseas trend influences prices.Crude palm oil futures prices rose by Rs 10.60 to Rs 551.90 per 10 kg today as speculators created fresh positions on expectations of a rise in spot demand. A firm trend in overseas markets influenced crude palm oil prices in the futures market.

At the Multi Commodity Exchange, crude palm oil for October rose by Rs 10.60, or 1.95%, to Rs 551.90 per 10 kg, with a trading volume of 513 lots.The September contract moved up by Rs 10.10, or 1.87%, to Rs 548.40 per 10 kg, with a business volume of 507 lots.

Marketmen said fresh buying by speculators on hopes of a pickup in spot demand led to the rise in crude palm oil futures prices. A firm global trend influenced the market sentiment, they added.

Explanation


The word ‘futures’ here refers to a futures contract- a futures market is a standardized contract between two parties to buy or sell a specified asset/ commodity for a price agreed today with delivery and payment occurring at a specified future date. Futures is a huge market and an important tool in financial markets.

The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties and acts so as to minimize risk of default. The exchange requires both parties to put up an initial amount of cash – margin. These futures are tradable. The futures price will generally change daily, and the difference in the prior agreed-upon price and the daily futures price is settled daily. The exchange will draw money out of one party’s margin account and put it into the others so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account.

This entire process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value or the current value, and yet the commodity has been traded and passed through various hands (since any gain or loss has already been previously settled by marking to market). — (as explained on Wikipedia)

A position is when you buy/ sell a tradable commodity and ‘take a position’ on it. If you buy a commodity at INR 100, hoping to sell it in the near future. You might sell it after 1 hour at the current spot price, or you might say I will hold this commodity for 3 days because the value will go up to INR 125. Either ways what you have done is taken a position on that commodity. For some reason speculators believed that the demand of crude palm oil would rise making them take aggressive positions which shot up the price of crude palm oil. When you demand more of one commodity, and when this more is done by multiple people in huge numbers; you create more demand which means the product is more valuable. This shoots up the price as more investors try to buy in with hopes of greater profits.

These speculations are always based on reports, analysis and news releases. If a well known company A announces a merger with another not so well known company B; then in the immediate future, share value of company B rises as investors perceive it to be a good investment because company A — a well reputed firm has seen something in company B (this is a very simple explanation to put forth the concept and is not a fixed rule, and as it depends on various company specific variables this might not happen always for all companies.) Likewise a government release banning/ making cheaper a particular commodity can influence the share value of a company which is dependent on that commodity. For eg. – if the government announces a huge increase in taxes on steel; then share value of steel companies listed in that country will go down as investors find this to be a negative impact. Global and national trends both determine prices. For eg. – If demand for crude palm oil in international markets has been steadily increasing, then manufacturers would be lured by higher profits into tending to export more. As the commodity’s demand has risen, traders would buy and take a fresh position on crude palm oil in domestic markets in the hope of selling at a higher price and cashing in an increase in demand.

Multi Commodity Exchange is India’s largest commodity exchange and 5th largest in the world. It offers futures trading in commodities like metal, agricultural commodities, energy, etc. The turnover of the exchange for the fiscal year 2009 was US$ 1.24 trillion. In February 2012, MCX became the first Indian exchange to come out with an IPO- raising around $134 million.

[box bg=”#fdf78c” color=”#000″]About the Column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.[/box]

 

Coin Dropping Into Piggy Bank

By Rahul Mehta:

If you had 1000 potatoes in a year, while you needed only 800 to survive, what would you do with the remaining 200? Different types of people would respond to this in different ways. There are those who would save the 200 potatoes for a rainy day. “What if the next year’s harvest is not all that good?”, they would say. Let us call these the Cat A people. Then there are those who would plant the 200 potatoes, so that they could have even more potatoes the next year, assuming all goes well and the harvest is good for the planted potatoes. Let us call these the Cat B people. Some people would however not be satisfied with this. They would borrow 200 more potatoes, while agreeing to give back 250 potatoes in the next year, so that they could plant 400 potatoes, with the expectation of an even bigger harvest the next year. Let us call these the Cat C people.

Which category do you find yourself falling in? If you find yourself leaning towards Cat A, don’t be surprised. You are not alone. A vast majority of Indians fall in this category. We brace ourselves for the worst: “What if it does not rain the next year and there are not enough potatoes for survival? What if we plant the surplus and it gets infested by pests?”, we ask. And so, we find greater comfort in saving our surpluses rather than risking losing them for the possibility of greater returns.

Numerous studies and surveys have time and again shown the average Indian’s propensity towards saving so as to minimize financial risk. Provident fund accounts and fixed deposits still count for the vast majority of Indians’ surplus funds. “Indians Save, Americans Invest” they say, and quite rightly so. What is the reason behind this incessant Indian desire to save?

One possible explanation could be that we have been brought up this way. Most Indians would feel more than a tinge of guilt if they were to spend their surplus finances. Leave alone spending, even investing hard-earned savings into equity instruments would be tantamount to greed, wouldn’t it? Isn’t that what brought about a recession in the United States?

The fact that such stock explanations and fundamentally flawed analyses work in India indicates a severe lack of financial skills among the people at large. Most Indians are just following traditions and money-management practices that their ancestors did, without thinking for themselves as to why they are doing so. Conventional wisdom passed down through ages extols the virtues of saving and the lack of financial education among Indians at large combines with this to make Indians risk-averse savers.

This is not to say that investing is superior to saving. Investing is attractive because it can be a means of wealth-creation, but then again, wealth-creation is not everyone’s primary goal in life and saving their surplus works out well for many people. However, if more Indians were financially well-educated, there would definitely have been a larger proportion of the Indian population taking well-calculated long-term risks with their money than there are today.

oil companies

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi:

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Original Article

Oil marketing companies (OMCs) fear a rating downgrade, as borrowings of the government-owned entities remain well above Rs 1 lakh crore and a fuel price rise is pending.

A cut in ratings could raise their borrowing costs, especially for foreign funds.

On June 1, Fitch Ratings had lowered the rating outlook of Indian Oil Corporation, long with those of other government-controlled companies. This followed the lowering of India’s rating for long-term foreign and local currency (issuer default ratings) from stable to negative.

A senior executive in an oil company told Business Standard, “We fear if petroleum prices are not increased, ratings may turn negative.”

Non-revision in the prices of diesel, liquefied petroleum gas and kerosene for more than a year led to OMCs resorting to heavy borrowings, which rose 23 per cent to Rs 1,57,617 crore at the end of the quarter ended June, compared with Rs 1,28,272 crore at the end of the previous quarter.

Indian Oil has a foreign currency loan portfolio of about $7.5 billion. “We continue to borrow from the international market and interest rates have not changed due to the outlook downgrade. The positive thing is the credit rating has not been downgraded. But if the government does not compensate us fully, there may be problems on that front, too,” said P K Goyal, director (finance), Indian Oil.

The government’s balance sheet is also stressed, owing to a mounting subsidy bill. Petroleum subsidy accounted for about 30 per cent of the subsidy bill of Rs 2,16,297 crore in 2011-12. “If the price increase does not happen, the government will have to give higher budgetary support,” said Abhinav Goel, senior director, Fitch Ratings.

However, that these companies are government-owned is comforting for rating agencies and lenders. “We believe the government is using the pricing of petroleum products as a tool to push its socio-economic goals. OMCs are, therefore, strategically important for the government,” said Goel. The government would support these companies through subsidy and discounts from upstream companies.

However, many say the government-ownership tag could also lead to hurdles.

A lot depends on market conditions. But even at the peak of economic slowdown in 2008, Indian Oil was able to raise money, though private companies were unable to secure funds. The country’s largest petroleum marketer is funded by banks in various regions, including the US, the UK, Norway, the Netherlands, Germany, France, Mauritius, South Africa, West Asia, Japan, Taiwan, Singapore and Australia.

Explanation


Oil Marketing Companies are companies like Indian Oil that are involved in the business of distributing oil to the Indian market through combination of different business lines including importing, procuring, etc. OMC’s buy oil and then sell oil for private/ public consumption through different mechanisms. Now for day to day operations and long-term growth, OMC’s like all companies raise money through various financing mechanisms — one of which is borrowing money from international and domestic lenders.

Now a bunch of concepts are intertwined here. Having borrowed money, OMC’s owe this amount along with agreed interest to the lender; and the outstanding amount now is well over 100,000 Cr. Typically in the current government regime oil is subsidized by the government. i.e.- the government pays partly for the oil as it is too expensive for the end-user. To protect the financial interest of the common man the government has to take this step and subsidize a commodity. Typically the government is directing profits from its various enterprises into providing this subsidy in the interest of the end-consumer.
So the OMC sells oil in the market at a lesser rate with the balance amount paid by the government through subsidy mechanism. A lesser price makes oil and related products affordable for consumption and keeps the economy running. Governments increase the price of fuel, when they can no longer afford subsidizing it- when subsidizing becomes too expensive for the government to bear, it is compelled to raise the tariff and pass on some part of the cost to the end-consumer.

Every time the amount of subsidy increases beyond a limit, the government has to increase the price of fuel thus passing on the cost partially to consumers to recover costs. These prices are mainly market driven and can happen because of multiple reasons like increase in Global crude prices or sudden excessive domestic demand.

