The modern thinking Indian

What does a deficit mean ? There are many terms such as fiscal deficit, monetary deficit, revenue deficit, but the differences between are them are relevant for people involved in the field of economics. For the normal person on the street, a deficit means that you are spending more than you earn. A normal person cannot do this without getting into serious money problems, but a Government can (and in almost every case the world-over), does do this. How can a Government spend more than it can earn ? A Government does this through means of a deficit, that it either finances by printing more money, or by borrowing funds from the market.
Both cases cause problems for the economy as such, since if the Government prints more money, this essentially means that more money is being put into the system. More money, but the same amount of production means in simple terms - if you wanted something, and many others want the same thing, then the thing you want gets more expensive. In terms of the economy, if more money comes into the system, then things get more expensive and inflation rises.
If the Government borrows more money from the market, that is less money that is available to private companies to get from their market to meet their funds requirement, or if they need loans for capacity repair or expansion. Such reduction in the availability of funds means that loans for companies get more difficult and has an effect on the ability of private sector to rise above these bad economic times.
Why did the Government need so many funds that it was willing to increase the fiscal deficit to a point where it would be pointed out by economists as a risk ? Well, these are bad economic times and it is at these times that Governments the world over are putting more money into the economy to try to get out of these struggling times. In addition, the Government realized that politically, it has benefited through such measures such as the National Rural Employment Scheme, and it wants to make sure that it is pumping money into the rural sector, the agriculture based sector.
Why did the market react negatively to the Budget, and why am I writing about it after so many days ? Well, the market had been expecting some relief measures, or at least token gestures such as the removal of the Securities Transaction Tax. Instead what it got was no new seemingly market or industry oriented measures and no removal of the STT. Instead it got a much higher fiscal deficit and a seeming reversion to populism. And hence the initial bad reaction to the budget.
However, every year, there are more voices gaining ground that industry should stop looking to the budget as an earth-shaking event, instead treating it as a simple Profit and Loss statement of the Government. In addition, the initial depression of the market has subsided as it looks like there are faint signs of revival, and the realization that the budget did not make things worse, and if rural consumers get more income, that is a new market.
What should you do ? Unless, there are some earth shaking events, the long term prospects look good and you should stay invested for the medium to long term in fundamentally safe companies. Avoid risky companies unless you know what you are doing and you know the risk involved.

Labels: Budget, Economy, Equity, Future, Growth, India, Indian, Market, Stock

Climate change, and the efforts needed to counter it, are among some of the hottest topics in the last 1-2 decades; it is also easy to see that the effort to discuss the needs for combating climate change is more than actual work being done to reduce emissions (climate change needs quick action and some aggressive goals of reducing emissions, and they are nowhere near happening). Nations get into political arguments when discussions start; the main major polluter (the United States) refuses to take action because of the feared effect on its economy, Europe looks to somebody for taking the lead on this, and the fast developing nations such as China, India, Brazil, etc who are still current low contributors but will have a much higher impact on emissions going forward want to get funding from the rich before taking action.
And in the middle of all this, the world keeps getting hotter, and the changes that are being made due to the global warming phenomenon keeps on working to its own cycle. Global warming is supposed to affect poor nations much more than it will affect the richer nations (and it will affect nations that are more sea based much more than nations that are bigger land masses) since some of the changes being caused due to global warming are higher sea levels and changes in weather patterns that affect crop cycles. Another way in which global warming directly affects the world food economy is due to the impact on fishing, and a study points out that the rich fishing waters near Southeast Asia will get severely impacted (link to article):

Experts have warned that the richly diverse coral reefs of the Coral Triangle around southeast Asia will disappear by the end of the century if action is not taken against climate change. As well as the loss of one of the world's most diverse underwater ecosystems, the knock on effect would be the collapse of coastal economies that supports around 100 million people, according to the WWF- commissioned study outlined at the World Ocean Conference this week.
The Coral Triangle includes 30 percent of the world's reefs, 76 percent of global reef building coral species and more than 35 percent of coral reef fish. "In this world, people see the biological treasures of the Coral Triangle destroyed over the course of the century by rapid increases in ocean temperature, acidity and sea level, while the resilience of coastal environments also deteriorates under faltering coastal management. Poverty increases, food security plummets, economies suffer, and coastal people migrate increasingly to urban areas."

The report concludes that unless we take action to rollback some of the effects of global warming, the direct impact on fishing will cause huge problems to the global fishing economy and impact people who are dependent on fishing as both livelihood and for their food needs, and yet, if one evaluates where we are with trying to roll back emission levels, it is still talk and no action. The Obama administration, for all its talk about making changes in the Bush administration policy of action on global warming, has not taken any concrete action.

