economic handbook final

8/8/2019 Economic Handbook Final

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Career Launcher

Analysis of Current National &Business/Economic Events, 2008

Personality Development Program, 2008

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Contents

1. Introduction 03

2. The Fundamentals of Indian Economy 04

3. Important Economic Issues of the Day 10

4. Global Economic Meltdown 21

5. General Economic Terms 28

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Introduction

Dear Students,

Youve just completed the dreaded and at the same time revered written examinations for variousmanagement institutes youve selected to be your training ground en route your journey tobecoming a successful manager in the corporate world.

Till now you had no say whatsoever in the selection process as the questions were simply therefor you to solve in whatever little time stipulated for it. But thats history and you would do well tomove on with it. At this stage, things almost take a u- turn! You get to say allyou wanted to andalso end up being rewarded with an MBA institute of your choice. You are now at the PersonalityAssessment stage where you will face questions on your understanding of the current businessscenario and general events of importance.

You need to make efforts at understanding the core of any issue being discussed. Culling andparroting facts and figures without understanding the heart of the matter will undo all your hardwork.

In order to maximize use of the handbook, you need to make it a starting pointof all your opinionformations, rather than restricting yourself to just reading it. Never try to mug up this book, as itcontains supporting ideas/opinions and encourages you to speak out and speak sense!

This handbook is largely simple in language; explanatory in content; low in mere facts andfigures; a sort of guide on how to form your own opinions on important business affairs andissues.

Finally, do note that in GD/PI, the examiners are more interested in your speech and ideas andyour approach on current events, so prepare accordingly.

Best wishes from the Career Launcher team!

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The fundamentals of Indian economy

Through this handbook, Career Launcher seeks to explain in simple terms, one of the mostcomplex networks within the Indian social systems the Indian economic structure. We shall tryto discuss and understand oft heard terms like 'fundamentals of Indian economy', India's GDP,the growth rate; and seemingly complex terms like CRR; SLR; et al.

Let us start off with the sheer size of the matter in front of us. Well, Indian economy is worthprecisely $ 1.2 trillion dollars. That is, India indigenously produces goods and services, excludingimported stuff and things foreign, worth 1.2 trillion dollars annually. She is the 12th largesteconomy in the world with the US at the top, worth $ 13 trillion. The world economic output is at $65 trillion dollars annually, at present rates.

Now when we hear the phrase; India grew at a very decent rate of 9% in 2007 or our economyshall still attain 8% rate in 2008 even after the meltdown, what do we actually mean? Well, what

we mean is that India will add $ 80 billion to our kitty this year (8% of $ 1 trillion {1 trillion = 1000bn}.

Let us go on to the most popular phrase, generally touted by our Prime Minister and morefrequently by our finance administrators while assuring us on the soundness of our future growthand inviting international investments:

'India's economic fundamentals are strong'

Let us understand this phrase and what it means: There are several significant parameters orfactors, which are generally taken into account collectively while ascertaining or assessing thestrength of any economy. Let us examine and understand their impact:

1. The political structure: India's political structure is 'liberal' democratic. {Here liberalismpertains to individual enterprise and freedom against the Marxist premium on state actionand patronage} All major political parties are committed to honoring the writtenconstitution in letter and in spirit. All political shift-of- power is peaceful. There are nosignificant and perpetual political or organized threats to our political structure. Dissent,protestations and disagreements are constitutional and legal. In sum, our politicalstructure is deemed stable and conducive to long-term investments.

2. The economic model: Basic principles of India's economic model are derived from ourpolitical structure. Though constitutionally socialistic, the private sector is increasinglybeing assured of full political support and since the 90s, India has adopted an aggressivepolicy of openness and globalization. Our country is on a fast track to globalizing andprivatizing the economy. Barring very few commodities of strategic and rural importance

and with certain aspects of rural market closed to global commerce, the entire country isopen to world trade.

The most important point is: A quick look at our economic bye laws, provisions, bills andannouncements reveals that the Indian state is committed to liberalization and enabling 'fair' andequal opportunity to citizens of the world. Policies and measures since 1990s (and accelerated in2004) have testified to government intentions.There are some immediate parameters, which are crucial to the soundness of our economy:

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3. Nature of our economy: Is our economy import led or do exports form a major part ofour economy? What does Indias balance of payment sheet look like? While India largelyimports oils, it is increasingly becoming ambitious in its export targets. Though our exporttarget of $ 160 billion was not met, it talks of the greatness of our economic strength.India exports more than she imports from the US! This scenario attracts foreign

investments seeking to benefit from export-oriented units in India.

4. Rupee strength and exchange rate mechanism: the strength of any currency isdetermined through three major routes: 1.The market decides as in the US and Europeancountries 2. Government designates its value, as in China and other communist regimes.3. While the actual rate is left to market forces, the government designates a band orwidth movement. It shall intervene if the rate approaches an end of the band. Indialargely follows the third route. The Government is actively seen to influence the rate onlyif the fluctuation is high, in order to restore the stability, BUT will not necessarilydetermine the rate itself. The rate is affected by a series of indices like:

1. Forex1: The absolute amount of the stability factor; growth pattern and source ofincome to our FOREX or the foreign exchange reserves. Foreign reserves includeGold, currencies and depository receipts; and global loans. While Indias foreignexchange reserves reached a comfortable $ 300 bn this early year, it slipped toaround $ 250 on account of the meltdown.India the fourth-largest holder of foreign exchange reserves in Asia afterChina, Japan and Taiwan has seen reserves sliding since the start of this fiscalyear. Since March-end, the forex stockpile has shrunk by $50.2 billion. An importantpoint before we move on: We must appreciate the nature of the forex reserve. Is itonly short term FIIs2(Foreign Institutional Investors) or stock money; FDIs (ForeignDirect Investment) or long-term money invested in the durables/ nation buildingindustries or manufacturing processes? What is the proportion of our debts andexternal borrowings? These may be noted to assess our fundamentals. It is alsoimportant to know our debt servicing track record.

2. Inter alia Commodity and manufactured-product led Exports and imports: A highexport oriented economy is growth led, and shall yield a stable currency regime.

3. The position of our manufacturing and infrastructure development in oureconomy. Some of our infrastructure projects (Bharat Nirman, Sarv SikhshaAbhiyaan, Road corridors like Delhi Mumbai Industrial Corridor) are among the mostexpensive and largest projects in the world. India has assigned prime importance toinfrastructure in our five-year plans and annual budgets.

4. Nature and direction of our five-year plans and annual budgets; per capita income orthe total income of our nation divided by the total population; rate of nationalinvestments and national savings.

5. The literacy rate and the quantum of technically skilled labor present in ourcountry. Incidentally, almost all institutions of technical excellence have an Indianwork force at the highest level. India has the highest contingent of technical

personnel in the world.6. Profile of operating multi nationals in India: A profile, which hardly excludes any majorbrands of the world.

Track record of profitability of some leading foreign companies in India: Members of American Chambers of Commerce in 1992: Zero 2006: 300.

Most of the US based companies are making huge profits.

1 Foreign Exchange Reserves2 All important terms like FII & FDI have been explained as you read on

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India is the most profitable market for Coke.

For, Reebok India is the fastest growing market.

For Motorola, India is the third largest market.

GE is taking home three times its investments.

McDonalds is set to earn a 100% profit every three years. Adding on 50 more outlets thisyear.

Nine of the top 20 IT companies are American, amounting to 40% of the profits.

For Citi Bank and Bank of America, India is the largest market outside the US.

IBMs presence with 40,000 employees is the largest outside the US.

Please note that the above data pertains to the situation just before the meltdown. This gives anindication of the potential of our economy to perform under a normal economic regime.

The upshot of the argument so far is that we are making a case for a very strong economic baseof the country. This enhances investor confidence in the Indian market which brings moreForeign Direct Investment; Foreign Institutional Investment; venture capital; equity; and makingIPOs (initial public offerings) a success.

Drivers of the Indian economy:

The recent growth of our country is mainly policy led. Structural adjustments in the economy ofour country have made trading easy. There is a network of credit agencies giving capital for startups, foreign investors are being welcomed, exports are simplified and made less expensive,regional development boosted through Special Economic Zones being created in low incomeregions by giving incentives to big companies like the Reliance, Tata etc. through less taxes, taxholidays, cheaper infrastructure, cheaper lands, power etc.

Foreign Direct Investment:

Buoyed by a largely supportive public, policies and lawmakers, vast market, foreign investors arecoming to India in hordes. As per the recent rankings India is second only to China in terms of

foreign direct investment demoting the US to a third position. FDIs increase our Forex, therebyhelping the rupee; they also bring dollars, stay for long, build industries, start manufacturing,increasing both employer and employment potential and help build the nation.