Every government functions like a company where it has its own cash flows and market outlooks- a continued staggering loss on account of providing subsidies may have multiple damaging effects like – the government defaulting on its payment obligations, unnecessary inflationary promoting measures, negative perception of investors and banks, etc. These effects might have cascading effects which can further hurt the country’s economy. Though raising prices of essentials like electricity and oil is seen as detrimental in terms of public welfare, is sometimes a necessary step to control the economy.

When the government doesn’t pass on the cost to the consumer, it is essentially increasing the amount of subsidy paid to the OMC. If the subsidy is not paid out to an OMC on time, the OMC will further not be able to pay its creditors thus accumulating debt and a negative outlook in the eyes of investors. This is what is happening now. Having not increased the price of petrol ( which is a huge % of the oil consumed), the government is under a lot of financial stress and this results in delay in payments to OMC’s which increases the OMC’s outstanding debt.

Now investors, lenders, banks and industry stakeholders bank on rating agencies like Fitch, S&P and Moody for many of their decisions. These rating agencies analyze a company and rate its capacity to fulfil financial obligations. A company with a good credit rating would be deemed to be stable and profitable, while a company with a bad credit rating would be seen as a risky investment. Neutral is a good rating, and rankings go above — positive and below- negative. There are various denominations and levels even in both positive and negative ratings. (rankings are very much detailed and categorized and this explanation is just to explain the concept). A rating outlook refers to the direction in which the agency sees the company going in the immediate future and might not necessarily mean a change in credit rating. So a company could have a negative credit rating and have a positive outlook means that a rating may be raised for the near future.

When lenders lend money, the risk profile of the investment is a very important aspect. Higher the risk higher the return expected. Because of this increasing deficit in ‘outstanding payments’ of OMC’s, rating agencies perceive them to be more risky and this in turn is increasing the rate at which OMC’s can borrow further capital from lenders.

Ratings depend on a bunch of factors both globally, industry specific and company specific. Ratings of government controlled OMC’s along with other government controlled companies also were affected with lowering of India’s rating for long-term foreign and local currency. Foreign currency ratings refer to an entity’s ability and willingness to meet its foreign currency denominated financial obligations and local currency is an entity’s ability and willingness to meet all of its financial obligations on a time.

In day to day working of infrastructure projects, cash inflows occur after a period while cash outflows might happen every day ( operations and maintenance). Many a times to fund daily expenses companies take short term loans which they then pay off through sales. Sometimes to pay off a short term loan companies take yet another short term loan relying on cash inflows and pay more interest. It is not an uncommon practice, but one that is executed with great care. Mismanaging this can lead to a spiral of loans engulfing the borrower in a vicious debt trap. Without increase in diesel and fuel prices, the financial stress on the government would continue, putting more pressures on revenue lines of OMC’s. While increasing borrowing rates, some of them (speculative) might have also had to borrow further in absence of revenues thus increasing the deficit.

As explained earlier only the rating outlook has been lowered and the agencies have still maintained their view of the OMC”s ability to fulfil its financial obligations. A credit downgrade would pose serious concerns and ring alarm bells

The government might deliberately not be increasing prices keeping in mind the socio- economic situation. An increase in price hurts the local common consumer and creates a negative sentiment. Though a temporary step some action would have to be taken soon. If not then the subsidy amount outstanding will increase leading to more economic problems; and which will then have to be corrected through other means like the taxation system. The rating agencies are still very confident about the OMC’s as being government controlled the government will not let them fail.

rupee vs dollar

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal:

Link to Original Article

Original Article:

Fall in rupee is likely to bring opportunities for the domestic economy by boosting exports and substitution of import in the near future, a Credit Suisse report said.

“We believe India’s trade should start to change now as the economy re-anchors…the fillip to inflation and subsidies have already been felt, the opportunities though will be more visible over the next 18-24 months as companies generally hedge and it takes time for supply chains to reconfigure,” the report said.

As many companies would have hedged, the changes in exchange values will not affect them; but with reflect in recent and newer deals which will be reflected a couple of months into the future.

Giving an estimate of opportunities, the research report said around $ 60 billion of exports can be increased due to weak rupee, while $ 60 billion of import can be substituted.

“We estimate about $ 60 bn of imports can be substituted and $ 60 bn of exports could see a boost,” the report said.

Indian rupee is now hovering around $ 55 level which is likely to make exports from the country competitive with substitution of imports due to expensive imports.

Referring to import substitution, the report said the opportunities for substitution exist only in those areas where domestic manufacturer can’t compete on cost.

“The rupee being down by a fourth against the dollar over the past twelve months should create opportunities…either by allowing for immediate substitution or, in a smaller way, by accelerating the set-up of new capacity. In particular, we focus on the $ 61 bn of imports where the primary reason is cost,” it said.

“We believe categories like diesel gensets, textile-related machinery, household appliances, furniture, tyres, penicillin/cephalosporin intermediate manufacturers and sectors aligned to the growing of pulses and oilseeds are potential beneficiaries of import substitution,” it added.

Similarly, the report also said exports will get benefitted due to competitive advantage, low cost of labour and weak rupee.

As per the report, sectors like auto and auto components, agriculture, bulk drug exporters, jewellery and service exports will be benefitted from the weak rupee.

Explanation:

Currency effect on trade

Fluctuation in currency of any country has a major impact on the trade that a particular nation does with other economies of the world. The trade being, the import and export of goods or services. The rise of currency of one nation with respect to its trading partner will benefit the first if he buys products from latter and benefit the latter if he sells to the first. So the fall in rupee in recent times can be added to India’s advantage if we start boosting exports by substituting imports. And as per the recent Credit Suisse report this seems to be a likely strategy that Indian economy will experience in near future.

Import — Export

An exchange rate is the value of one currency in terms of another. So when we say INR 55 = 1 US$, it implies that 55 INR can be traded for 1 US Dollar.

All countries trade a variety of commodities and exchange rate is relevant here. An Indian manufacturer produces a certain type of goods and sells it at 5500 INR. If an American was to buy this product he/she would pay 100 USD for this (assuming perfect conversion with no taxes).

If the exchange rate changes and become INR 60 = 1 USD; then for the good offered at a price of INR 5500, the American will pay 91.67 USD (1 INR = 1/60 USD). Thus it is cheaper for an American to buy the good and he would prefer to buy this- i.e., demand more; and increase exports.

Likewise say an Indian was buying an American product priced at 50 USD, and then originally when the exchange rate was 55 INR, he was paying 550 INR for the product. Now at the new exchange rate he would be paying 60 INR. Hence he would look for an alternate product that is cheaper yet of the same quality and thus demand for the American product would go down, implying imports go down.

Now a fall in the Indian rupee, meaning a fall in the value of the Indian rupee with respect to the US dollar thus seems to increase exports and curb imports. (The example was that of a Dollar, but holds good for other countries and currencies too). Terminology wise, a fall in rupee value to a dollar (e.g. in above case from INR 55 to INR 50) is called appreciation of the rupee value whilst a rise in the rupee value to a dollar (e.g. in the above case from INR 55 to INR 60) is called depreciation of the rupee value

Why the effect will not be visible in recent times? What is Hedging? What is its relevance in international trade?

The effect of the change brought about by the variation in the value of the currency will not be immediately seen and will be felt only after a couple of months.

In foreign / international trade, companies ‘hedge’ their business transactions / dealing. Hedging means covering the risk exposure due to prevailing fluctuation in the open foreign exchange market. In simple terms, hedging is covering the financial risk of the transaction arising out of the trade.

For example, assume Company A (in India) buys goods worth 100$ from Company B (in USA). Consider the Indian Company A has to pay this transaction value of 100$ after it receive the goods which may be after 10-15days. Now, since the currency of INR / US $ gets traded and changes value every day, Company A decides to hedge this transaction for a fixed exchange rate. It will approach a bank or financial institution or any authorized dealer(s) for conduct this hedging transaction. This means that Company A will block a rate (of US$) as of today, payable on the agreed future date. It also means that Company A is immune for any change in exchange rate between from the date of hedge until the actual payment is done. For doing so, Company A has to pay a premium or a charge to the bank / financial institution / authorized dealer. In fact the bank/ financial institution would make revenues through providing such services, and they based on their market intelligence will also take further positions/ further trade/ further hedging. (Hedging is a complicated science and this is a very basic example based on multiple assumptions to simply explain the concept).In today’s world, foreign exchange market is too volatile and riskier. Therefore, hedging has become a perennial and imperative part of any financial department.

Import Substitution

India like any other country is characterized by imports and exports. Import Substitution is a common term used in economics. Import substitution is when a country reduces its imports i.e., dependence on foreign goods through local production specifically for local consumption. Import substitution is seen as a necessary and positive tool depicting growth in an economy.

The rise in imports is attributed to various factors of which the most important ones are — lack of availability, incapability, lack of cost competitiveness (making it cheaper to buy from outside rather than produce locally) and lack of capacity. As per the Credit Suisse report, on account of the rupee devaluing major opportunities for import substitution exists for sectors which are now cost competitive — i.e., local products can compete with those in the global market, as the effective import cost has increased, thus making it more expensive to import. As explained above, the product that was available via import for INR 550 (when USD $ was at INR 55) will now cost INR 600 (assuming the rupee depreciates to INR 60 / 1S). This gives the Indian / indigenous manufacturers / traders, in the similar product segment more cost advantage as their product (similar / competitive) gets cheaper.

