TRACKING THE INDIAN ECONOMY -NOV 6TH ,2008

The Indian Economy as on Nov 6^th 2008

*The PM has requested the industry to ensure that there are no lay off’s. With the elections round the corner that is understandable. There is also talk of enhanced investments in infrastructure to expedite projects (read : improve liquidity in the system). Expenditure is social sectors would be enhanced. This will ostensibly be not done through the “smart cards” that have been used in some States and proved extremely effective in welfare projects but through the “traditional” health and educational projects. (grass root level politicians should be happy!).

*As if on cue, the LIC has pumped 15000 crores into non convertible debentures of private companies with AA ratings.

*While Mulri Deora will celebrate his son’s wedding to Manmohan Shetty’s daughter in an austere fashion, with due respects to the economic situation in the country, he might treat the country to a reduction of at least Rs 2 per litre on petrol given that crude has come down to the figure of 69$ per barrel.

*The calm on the surface however, belies the undercurrents.

* Kingfisher defaulted on lease payments for 4 jets. Given what happened to Jet, he may not risk slashing jobs, but salaries are likely to be cut .The “sons of the soil” argument is now being extended to “desi vs videsi” pilots. Cutting the salary of expats is now the clarion call. This has been heard at Jet and is likely to be the scenario at KF. “King of hard times” seems to be the best way to describe Vijay Mallya nowadays J

*The fall in crude and ATF has not seen a cut in prices from the premium airlines, but the budget airlines are expected to reduce prices. Some of them have introduced full service “value class” options. I guess now it is a case of “anything that flies”!!! There should be some downward migration of customers from the Mallya- Goyal Alliance.

* In the travel and tourism sector, it is learnt that web sites and agents are not likely to be given commissions as of yore and travelers may soon be getting better deals by dealing directly with airlines. Hotels may remain the bread n butter of these sites

*From 150 proposals every week for realty projects in BMC(Mumbai Muncipality), it has come to 15. According to the TOI Mumbai ( a couple of days ago)there is a list of real estate projects in Mumbai which are on hold. Real estate prices are likely to move down significantly in the next quarter.

* There is a reported freeze on new recruitments in most companies in all sectors. Spice Group has gone in for salary cuts and probably there are others too.

* News channels seem to have been the worst hit. Most financial services, realty companies which form the bulk of advertisers in these channels are “flighting “ their schedules and the channels in turn seem to be “grounding” variable costs and that now seems to include staff costs. There is no blood bath as yet but the chiseling has started according to news reports.

*PWC mentions that in the Rs 51,300 crores ,Entertainment and Media sector, the growth rates would come down from 17% to single digits. Sale of movie tickets and rights in India was estimated at Rs 9,600 crores for 2007(annual growth rate of 14%). This is not likely to be repeated in the next year though the closing figures for 2008 may not be alarming. The Rs 22,600 crore TV industry too, which had a 17% growth will see a slide.

*The sports industry too will show a decline with sponsors backing off and in case of the EPL , the precarious situation of a lot of Clubs were exposed with the crisis of the Iceland Bank. Australia and New Zealand , which are popular cricketing nations also have huge financial problems. The Australian Bank has cut interest rates and in new Zealand there are reports of financial companies going bankrupt. (The tourism industry in Kerala , which saw a spurt in inbound from Australia is likely to be hurt , more so given the overall dip in inbound from W.Europe and UK that it relies on)

*The only saving grace is the 6^th Pay Commission report which was disbursed to the Govt employees this Diwali (40%) .The next instalment (60%) is scheduled for next year.

*FMCG too, should hold fort. People will continue to eat and have a bath and brush their teeth J never mind the meltdown and the roll backs!!

Movies, Music, Marketing, Martial Arts & the Muse: GLOBAL MELTDOWN- IMPACT ON THE INDIAN ECONOMY

Movies, Music, Marketing, Martial Arts & the Muse: GLOBAL MELTDOWN- IMPACT ON THE INDIAN ECONOMY

GLOBAL MELTDOWN- IMPACT ON THE INDIAN ECONOMY

According to Percy Mistry who was writing in the Business Standard, the world financial crisis has turned into a global economic slump. Fear about future job and income security has spread more rapidly in all countries than anyone thought possible.