More than $ 20 bn of FDI have already been invested in the current year. Compare this with lessthan $ 4 bn that came to India in 2005!

Venture Capital and Private Equity:

Venture capital is the money made available to a 'risky' project. The financier is convinced of theidea, its blueprint, execution and viability. The financier is not involved more than merely investingheavily. Any smart management personnel, entrepreneur, individual or a small company can getfunds through a venture capitalist and start his or her project. Generally, venture capital is given

to an entrepreneur, who is brilliant in his/her field of expertise, though s/he may be new tobusiness. The IT boom has been powered by Venture Capital.

Private Equity: Private equity is the foreign money, which is invested on our IPOs, jointventures, and industry start-ups and green field projects. These money are all long-terminvestments, growth linked and increase our capital base and employment and eventually the percapita income

Private equity is a type offoreign direct investment.

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Among all types of Foreign money, the FDIs are most sought after, as the capital is invested innation building processes as manufacturing, export promoting ventures, infrastructure and in longterm equities.

IPOs or Initial Public Offerings:

Lets read a news article published in January 2008: This piece will give us an idea of thesignificance of IPOs before the meltdown stunted this marketactually the entire global market

India's Initial Public Offerings (IPOs) market has emerged as the eighth largest in the world.The year 2007 saw 105 public offerings raising Rs 39,387.72 crore (Rs 393.877 billion).According to some estimates, the total value of public issues in 2008 could be as high as Rs75,000 Crores (Rs 750 billion). (Rediff)

When a SEBI registered company wants to raise funds or capital for its expansion programs, itfloats an IPO for the first time related to that project. The IPO document will in detail inform theinvestor of the project, its growth trajectory, and its profit potential. The risk factors are alsooutlined. Based on his personal assessment, the investor may invest as a shareholder, by buying

shares at the face value as announced by the Company. Each investor who buys stocks throughthe IPO gets dividends or profits based on the companys performance, as declared by thecompany. If the company faces losses, the equity holder also bears the losses. In uncertainmarket situation, IPOs incur losses and so does each investor.

IPOs are generally welcomed as they attract public stakes and long term FDIs, equity. IndiasIPO market fetched Rs. 25,000 Cr in 2006-07. It fetched over 40,000 in 2007.However, it will not continue to grow this year, for reasons clear to all.

Some of Indias biggest IPOs in the recent past include (in Rs):

1. Reliance 11,000 Cr: Fully subscribed or sold out

2. ONGC 9,500 Cr: Fully subscribed or sold out3. DLF: 9,100 Cr: Fully subscribed or sold out4. Cairn Energy: 6000 Cr

When a company floats its second or third public offering, its called FPOs of Follow-on PublicOffers. ICICI floated its FPO last year.

Though corporate India had over ambitious plans to launch even bigger IPOs in the latter part of2008, all such mega projects have been halted due to the crises. India holds the 10 th position inthe global IPO market3.

Foreign Institutional Investment or FII: FIIs are funds that are active in both primary andsecondary markets, invest in stocks and aim at reaping short-term profits. Though they bringdollars, the flight of the capital is sudden, at times leading to currency and monetary fluctuations.

FIIs are heavily involved in speculative practices like futures trade and short selling. They indulgein heavy trading in times of crisis making the situation very volatile. The recent controversyrelating to Participatory Notes, involved active participation of the FIIs.

3 Positions vary with time.

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Still, FIIs push up the stock prices, enhance national reputation, increase the investment profits ofstock players, strengthen the stock exchange and generally increase the brand value 4 of theregion. Presence of over 1000 registered FIIs in India boosts investor confidence in Indian stocks.

Hedge funds: Extremely important in the present times of economic crises. Hedge funds areinvestment pools of some of the uber-rich or very high net worth individuals across the wealth.The Hedge Funds have a certain tendency to aggressively invest and usually their returns aretypically higher than any other form of investment. Hedge funds had initially reaped high returnsin the US realty boom. They have been accused of short selling. Much of their strategies remainsecret. They operate in high-risk markets. Hedge funds have this ability to return profits in boththe bear and bull hugs. They have also been affected by huge losses in the present crisis5.

HNIs: It is noteworthy that more and more Indians are reporting to the millionaires and billionaireslist. HNI orHigh Net worth investor/individual is the person who has more than $ 1 million,excluding his immovable properties.

There are close to 1.3 Lac millionaires in India and more than 40 billionaires with four in worlds

top ten richest including Mukesh Ambani, L N Mittal, Anil Ambani and K P Singh.

The idea to include a note on the annual increase in HNI and the millionaire/billionaire list was toindicate the very fast growing corporate sector in India. Do note the per annum increase in thelist, and the profile of the rich list. While increasing numbers indicate wealth formation, their profileindicates enterprise and entrepreneurship, indicating tapping of economic opportunities. Ofcourse it is said that LN Mittal has lost over $ 50 billion in assets and will no longer fall in theabove list. But who hasnt?

India and China

Most of the noteworthy world leaders, global financial institutions like the WTO, credit ratinginstitutions, economists, market observers and analysts have called Indian and the Chinesemarkets as emerging growth centers. A few years back Goldman Sachs, a global credit ratingagency developed the BRIC theory which stated that countries like Brazil, Russia, India andChina would be the new global economic super powers by 2050. They would have the maximumpercentage in the global financial output.

Well, the present crises have certainly proved that India and China have at least been little lessaffected by the meltdown, though in reality, India is now feeling the pinch.

If we compare the two economies6 in question closely, we will gather that India is actually distantfrom this growing machine called China. But then later, when we evaluate world GDP, in theirown currency value or7, we come to some really pleasant conclusions.

Various financial reports/studies by IMF and World Bank (2007 figures) have placed Indiabetween a high of 3rd and 5th position.

China is one point ahead of India at 3rd or at 4th positions.

Wide disparity is witnessed against Food production capabilities.

4 Read detailed discussion on brands in the last chapter5 Hedge funds role in the Economic Crises has been dealt with in Chapter on the Meltdown.6 See chart7 GDP at PPP has been explained in the Chapter on Economic Terms

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Both India and China are behind only the US, the European Union and Japan. Thisclearly makes the Indian economy among the worlds most growing.

We need to focus on these areas in order to catch-up with this aggressive neighbour of ours!

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An analysis of the above data reveals these distinct trends:

India lags behind in good measures on the following scores:

Exports The balance of payments Foreign reserves

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India and China: Economic comparison

Indicators India China

1. GDP (PPP $ TRILLION) 2.34 5.332. GDP per capita (PPP) 2,126 4,0913. Exports (2006-7 Billion) 126 9004. EXIM BOT (Bn) - 60 +1805. Forex ($ billion) 276 16126. Population below $1/ day (%) 34.3 9.97. Population below $2/ day (%) 80.4 34.98. Cultivable land (million) 146 1009. Foodgrain production 108 400

10. Rice productivity (KG Per Hectare) 3034 623311. Wheat productivity (KG Per Hect) 2688 415512. Life expectancy (Years) 63.7 72.513. Underweight children (%) 47 814. IMR per 1000 live births 56 2315. MMR 100,000 live births 450 4516. Public health expenditure (% of GD 0.9 1.817. Telephones (million) 265 91018. Internet users (million) 46 18519. Population (billion) 1.12 1.3220. Population Growth Rate 2.0 1.2

21. Urban to total (%) 28.7 40.422. HDI Rank 128 81

India and China account for 14% of World GDP

Indian exports to China are mainly iron ore based.Indo-Chinese trade = $ 25 billion our BOT = $ 8 billion this year, may be $ 14 bn year-end. Chinese industrial goodsexports to India account for our 10% of GDP (1.3 reverse)(It is $8 bn surplus with US). India imports 75% of tubes from China. Data processing machines (35% transmissionapparatus (50%)

Non-tariff barriers: Chinese pricing mechanism is opaque with massive capital and input subsidies. Registrations forcommerce are difficult and expensive no direct flight to Beijing et al.Agriculture: China invests enormously more in terms of public investment, land holdings are remunerative, more inputs(water, fertilizer)


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Important Economic Issues of the Day

Fiscal Deficit:

Simply put the difference between the government revenue and expenditure is known as fiscaldeficit. Since the governments of the day are welfare governments, they spend a very largeproportion of the revenue earned on non-productive expenses like government salaries, povertyreduction, infrastructure, education and subsidies to poor and farmers.Funds for massive projects like rural infrastructure promoting Bharat Nirman, the selfexplanatory Sarv Siksha Abhiyaan or education-for-all, rural employment based NREGP orNational Rural Employment Generation Programme mostly increase the fiscal deficit of India.

These deficits are recorded in the annual financial statement of the general budget and the Five-year plans.

It is said that Indias fiscal deficit is one of the largest in the world. Around 5-6% of our trillion-dollar economy forms the deficit. This makes FD at $ 25 30 bn in todays rates.