Labels: Climate, Climate Change, Economy, Fish, Global Warming, Impact, Livelihood, Reef, Weather

What should a person look for when to invest in the stock market ? The stock market is always said to be a reflection of the economic future of the country, and in the view of many experts, seen to be an indicator of the next 6 months to 1 year. So what does the future say for the country ? You need to be cautious, monitor the sectors of the economy that are not so affected by the company, look at market value of companies as opposed to their book values, look at their future potential, and so on.
Well, the last few months have been a major shakeout. The world economy is projected to have an overall negative growth or zero growth with most developed economies contracting (in fact, China and India are supposed to be among the few countries that are still growing). Scratch the details, and you see how things are pretty bad. The United States is going through a recession not like what it has seen for decades, with consumer sentiment way down. Jobs are being shed on a huge scale, industries are down, and major corporations are reporting losses or sharply reduced profits. Obama is pushing huge packages in order to try and turn around sectors such as finance, housing, auto, etc, but the economy is very slow to respond.
The slow-down in these developed economies has had a ripple effect on economies that are export led, such as China, East Asia, and even India. Sectors such as textiles, IT, gems, etc have been impacted pretty badly. At the same time, the overall sentiment is badly negative, and this has impacted growth in sectors such as Finance, Realty, Construction, Auto, name it, and the sectors are impacted. Industry is looking at getting good encouragement from the Government, but in an election year, populism is the key. At the same time, since inflation is down below 4%, one can expect some key monetary steps such as reduction of interest rates to try and boost the economy. One needs to evaluate companies that are well run, fundamentally sound, and does not indulge in unsound practices.

Labels: Company, Economy, Finance, Future, India

The scandal about Satyam just refuses to die down. There are so many questions that remain open, and there is the major feeling that even though the Central Government took quick action once Raju had come out with his confessional statement, the state Government of Andhra Pradesh is not being so open. Before Raju had made his statement, the Chief Minister, Rajshekhar Reddy had made a statement to the effect that the aborted merger was over, and people should get on with their lives. No reassurance about watching out for a company that was the star of Andhra Pradesh and employed 50,000 people. And just a few days after the Chief Minister dismissed all warnings, the Satyam Chief went ahead and wrote his confessional note. And after this, the Chief Minister had nothing to say.
Now, there are so many open questions that it seems that there are so many mysteries to resolve, and the former Satyam Chief is sitting in jail, with some police investigators getting access to him. For some arcane reason, SEBI investigators are unable to get access to Raju, currently in jail (The Andhra High Court has refused SEBI the permission to do so even though a huge amount of investor money went down the drain).
- How many employees does Satyam have ? There are multiple reports about whether it has 53,000 employees or it has a lower number of employees with contradicting statements from the board and from the public prosecutor
- How did Raju divert money away from Satyam to the extent that a software company that has a large margin is very low on money ?
- What are the exact details of the Andhra Government support to Maytas (a company also run by Raju and his family) ? It has a huge amount of Government contracts that are now in jeopardy. In fact, the contract for the Metro was so controversial that the head of Delhi Metro (Mr. Sreedharan) stepped away as a consultant with a talk about this being an unfair contract (and the Andhra Government threatened him with a defamation lawsuit).
- Why has the investigation into this huge fraud case not yet handed over to a central agency with the ability to do a financial and criminal investigation both ?
- Will the money that has been diverted away from Satyam ever be recovered ?
- What was the level of interaction between Raju and the Congress Government of Y Rajsekhar Reddy ?
- What was the exact role of the auditors given that they appear to be grossly incompetent, and maybe involved in a criminal conspiracy ?
There are so many other questions, and yet there are no good answers. The investigation is continuing, but already questions are emerging about whether this is a fair investigation, or whether this is an attempt to try and protect Raju. For a scandal that is India's largest and casts a negative impression on the overall positive India story, the investigations needs to be time-bound and very thorough.

Labels: Corruption, Economy, Finance, Fraud, Investigation, Police, Politics, Punishment, Stock Market