Cheap labour and cost competitive sectors likely to drive exports-

Exporting from India has so much advantage that Japan’s 2nd largest automotive giant — Nissan currently ships 85% of its total production from its plant in Chennai to Europe and various other emerging nations.

Depreciating local currency, benefits an exporter and foreign manufacturers who would manufacture in India. A foreign auto company will benefit from the depreciating rupee, because it is now able to get cheaper labour and services at the same price (in foreign currency) which also allows it to earn more in exports.-Foreign manufactures / foreign investors, will now get more INR on every dollar invested in India. This will further encourage more investments and capital inflow in the economy as well.

italy

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal:

Link to Original Article


Actual Article (Original)

Italy’s borrowing costs dropped at an auction of 5-year and 10-year debt on speculation the European Central Bank may buy euro nations’ bonds to stabilize their economies.

Italy sold 4.73 billion Euros ($5.8 billion) of 5- and 10- year bonds. The Rome-based Treasury priced the 10-year debt to yield 5.96 percent, down from 6.19 percent on June 28. The Treasury priced its 5-year bond to yield 5.29 percent, compared with 5.84 percent last month.

Italy also sold 750 million Euros of a 3% 2015 bond to yield 4.49, bringing the total amount sold to 5.48 billion- Euros, near the 5.5 billion Euros that was the maximum target for the auction.

“Expectations that the ECB will contribute to more forceful policy action to bring down Spanish and Italian yields are running high,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm specializing in sovereign-credit risk, said in an e-mailed note. The Italian Treasury couldn’t have issued longer-dated paper at a better time, he said.

ECB President Mario Draghi is trying to persuade policy makers to agree on a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, two central bank officials said July 27, asking not to be identified because the talks are private.

Italy’s 10-year yield was up 6 basis points at 6 percent at 11:34 a.m. in Rome, pushing the difference with German Bunds to 464 basis points.

’Under Pressure’-

The ECB is under pressure to lower borrowing costs after three interest-rate cuts since November failed to stop bond yields soaring in Spain and Italy, threatening the survival of the euro.

Draghi, who meets with U.S Treasury Secretary General Timothy Geithner in Frankfurt today, sparked a global market rally last week by pledging to do whatever it takes to preserve the euro. His proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the two central bank officials said.

The ECB, which holds its next meeting on Aug. 2, has disbursed more than 1 trillion Euros to European lenders through its longer-term refinancing operation, or LTRO, since December.

German Chancellor Angela Merkel, French President Francois Hollande and Prime Minister Mario Monti have already endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the 17-nation euro.

Merkel and Monti agreed by phone on July 28 that the EU’s June summit decisions “must be implemented without delay,” according to a statement by the Italian premier’s office. Monti agreed to travel to Berlin for talks with Merkel in the second half of August, and will meet with Hollande tomorrow in Paris, according to his agenda.

Explanation:

Like companies, nations borrow money to fund their activities. In a country like India the government takes a loan from its Central Bank and pays it interest, and India’s central bank further manages the money. Like a company, a government can also borrow money. Now the rate at which Italy will borrow money reduced on speculation/ on ‘a feeling’ that the ECB (European Central Bank) will buy Italy’s bonds. A couple of intertwined concepts are involved. In the real market when banks lend money to companies, they do so based heavily on the financial credibility and stability of a company. A company with volatile and unstable operations and financials will attract a higher interest rate from its lender as the lender perceives the transaction to be of a higher risk. Hence Italy getting a lower rate means that the outlook of its economy is considered to be ‘less risky’ in comparison and ‘relative to its earlier image’. Keeping in mind Italy’s perception by lenders, now lenders believe that the chances of a default are lesser and their investment is safer; hence giving a lower rate.

What is it that gave this confidence to investors? — Speculation that ECB will buy the country’s bonds.

What are Bonds ?

Bonds are tradable commodities representing Debt of a company. For eg.- when you buy stock of a listed company you are buying equity and are a part owner of the company. The market value of the stock determines how much money you will make for your decision to decide to be a part owner in the company. Bonds are comparative, but instead of buying equity the investor is buying ‘debt’ i.e., ‘ the right to be paid principal and interest on a loan made’. So if a lender holds a bond of Italy, in simple terms- Italy will pay the lender the agreed interest in the agreed period of time.

Bonds are traded and are a critical market. Bonds also have categories of risk and range from safe ones to risky ones. Any external investor will buy a company’s bond if he/ she feels the company can repay and not default. The degree of confidence determines the rate and market value of the Bond. So when ECB buys bonds of Italy one would perceive this as a sign of trust of the bank in Italy’s financial health. The bank feels that Italy will be able to pay off the debt and hence it will buy in- it signifies to the investor that ECB has confidence in Italy and is ‘ready to support it’ while it turns around.

Thus ECB buying a bond of Italy signifies the banks faith in the country’s ability to pay its debt and not default; which translates to the country’s outlook as ‘safer’ which allows it to command better and lower interest rates for borrowing, thus improving its financials and showing a ‘sign of stability

High Yield and Low Yield —

Yield is return an investor will receive by holding a bond till maturity. In simple terms it is nothing but interest rate that the investor earns when he/she provides money to the borrower on the principal amount.

Yield rate are fluctuated by various factors- for eg.- on 3rd August 2012 India’s yield rate increased as Reserve Bank of India is unable to maintain its positive outlook on inflation rates. This means that with increased yield the value of the bond decreases which translates to lower confidence of investors in the Indian economy.

Relation between bond price and yield —

Yield is defined and understood on the basis of money the bond will earn. Here’s a brief working.

A bond is purchased at INR 100 and will upon maturity give 110; then the return (coupon amount) is 10%.

Now bonds are tradable and buyers and sellers both want to maximize profits. An investor would have a fixed amount of money that he could invest in ‘different bonds, issued at different points in time, giving him different yields’– Also new bonds are issued all the time. So a company X might offer a bond with an X% return on 2011 and issue new bonds in 2012 with a Y% return.

Let us take a case where a new bond is issued at 12%. Now an investor would want to maximize return and will say instead of putting INR 100 in a bond with 10% return why don’t I put the same money in a Bond that gives me 12% return on maturity- thus the demand of the original Bond giving 10% return goes down. To attract an investor the value of the old bond has to be such that it matches the 12% return or higher.

Assuming the old bond wants to offer a return of 12%, instead of the offer value being INR 100, it will now have to be (110- X)/X = 12% = INR 98.2

The amount that an investor pays has reduced and thus the bond value at which it is traded is effectively reduced. In the real market depending on the current interest rates bond value fluctuates. Business cycles determine interest rates, which determine expectations of investors in terms of returns. Higher interest rates reduces bond values and vice-versa.

So a High Yield Bond will be one which gives a higher return and a low yield one which gives a lower yield, and is related to the risk of that investment-for a riskier investment the investor will expect a higher return.

By buying Italy’s bonds, the ECB will pump in more money in the Italian economy and also send out a positive sentiment that the ECB is ‘supporting the Italian economy’. There is more money in the system immediately which translates to more money being available in the system for businesses to use and invest, which would get a slowing economy moving.

The rise and cut of interest rates along with various other financial indicators has a direct effect on the economy of a country. Normally when the rates are high the economy is considered going down as the overall environment feels a grip because of high borrowing rates, high mortgage, reduced bank funding. So when ECB in November 2011 cut interest rates 3 times it would have expected the value of bonds to increase and decreased yield expectations making them more valuable and worthy to be held. This would also signify a stronger economy and a safer and positive outlook of the economy. Now when the market did not respond to such changes, and the yield’s expected kept on going up- it put the ECB under immense pressure to take action and correct the market. The coming weeks will be very trying for ECB given the deliverables to ensure survival of the Euro.

fdi

By Harsh Choudhary:

The Indian Government has stepped towards the growth of economy in the long-run by allowing fifty one percent in Foreign Direct Investment (FDI) in multi-brand retail. The much awaited reform has been passed and now and the global retailers are welcome to get going with the national retailers. India happens to be a potential market and thus, this reform will attract many foreign investors to invest in this fruitful tree of Indian retail.

The interest of global retailers is quite obvious due to their profit and their dream of attaining monopoly in the future in this competitive market. So, does it not benefit the foreign retailers more than the indigenous ones? Or is it just another form of neo-colonialism? The dependency of domestic retailers over domestic suppliers might lead to the decrement of progress rate upon the entry of their global competitors. The foreign retailers have wide global sources of goods and services and this is an edge over their domestic counterparts. The Foreign Direct Investment can thus diminish the local retailers and get their roots strengthened in this fertile ground. The indigenous manufacturing units might be closed and unemployment would be increased. The global retailers, who in need of less human resource, but on automation, would not be able to provide the enough job opportunities.