In order to bridge this difference the government borrows money either from the market orinternational lending agencies. A sustained borrowing leads to external debts, and it is due toincreasing debts, that this instrument is constantly questioned and debated.

Issues related to Fiscal deficit:

The greatest dilemma with the government is the non-receipt of the earmarked funds by theactual beneficiaries. Former Prime Minister Rajiv Gandhi has famously said that less than 20paise reaches the poor on every rupee spent! Due to rampant and organized corruption, thesubsidies never reach the poor. As a result no tangible progress is seen in the quality of thesetarget groups, and the need for huge government expenses is questioned.

Severe political pressure to appear as patrons of the poor does not make possible thewithdrawal of any pro poorbut unviable project expenditure by the government. Hugely popularmeasures like the recently announced Rs. 65,000 Crores farmer loan waiver by educated andeconomist Prime Minister Manmohan Singh, shall only add to the deficit account. Therefore,reduction in fiscal deficit becomes extremely difficult for any government of the day.Another major source of fiscal deficit is our oil import bill. Petrol prices in India are one of the leastin the World. Economists and observers have consistently advocated raising oil price but thisagain will not be possible at least in the foreseeable future.

The government has recently admitted that reduction in our large fiscal deficit will not be possibledue to lower revenue generation due to the meltdown and the target to stem and hedge the deficitat 3% of our GDP will not be possible.

Mergers and Acquisitions

Generally, barring some solid exceptions, Mergers and Acquisitions (M&A) indicate robustness,soundness, success and even pride on the part of the acquirer and at times both the parties.

While corporate takeovers and complete mergers have been a regular feature in normalinternational trade process, the issue of M & A has recently acquired the status of most tracked-after phenomenon in the market.

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As per the Economic Times, the size of M&A market worldwide this year may cross $ 300 - $ 500bn, involving some 4000 deals. Most of the deals relate to emerging markets, though. In a trendsetting instance the Tatas have bought luxury brands (the Land Rover and the Jaguar) that arepremium brands in the global upmarket. L M Mittals acquisition of a European steel company,Arcelor is also a trend setting example. An Indian company/India-born industrialist had never

before conducted hostile takeover of globally renowned brand.

Industrial growth is mainly organic and inorganic; M&As involve mainly inorganic growth, wherethe expansion is through existing infrastructure and running business operations. For exampleMittal took over all existing steel manufacturing plants of Arcelor. In organic growth, he wouldhave to develop all plants by purchasing land; employing people and fabricating the machines etal. Organic growths take place as Greenfield projects8.

Causes of heightened global M&A activity:

In general:

A new aggression witnessed amidst increased world trade volumes.

Increasingly globalized market Entry of big-ticket private equity in international trade facilitating such takeovers rather

easily Example: US based private equity Blackstone, Singapore governments;investment arm the Tamasek etc. Equities come into play when a major player like RatanTata needs money to finance the acquisition of Jaguar or when Mittal bought theincredibly expensive Arcelor at a bidding of $ 35 40 bn.

Companies have taken the M&A route as a business strategy.

o This is done to enhance global branding: Arcelor Mittal, Tata Motor Jaguar andLand Rover deal.

o Foray into new market: Naukri.com acquired Jeevansaathi.com to entermatrimony business.

o Consolidate parent companies global position; Tata Steel Corus is now theworlds fifth largest.

o Acquire emerging threat to big players: Sameer Bhatia and Microsoft deal onHotmail, Centurion acquired by HDFC while ICICI acquired Bank of Madura.

o Acquire equally big players to establish monopoly. Arcelor by Mittal Steel andHutch by Vodafone.

o

As a survival strategy: the Indian aviation industry with its three high profile mergers is a classiccase in point.

o Indian and Air India.o Sahara and the Jet Airways.o Kingfisher and Air Deccan

Do note that Kingfisher and Jet Airways have formed an operational alliance and no mergers oracquisitions have taken place in this venture.

In order to understand why mergers and acquisitions are now so actively and aggressivelypursued as a corporate strategy, we should take a closer look at the economics of Arcelor -Mittalmerger:

8Greenfield projects are projects which start from a scratch, or undeveloped land or plain field.

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First steel maker to cross 100 million tonne production capacity. $32 billion bill for the takeover $ 38 billion combined assets. 112 mt of steel production. Three times more than Nippon Steel 10% of the total world steel production. Second position: Nippon Steel 3, 20,000 collective staff strength.

We note the achievements of Mittal steel after the merger:

1. They became largest steel producer through one move!2. Their combined net assets rose manifold3. Their nearest rival was no longer near in terms of production scale.

In the recent meltdown M & A again become prolific with many acquisitions. Read the details in

the chapter devoted to the meltdown. The world financial landscape will no longer be the samefor the M & As after the economic bloodbath.

Vijay Mallaya (Kingfisher), Ratan Tata (Tata Motors, Tata Steel, Tata Chemicals) and Infosyshave been active in the World M & A market. Shiv Nadars HCL which acquired the UK basedconsultancy, Axon saw Infosys as its main rival making the M & A a completely Indiancompetition.

M & A also establishes the soundness of the market in which the players operate. Thus, thesegentlemen have added legitimacy, soundness, credit rating and general acceptance of Indianmarkets globally.

M&A in the Aviation sector:

Kindly refer to Market Trends: Aviation Sector for analysis of M&A in the aviation sector.

Participatory Notes

We have discussed Participatory Notes in the Chapter on technical terms elsewhere in thebook. Since this instrument has supposedly played a major role in market volatility, it isextremely useful to understand its features, as objectively as possible.

Participatory Note is a sort of identity card or entry card issued by SEBI to an registered FII,who in turn issues such PN to any unknown, unregistered foreign investor/company to enterIndian stock market, since the PNs can be freely traded. Thereafter, he is like any other market

investor. Since foreign individuals cannot directly invest in Indian market, PNs are issued.Participatory Notes may also be used by foreign investors to protect identity.Unstated fears: Money belonging to Indian residents is being round tripped through the PNroute.

What are the issues involved: The final beneficiary in unknown. The ultimate investor may or may not be eligible to

invest in Indian markets. Either way, the rich investor is uncomfortable in trading in theIndian stock market in an open and transparent manner. It is said this leads to lack of

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transparency and may be used to launder money out of India. This instrument is popularamong FIIs.

Tarapore Committee, said to recommend roadmap towards convertibility, suggested itsban. RBI also wants to ban it. Says it is dangerously non transparent and can be used tolaunder money

There is considerable apprehension about it as the government has simply bought timeto study the report and has assured no immediate ban.

A sudden ban can hurt Indias credibility as a business hub. No ground evidence for the unstated fear. Most of the money is foreign coming from the

FII route.

Special Economic Zones

SEZs are special earmarked regions or vast lands offered to the private sector for investment onan industry or a group of activities relating to industry, manufacturing or commerce. The idea is topromote regions with little or no development. To further its agenda of regional equity, thegovernments offer concession on land, power, other infrastructure, tax holiday/ reduction and

scores of other specific concessions.

Typically, the private sector chooses to operate in a developed market like those near the fourmain metros, leading to the creation of industrial clusters. To infuse regional equality, thegovernment borrowed this fairly successful model adopted in some countries, particularly fromChina. The famed Chinese Shenzen SEZ is a model for all such aspirations.

The concept of encouraging SEZs appears to be a right strategy to develop extremely backwardregions of the nation, where the private sector may never tread on their own. India has some 10major SEZs with over 1,000 units operating in these exclusive zones. As a tool, SEZ is anecessity. Most of the units are export oriented and with massive concessions, units wereexpected to break-even early.

Other similar strategies of the government to address accelerated development include ExportProcessing Zones, Exclusive Economic Zones and the state government promoted technologyand industrial parks.

The SEZ controversy in India:

SEZ progress in India is slow owing to over enthusiasm on the part of the government in respectof allotting land to the commercial units.

Issue at hand: In India, land is both an economic asset as well as an emotional possession.Dispossession of land is, at all times, an extremely difficult step. Constitutionally, only the DistrictMagistrate (DM) through a government order, in the supreme interest of the nation, can remove aperson and acquire his land. The government can also fix compensation on certain announced

criteria. These are constitutionally accepted transgressions for and only for national growth andsecurity.

The Nandigram Controversy: The Government of West Bengal announced a SEZ projectinviting the Salim Group to establish a group of chemical industries in Nandigram, a village areanear Haldia last year. Now understand where the government in Nandigram went wrong: A PSU,Haldia Development Authority, issued a circular detailing the names of those to be evicted for aprivate venture by a private company. This was sheer scandal and the government had to retreat,and rightly so. Sensing electoral losses, the ruling UPA has practically suspended the giant

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project. It will perhaps in future, leave land acquisition to private investors but will assist them inlogistics only.