In a few days, people have reined in spending, more swiftly than central banks had contemplated. So have companies. Volvo reported that its total global orders for new trucks in Q3-08 were 115, vs. 42,000 for Q3-07, when things were turning bad. Auto firms are gearing for a 25-40 per cent fall in global demand. So, steel mills are shutting down furnaces across Europe.

The UK economy shrank by 0.5 per cent in Q3-08. The US economy has shrunk likewise. It would be surprising if numbers for continental EU and Japan did not look similar or worse. Contrary to expectations, China will be lucky to register a growth of 8 per cent in 2008-09. India will be fortunate to hit 7 per cent.

But the issue is not whether growth in OECD in the next few quarters is minus 0.5 per cent or minus 2.0 per cent, or whether Indian growth turns out to be 7 per cent or 8 per cent.

The Reserve Bank of India's [Get Quote] latest credit review suggests that the authorities are in denial about how rapidly unwinding could occur with a change in public sentiment, despite our robust domestic market.

The issue right now is whether governments and central banks realise the magnitude of the economic implosion they risk (through complacency or fright, even in relatively robust economies like India) without decisive action; even if it seems to traditionalists to be over the top.

The facts have changed dramatically. Governments and central banks must respond accordingly. Right now, perception and signalling are even more important than reality in ensuring that the public's fearful sentiments are allayed.

But governments and central banks seem in denial about the ineffectual impact of their Herculean exertions last month, which saw unprecedented financial rescue and liquidity pump-priming packages being put in place.

Yet, despite these efforts, which were necessary (if too little too late), the second shoe has dropped. The effects of that are likely to be large and contagious, as sudden concern about the vulnerability of ALL emerging markets suggests.

The financial crisis of 2007-08 required bank balance sheets to be propped up through measures unimaginable two months ago. But those rescues were based on harm done by sub-prime debt, toxic securitisation, and uncertainty about coverage in the credit-default swap market, which unzipped after the demise of Lehman Brothers and (virtually) of AIG.

With a full-blown global recession now under way for 2008-10, even prime loan portfolios will turn sour until economies turn around. That will result in increasing non-performing assets in portfolios that were until two months ago regarded as secure.

So banks will go into a second round of provisioning, write-downs and reserve accretion, requiring more capital. But government rescues have exhausted the ammunition available to fight this new scourge. The Brown Plan will make it more, not less, difficult to raise more bank capital.

National governments, having mutilated their budgets with financial rescues, are now talking up plans to launch counter-recessionary public capex programmes; even as demands on social security safety net financing increases with rising unemployment.

But, as Japan showed in 1990-2005, large public capex can be ineffectual, even counter-productive. What may be better is inducing private consumption through direct and indirect tax cuts, along with expenditure incentives, to ensure that private consumption does not fall through the floor.

But, with governments having stretched their fiscal deficits beyond tolerable limits, those measures seem counter-intuitive and dangerous. If a first-order problem has been created by spending and borrowing too much (whether by individuals, families, banks, companies or governments), can it be solved by spending and borrowing even more?

The answer intuitively is NO. But the consensus among global policymakers seems to be YES - at least until panic subsides and normalcy returns. Even if one agrees, it cannot be without deep concern about mortgaging the future.

The WORLD BANK takes a more optimistic view:

The World Bank report on "Global Financial Crisis: Implications for South Asia" released on Thursday shows that even as India is relatively more exposed to the contagion effects of global financial markets, risks associated with it are countered by a fundamentally strong macro economy including prudent foreign debt management, high savings rate, solid financial sector health, and a pro-active monetary policy management.

These steps will allow India to ride the crisis without destabilizing the financial sector. Further, the report indicated that the main effects of the global financial crisis will be to reduce the availability of funds leading to higher interest rates and lower public and private investment that will hurt growth.