The Indian market is one that is not much organized; there are shops on the footpaths and in the malls. It is composed of people who are fully dependent upon the small-scale retail shops and thus, the so-called reform might make them move out of this marketing sector. Only the organised firms, which are very less in this domain, will be able to survive and benefit. The monopoly may arise and that will directly benefit the global retailers and sure will cost us a lot in the future. This reform would however not be able to promise employment to the already settled small scale retailers after they would be thrown out.

This is simply providing us with a glimpse of neo-colonialism: the economic colonialism of the Indian market by foreign retailers. The involvement of global sector retailers in the internal markets of India might lead to domination by them. The multinational corporations would exploit the natural resources and the people of the Indian retail sector. It might be the same situation as that time when the English came to India for business and then continued exploiting us in all forms for more than two hundred years. The apparent business first took the shape of neo-colonialism and then ultimately transformed into colonialism in all sectors, be it the political, economical or the cultural sector.

But today, India is nothing like it was used to be almost two hundred years ago, it is now considerably developed. The many economic policies of India after independence have lead to the maturity of the retail sector. The retail sector of India ought to be confident to compete with the global retailers at this stage. The policy of FDI in multi-brand retail is very well and innovatively formed and primarily focuses on the development of India’s retail sector. The third proposal of the policy states that fifty percent of the total FDI shall be invested in back-end infrastructure which will thus improve the quality of goods, their manufacturing process, the agricultural market infrastructure, storage and a lot more.

Also, the expected problem of unemployment will be efficiently checked. The policy allows the foreign retailers to set up their firms only in the cities with a population more than ten lakh. The small range influx of the foreign retailers will help the government to test the consequences. Plus, the establishment of retail shops of foreign investors will be passed through the state checkpoints where they have to comply with their terms and conditions. Thus the well-planned structure of the policy and efficient checking is promising opportunities to the indigenous retailers without them having to suffer any losses. The wise working will surely make a progressive market for the local retailers and will abandon any issue that might be the reason for neo-colonialism. The government, according to me, has come up with a very well-formed policy which should be appreciated and welcomed by all.

lavasa

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal:

Link to Original Article

Actual Article (Original):

Troubled real estate firm Lavasa’s efforts to escape the stigma of bad debt suffered a jolt with the Reserve Bank of India rejecting a request to confer infrastructure status on its loans. The rejection means that the firm cannot enter the special cell set up by banks to help ease the debt burden of troubled companies with high-cost borrowings.

It must take the difficult road of negotiating individually with the banks and its debt will not have any chance of becoming a standard asset. The 850-crore loans on Lavasa’s books are now treated as bad loans by most banks.

Lavasa sought infrastructure status from RBI some months ago on the grounds that it would help the company join the corporate debt restructuring cell set up by banks. The CDR cell helps companies restructure debt, ensuring that their loans stay as a standard asset on banks’ books. Lavasa’s loans would have been converted into a standard asset in the CDR if the RBI had agreed to the move.

“Lavasa Corporation is always in dialogue with all its stakeholders, including bankers and lending institutions,” a Lavasa spokesperson said.

Commercial Real Estate Loans

Allegations which are devoid of any substance and made with a deliberate intention to derail the smooth progress of the project did have an impact on the finances of the company. We are confident of resolving these issues with our bankers and lenders.

It is business as usual at Lavasa as we have sold close to 100% of our properties at Lavasa in phase I and bookings are on in full swing for phase II, which has opened recently. Lavasa is committed to deliver and be the role model in meeting the gigantic urbanisation challenge that India faces,” the Lavasa spokesperson added. Loans granted to Lavasa are classified as commercial real estate loans and CDR norms do not permit their restructuring.

The company must now individually negotiate with banks for restructuring its loans, a difficult but not impossible task, and agree to the various conditions stipulated by them. Banks, which were hoping to avoid making provisions for Lavasa’s debt, will now have to do so.

“This would mean every bank would have their own set of demands to be fulfilled for the restructuring,” said a partner with a consultancy firm. “Since this loan continues to be treated as a real estate loan, it would be a part of the sensitive-sector exposure of banks, and banks would have to set aside higher capital by way of provisions for any contingency,” he added.
HCC’s ambitious hill city project, Lavasa, ran into trouble after the ministry of environment and forests stalled construction at the site for violation of environmental laws. After a long battle between the company and the environment ministry, the latter gave a conditional clearance to the $31-billion project in late 2011.

In January, rating agency CARE downgraded Lavasa to default grade after it delayed payment to banks. HCC, the parent firm, claimed losses of Rs 2 crore a day when work was halted. A silver lining for Lavasa is the approval given by banks for funding the hill city’s second phase. Despite the troubles in the first phase, banks have decided to give Rs 600 crore to help it complete the second phase.

Explanation:

The road to the completion of Lavasa (project) has been bumpy over the past years. Be it accusation by Indian Environment and Forest Ministry of causing environmental damage to the picturesque landscape of Lavasa hills or CARE downgrading its rating from in January 2012; the project has garnered a lot of negative news.

Lavasa, idealized with the aim of bringing the concept of new urbanism/real urban life experience to Indians, recently suffered a major shake as their request to grant infrastructure status on its 850 crore loan was rejected by RBI on July 2011. Lavasa’s high cost borrowings from various banks are now considered as bad debt thus restricting the company to enter Corporate Debt restructuring cell to ease debt burden.

Flow of explanation:

  • What is bad debt? – What are its implications?
  • What are infrastructure bonds?
  • How would ‘infrastructure status’ have helped?
  • What are standard performing assets?
  • What is Corporate Debt Restructuring?, and what is its relevance in the current context

What is bad debt?

A bad debt is referred to any debt that has been borrowed which in the ‘perception’ of banks and investors is seen as ‘risky’. There might be a possibility of a default on this debt, i.e. – the borrower might not be able to meet its payment obligations. For a company its image in the market is greatly determined by the ‘banks perception of its ability to pay its debt’- now Lavasa was pursuing a way by which they could prevent the perception of the banks of its loans as bad ones, i.e. – through a request for its loans to be considered as ‘an infrastructure status’ loan; and the RBI rejected this proposal.

Infrastructure bonds and how the infrastructure status would have saved Lavasa’s debt from being considered as bad loan:

An infrastructure bond is a bond specifically sold to investors for the purpose of raising money to fund infrastructure projects, i.e., roads, dams, etc. Infrastructure bonds offer tax benefits to investors and are an attractive option. With the protection from government and assistance from infrastructure finance companies the bonds are floated to retail investors/common man which helps firms generate desired cash for successful completion of the infrastructure project.

Seeking Infrastructure bond status on its loan would have made it easier for Lavasa to raise money from retail investors and also they would have commanded a higher value making it more attractive for investors. Bonds can now be issued at a discounted interest i.e., interest that Lavasa would have to pay to is debtors will be lower for the same amount of money. An infrastructure bond status would have given Lavasa more options to raise money, eased its cash flows, made it more valuable and attractive and allowed it to better negotiate a restructuring deal.

Standard Assets and Corporate Debt Restructuring:

Assets which are perceived to be risk free (normal) are referred to as Standard assets. These assets are considered to be performing assets as they on a regular basis generate income. As long as Lavasa’s debt would be perceived as a standard asset no alarm bells will ring in the market as they would be expected to generate stable projectable cash flows. Now to still maintain the status of a standard asset Lavasa would have to ease the expenses being incurred which could be to some extent be achieved through restructuring this debt and re-negotiating interest terms. Restructuring a Debt involves cutting a new deal with Lenders at ‘lower interest rates, ‘longer repayment periods’ or a combination of both and more factors. This option gives companies more cushion and space to repay obligations, thus improving its financials. While longer repayment periods would increase the interest that the borrower might have to pay, Banks take a call on if by increasing the repayment period, a project would have more room/ opportunity to generate revenues and meet its expectations.

For example – if a debt has been restructured at a longer payment period, then more time is given to the debtor to pay back the outstanding amount, thus improving revenues and a company’s financials

Getting this infrastructure status would have allowed Lavasa to enter the CDR cells of banks giving more muscle to Lavasa to negotiate a ‘restructuring’ deal. It is a lot like a VIP pass giving you special privileges over the rest of the masses

To give some perspective about this, one could look at the ‘government bail-outs’. Many banks simply cannot fail and go under as they would bring the market down with them leading to a chaotic environment. Instead of letting them become non-performing, governments here have no choice and but to infuse more capital and make a deal which keeps these banks afloat and gives them another chance to right their wrong decisions.

Infrastructure status would have given more muscle to Lavasa for its negotiations; and without this status Lavasa will not have an upper hand when it sits with the banks for a restructuring deal. In fact being now a ‘real estate commercial loan’ banks will be all the more wary, cautious and conservative while dealing.

21pm5

By Rahul Kumar:

Ever since the FDI in retail and Diesel price hike were proclaimed I’ve been trailing the news and debates concerning these reforms. And all I’ve perceived is that everyone had been targeting and criticizing the government and Prime Minister Dr. Manmohan Singh over these reforms. I’ve read not a single article which explains or praises these reforms, which I do agree came late for various reasons. First I’d like to start off by saying that we have to stop being pessimistic towards every decisions that the government takes.