The Singur Controversy: The Singur controversy has nothing at all to do with the governmentsSEZ projects or policies. It has been included here in order to establish some clarity on how the

Singur controversy is different from the nearby Nandigram issue. The governments handling orbungling with the farmers land is, however, common to both.

The Bengal state government specifically invited Ratan Tatas vehicle maker Tata Motors to starttheirlaktakiaor One Lakh Car project in Singur. They made available some 1000 acres in oneplace for the start up. However it was realized that 400 acres of the 1000 acres were acquired bymuscle power rather than through a fair deal. The state communist cadres had unleashed a spateof terror to evict the land and make way for the Tata dream car. The Opposition leaderscapitalized on this loophole, and the controversy was played out at the national theatre. TheTatas chose Gujarat, inter alia because the chosen site, Sanand is located on the strategic DelhiMumbai Industrial Corridor.

Issues at hand: While the entire drama, witnessed by all stakeholders across the world, did notbode well for Bengal, the Indian economy, we have noted is too vast and huge to be affected bysingle event like this, investments in West Bengal will be affected in the short term. Already someprojects are being affected.A part of the blame must be directed towards Ratan Tata also, as he must have been aware ofthe wrong methods used in the land acquisition. Possession of land and sovereignty over theproperty must be sacrosanct. If the land is wrongly acquired, development, as a legitimate excusemust not be accepted.

Patents

A patent is an internationally recognized certificate of 'ownership'. A patent holder is awardedexclusive rights for the idea, invention, discovery he has made for some specified time from thedate of registry. Thus, ideas, products, methodology of producing in a certain manner, all can be'patented'. It is directly related to the standards and size of research and development.

Graham Bell was awarded a patent for the phone he invented in the year 1876!Since patent protection needs multilateral understanding and rules vital for the efficacy of patentlicense, roles of world body like the WTO are important in honoring the patented rights.

The Trade of Intellectual Property Rights (TRIPs) executed under WTO ensures uniformity ofpatent laws across the world; some 1.5 lac patents were filed last year. While US is the mostinventive country with over 50,000 patents, India is at 11th position with over 15,000 patents

being granted in 2007.

Patents could be product patents or manufacturing orprocess patents. In other words, eitherthe whole product say, a certain type of energy drink can be patented, or a certain formula can bepatented while the energy drink per se is open to replication. Horlicks, Bournvita are all types ofprocess patents.

Patents are directly related to the volume of market innovations. The life of patent is variable,though generally it is 20 years.

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Up to now, India was under a process patent regime. From January 2007, India is under productpatent regime. The surge in global players entering India aggressively is inevitable andunstoppable.

Since India is now a hub of innovations in the Asia Pacific region, the number of Indiancompanies patent applications is rising.

1995: 65 2005: 520 2007: 15,000. What is the rate of growth?

US Patent Office has received maximum applications from this region. In India, more than 50%patents are still filed by firms based in foreign countries (mostly by IBM, Texas Instruments andGE)

Causes of Concern:

1. Patent quality is very low in Asia Pacific.

Patent quality is measured through citation index of prior art. Higher the index better is the quality.India and China are at the bottom and Singapore is at the top.

2. High degree of foreign ownership though declining to a low of 50% from 80% during1986-1995.

Encouraging trends: Increased awareness among corporate on patent issues. Companiesrecognize they have, apart from their physical assets, something called intellectual assets.Infosys, TCS and all major IT companies are now aggressively filing for patents for their products.

Pharmaceuticals:

Patent Wars:The pharmaceutical industry is fiercely engaged in the patent war over the data exclusivityclause. The fight is between innovators (the west) and generic companies (Indian). Also, sinceIndias pharma companies lack scale and no R & D base, but are numerous in numbers, the onlyway to survive, after Jan 1 is to consolidate or perish. Further, the falling prices due to stiffcompetition, is killing them.

Other companies involved in patent wars:

1. T Series with Philips, inter alia over CDs DVDs and VCDs.Philips is the market leader in the DVD market with 21% share.2. Parles Frooti has protested against the use of Frooty by Cadburys.

Try to find some more of the companies and issues involved.

Rupee Convertibility

What is rupee convertibility?

The issue of rupee convertibility (RC) has taxed Indian economic leadership since the late 90s.Opinions are divided on this extremely sensitive economic instrument.

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If our country allows free conversion of your rupees into dollars without official interference, thecurrency is said to be fully convertible. This will make you eligible to invest all your earningsabroad, again, without government regulation/involvement. In other words, you will not berequired to inform the RBI of your dealings in foreign markets.

Theoretically then, every Indian can invest all his savings abroad, and all Indians can also losetheir moneythrough external investments, say, in one or at best few sessions!

Current situation:

Indians can use their personal financial assets to finance their travel; education, medicalexpenses and tourism and the petty and individual needs only.Simply put, one can use the currency to meet personal expenses BUT no investment through therupee is directly possible. There are regulated and limited opportunities possible through RBIregulations and rules.

Let us now understand the concept in detail:

As of now, Use of currency for international transactions is available for these purposes:

1. Travel, tourism, personal expenses, education, health etc.2. Trade and commercial activities, purchase and sale of Indian and overseas assets.

The Rupee used for purposes under (1) is transacted under current account and the Rupeeused under second category is undercapital account.

In India, money is fully convertible under current account. India is migrating to full capital accountconvertibility gradually. It is said by some economists that we need to make capital accounts fullyconvertible if we wish to sustain 8-9% growth momentum. Fuller rupee convertible currencymakes Indians truer global citizens.

The Tarapore Committee on Fuller Capital Account Convertibility (FCAC) has suggested aroadmap towards fuller capital account convertibility.

Under current account, individuals should be allowed to remit up to $200,000 in five yearstime, beginning with $50,000 immediately, up from the present $25,000

Under capital, the raise must be to $1billion (up by 100%) Banks to raise 100% capital from the overseas market. In simpler term curbs on personal and commercial expenses of Indians would be lifted.

We would be able to acquire assets and open accounts across the globe. Companiescan borrow over a billion every year, without the intervention of RBI. Further, thecompanies would be able to invest up to four times their worth, anywhere in the world.

Capital cost would be lowered for domestic corporate.

Allowing liberal flow in both debt and equity markets enables instruments to maketransaction costs cheaper. Mutual Funds can invest in foreign stocks up to the tune of $ 2billion.

Caveats

No individual investments in foreign stock exchanges Banks to first consolidate capital base. While foreign money in equity market is possible, not allowed in debt/bonds market.

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Rationale for Fuller Capital Account Convertibility

In 1992 gross currency inflows of both current and capital accounts added up to 45 % of

GDP. In 2004, it was 72%, of which 24% was in the capital account. Presently thecurrency inflow is 90% of the GDP. An open norm for currency movement across bordersis very necessary. There are established norms on international trade in all aspects likeequity investment pertaining to security disclosures, etc. which was absent in earlierdecades, and makes international trade more transparent and accountable.

Risk management is more effective now, as global trade is conducted with expertise anda high degree of management.

Indian economy is robust to endure freer entry and exit of currencies. With a stagnant dollar, and rising Asian economies, the rupee should emerge stronger. Substantial FDIs and FIIs should ensure investment up to 40% of the GDP. More flow of capital should check the current account deficit of 2-3%, which is presently

bridged by remittances. India has never allowed private capital to check this, mainly toprevent leverage to foreign capital. Indias total public deficit presently is 8% of GDP.

A phased approach is ideal and necessary.

External commercial borrowings against national assets should not exceed 20% of totaldebt.

RBI must keep a tab on the quality of flow to ensure flow of capital in vital sectors likeinfrastructure etc.

Rupees equivalent to $165 billion FOREX reserve is not excessive but comfortable. Inflation must stabilize before Fuller Capital Convertibility or FCC.

Case in favor of FCC:

Past experience in allowing FII in equity market saw comprehensive changes in stock

markets. Foreign funds demanded more transparency, better data management and betterdisclosure. The Indian market responded magnificently. Opening up of the market directedmore foreign money to a few large companies in India.

Moot point: Full Capital Convertibility of the Rupee could see Mumbai as a regionaleconomic hub as a present day Singapore and Dubai.

Full convertibility (FC) and the recent financial meltdown:

Had India been fully convertible, it is said that a huge amount of foreign currency would havebeen taken out of India. As it is, foreign investors have withdrawn funds due to parent (company)pressure. In a FC rupee regime, all investors would have suddenly withdrawn leading to a

possible collapse of the system.

WTO

Failure of WTO Doha Rounds on farm subsidies after 5 years of global negotiations

Simplified explanations:

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Core issue: The US says the real issue is entry tariff barrier, blocking the markets access todeveloped countries, which inflates prices, while the rest of the G-6 say, subsidy cut to thefarmers should first of all be implemented. The US has resolved to increase the subsidy supportto farmers from the present 19 billion dollars to $23 billion. The EU on the other hand agreed tocut tariffs by 51% while the US demanded a 64% cut.