According to the report, "The largest economy, India, is relatively more exposed to the contagion effects of global financial markets through adverse effects on capital flows from portfolio and direct foreign investments, and also through exposure of domestic financial institutions to troubled international financial institutions and to contracts-including derivatives-that have undergone large value changes. The evidence so far shows significant losses in the stock market and a reduction in the flow of foreign capital.

RBI has already responded by letting the exchange rate depreciate to stem the outflow on the current account, by providing extra liquidity to the financial sector, and by raising the limit on private foreign borrowing. The nature and depth of the global financial crisis is still evolving and there is a significant downside risk of further slowing down of net capital flows and a hardening of terms. But these are countered by an overall healthy banking sector with low non-performing loans and a comfortable capital base and a pro-active monetary and exchange rate management. Foreign debt and debt service is low, and reserve cover ($274 billion) is still substantial. The high domestic saving rate (34% of GDP) provides added cushion."

Given that an election year is around the corner, Government is pulling all stops to ensure that there is no "blood on the streets". The roll back of the Jet Airways layoff and the instruction to the Industry captains to avoid "pink slips" is aimed in this direction. LIC and public institutions stepping in to improve liquidity is part of the symphony being played by the Government orchestra. No wonder Karl Marx has suddenly emerged as the best ing author of the week!!!

Movies, Music, Marketing, Martial Arts & the Muse: An Icy Breeze - Ajit Chaudri IRMA Alumni

Movies, Music, Marketing, Martial Arts & the Muse: An Icy Breeze - Ajit Chaudri IRMA Alumni

An Icy Breeze - Ajit Chaudri IRMA Alumni

AN ICY BREEZE

A 2-Pager by Ajit Chaudhuri

Introduction: Readers of my generation may remember the novel "Running Blind" by Desmond Bagley - a good book made better for its introducing the reader to a small[1] island nation nestling just under the Arctic Circle. Iceland occasionally popped up in the news after that - from its location as somewhat in between Moscow and Washington and therefore a good place to hold contentious discussions[ 2] during the cold war years to the exploits of the singer Bjork. Readers of human development indexes would know Iceland as a country that combines wealth with equity[3], travel addicts for its mountainous and volcanic interior and for whale watching, and scientists for its energy policy[4] and research on genetics[5]. And hardcore Olympics watchers this August, such as yours truly, would have followed the country's men's handball team trying to win its first every gold medal (they lost in the final and settled for silver).

Iceland burst into the news again last week as the first nation-casualty of the current financial crisis! Its banking system has broken down, its currency is in free fall, and it has moved from being a wonderful example to a horrible warning - all in one week. What happened? Why? And what are the lessons to be had?

What happened? The first indication that it was not only banks going under and that an entire nation was in deep s--- was on 7th October, when the Icelandic government made three announcements -

1. That it was abandoning its efforts to peg the Icelandic Krona at 131 to a Euro.

2. That it would nationalize the country's three largest banks - Kaupthing, Landsbanki and Glitnir.

3. That it was in the process of obtaining a loan of Euro 4 billion from Russia.

The British were the first to react! Upon not getting a guarantee protecting British deposits in the banks, Gordon Brown announced the freezing of Icelandic assets in Britain on 8th October and used anti-terrorist legislation to do so. Other countries with a significant Icelandic banking presence followed suit. The Icelandic Krona dropped in a day to 340 to a Euro and then went into free fall. There was no sign of any money from Russia, and Iceland's Prime Minister Geir Haarde backtracked to say that the loan was still being negotiated.

Why? How did a country fall so far so fast? Iceland had traditionally been dependent upon fishing - its location and lack of neighbours give it a natural advantage in this field. Somewhere in the 1990s, the government decided to liberalize the economy - starting with the banking sector. Banking prospered, and soon found that Iceland's demographics did not match the banks' growth ambitions. Aggressive expansion followed - into the UK, the USA, the Netherlands and Scandinavia. Deposits were attracted by high interest rates[6], which were in turn forced up by Iceland's high inflation - about 14 percent in the 12 months up to September 2008. They were successful! IceSave, an Internet banking subsidiary of Landsbanki, had about 300,000 depositors (about Iceland's population) in the UK. Landsbanki's owner, Bjorgolfur Gudmundsson, became a billionaire and Iceland's second richest man (after his son) and went on to indulge in typical billionaire stuff like buying an English football team.