I do agree that criticism is an impeccable part of society, it creates accountability and alertness within executives that they have to do what is right. However we should not follow pessimistic approach towards whatever government does. We should at least give a fair share of chance to them so that they can do what is necessary to bring prosperity and growth and hence before criticizing we should know about and put both pro’s and con’s to test. Now coming to the current topic of FDI and Diesel, all I’ve heard till now is vague and suspicious views towards these policies. Hence I decided to write why it could prove to be a boon for us and what precisely the government is thinking and wants to do by implementing these policies.

The article is addressed especially to those against these reforms. With FDI finally being introduced in retailing, foreign currency will flow in, which our country desperately needs today to bridge its BoT, and with foreign companies like Walmart bringing better infrastructure and facilities to India, the food and commodities lost in transaction due to lack of good means of transportation or due to lack of storage facilities will finally come to an end (this is a mandatory condition for bringing FDI that 50% of amount bought will have to be spent on betterment of infrastructure and transport facility).I guess the farmers and consumers do fulfil your eligibility criteria for being a so called “aam admi“; both these are going to benefit with this decision which finally PM has taken. Farmers would get right prices for their crops and consumers will finally get commodities at the right prices.

All this while, before these reforms, which you all are criticizing as a red herring, you were calling the PM an underachiever and were criticizing him for not doing enough and taking necessary steps to balance our falling economy, and now, when finally he’s taken these vital steps and done something right you all are questioning upon his knowledge over the economy. He’s the same person who saved our economy from the 1991 crises when our country had literally become a beggar as no one was ready to lend a penny to it. Finally the reforms, “LPG” was brought in by our then finance minister and current PM who you’ve been calling underachiever. Same questions were raised back then too when liberalization was initiated and FDI was introduced in manufacturing, everyone thought our manufacturers would not be able to compete with these foreign giants, but on the contrary, our manufacturers not only competed with them but created there firms/businesses as global giants themselves. I am sure this time too, the retailers no matter how big or how small would compete and emerge as better than ever before.

Let’s talk about the facts and figures. When the price hike of diesel and FDI policy was announced, the very next day rupee finally breached 54 mark and finally gained more than it had gained in months and the Sensex rose more than 400 points.

Now you all (who are criticizing these policies) would have an argument that how’d it help taming the inflation and help your so called “aam admi“. Let’s take this argument too; with subsidy on diesel reduced, the highly widened FISCAL DEFICIT would start getting bridged (subsidiary on diesel widen the fiscal deficit by 2,00,000 crore; with decreased subsidiary the gap would be bridged to an extent of 40,000 crore leaving it to 1,60,000 crore). Also with revenue expenditure being reduced, government can finally use funds for capital expenditures like infrastructure, and with FDI initiated, the foreign currency will start flowing in, which would help bridging TRADE DEFICIT which is a very crucial need of hour today. Now with both the deficits bridged to quite an extent our CURRENT ACCOUNT DEFICIT would also get narrowed down and our currency can finally inflate and inflation rate consequent upon this rise in value of our currency would finally fall. The initial rise in price consequent upon the inflated diesel price is just a small snag hoarding us from the big and true picture.

At the end I’d like to wind up by saying that yes our government has disappointed us with scams like 2g and coal, and our doubts and qualms against their intensions are very much justified but we need to stop being cynical about everything they do. We should think about the pro’s too and stop getting our thoughts and deeds mislead by the people claiming to be supporters of so called “aam aadmi” when all they want is just their political agendas to be fulfilled.

RBI building

By Abhinav Srivastava:

One local bank boss says the RBI “runs a repressed financial system which is intolerant towards innovation. If the US was at 90 out of 100 in terms of complexity and sophistication, we are at 10…I sometimes get the impression it [the RBI] is resting on its laurels, not realising that more financial innovation could help India’s development.” — The Economist

The capitalist, industrialist, imperialist aren’t the happy men here. There is nothing more fancy policy in nature if it fails to keep the price of daily bread constant. The capitalism crises have made this happen, bread prices fluctuate much more than the smart phones. While Bernanke and Obama still fumble for a perfect fiscal and monetary relationship, Subbarao and Manmohan have made it certain; India and its willingness to deal with the present crisis. RBI’s no rate change policy states the common man concern of rising prices a priority over industrial expansion in the countryside. RBI has successfully maintained the inflation and balanced growth relationship while simultaneously regulating the Indian banking industry.

Comparing RBI’s perspective with FED, there is nothing much in common about them. Although they are both operating in an environment where fiscal policies aren’t doing much to accelerate growth and tame inflation their approaches have been much different. While FED believes in buying billion dollar US treasuries such that interest rates go down encouraging consumers to spend, RBI tries to defuse the cash tripped Indian market primarily responsible for unregulated money supply hence the inflation.

Obama’s policies have made it clear; financial buyers are not willing to buy his treasuries necessary to finance the spending; only the central bank comes to rescue projecting more job growth in the US economy. The primary assumption lies in the central bank reforms that some magic always heals the economy. However, this massive easing depreciates the dollar, creating an export chaos with more dollars chasing few Chinese or Indian goods. Further it attacks the common public with a rise in prices of the daily produce leading to another crash in the market. Dollar has now joined Japanese Yen as a cheap funding currency. The simple Keynesian led US growth story is accompanied with high degree of leakages, majorly inflation and export-led growth. While no confidence in dollar provokes people to buy real goods hence increasing their prices. The Europe economic slowdown hurts the US sentiments unfortunately as they can’t find their customers on Mars, Nobel Prize winner Paul Krugman famously said.

The Reserve Bank of India has entirely different dimensions. Not fortunate to be a developed nation state, the cash stripped market happens to be the biggest worry. The cyclical markets like manufacturing, industries and their negative outlook create a crawling growth rate of just around 5%. To bring more chaos the fiscal deficits have been rising with no reform process initiation that could possibly take place. However, RBI had a different economics to perform. Instead of heavy rate cuts they moved ahead for soaking excess liquidity and some fiscal reform initiation, it resulted in job cuts, rupee depreciation and soaring crude oil prices. However, after much of tussle between fiscal and monetarist, the reforms stated initiating. The fiscal consolidation plan restricting 6 cylinders and diesels hike along with FDI reforms help the nation economic building. The RBI’s much delayed decision of a rate cut has blocked the industries for a while but certainly helped its civilians from hyper inflationary pressures. The ideological rift behind Indian monetarist was based much more on improving the fundamentals rather than some short term revivals.

While Bernanke is still in the pursuit of reviving the economy, RBI kept the inflation rates below double digit while simultaneously maintaining a balanced growth rate with a revival in Indian economy much more certain. The common man’s monetarist approach happens to be much more productive than industrialised reforms.

fdi in retail

By Anvita Shukla:

On 14th September 2012 Central Government of India allowed upto 51% FDI in Indian Retail market, subject to approvals by Indian States. While this move is being welcomed by many, several political parties are opposing it vehemently. Here is a look into what this relaxation in FDI promises, and threats that it has for Indian economy.

FDI in retail market has thrown some serious concerns, and sparked agitations nationwide. Retailing in India is one of the pillars of its economy and accounts for 14 to 15 percent of its GDP , and India happens to be the fastest growing retail market of the world. This makes our country an investment paradise for huge retail chain owners.

The government, constantly being accused of a policy paralysis, has tried to lure the public into promises of growth the FDI in retail would make. These promises include, a speedy economic growth, recovery of GDPI which has been plummeting from a couple of quarters, improvement in falling value of rupee, and reversing an economic slowdown. Middle class of India believes FDI in retail would be a bold step in economic reforms. This strata of society largely believes that advent of store chains like Walmart in the retail market would change the way a common Indian shops. In the coming times an average Indian would experience lower prices of commodities, organized shopping with world class facilities, millions of jobs for youngsters in the country, and inflation would be curbed.

Experts claim that lack of retail experience and capability has been one of the primary reasons for subdued growth in this industry. FDI in retail will make way for inflow of knowledge from international experts which can boost the overall growth of the industry. Experts also say that this step would improve the management of supply chain, improve the productivity of food and agriculture in our country, and increase the investment in retail sector. It is also being expected that cold storage infrastructure will become economically viable only when there is strong and contractually binding demand from organized retail.

But grass root activists and several political leaders have very different opinion about FDI. What most experts and middle class Indian seem to forget or not realize is that retail industry is not a mere form of business in India. It is a mean of livelihood for several people who have not been able to secure a proper job. When store chains like Walmart pose a threat to our domestic retail chains like Pantaloons, Reliance Fresh etc., it might sweep off the local retailers from the entire market. FDI promises to create around 2 million jobs in the country whereas India’s retail and logistics industry already employs about 40 million Indians, many of whom stand a threat of losing their jobs.

Another factor is the monopoly of big brands on the Indian market. FDI would have a huge impact on the sale and profit margin of Indian farmers. Government has laid down the guideline that the single brand retailer must source 30 percent of its goods from India. Now reading the trends of market, chain-store owners have the tendency of overpowering the market and exercise monopoly. They would purchase 30% of their goods from the local farmer at whichever price they please as against today, where several traders have to compete with each other in order to buy the farmer’s produce. This will bring about greater dependence of farmers on the MNCs and they would be vulnerable to exploitation. Now we are already facing challenge of bridging the gap between Bhaarat and India, but FDI in retail might just widen it further. Talking about improvement in supply chain management, complains have been registered all across the world against the retail store chain owners about not paying their suppliers timely. Forget about any other country, retail chains like Walmart are facing a huge opposition from their own country. The following link talks about the high cost of low price which America has to pay for the flourishing business of Walmart.