The US wants to increase the quantum of farm subsidies to its farmers but wants greater entry toforeign rural markets, like India, before opening up. The rest of the negotiating partners do notagree on this.

The US stance. Global pressure on the US to start renegotiations. The United States iscompletely isolated in its stance of me-first. Even its European guard, the EuropeanUnion, does not strongly support the Americans, as it is itself affected by the Americaninsistence on giving subsidies to its own farmers.

The Indian EU and other countries combined stance. As noted above, this is perhaps arare issue India and the EU stand together. India however has assumed leadership rolein voicing international concern over the US stubborn policy.

Multilateralism versus Bilateralism: The US is never comfortable when smaller countries

unite and create nuisance for the US. The US at times prefers bilateralism where it hasmore bargaining power against any country. The other forum where the world hasconvincingly come together is the UNEPs Kyoto Protocol on Climate Change forcing theUS to reluctantly join international efforts at combating climate damages.

The resurgence of regional markets. The emergence of regional trading blocks like theASEAN etc are not very much liked by the US as it undermines its market strength.

The above tendency indicates:

Presence of protectionism to national market. It is believed that Protectionism was acharacteristic of the earlier regulated markets. The US government is openly subsidizingtheir farmers and is insisting others do not do the same; tantamounts to its double speakson protectionism.

Preference of regional trade blocks/bilateralism among strong trading partners.o Indias offer of new tariff cuts to ASEAN to bolster Free Trade Area.

Business aspect of Environment Conservation:

India and the Carbon Credit Market

Context:

For a long time, the world faced an acute dilemma on environment conservation. The richcountries developed at their own pace, without much restriction on their activities and with

virtually no obligation to environmental conservation. Now, when the developing countries areprogressing, their acts of industrialization and urbanization are sought to be constrained forecological preservation. This, many countries like India and China, object to.

Yet, the developing countries have accepted some checks on their rate of progress as the globalecological destruction is showing. IPCC (The International Panel on Climate Change, aspecialized UN body on climate change strategies, headed by Indias R K Pachauri) hasstatistically proved that the rise in global temperatures in the recent years is caused substantiallythrough reversible man made processes.

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According to IPCC, climate change is happening faster than expected; stronger than expected.Since 2000, the rate of increase in Green House Gases is 3% per year. In 2005, the total carbonemission was 18 billion tonnes with the US emitting 7 bn tonne and India 1 billion tonne or I tonneper capita.

Annual carbon-di-oxide emissions today are 35% more than the benchmarked 1990 levels!

Since the 1990s, international concern on ecological conservation has gained momentum.The United Nations through its specialized agency, the United Nations Environment Program(UNEP) has brought together the world leaders through various dialogue platforms like the

The Earth Summit (1992) The Kyoto Protocol (1995) The Bali Summit (2007).

The world shall meet again in 2009 (Copenhagen) to discuss the world measures to be adoptedafter the duration of the Kyoto Protocol ends in 2012.

It was in the Kyoto Round of international discussions on Global Warming through emission ofmainly carbon-based green house gases (GHG) that the idea of Carbon trading through creditsystem was accepted.

A carbon credit is the monetary value of one tonne of carbon saved due to application oftechnology by adopting a clean development mechanism. Technically, one carbon credit is knownas CER or Certified Emission Reduction.

Rationale: The UN seeks to compensate all those who shall reduce carbon emissions, both ascommercial strategy and as effort recognition. Thus it seeks to arrest any slow down indevelopment caused by conservation measures. As a spin off, it will encourage businessenterprise to profit from this necessity.

How it works: The United Nations Framework Convention on Climate Change (UNFCCC) is themain UN body which regulates the carbon trading.

A company may wish to reduce its carbon trading for two main reasons:

1. As its obligation to reduce carbon emission under Kyoto Protocol.

2. It may want to trade the saved carbon credit in international market.

A company, which wishes to reduce its carbon emission, may avail funds and technology byapplying for UNFCCC supervised Clean Development Mechanism or CDM. A UN appointedagency would certify the reduction in the amount of carbon emitted by the company, which hasadopted CDM. Thus, for each one tonne of Carbon reduction achieved, the company shall getone Credit or carbon share. This may be traded at the five dedicated carbon stock exchanges inthe world as of now. Each CER is worth Euro 15 - 20 C02 e.

Many think that this step is a win- win strategy as the company which sells saved carbon shall winmonetary rewards, and the company which buys credits may legitimately emit carbon after payingfor it, and may sooner undergo carbon reduction to save its expenses. While the overall emissionquota remains fixed, commercial activity will make its implementation viable.

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The Carbon market is said to be worth $ 100 bn. It was expected to reach Euro One trillion in tenyears time. India is emerging as a world leader in generating maximum CERs. According toreports India has the potential to generate close to 50 mn CERs per year. India is the largestsellers market in the international carbon market.

In India it is estimated that carbon market has the potential to grow faster than even the BPO orearlier when the IT industry had grown at its peak. Even in the world, the carbon market is slatedto be the largest commodity market.

We must note that the entire global carbon market has been severely hit due to the financialmeltdown. The crisis has upset all carbon calculations.

Carbon credit market and the present financial crisis:

The present financial meltdown has adversely affected the carbon market. In view of the creditcrunch, or lack of capital available to companies for growth, and in some cases even to meetdaily working demands, the industrys enthusiasm to reduce carbon has dampened. Also, themajor incentive actual carbon trading, is also affected. Carbon credits are being sold at cheap

rates, attracting slow down in selling activity, as players want to sell it later at higher rates.Clearly, the world attention is elsewhere and for the present Carbon trading has taken a hit.

Carbon Credits and the US:

The United States has stayed away from all environmental obligations to be observed, asstipulated by the United Nations. Thus Kyoto Protocol lost its effectiveness as the largest emitterkept away. The US wants no time limits imposed on it. The worlds largest polluter wants Indiaand China to be reigned in or checked rigorously. Of course there is a distinct hidden economicstrategy in this finger raising. However, in the recently concluded conference in Bali, the US hasin principle agreed to observe the green obligations though it again forced India and China tocome up with a concrete National Action Plan on Climate Change.Once the United States fully endorses and becomes a party to the UN obligations, and once themeltdown effects fizzle out, carbon market will again assume really big proportions. The US is thelargest buyers market and India, one of the largest Credit sellers.

Public Private Partnership:

PPP is a novel and an innovative government strategy to engage the private sector in the nationbuilding processes. Thus the government is inviting the private sector to initiate projects in thepower, aviation, railways, and telecom sectors. These projects will have full government supportin terms of logistics, finance and clearances. Those executing PPP will also get fast trackapprovals in their other private projects.

This tool brings together the expertise, experience and wisdom of the government and the private

sector for the ultimate public good. These are areas the private sector would have avoided, as itwould be unviable for them to execute keeping only profit in mind.

The government has taken this initiative rather seriously and has claimed that close to $ 200 bnworth of projects would by available by 2012. Already it is offering projects to the tune of $ 20 bn.

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Global Economic Meltdown

Understanding the US-led global economic crises

Perhaps, never before in recent history, has any economic development been so talked about asthe ongoing 'economic meltdown'. Therefore let us understand this phenomenon gradually andfully. This will also give us a clear picture of the existing global and national economicadministration and functioning. We will stop by important terms and incidents provided in boxes orin other places as indicated.

As is clear no one person or institution ever understands the world economic network andfunctioning completely. Naturally, the fault could not be detected until the symptoms provedbeyond repair.

The sudden collapse of global finance giants like Lehman Brothers, AIG, and battering ofnumerous other behemoths like Citi Corp triggered the collapse of the stock capital, affecting allUS financial institutions, the effect spreading to European and Asian markets, leading to aworldwide credit crunch or lack of capital for daily operations, loans and expansions across allsectors and all markets. This present situation-- of substantial loss of stock money, shares beingtraded very low across all stock exchanges, high rates for borrowing money, and low productivitydue to low demand-- is termed 'economic meltdown'.