And then, the sub-prime crisis happened and banks stopped lending to each other. Icelandic Banks, like other banks, were unable to roll over their loans - and with a combined foreign debt of about seven times Iceland's GDP, a falling currency (thereby increasing the value of foreign debt in Icelandic Kronur), and a high inflation rate (thereby adding momentum to the falling currency), they were particularly exposed. This is normally where a central bank would step in and play the role of a lender of last resort - but this was not possible here with the debt being so much more than the size of the national economy.

What's going to happen? Difficult to say, with events still unfolding every day! Can the USA play guarantor, as it has chosen to do with its own banking system? Possible, but it does relegate Iceland to Puerto Rican status. Can the European Union? In the long run, Iceland may see value in joining the Euro - but not right now, Iceland's current ruling party and opposition are both anti-EU and anyway the EU is unlikely to be interested. On the other hand, the fundamentals for Iceland are intact - the fish haven't gone anywhere, there are still no aggressive neighbours, and its human capital remains among the best in the world. Its currency was considered the world's most overvalued[7] and could do with a correction. The tourism industry is already benefiting from Iceland being a less expensive place to visit. I would bet on a large loan (from Russia?), a circumspect recovery, less flirtation with neo-liberal concepts, and, for the West Ham United fans among you, Mr. Zola not getting funds for a major expansion this January.

What are the lessons here? The first is a sobering note for all the insurgent elements in India who are looking to break away - running a small country requires more than the ability to fire an AK-47 and suck up to fringes in the Pakistani and Bangladeshi armies. You have to run an airline, maintain a central bank and a currency, and develop a football team for world cup qualifiers. And when large fish decide to screw you, you have to lie down and take it - witness Geir Haarde's comment when Gordon Brown used anti-terrorist legislation to send Iceland into a tailspin, a mere 'this is not a friendly act'. Iceland may be the richest, whitest and most progressive country on the planet, but when the fertilizer hits the fan who cares - the world can afford it to fail.

The second is more worrisome in the Indian context. Policy makers choose between enabling growth and fighting inflation. Policies that enable growth, such as low interest rates, more circulation of money and larger fiscal deficits, tend to be inflationary and to reduce the rupee's value. And policies that fight inflation, such as high interest rates, squeezed money supply and circumspect government spending tend to curtail growth. It is an interesting tightrope walk and one that is not so much of an issue in times of high growth and low inflation - this was the case over the past few years but is not the case now. The Indian government had reacted to the difficulties faced by people because of rapidly rising prices by taking anti-inflationary measures. The priorities appear to have u-turned in the aftermath of the financial crisis, and all hands are now on the pump that looks to maintain high economic growth and protect the integrity of the country's financial systems. In effect, they have chosen the interests of those with businesses, jobs and bank accounts over those who use a significant proportion of their earnings to buy food. Given the number of elections scheduled over the next year, I am yet to decide whether this is brave or foolhardy.

------------ --------- --------- --------- --------- --------- -

[1] An area of 103,000 square kilometers (about half the size of Gujarat) is inhabited by about 300,000 people (about my neighbourhood in Delhi)!

[2] The Strategic Arms Limitation Treaties were negotiated here in the seventies, and the Fischer vs. Spaasky chess match was played here in 1972.

[3] It is among the richest and least corrupt countries in the world, has the highest participation of women in parliament, has the lowest Gini Coefficient (i.e. has the least inequality of income among its citizens) and the best social safety nets - a model in every way.

[4] Heating is free to all households and is from harnessing geothermal energy.

[5] Iceland has a homogenous population with few immigrants and family records from the time of the Viking settlements in 874 AD, a perfect situation for the study of human genes.