Bihar CM Nitish Kumar expressed his concerns on FDI in retail market. He said “here is a serious apprehension that the flow of organized foreign capital with its associated baggage of infrastructure, bulging financial power, professional managerial staffs etc, would sound the death knell for the Indian retailing sector. This will hike the rate of both unemployment and underemployment.” In the current scenario only 20% of the retail market is organized, the remaining 80% unorganized and in an extremely nascent stage of development. The entry of large global retailers would slowly but surely marginalize domestic retailers and in the long run kill local shops and millions of jobs.

The government has already passed the verdict and appears in no mood of rollback, Mamata Banerjee has withdrawn support, and other political parties have called in for a bharat bandh, we need to wait and watch the politicians decide the fate of retail industry in India.

iphone-5

By Shaifali Agrawal:

The thinnest, lightest and fastest iPhone is here. The pre-ordering of iPhone 5 began on the 14th of September and is expected to fetch 1.3 million to 1.5 million buyers in the first week, which is more than the first week pre-orders of the iPhone 4. The iPhone 5 launch date has been set for September 21st and Apple is hoping to sell as many as 10 million of the devices in just the first few days of launch. Thanks to the hype, the leaks, the crazy fans, the blog posts and the tweets: the entire day of the commencement of pre-ordering was about nothing else but the iPhone release, its awesome features, its price, etc. Now, the ultimate goal of most marketing plans is to generate the kind of interest the iPhone created before and after the event.

There was a time when Apple was the only Smartphone in the market, but it now has rivals to compete with. Samsung and HTC have taken the front seat the entire year, with Samsung Galaxy S3 selling more than 10 million units in its first two months on the market, reaching sales figures comparable to those of Apple. Samsung wants to portray itself as ‘Better, faster and cheaper’.

”What’s in a name?’‘ Shakespeare avowed. He did not know his words would be echoed even in the 21st century where they won’t hold true. Does a brand name increase its value, or only its price? Samsung’s stand is that it can provide you at a lesser price what Apple would, at a much higher price. Though Samsung is the king of mobiles in the market as of now, but somewhere its policy of providing you great features at a not-so-expensive price lowers its position in a status-conscious and pretentious society. It does not matter if the price tag is burning a hole in your dad’s pocket; you need to flaunt your iPhone 5 in front of your enemies. And you can be sure that, that friend of yours would go green with envy.

Because of the competition, Apple hyped up its new release and though the publicity and excitement among the fans was noticeable, the iPhone 5 fell short of the people’s expectations. One particular website called it “the victim of its own marketing plan’s success”. Despite not fulfilling the expectations, Apple would still continue to be in minds of people as a leader in functionality, beautiful design, and innovative device. The iCraze will definitely not die out soon.

airfares

By Shaifali Agrawal:

The hike in the prices of air tickets is what is making the news recently. After an increase in prices of petrol, diesel and gas, major Indian air carriers hiked fuel surcharge on Tuesday, the 4th of August, increasing an amount of Rs. 150 to Rs. 250 for distances less than 1000 Km and USD 15 (Rs. 825) for international tickets, following an almost eight percent increase in jet fuel prices.

Owning an airline in India seems to be one of the most profitable businesses today. Airlines have hiked the prices wherever they could. Besides, thirty to forty percent rise in fares during the past six months, higher charges for cancellation of tickets, paper ticket printouts, extra baggage and extra charges for unaccompanied minors are pinching the passengers’ pockets. Ashoka Chawala, chairman of the Competition Commission of India feels that this could be a case of cartelisation that all airlines collectively decided to impose extra charges. If this is the case, then CCI would have to investigate. Many people are of the opinion that since airline carriers have been struggling from a very a long time in order to make profit, the price hike will probably encourage them to cut costs, which would adversely affect airline safety.

Moreover, the Indian airline sector is not an exclusive industry. The price hike is going to affect other industries as well. It will impact people’s holiday plans and tourism would thus be negatively affected. According to a survey conducted by holiday planning site ‘TripAdvisor‘, sixty six percent of the thousand members polled said that they would be changing their holiday plans due to budget constraints.

If we think that competition among different airlines would reduce the fare, it might just be the opposite. The fares have gone beyond the reach of the middle class families already, but since travelling in a costly airline positively impacts a person’s social status, the competition might never be profitable to the majority of Indians. Increased taxation should be stopped if poor people need to survive. Air travel is not the only issue, but if these are not the genuine increase in prices, like the chairman of the CCI hints, some poor people who have started using air travel recently might opt out soon. It could then be true in the coming years that many flyers would gradually stop using the medium of travel and the entire air travel industry may not survive. Therefore, possible solutions in the favour of frequent flyers could be transparency in pricing of air tickets. Only then can we save this industry from dying out.

What-is-globalization

By Reeti Mahobe:

On a closer look, as a concept, Globalization has existed for past several decades only undergoing changes in the ways it has been perceived at different points of time. Beginning from that of colonial exploitation to the then wave of independence and economies getting into a shell, making this phenomenon of globalization non-existent, to the “era of dependence” (dominance of First World countries and dependence of Third World economies on them) later on giving way to “interdependence of economies” that gave the fillip to bring back the thrust on globalization. While now, that its driven mostly by mutual needs of diverse economies, it signalled an end to “era of hermit economies” marking a transformation of economy from inward looking to that of outward looking.

 

Divergent views have been presented as reaction to it. While extreme opponents charge it with ruination of indigenous arts and crafts, impoverishment and threat to environment while those supporting it give arguments claiming it to be the harbinger of world peace and prosperity and a blessing at times of a domestic calamity. It is observed in simple words as the integration of domestic economy with that of world economy.

The need for globalization was felt on account of seeking of greater technological investment, better quality of both goods and services and knowledge sharing. The course that it follows mainly involves a growing international trade of goods and services and increasing strategic cooperation with world economies. Another significant way towards globalization is that of Foreign Direct Investment (FDI) as well as Financial Institutional Investors (FIIs) and foreign portfolio investment. These allow increased capital inflows and outflows while also introducing the newer technologies, better quality goods and services and providing newer avenues for employment.

The international organizations and institutions such as World Bank, IMF and WTO are encouraging to adopt it. This was so in the case of India too, when BOP crisis ridden India, took over the path of New Economic Policy in 1991. It was herein when the two terms of ‘liberalization’ and ‘privatization’ became the watchwords. These two are many a times used interchangeably as both are ‘conducive’ to each other. The recently talked about FDI in retail, insurance or aviation sector are few others in this row.

Globalization seemingly an economic term has more to itself than this. It is rather a complex set of processes and impacts politically, economically, technologically and culturally. Thus we come across related terms such as ‘global village’. While the ‘positives’ of globalization may be manifold it would be unfair and unwise to ignore the risks involved. It could on hand soar up the profits of one company operating globally while on the other hand it may worsen the condition of ‘poor’ and unskilled in primarily third world economies. Such an under employment has been termed as structural unemployment. It may also be a threat to long lived tradition. Under the sheets risks also include the fears of ‘security system’ being plagued.

In today’s world we cannot remain secluded and with increasing population and developing economy we cannot afford to escape it. Its rather supposed and preferable that we must allow processes of ‘globalization’ to work smoothly with the conditions applied that our ‘indigenous arts’ are not compromised. Rather using this as an opportunity to establish its excellence elsewhere, like for an instance, one may experience it at ‘Delhi Haat’ where foreign visitors appreciate what’s ours and highlight the same in international platform.

Further we must tighten up our security measures so as to avoid any loopholes and also try to be at par with competitive levels and have a sound human resource skill development programme which would help in smoother switch to newer technologies and thus avoid ‘unemployment’. For the purpose, we also ought to have better ventures in ‘research and development’. In the scenario of coalition politics, we need to communicate the policies in a more comprehensive manner to the people as well as to the parliamentarians outlining the strategies that may be adopted to clarify and remove their ‘fears’. Global slowdown has also raised the suspicion which could be overcome through a proper ‘economic cushioning facility’ and also have positive effect on investor sentiments with an enabling environment. Globalization has become the way of life, if targeted and careful measures taken to eliminate the dangers, it would be even better.

Democracy

By Rahul Kumar:

With debates and talks about elections to be held in 2014 and the strategies and course of action by various political parties not to mention the coalition UPA presently in power for winning the elections, I couldn’t help but notice the influence of these elections and the democratic society over the economy, as well as the decisions and techniques manipulating its course. First of all, without a doubt the decision of our great leaders who got us out of the claws of British colonial system regarding the choice of constitution and system (democratic) we were to follow was not at all questionable upon and not just Indian constituency but the countries around the globe for example US has chosen it and praised its success. However every system has two fold traits, and so far we’ve been converging towards the smoother side of the democracy. But how many times we take down the monocles of respect towards the decisions of our old ones and put to test on a balance, pros and cons of this system.