How it started: The sub prime crises

Actively supported by the government, large banks, led by Citi Corp started encouraging thelower middle/lower class to seek loans to 'own a house' in America. While the banks wanted tocash in on the booming real estate market, the less affluent were lured by the idea of having their

own houses. Since the boom in real estate appeared real and actually gave high returns, thebanks forayed into lending to those incapable of repayment the poor and the students. Loans tothis category were known as NINJA loans or No Income No Jobs or Assets Loan. It wasassumed, and here lies the core of the storm the house shall always be worth more than thedefaulted amount and therefore the banks would always yield profitseven in the 'default' case.As stated above, the US government actively encouraged this arrangement as suited its welfareagenda of 'house for all'. Institutions like Fannie Mae and Freddie Mac, which gave unlimitedmortgage based loans to individuals were supported by it. Since this model appeared to yieldhigh returns in less time, hedge funds started operations. The advent of huge and easy money forhouse loans made loan seeking very popular among the NINJA awardees. Till 2006 and early

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There is a whopping increase of 116% in the number of enterprises closing shopat 25,000 this year; up from 11,044 in 2006. Another 7000 have gone forbankruptcy, up from the 3500 two years ago. These figures give ample idea of thefinancial trauma in the United States. These are unprecedented in the land of

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2007, all gained. The poor had houses; the hedge funds went for a kill. The banks made sedateprofits and the US was more socialist now, comfortable in the idea that in US, all will have ahouse of their own.

House owners who had no income had to default one day. This happened in 2007. Then this

became a trend and suddenly hedge funds, which cannot tolerate losses for long, startedwithdrawing. The banks, which had given loans many times more than they should, couldn't domuch to stop the flight out of funds. Since, the realty sector was earlier booming, investors hadput in major capital in realty stocks. Now they started withdrawing. As the realty stocksplummeted, the realty sector no longer commanded premium. The worst point came when thehouses themselves lost premium and were now worth less than the loans forwarded. This meantall loans ever forwarded were loss making. The banks themselves had taken loans to forwardloans to retailers. As a result, in a free fall, all realty stocks crashed.

How and why the crisis spread all over the seas.

PLEASE UNDERSTAND THAT THE CRISIS PRECIPITATED NOT BECAUSE OFCONSTRUCTION ACTIVITIES BUT DERIVATIVE OR FUTURES TRADE AND SPECULATION

OR GAMBLING BASED ON CONSTRUCTION ACTIVITIES.

Role of investment banks (i-banks), Hedge funds and HNI money.

Generally, a bank has substantial liquid cash base on the basis of individual and corporatedeposits. This is safe and continuous supply of cash, which forms the base capital of all bankingoperations. Investment banks like Lehman Brothers, Goldman Sachs and JP Morgan are not theusual individual account holder type of banks we have explained above. They have no securityof assured individual clients like the State Bank of India! They earn as returns on the investments.They assess and predict the profitability of a project, invest a huge amount and earn profits asreturns. Thus Lehman and others gambled on house mortgage big time. Hedge funds madecapital or money available for investing in high-risk high-return projects. While the i-banks andhedge funds made the mortgage market huge, the losses too were vast. And since the samecompanies also invest in other global projects, the crisis spread like wild fire. As the marketscrashed, all investors who would have funded other equity projects, infrastructure works,construction activities, export oriented manufacturing across the globe went bust; all their projectscollapsed.

Since investor money was completely wiped out, no other stock found purchasers, leading to allround loss across US exchanges. Since all major world companies had invested in USexchanges, all these companies lost hugely. There was heavy selling and no buying across allexchanges leading to collapse of the system. Short selling further added to the panic.Additionally, no money was now available to any new activity. In London, inter-bank loan rate wastrading at unrealistically high levels. This was because no bank knew the level of losses of otherbanks and was reluctant to give loans to other banks. The distrust was complete. It was clear, justas in stampede, where all near the point of origin generally die/ get injured, all major moneyforwarding institutions, were paralyzed.

Immediate Impact: It is said that this crisis has wiped out 30% of bank assets in the US.Lehman Brothers were trading 30 times more than they should have. Citi Corp losses are inbillions of dollars. Washington Mutual, Wachovia, Merrill Lynch, Goldman Sachs, etc. were bignames that orchestrated the world economy. Some of these companies total assets are higherthan the GDP of many countries. Citi Banks total assets equal a whopping $ 2tn. LehmanBrothers' assets are pegged at $ 300 bn plus. They predicted, financed and rated futurebeneficial projects and were at the core of all global plans. As they plunged same-day-same time,the world followed suit. Clear enough?

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Long-term impact:

Capital for future projects are based on predicted future profitability of the project. Lets take anexample for elucidation. If ONGC announces an IPO for an oil project, the investors will assume

profit based on increasing demand of oil due to rise in population and purchasing power, pushingthe oil demand. This is how money will be made available to ONGC today.

In the present situation, investors will take the following considerations into account:

1. There is no guarantee of increase in purchasing power as no new jobs are foreseen.2. Projects might suffer due to credit crunch, as banks have no excess money. Therefore,

the project might suffer delays and increasing cost overheads.3. There are little prospects for the share of the company rise in near future.4. No one knows when the global recession is likely to end.

Therefore, if a company is to launch new major projects now, it may not find easy funding. Manyglobal majors cannot survive without new projects and almost all companies have to innovate.

But again no funds are possible for R & D, innovation or expansion.

India and the US Crisis:

At the beginning of this rather depressive chapter, we noted the gloom statistically. Now relate itto the fact that the US market formed 14% of our exports in the year ending March 2008.

The prime minister while admitting slow down of our economy has clearly stated that there wouldbe no recession in our economy. WTO chief Pascal Lamy, said India and China has saved off theworld economy from total collapse. He said India along with Brazil, Russia and South Africa arestill growing economies. These statements suggest soundness and resilience of the Indianeconomy in the face of global fluctuations. Still, the impact, in the immediate term, is showingheavily

The 'meltdown impact' on India has been moderate to heavy based on the sector/area we arereferring to. There is no uniform assessment across all sectors of our economy. The top TenIndian Companies have lost over 3 lac crore rupees through stock capital losses, as of Oct 2008.

Broadly, we must analyze the following activities:

1. Banks operations: Most affected. While we from interest on our saving or currentdeposits, banks themselves earn through speculation, futures trading and furtherinvestment. In the absence of these options, as of now, not much capital is available withthe banks to grow. Though individual money is safe under governments strict regulation,banks are unlikely to offer easy money to individuals, companies and other banks leading

to slack in manufacturing and trade. It is largely speculated that the ICICI bank has beenparticularly affected by the crisis owing to its heavy exposure to world derivative market.As a result of this rumor, no bank was willing to supply credit to this bank, furthering itswoes. In the quarter ending September this year, ICICI lost Rs 11,000 Cr in depositscontraction, while the safe public sector banks (SBI and PNB) gained Rs 70,000 Cr inthe same three months, as fresh deposits. By safe we mean from the public perceptionangle.

2. Sectors affected: Banks and all other financial institutions; real estate; construction; BPO;Aviation; Hospitality.

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3. Job market: projected 20% job cuts. Fresh hiring is negligible. Bonuses affected. Mostaffected: IT, Finance; Banking, BPO; Real estate and Construction.

Most of the leading IT companies have recorded low Q39 profits due to meltdown.

Some leading corporations like Tata Motors have temporarily closed down some of its plantsto prevent the piling up of the inventory or previously produced unsold goods and material.

4. Not yet impacted: FMCG; Pharma; Media;5. Stock Exchange: Plunged from a high of 21K in Jan '08 to 6 K by Oct 08. This is mainly

because of global cues indicating slack future economic activity and withdrawal of foreignmoney (FIIs) by parent companies themselves affected by the losses.

6. Slack in demand of Indian goods leading to decrease in export volumes. This means nodemands and therefore no work for EOU or Export Oriented Units.

7. Lack of tourist footfalls.8. Read along with point 3, decreasing business trips to India is already leading to slower

growth in high-end luxury hospitality sector.

9. Slack demand for Indian professionals in US or other European countries.10. NRIs across the globe and particularly in the US may send lesser remittances back toIndia.

11. Possible job cuts, as there could be a gap/delay in new international projects/ because ofless economic activity in sensitive sectors like aviation.

12. All major BPOs are run on US led projects. They may be impacted.13. This would mean fewer dollars added to our FOREX. This may impact our national debt

servicing. It would also impact the Sovereign wealth fund.14. Owing to fluctuations in the dollar trade, the government leverage in regulating currency

demand supply may be restricted. In other words, there could be more demand on thedollar as less and less dollars would be available for international trade.

15. Government has admitted to slow down in economic activity. India will not achieve 8%growth rate in 2008 and our five-year plans shall also suffer with a targeted achievementof 9% annual growth.

The governments' reaction:

The US government has meanwhile made available $ 700 bn (Troubled Asset Relief Program) tothe ailing financial behemoths and for the general resurrection of the recessionary US economy.The US has provided money to the banks to ease pressures on liquidity demands and other suchpurposes, subtly encouraging moving away from speculation based trading. Likewise, the twomajor surviving investment banks (Goldman Sachs and JP Morgan Chase) have restructuredthemselves to regular banks. The government is keeping a close watch on all major economicactivities and has banned short selling in the stocks for now. It bailed out mortgage banksFannie Mae and Freddie Mac; bought majority stakes in AIG to make it government aided andhelped in all bailouts and mergers.