India has seen corporate scandals in the past, but never one of this magnitude. A software company, touted as a success story, the 4th largest software company in India and one that services around 1/3rd of the Fortune 500 companies, the events of the past one month have been a total shock. They have called into question the entire range of issues related to ethics, corporate governance, fiduciary responsibilities, professional auditing, and so on. There will be a lot more soul-searching that will happen, a lot more inspection and suspicion of other companies, search for more skeletons in the cupboard, and so on.
What has Mr. Raju brought forward. Starting from the surprise news about Satyam trying to buyout the realty companies, Maytas (run by Mr. Raju's sons), this is almost like a film story. The news about Satyam using its huge estimated surplus of more than $1.2 billion to buy companies related to the promoter (especially when the promoter held only 8% shareholding in the company) was a huge blow to all norms of corporate governance and met with huge resistance. Seeing this resistance, the company decided to roll back this proposal, but things would not stop from that point onward.
The issue kept on snow-balling, and when a popular issue comes up in the press, they can push at all areas and get more secrets out. So, questions started being asked about respected board members such as Vinod Dham as to whether they asked the right questions and acted in the interests of the shareholders. Other news started disclosing that actually the promoters had already pledged all their shares and effectively could be actually holding no stake in the company. And then the World Bank announced that in continuance of an earlier investigation, Satyam has been found to have a great many security problems with their last work (including probable sniffer tools and a data hole), and hence Satyam has been banned from further World Bank contracts. By now the independent board members had started resigning.
There was a lot of news about how attractive Satyam could be because of its huge holdings of cash and high book value vs. the value of shares, and then there were even more reports questioning whether Satyam really did hold onto these reserves.
And now, finally the CEO of Satyam has revealed all. The company was cooking its books, and once started, there was no going back, and hence the company eventually has declared reserves to be $1.5 billion more than what they actually hold.
All this came as a huge shock to the people of the country; how can such respected promoters actually commit this huge fraud, can one really believe them now when they say that they did not benefit ? What were the independent auditors (Price Waterhouse Coopers) doing when they were doing audits since 2001 ? There are already too many jokes about lawyers and accountants, so maybe this was another reason why accountants cannot be trusted. Is it possible that only a few board members and CEO knew about this, and no one else ? This was money that was supposed to be coming into the company, how can senior management (besides the promoters) claim that they did not know ? There are too many questions, and one wonders as to whether all this will really become clear ?
Now what happens ? Well, it is not like Satyam is bankrupt - it still has a large number of clients (although some of them would want to bail out), it has a huge number of people on its rolls (50,000), it is a huge part of the reputation of Hyderabad as a big IT city, and there are still institutions who hold a huge amount of the company's shares. It is difficult to let such a company go out of business, and one expects that there will be pressure to ensure that while the investigation goes on, the company is retained as a going concern. However, the US has a law where auditors and the company's management are responsible for the accounts of the company, and this is a blatant violation.

Labels: Company, Economy, Finance, Fraud, Investigation, Software

The recession word is haunting markets the world over. The US was already in recession, and given its status as the driver of the world economy, it is not a good portent for the rest of the economies all over the world. Other economies are starting to get badly affected; the collapse of an economy such as Iceland typically is of concern only to the natives, but a recession in countries such as Germany (the largest powerhouse of the European Union), slow growth in Japan, reduced growth in China, all of these are very bad portents that the situation will get much worse before it gets better.
In India, things are getting bad. Reduction in inflation to less than 9% is the only bit of good news, else the shake in consumer confidence has had a drastic effect. Entire industries such as textiles (hit by loss of exports), IT (because of reduction in IT spending in the US), Consumer Goods / Auto (because of loss in confidence and hence reduction in spending), Realty (massively hit because people are unwilling to commit), Airlines (massive losses so far), and numerous other industries are being hit.
So, in the space of a few months, the Government and the RBI are trying to reverse all the measures they took earlier, such as a tight credit scene (they were trying to cut inflation, but also cut industrial growth due to the tight credit squeeze), the Government is willing to give measures to improve the lot of airlines, banks, mutual funds, and so on; with this being an election year, the Government will also try to ensure that they will do what they can to bring back the good times. The biggest question is about whether the Government can do anything substantial, other than wait for these recession times to pass over.

Labels: Economy, Equity, Finance, Problems, Property, Stock Market

The Left is waxing eloquent over the current economic problems sweeping all over the globe. The Left parties, represented primarily by the CPM in India, claim credit for opposing FDI in insurance upto 49%, for preventing full capital convertibility, for banking sector reform, and so on. In addition, they claim credit for such social alleviation schemes such as the National Employment Guarantee Program, the farmer loan waiver, prevention of expansion of the SEZ Act, etc. In this, the Congress has also come to the forefront, claiming that it was the slow and measured pace of implementation of reform that led to the country being reasonably insulated from the global mayhem, and by preventing pension fund deposits into the stock market, they prevented loss of money in the pension funds (due to the stock market crash). As further proof of the re-emergence of their way of thinking, they quote the recent interest in Marx and his books.
What a lot of bull. If you compare India with other countries around the globe that were in a similar situation just 20-30 years back, many of them would have suffered much greater economic turmoil than in India, but, and mark this point, even with all this turmoil, these countries have a per capita standard of living which is much better than that afforded to a majority of Indian citizens. For decades after independence, India used a socialist state-controlled approach to growth, and ended up with a small incremental growth level of 2-4 %. Combine this with a population growth of a similar percent, and you end up with a continued high level of grinding poverty.
It is only when the state let go of some of its controls and allowed private enterprise to grow did we start seeing a higher rate of growth and a trickle down effect of the growth starting to reach lower sections of the population (by lower, I mean lower on the economic plane). What India needs is more release of the merits of private enterprise, more openness. What one needs to recognize is that the economic turmoil growing through the US is the result of the regulators failing in their duty, and not the failure of capitalism. Currently, everything seems bleak, and that is because this seems like a terrifying recession. However, every recession comes to an end, and when the next growth phase starts, we will all be enjoying the merits of free enterprise and a faster rate of growth.

Labels: Depression, Economy, Finance, Growth, Left