 

Yes when we look at it from a social point of view the pros defeats the cons with whopping numbers. However we cannot overlook the other aspects it has been influencing such as the economy which has become a very serious concern these days. With slowdown in Indian economy, falling growth rate increasing trade deficit, falling currency consequent upon widening of the current account deficit and trade deficit, also not to mention the Eurozone crisis, which has not only influenced the European union, but also has had a great impact on global economy, hitting hard the western subcontinent like US as well as the Eastern coalitions like BRICS, there has emerged a great need for fierce economic reforms more than ever before. The need of the moment is for government to take stern actions to dilute the global slowdown as well as the inside problems. However with elections on horizon the inclination of government is more towards pleasing the population rather than bringing reforms, the indication of any such reforms seems a far-fetched dream.

The problem arises due to the little information over economic matters and more preference to quick gains by people. In a country with only a bunch of educated people, people are not aware of how the economic system works and why a certain decision is being taken up. For example, recently the rates of petrol were elevated and there was a spread of rage over this increase in rates. However little did people know about the reasons for the increase in prices. First of all, the petrol is no longer a government regularised commodity, hence the decision relating to the increase or decrease in prices of the petrol is no longer in hands of government, it was solely the decision of the oil companies due to the losses they’ve been incurring due to the falling rupee.

Now another argument against government arises that it could have given subsidiaries or it could have reduced taxes to dilute the impact of elevation in prices, but with a high fiscal deficit it wasn’t an option either. However with lack of information about the problems being faced by finance ministry, people started pin pointing government for their incompetence and lack of taking up necessary steps in bringing down the petrol prices. Another such case in this regards can be quoted when the former railway minister Mr Dinesh Trivedi tried and elevate the ticket prices. It had to face resistance from Trinamool Congress supremo, Mamata Banerjee, who just to project a public friendly image not only stopped this elevation from taking place but also forced government to change the railway minister. Once again political influences and voter inclination took precedence over economic gains. The ultimate result was rollback of these prices and coming up of new railway minister Mr Mukul Roy.

One of the most talked about instance of influence of democratic forces over economic decisions is “FDI in retail” which could have proved to be a boon not just for economy but for farmers and consumers. The farmers would have got right prices for their hard work and consumers would get commodities at right prices too. However the resistance came from retail owners who were afraid to lose their commission. Now just to keep this retail section happy and protect the vote bank from this section all the pros of FDI in retail were overlooked, and the idea had to be dropped. There’s a long list of such incidents where just to please the public and give them immediate gains for protecting the vote banks, the perfect reforms that may have pushed our crippled economic boat to a swift speeds were dropped. Now are we really in shape to question our finance ministers for economic slowdowns and not bringing necessary reforms when we are the ones pressurising them.

Next is the question of elections 2014. With an inflation rate of 7.2% and increasing pressure of public on government to bring down the prices the abrupt decisions of government to take steps to reduce these inflated prices on the cost of already wide deficits is but obvious. Unnecessary subsidiaries and decrease in taxes would be next steps to please the voters by our finance minister.

The democratic system has undoubtedly brought down many of the social evils prevailing in country for ages. But its flaws have also been overlooked for ages too. The problem is not in the democratic system; of course economic democracy is an integral part and is very crucial to economic equality and justice. However the near fossilised system needs reforms itself. A better understanding and amendments in old and dusty democratic system is needed. Also an understanding needs to be created within the public/voters about how the economy works and need to educate them in a better way regarding the economy, its working and the problems. We need aggressive and stout-hearted government to speed up our crawling economy. Aggressive reforms and far sightedness is the need of hour. And in a society like ours where the decisions are so much influenced by the voter and election point of view, and the public is merely interested in short term gains; the miraculous reforms merely seem like a mirage.

change sign

By Saloni A D:

Situational Management theory is undergoing a sea of change with most of its disciplines viz. Human Resource Management, Marketing Management, Financial Management, Operational Management, Systems Management etc. being seen as fluid disciplines.

Leaders world over, are gearing up to cope with “Change”. Firstly, the need is to understand “Change” by the leader himself and then prompt the “Change” in such a way so that there is decreased resistance when the task comes to operation. Hence, “Change” is apparent at Individual level, group level and at organizational level.

However, “Change” that happens to an organization can be distinguished from “Change” that is planned by its members. Organizations can use planned change to solve problems, to learn from experience, to reframe shared perceptions, to adapt to external environmental changes, to improve performance and to influence future changes.

There are three major theories of organization change that have received considerable attention in the field — Lewin’s Change Model, The Action Research Model and the Positive Model.

Despite their continued refinement, the models and practice of planned change are still in a formative stage of development and there is considerable room for improvement. Planned change has typically been characterized as involving a series of activities for carrying out effective organization development.

Although current models outline a general set of steps to be followed, considerably more information is needed to guide how those steps should be performed in specific situations. Planned change also tends to be described as rationally controlled, orderly process.

Critics have argued that although this view may be comforting, it is seriously misleading. They point out that planned change has a more chaotic quality, often involving shifting goals, discontinuous activities, surprising events, and unexpected combinations of changes. For example, Executives often initiate changes without plans that clarify their strategies and goals. As “Change” unfolds, new stake holders may emerge and demand modifications reflecting previously unknown or unvoiced means. Those emergent conditions make planned change a far more disorderly and dynamic process than is customarily portrayed, and conceptions need to capture that reality.

Reshaping the organization’s culture and design element becomes need of the hour. Organization transformation implies radical changes in how members perceive, think and behave at work. These changes go far beyond making the existing organization better or fine tuning the status quo. They are concerned with fundamentally altering the organizational assumptions about its functioning and how it relates to the environment. Changing these assumptions entails significant shifts in corporate philosophy and values and in the numerous structures and organizational arrangements that shape members’ behaviours. Not only is the magnitude of “Change” greater, but the change fundamentally alters the qualitative nature of the organization.

Leadership And Communication Traits in implementing Change Management: The ability to communicate has been a proven factor in leadership. Generally, a leader’s communication comprises:

– A sense of confidence and control over employees.
– His/her own feelings about the change.
– The degree to which he/she trusts the abilities of the employees to get through the change.
– A sense of purpose and commitment.
– The degree to which he/she accepts the reactions and feelings of employees.
– Expectations regarding behaviour that is seen as appropriate or inappropriate.
– the degree to which he/she is “connected to” employees’ situations and feelings or is “in-touch” with them.

It is clear that if the leader communicates effectively, he/she will be sending messages that decreases resistance, and encourages moving through the ‘change’, more effectively and positively.

Contemporary Managerial Communication pattern embraces both the basics of communications of yesteryears and complex electronic communication systems. Thus, the latest meaning to “Communication” has been “CREATING UNDERSTANDING”.

Whenever a leader communicates to employees about change, he/she should be striving to convey the following position:

a) That he/she is personally committed to the change, and is seeing it through, even if it has negative consequences.
b) That he/she can recognize that the change negatively impacts upon some people.
c) That he/she is open to discussion of the feelings of employees regarding the change.
d) That he/she is confident that the “team” can make it through the changes.
e) That he/she wants and needs input to make the changes in work.

Sometimes the leader won’t be committed to the change, or won’t be very confident that self and the staff can pull it off, particularly when the change is imposed from above. While some may disagree, it is important that the leader still conveys an image of strength and commitment despite his/her own misgivings. The change leader has a role to play, and if he/she have misgivings or strong negative emotional reactions of own, it may be more effective if he/she underplays them. If the leader shows anger about a change, he/she may legitimize the same kind of negative behaviour in the staff.

While the leader shouldn’t hide his or her negative reactions completely, it is probably wise to keep them in the background by stating them in a matter of fact way and moving on with time.

Change is continuous. As a change leader, communication is the primary and most important tool. There is no substitute for good judgement and thus, change leaders need to be reflective and thoughtful about the ways they communicate.

the_war_socialism_of_the_american_right-460x307

By Shobhit Agarwal:

“Every gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its labourers, the genius of its scientists, and the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron.” ― Dwight D. Eisenhower.

Fact list-1

– Almost half the world, over 3 billion people, live on less than $2.50 a day.
– 1 billion children live in poverty (1 in 2 children in the world). 640 million live without adequate shelter, 400 million have no access to safe water, and 270 million have no access to health services.
– 2.2 million children die each year because they are not immunized.
– Funds close to the tune of $150 billion are required to meet the complete targets set by countries in Millennium Development Goal      (MDG) to wipe out poverty.

Fact list-2

– Global military expenditure stands at over $1.7 trillion in annual expenditure.
– The UN was set up to be committed to preserving peace through international cooperation and collective security. Yet, the UN’s entire budget is just a tiny fraction of the world’s military expenditure, approximately 1.8%.
– The military expenditure corresponds to 2.6 percent of world gross domestic product (GDP) or approximately $236 for each person in the world, having seen a 50% increase since 2001.

On combining the two lists together, what we get is a list of startling facts —

– Less than 1% of what the world spent every year on weapons was needed to put every child into school.
– Poverty will be eradicated many times over from the face of this planet if a fraction of the funds spent on military was spent on that front.
– Every person in the world will be immunized against all form of preventive diseases if only a small portion of the world’s military budget was employed for the same.