A brief digression is required here: Was the government right in offering such a bonanza to theseinstitutions? Yes and No. The government at the end of the day is the final guarantor. If all elsefails, the government has to intervene. Second, this crisis was cancerous and was eating away atall financial institutions and the entire economic fabric of the US - therefore the bail out.Opposition says there was no need to fund the greedy professionals who lived off gambling with

poor peoples hard earned money. Actually all derivative trade is a form of gambling andgovernments do not and should not bail out failed gamblers ever.

9 Q means a Quarter. Q3 = third quarter of a financial year i.e. July-August

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India's reserve bank and the bankers' bank, the RBI has made available more than a lakh crorerupees since the crisis to banks by allowing them to keep less cash with the RBI (CRR). It is alsoencouraging banks to lend easy money to other banks by restricting call money market (rate at

which one banks lends money to other banks for short periods). The RBI is also easing offrestrictions on stock trading through Participatory Notes, to infuse more foreign exchange andcash in the bourses.In the long-term the government may look into banking reforms, liberalize foreign directinvestment norms, further de-control industry and generally boost trade and investment

The Great Depression of 1929

In order to understand the present crisis and its relation with the term ' recession' we need to visitthis often read phrase: the Great Depression!

The Second World War had ended in 1919 and there was optimism and hope in the air.

Governments of the day had become major buyers of consumer durables in the preceding waryears (1914 1919). These purchases were war requirements and did not merely tally withpresent demands. While the war ended, the production did not. Years preceding 1929 werewitnessing successive years of frenzied production, apparently fueled by expectations of higherand still higher demands by consumers. This did not happen. When the demand started falling,production should have immediately stopped.

The term (economic) depression means a sustained recession in an economy/ (economies). Adepression is a serious form of recession. The 1929 stock market crash preceded the GreatDepression. The crash was followed by the drought of 1930. In the resulting scenario, the banksfailed completely. Production stopped completely and prices fell. Agricultural products becamehighly unprofitable. Due to a general lack of work, there were massive defaults on loanrepayment. Simultaneously, people lost trust in banks and started withdrawing their liquid assets.Banking systems crashed completely. The lowering of Gold prices, crucial at that time, furthercreated economic void. Unemployment reached unsustainable levels, as there was noconstruction activity. In the 30s, these effects reached Europe. These depressive circumstancescontinued up to the start of the Second World War in 1939. The governments of the day sattogether to make sense of the events, prevent recurrence (of wars too!) The United Statesannounced the New Deal for the massive reconstruction of the damaged economies. Theresultant solutions were the International Bank for Reconstruction and Development or the WorldBank (through the Breton Woods Conference, 1945), the IMF and the United Nations.

Select Institutions Affected and Bail out Actions Taken

Fannie Mae and Freddie Mac : US Govt. has taken over AIG : 80% Government stake WaMu : JP Morgan Wachovia : bought by Wells Fargo (Warren Buffet backed) for $ 15 bn ML : bought by BoA for $ 44 bn Lehman Brothers : various Barclays, Noumora

Economic Financial Meltdown

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Role of RBI in the control of Money supply

We shall talk about RBI (The PMO10 for all banking operations in India) in the specific context ofits role as troubleshooter in the recent meltdown.

Basically, the bankers bank is the supreme monetary institution in India. It is also the watchdogof all economic transactions in India. In the ultimate interest of our economy, RBI is authorized toinitiate measures to control money supply in the country.

In troubled times, as in the present, RBI virtually becomes the doctor, whose skill shall shape thedestiny of the patients health.

We shall see how exactly, the RBI intervenes in the times of crisis, as in late 2008:

1. Repo rate is the rate at which our banks borrow rupees from RBI. When the repo rateincreases, borrowing from RBI becomes more expensive. Naturally, a reduction in therepo rate will help banks to get money at a cheaper rate. Every half percent cut infusesone lakh twenty thousand crores into the market (@current price) for lending, growth

purposes. A cut in the repo rate will add pressure on commercial banks like HDFC orICICI to lower the bank rate or the interest charged on loans they would give individualretail consumers. Now, the loan activity will increase leading to a greater economicactivity or growth due to expansion.

2. Cuts the CRR. Well, CRR is a potent fiscal instrument with the RBI to control (rupee)money supply in the market. CRR or the Cash Reserve Ratio, is the compulsoryrequirement on the part of each bank governed by the RBI or scheduled banks to keep acertain amount of money in the liquid form with the RBI. Every one percentcut would mean Rs. 40,000 cr that banks can retain to give as loans to people.

These ensure the following:a. No bank will go bankrupt, as some of its money is always available with the RBI,

which may be utilized for this bank.

b. More importantly, the RBI can check reckless lending by the bank to the retailers,flooding the market with excess rupee.

3. Give more window or leverage to banks to borrow from the banks against their depositsto be used to firm up the Mutual Funds floated by the bank.

4. Special refinance measures by RBI to commercial banks against their deposits. Thismeasure is done to enable more funds with the banks for short-term investmentpurposes.

By the end of October the RBI had already pumped in more than 2 lac crore into the systemthrough RBI interventions.

Are the measures undertaken by the Indian government, enough?

Well, first of all, the question itself is inappropriate. We must first understand that to survive andprogress in the present age of competitive market, we need to streamline our economic patternsand steadily integrate with the global village.More isolated (or closed) the market, more insulated it is to international fluctuations {as we werebefore the 1990s}.

The nation was swiftly moving towards globalization for the preceding 17 years.

10 The Prime Ministers Office (humor: most important office!)

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It is only natural that when a 13-trillion dollar economy suddenly gets devastated, affecting theworld economy-- to which we were trying our best to align with-- we are bound to be affected. So,do not take a knee jerk stance. Understand the core of the issue.Still, are these troubleshooting measures by the RBI enough? No, the RBI can only give you anumbrella during rains; it cannot either prevent rains or attend to pneumonia.

In the long term we must strongly discourage heavy speculative trade; or at least move awayfrom our over dependence on select financial institutions, which thrive on risky investments.We must make our banks and institutions more accountable and transparentExports need to be encouraged and diversified, both with respect to product and market.Our contribution to world trade stands at a measly 2%. We need to enhance this portion.We need to diversify our trade partners and move away from US based export partnership toperhaps new markets like the ASEAN.

We have seen how an increased purchasing power can lift up sectors like telecom, retail etc. Weneed to develop our human capital to perhaps lead world trade through a stronger trading center.The point is, rather than being panic, we must use the interval to warm up ourselves and emergestronger in trade, commerce, science and education. These are the basic requirements tobecome a world leader.

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General Economic terms

We have attempted to include frequently used terms/words while describing economic stories inthe last few months. We have tried to explain the terms; their meanings and roles in the economicmatrix in which they operate so that the student relates to each of these terms in their marketsetting hereafter.

SEBI: Securities and Exchange Board of India

As of today, SEBI is perhaps the most watched body in India. Along with the central bank the RBI,it is at the center of focus, especially after the meltdown.SEBI regulates the Indian capital market.Set up in 1988, it is after the 1992, SEBI was empowered enough to assume position ofimportance after the passage of the SEBI Act.Its prime functions include making and implementing regulations with respect to

The trades of all instruments like stocks, bonds and government securities. Corporate and retail investors. Market holders and intermediaries like brokers etc. It frames rules for foreign players investing as FIIs. It supervises practices like participatory notes.

In other words it is the watchdog of the Indian stock markets. In India, government ownedinstitutions are rarely any source of solace, let alone inspiration. But like the ElectionCommission, SEBI (under economist administrator CB Bhave) has been rendering superiorservices and in many ways, the efficacy and efficiency of SEBI has contributed substantially tothe success of Indian stock market.

Illustration: While the recent crisis sent the US administration in the panic mode, both the RBI

and SEBI have been extremely calm and efficient in the handling of its implications in the Indianand the capital market. While the US banned short selling, identifying this practice as mainreason for the stock crash; India refused to ban this suspect practice, saying our regulation isresilient enough to contain the use and practice of shorting without damaging the market.

This demonstrates the maturity and the superb independence of our financial regulators.

Indian Stock Exchange:

Till the financial crisis hit all financial institutions, and arrested global growth, Indian stockexchanges were top global success stories. All world leading stock exchanges like NYSE,NASDAQ and LSE evinced keen interest when the BSE offered 5 % percent stake. Alreadyforeign stock exchanges have stakes in the National Stock Exchange.

This amply demonstrates the recognition of the Indian capital market by world leaders in globalfinance and that India now negotiates with the world on its own terms.

The Bombay stock exchange is one of the oldest stock exchanges in the world, established inthe nineteenth century (1875). At 5000, it has the highest number of listed players (companies)with Tokyo at 2nd (4000) and London at third (3000 companies).