[6] Typically, Icelandic Banks offered 15.5 percent interest on deposits compared with standard rates of 5.5 percent in the UK and 4 percent in the Eurozone).

[7] "The Big Mac Index", The Economist issue of 1st February 2007.

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Movies, Music, Marketing, Martial Arts & the Muse: Global Meltdown The Indian Impact .2008

Movies, Music, Marketing, Martial Arts & the Muse: Global Meltdown The Indian Impact .2008

Global Meltdown The Indian Impact .2008

I happened to run in to Nanubhai on Dalal Street. He was eating Khaman Dhokla in a farsan shop.
'Kame chho, Nanubhai?' (HOW ARE YOU NANU BHAI?
'Saru chhe.' (OK)
He was looking glum but gestured me to join him.

As I bit into the tasty dhokla with tangy chutney on the Friday afternoon, which was fast turning into a 'Manic Friday' as per Dalal Street lingo, hewas staring at the bull near the entrance, which overnight had become a Russian bear hugging everybody that passed the Street.

Nanubhai is a well-respected Dalal Street dada with an answer to every shareholder's query.

'What went wrong with Lehman Brothers?' I asked.

Lots of things. If the founder brothers, Henry, Emanuel and Mayer were alive this wouldn't have happened. Lehman Brothers were more than a 150-year-old company. But yet, it had no Lehman in the company. Such a situation can never happen in India.'

'Are you trying to tell me an Indian would have handled this differently?'

'Bilkul. If it was an Indian firm, Lehman Brothers would have fought as soon as their father died and divided in to three companies. They would have diversified into clothing, polystyrene, petrochemicals, vegetables, movie making, telecom, drilling oil, mobile phones, retailing, books, spectacles, gyms, wellness. In short, anything and everything under the sun. They would have made money for themselves and their shareholders.'

'But when there is massive failure there would be no option but to file for
bankruptcy?'

'Fail-wail chance hi nahin! Even if they encounter tough times, they would have friends like Mulayam Singh and Amar Singh to bail them out. They could finish off competition by befriending the finance minister and getting duties levied on the imports of competition. They would fund and befriend ruling parties. Unfortunately for Lehman Brothers in 2008, without a Lehman on the board or some Indian business brothers at the top, they couldn't openthe survival kit to stay afloat.'

As we were sipping double kadak chai, I asked: 'Did anybody anticipate this global meltdown?'

'Anticipate? Mazak chodo! I will tell you something. America has some 45 Nobel laureates in economics from 1970. From 2000 alone there are 15 Nobel laureates in econometrics sitting on company boards, treasury benches and in places like Harvard, Stanford etc. Kisiko kuch patha nahin tha! How come none of these had any inkling to the disaster awaiting the banking circles all over the world? Even the finance ministers of G-7 talked of strong 'fundamentals' of world economy around this time last year! Two months back the only topic they were discussing was the rise in oil prices.'

'What will happen if it goes all on like this?'

'Some American economist will study this, write a new a theory and get Nobel Prize next year, dekhna. Seriously, they forgot things like control, double check, systems-in-place etc and brought in vague words like Subprimes to give loans left, right and centre.'

'What will happen to the Indian market?'

'It's already having the Lehman Brothers' effect. Our finance minister seems to like the figure 60,000. While presenting the budget earlier in the year he pledged Rs 60,000 crore to write off loans given to farmers. Now he is pumping Rs 60,000 crore to help out the banks! I don't know what he will do next. He is again from Harvard!'

'What is the lesson to be learnt from the Lehman Brothers' episode?' I asked
as we were leaving.

Nanubhai took a spoonful of saunf and said: 'You know, we have an old elementary rule for keeping hisab-kithab. Divide a page into 'Left' and 'Right' with a line in the middle to denote Debit and Credit. In case of LB, as somebody said, nothing was right in the 'Left' and nothing was left in the 'Right',' concluded Nanubhai.

THIS WAS FORWARDED BY A MEMBER OF THE XNDDBIANS GROUP