The facts are for everyone to see. It is not that we aren’t familiar with these facts. Rather, we choose to pretend to not be in the know-how of reality. Advocators will argue that war is a necessary evil required to maintain peace. But most such preachers of war have vested interests. With billions of dollars riding on arms sales and deals, rather than the need of the times, it is usually the need of economics that dictate the onset of war.

There is no novelty in talking about the cultural and social impact of war. Enough has been said and written about it and that too by people with significant credentials. However, what needs to talked about is the economics behind the war. Just to cite an example, the war on Iraq was carried out by the USA on the pretext of “removing a regime that developed and used weapons of mass destruction; that harboured and supported terrorists; committed outrageous human rights abuses and defied the just demands of the United Nations and the world.” Even at the initial phase of the war itself, theories about the chief reason of war being America’s intent on stamping an authority on Iraq’s oil fields had been doing the rounds.

On August 30, 2005, Bush stated that one of the roles of the occupation of Iraq was ‘also’ to prevent oil fields from falling into hands of terrorists: “If Zarqawi and Bin Laden gain control of Iraq, they would create a new training ground for future terrorist attacks. They’d seize oil fields to fund their ambitions.” Alan Greenspan, the former Federal Reserve chairman, said in an interview that the removal of Saddam Hussein had been essential to secure world oil supplies. He quoted, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.

We see how what appeared to be a clear cut war against a tyrant dictator, has more to it than what meets the eye. And this unfortunately is true for almost all the wars that have been fought in the past century. What is further surprising is to know that at a time when a deep economic recession is causing much turbulence in the civilian world, defence giants such as Boeing and EADS, or Finmeccanica and Northrop Grumman, are enjoying a reliable and growing revenue stream from countries eager to increase their military might.

Wars have been fought in the past and will continue to be fought in the future. The vested interests of a few are going to outnumber the needs of the many. At least, the powers who initiate wars owe the bearers the real reasons behind their attacks.

india-194701

By Pradyut Hande:

In the bustling 21st century global economy that remains in the throes of perennial flux, India has traversed a tortuous path of socio-economic progression through the ages. Despite the economic slowdown and consequent market volatility, India is today one of the fastest growing economies in the world; well on its way to realizing its potential as a rapidly emerging socio-economic leviathan. It suffices to say, this can be facilitated predominantly through proactive and progressive governance and wide sweeping reformatory changes that relegate “policy paralysis” to the backburner. Granted the fact that despite the tumults of the day, India’s future appears bright; it is important to take cognizance of our past that eventually led us to embark on our current socio-economic developmental trajectory. Why is it that India presently languishes behind its fellow Asian powerhouse, China? Why have we always been looked upon as a state that is “on its way to realizing its potential”? What has hindered our economic progression over the years? Let me elucidate a critical collective factor that I believe is responsible for our predicament today…that has cost us almost two decades in our cycle of economic progression.

1947; after centuries of external subjugation, India was finally free of foreign rule. The air was abuzz with ecstasy, excitement and anticipation as our time had eventually arrived: India’s tryst with destiny. A charismatic, Jawaharlal Nehru was sworn in as independent India’s first Prime Minister. The task before our leaders to galvanize a fragmented and pulverized economy into some sort of action was daunting and required a demonstration of great courage, initiative and character. Given the prevalent global scenario and his ideological leanings, Nehru and his trusted coterie chose to embrace a “Mixed Economy” under the ambit of Planned Development to alleviate the masses from the depressing quagmire of poverty, unemployment and general backwardness. Nehru had committed the nation to “the establishment of a socialist pattern of society where the principal means of production are under social ownership or control”. Enamoured by the economic growth of the erstwhile USSR, Nehru’s socialistic blueprint turned out to be a juxtaposed amalgamation of Keynesian macroeconomics, Stalinist public investment policies and Gandhian rural development measures. On prima facie evidence, it appeared to be an idyllic ideology lined with potential, provided the government was able to establish a sound and flexible framework to facilitate its implementation.

However, with the advent of time, it became increasingly clear that Nehruvian socialism was not the palliative to the country’s woes. However, well intentioned he may have been, his flawed ideology coupled with even poorer management had set India on a disastrous course. In a bid to integrate his ideology into a democratic mainframe, set in a pluralistic society, the hope was that the “mixed economy” would conflate the benefits of socialism and capitalism; propelled by the state’s leading role in industrialization. However, all it did was spawn the birth of an increasingly interventionist state with heavily leaning towards the establishment of a largely ineffective and grossly underperforming public sector, steeped in Kafkaesque bureaucratic controls that further stymied growth. The powerful albeit monopolistic public sector failed to function anywhere near optimal levels in the absence of autonomy and soon became a huge drain on monetary and non-monetary resources. The state run bureaucracy continued to grow stronger and more rigid as potentially “game changing” reforms met with depressingly premature deaths. The excessive controls that were instituted to facilitate the proliferation of capitalistic tenets across a stagnant economy soon undermined its very purpose and suppressed innovation of any kind, further diminishing economic returns.

The private sector was shunned and riddled with regulations and abominably excessive taxation which killed the faintest spark of entrepreneurship and innovation. Furthermore, our ills were compounded by the fact that we chose to adopt a deeply internalized, import substituting strategy instead of following an export promoting approach with the objective to align the Indian economy with that of the world. Foreign investment was frowned upon and further alienated us at a time when we desperately required our integration into the global economic fabric. The fact that we had just tasted independence after years of foreign rule may explain our distrust of foreign involvement and association. Our faith in the state, although admirable, was grossly misplaced as we continued to pay heavily for our leaders’ impaired vision and floundering mismanagement. As it transpired, Nehruvian socialism that promised so much on paper failed on more counts than one, in both ideology and practice. The dreams of millions that hinged upon its success were shattered in the wake of our poor socio-economic progress for over four decades after independence.

The idealistic “mixed economy” approach was novel in its character. One can understand why it held immense appeal at that time for our leaders and policy formulators. However, its efficacy was questionable at best. Unfortunately enough for us, despite taking cognizance of its failings, we continued to regard the “system” as sacrosanct and sunk deeper into the abyss of low productivity and non-performance while our Asian neighbours embarked on a bold new reformatory trajectory. It took us until 1991 to act on our follies and embrace a majorly liberalized outlook that paved the path towards unprecedented economic growth in the years to follow.

We can lament the limitations and misadventures of our past policy makers and their myopic policies, but these are events that set us on the path that we tread on today. Having learnt from our failings, we ought to now channelize our efforts and resources to further our reformatory agenda down various avenues in our quest to push for greater socio-economic growth in the years to come.

Tata-Steel-logo

By Ankit Varma:

“Industrial Relation” is a function of many variables. Some of the contributing factors are participative management, grievance settlement machinery, wage determination etc. Tata Steel is the largest steel manufacturer in India with an annual capacity of 23.5 million ton and employees approximately 80,000. Tata Steel workers in a century-old history have not gone on a strike at Jamshedpur, where its Indian manufacturing operations are largely based.

The recent incidents at Maruti-Suzuki plant in Manesar have highlighted the perils of friction between employer and employee. The functioning and model of Tata Steel in many ways can be perceived as ideal and other unions across the country can adopt similar practices.

Growth of the trade union is a response to the challenge thrown by the modern industry. Viewed in this background, the origin of trade union movement in Tata Steel were due to the same reason as elsewhere in Europe and America. Since 1907 dissatisfaction was increasing in the working class in Tata Steel. However, it was only in 1920 that labour organization was born after great struggle with the management.

The genesis of trade union Tata Steel can be traced back to 1920. Over the years the workers’ union has evolved under the capable leadership of stalwarts such as Mahatma Gandhi, Rajendra Prasad and Subhas Chandra Bose to name a few.

Presently, over 25 trade unions exist in Tata Steel. Some of them are independent trade unions whereas some are affiliated to Central trade union federations, such as CITU, AITUC etc. But these trade unions have hardly any following among the workers and supervisors of Tata Steel. This is the primary reason for the non-political nature of the union. At present only one strong trade union is existing since long called Tata Workers’ Union (TWU).

Tata Workers’ Union is a registered trade union with a written constitution. Through INTUC it is also affiliated to the International Confederation of Free Trade Unions. This helps it to adopt international welfare practices for its members. The structure of the union is highly organized. Tata Workers’ Union has a general body compromising of ordinary members. Above the general body in the hierarchy of TWU are the Executive Committee members. These executive committee members represent the workers and supervisors of all the department of Tata Steel at Jamshedpur. They are democratically elected from their constituencies.

The constitution of the Tata Workers Union provides that members of the union shall propose the name of the candidate from their own respective units. The Unions’ constitution provides about the members, their membership, holding meetings and other relevant matters. The constitution provides that a strike shall not be resorted to unless according to the opinion of the executive committee, gross injustice has been done to a member or members of the union, and this will take place only after all other means have failed to bring about redressal or an improvement in the situation. The resolution for strike has to be passed by majority of the members of the executive committee and by that of the general body of members in a mass meeting.

A close look at the growth of leadership brings out clearly two factors that have helped industrial harmony, peace and understanding in Tata Steel. The guidance received by national leaders has helped in growth of responsible union and the outside guide and philosophers helped growth of internal leadership and bestowed them with the same philosophy as they preached and practiced.

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