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Total market cap of the BSE is over $ 2trillion, which makes it 10 th largest in the world and largestin South Asia. Its daily turnover is more than $ 1 bn.

In order to measure the daily fluctuations, it tracks the stock prices of 30 top blue chip companiesto form the index called the SENSEX or BSE 30. In October 2007, these 30-scrip led SENSEX

reached the magical 20,000 mark, an achievement reached only by few stock exchanges of theworld.

Recent achievements in by BSE 30 or the SENSEX:

The Bombay Stock Exchange touched the magical 20,000 mark on Oct 29 2007, in just over 10trading sessions and 15 days, to reach this level from the 19,000 mark. It reached the highestpoint 21,000 on Jan 21, 2008. Since then the SENSEX has fallen consistently, going down to9,000 in Oct 2008.

The National Stock Exchange:

NSE is technology driven, fully automated, very young state- of- the- art Mumbai based stockexchange, with close to 3000 terminals across the country. It also facilitates paper less tradingthrough Demat accounts or de materialized or non-paper based accounts. Its index is called theS&P CNX Nifty or Standard and Poors CRISIL NSE Exchange or simply Nifty. The indexcomprises leading 50 scrips from 21 sectors of our economy.

Though young, it trades over $ 2 bn each day. At present the listed scrips are around 1500; NSEis the second fastest growing exchange in the world at 17% annual growth rate. Its total marketcap is $ 1.5 trillion.

Compared to the US stock exchange, Indian companies are much smaller than the UScompanies. Consider this; the average size of a company listed at the New York stock exchangeis $ 5 billion, while it is $ 120 mn in the Bombay Stock Exchange.

Derivatives: Very simply understood, a stock is an example of a derivative! A derivative is afinancial instrument, which derives its value from some other asset/product/commodity. Thus thevalue of a stock is the value of the company it belongs to. It has no intrinsic value of its own.

Derivatives encourage futures trade. A futures trade is a trade on the assumed value of an assetin future. Futures on commodity, say pepper, is based on its likely growth pattern of price at afuture date. Similarly mortgages, loans, equities, stocks are all derivative trades. Hedge fundstrade on futures or those derivatives, which are highly speculative in nature.

Evidently, derivatives do not protect but trade on 'risk'. This practice or tendency is at the core ofall speculative profits and a major reason for losses and stock crash.

Participatory notes

Participatory notes are a stock trade facilitating financial instrument in the Indian stockexchange. As per SEBI guidelines only those individuals/companies registered with SEBI cantrade at the stock exchange. This has kept out a substantial category of high net worth individualswho would not register/open shop in India. Since the ultimate stockholder is not known, India didnot encourage this. However, from late 1990s, under SEBI watch, participatory notes were issuedto non-registered individuals/companies to become stock players after registering themselvesthrough registered FIIs. Thus FIIs were in some way careful of the players who entered boursesthrough their participatory notes. (Note that PN are issued to FIIs who give it to foreign players).

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Benefits of PN enabled players:

1. They infuse large capital to bourses, increasing trade volume market cap, profitability andof the SE.

2. This helps in international integration of our SEs with world stock exchanges.

Dangers:

1. PNs are used by Hedge funds who actively encourage and practice dangerous and riskypractices like shorting and indulge in futures.

2. Most importantly we do not know who the beneficiary is, what the motive is. It is said thatAl Quaeda type of outfits have benefited through this route. The recent attacks could wellbe funded by Indian stocks themselves!

3. Acting on global cues, they may withdraw huge amounts of money and take the wealthoutside India, thereby1. Affecting forex situation/health2. Putting liquidity pressures

3. Making SEs unduly bearish4. Making capital market volatile

A note on Participatory Notes Indian regulators have a love-hate relationship with PN as aninstrument. Their role in the recent stock panic crash suggests active involvement in short selling.Though laudably, India has refused to ban short selling to stem the free fall, yet too much shortselling is unhealthy and the indulgent players give scant regard to the SE health over personalbenefits.

Since close to 50% of all the capital in the BSE was sourced to PN players you are now aware ofSEBIs dilemma.

In Oct 2007, SEBI banned the PNs and the market crashed 9% -- a record of sorts. Thegovernment immediately intervened to announce status quo. Things stand the same as of now.

Investment Banks: Regular banks prime clients are individual account holders who deposit theirpersonal liquid assets. These banks invest further in stocks, equities, tender loans, financeprojects, issue credit or other financial products to use the money deposited by individuals andcompanies. Their core operation remains individual corporate deposits.

Investment banks thrive and survive on investments in their financial instruments only. They arenot eligible/entertain individual/corporate deposits. They trade on derivatives like futures heavily.Since their mainstay is speculation-based profit they survive by risk taking, i-banks are inherentlyhigh-risk high-profile and high-net-worth corporate entities. Lehman Brothers, Merrill Lynch,Goldman Sachs were some leading investment banks before speculations strangulated them.

Short Selling: Well, this financial instrument or process is closely related to the meltdown

aftermath. Though not a cause of the economic downturn, the brokers and investors use shortselling or shorting when they see a large fluctuation in the very near future.

Let us see how shorting or short selling works: Company A 'borrows' 100 shares at the prevailingprice at Rs 100/- per share and promises to return it the next day, since the shares are borrowedand need be returned, the Company 'anticipates' that the shares will go down from now on.Company A sells the shares at Rs 100. As the share price declines, as in meltdown times, theshares may be priced at Rs 70. The same company, that is, Company A, buys the identical

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shares at Rs 70. Recall that it had sold the rented shares at Rs 100. These repurchased sharesare now returned to Company B. Co. A has made a neat profit of Rs 30/- per share.

Likely pitfalls: If the shares rise up to Rs 130/-, Company A, which is time-bound to repurchasethe shares, will buy it at Rs 130/- and make a loss of Rs 30/- per share.

Why do companies do it: This is an instrument, which is used for profit even when the decline of ashare or market is forecast. While the US government banned this practice during the crash, Indiadid not blindly follow suit.

Decoupling: A theory, which suggests that a maturing economy, which is sufficiently sound andlargely self-dependent, is no longer, tagged to large economies and vulnerable to the biggereconomies fluctuations-- with which it was earlier closely linked to. It is theorized by certaineconomists that Indian economy is sufficiently strong and self-generating enough to bedecoupled from the US economy. Not all accept this 'separation' or 'distinction'. The recent globalmeltdown has proved that no economy is fully independent and that India has been impacted bythe meltdown. The RBI and Finance Minister do not subscribe to the decoupling thought. Butyes, due to the soundness of our economic system and strength of our key fundamentals, we are

no longer vulnerable to external shocks as in the nineties or earlier.

Primary and Secondary Share Market: All new stocks, bonds or government securities are soldin the primary market. Whenever a company wants to float its shares, it announces throughmarket channels open for this purpose. The process is called Initial Public Offering. Existingcompanies may float Rights issue. The shares are sold directly by the company to all categoriesof investors like individuals/corporate/government-- at a value known as face value, usually Rs.10 or Rs. 100, though this may vary.Investors seeking long-term benefits go for the IPOs. Based on the performance, fundamentals ofthe company, these are a bit safer, as the starting amount is less and large quanta of shares areavailable. There is a large amount of equity investment, or those investments, which are used forexpansion of business; setting up of new industry and the shareholders have some equity stake(partnership in profit/loss) in the venture.

In January Anil Ambanis Reliance Power launched its IPO, which created a record at the stockmarket raising Rs. 11,000 Crores. Presently there are more than 4 million shareholders of RelPower IPO.

The rights issued by the company may now be traded at the secondary market. Here the biginvestors usually dominate. It is a den for speculation, as the shares are bought or sold,depending on market cues and the companies performance. Such trading takes places at thedesignated stock exchange where the company is listed at the time of issue of the rights/stocks.Registered FIIs or Foreign Institutional Investors actively trade at the secondary market throughportfolio investments. The unregistered rich foreign investors speculate and trade through someregistered FII who issue participatory notes for these individuals to enter the stock market.

Bear hug/ Bearish/bullish sentiments: As we are aware of, brokers who buy the shares are

'bulls' or risk taking 'creatures' a bull shall pick on a fight, is courageous and straightforward. Hemay not always win. They are taking risks in the sense that they assume the shares of the priceswill only rise (short selling is an exception and we have dealt with it elsewhere). The same broker,when he is 'selling' the shares is now a 'bear'. He is playing it safe. He wants to either settle forthe targeted profit at selling point, or wants to stem his losses. He assumes the shares will fall(again the exception which you are aware of, right?)

When majority of brokers are ready to sell shares, the share prices fall, and the marketanticipates more fall, and hence the exit. The market sentiment (direction of movem

economic handbook final

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