Rupee Depreciation: There are lessons to be learnt

Rupee, our very own Indian currency, has witnessed a literal free fall especially in the past few weeks. The rupee slid 15.8% in 2011 and by 0.2% in the last week of 2011 to 53.065 per dollar in Mumbai, according to data compiled by Bloomberg. According to reports, this currency weakened the most in Asia this year. So, what has led to such weakening or should I say, depreciation of the rupee and what does it entail for the Indian economy? Let’s explore this interesting and crucial topic that has the potential to shape the future of Indian economy. After all, an appreciating currency makes a country's exports more expensive and imports cheaper in foreign markets whereas the reverse makes a country's exports cheaper i.e. more attractive and its imports more expensive in foreign markets. 

Double Dip: The likely impacts on India

In one of my previous blogs I wrote about why double dip was a possibility in the US? Now after the S&P downgrade of the US debt, it seems that the sentiments have really turned for the worse though fundamentally things haven’t changed a great deal. But what if the double dip materializes and what lies in store for India if US is engulfed by the economic crisis? Let’s discuss them. 

The US Double Dip: It could well be a reality

Initially the experts predicted a V shaped recovery i.e. a fast recovery for the US but then shifted to the left in the alphabetical order i.e. U, a slower path to recovery, but the existing scenario might push them further to the right i.e. to W or double dip. A look at the common economic indicators like unemployment rate, growth rate, rate of inflation or interest rate etc. would tell us that the future is murky. Add to that the increasing clout of countries like China or should we say decreasing impact of US on the global setup is only worsening the cause. The inability of the US to force appreciation of Yuan is a case in point. The usual backers of US like UK, France, Japan are themselves deep into crisis so no help can be expected from that quarter. The world economy discussing “decoupling” shows that the perception is that the US is lonely as well as depleted in its battle with recession.

QE II and the recovery story: Is it time for austerity?

(The article was adjudged the best entry at Consilium – The Policy Design Competition at IIM Lucknow)

Quantitative Easing II better known as QE II has been globally the most  discussed phenomenon in the recent times. Through this mechanism the US Federal Reserve will buyback 600 bn US$ worth  of bonds, at about 75 bn US$ a month, and infuse newly created money in the system. The buyback follows the QE I that saw an infusion of 2 trn US$.

The step can lead to lowering of interest rates or yields in the US thus incentivizing investors to look for greener pastures abroad that provided greater returns. Considering the deflationary concerns in the US and the unusually high unemployment rate, “doing nothing” was not an option for the regulators. With Chinese not allowing Yuan to appreciate to the levels acceptable to the US, Fed through QE has taken it upon itself to undo the “trade imbalance”.  QE through lowering of interest rates aims at spurring demand as well as consumption. This will generate jobs as well as lead to appreciation of asset prices which have touched new lows thus leading to foreclosures and defaults. As far as global economy is concerned, even they can benefit through FII inflows.

The Decoupling Theory

One term that has been doing the round nowadays on the web, on biz news channels or newspapers is “Decoupling”. The decoupling theory holds that Emerging economies have broadened and deepened to the point that they no longer depend on the United States or Europe for growth. Emerging markets (EMs) are nations with social or business activity in the process of rapid growth and industrialization. So let’s start our exploration of the decoupling theory (DT) now.

Decoupling as we all know is separating or detaching. But what’s the reason that we hear so much about DT? The two likely reasons are shaky recovery of the developed economies with V shaped likely to make way for a U or even worse W shaped recovery and the robust performances of the emerging economies like China & India.  So what does DT entail for the world economy? One, it signifies the growing strength of the developing countries as well as weaning strength of the countries like US & UK. Add to that it also tells that emerging countries are gaining self sufficiency i.e. consuming what they are producing within themselves.

Public Offers made Public - IV

After introducing Public Offers in the first part, discussing some regulatory changes in primary markets in the second part, pros and cons of the 25% listing norms in the the third part, the fourth and the final part will focus on ASBA, another revolutionary change by SEBI.

ASBA or Application Supported by Blocked Amount is a new method introduced by SEBI for making investments in IPOs, Mutual Funds and NFOs. SEBI has tied up with self-certified syndicate banks which shall provide this facility.

Public Offers made Public - III

After introducing Public Offers in the first part and discussing some regulatory changes in primary markets in the second post, the third post will focus on the pros and cons of the recently proposed 25% listing norms.

On 4^th June 2010, the Ministry of Finance amended the Securities and Contract (Regulation) Rules, 1957 to set a limit of a minimum 25% public shareholding for initial public offers (listings) by companies on Indian stock exchanges as well as for continued listing.

Public Offers made Public - II

After introducing Public Offers in the first part, the major focus of the second part of the series will be to discuss some of the Regulatory Changes in Primary Markets in the recent past and their likely implications.

Reduction in IPO timeline from 22 days to 12 days: Market regulator SEBI has amended the existing rules regarding the time period between closure and listing of IPOs. The window has been reduced from 22 days to 12 days.

Public Offers made Public - I

In this series of blogs, I’ll focus on some of the recent changes in the regulations related to public offers. I will also discuss some of the likely impacts of these changes. In the first part I will introduce public offers in brief.  

In order to finance their expansion, firms rely on different methods to raise capital. While deciding the mode of financing, the company looks at different aspects of capital i.e. cost of financing, amount of capital required, capital structure, size and reputation of the firm etc. The primary methods used by corporations to raise capital are: Bonds, Stocks, Borrowing & Retained profits. In this blog we will focus on the stocks as a method of financing.

Bonds and Bonding

Have you ever tried to find out what similarities do the financial instruments have with our day-to-day activities? Some might be wondering for the logic behind this question whereas some might say that it’s too obvious as the instruments are meant to take care of our day-to-day financial needs depending upon our incomes and risk taking capabilities. Let me put a more specific question; what are the similarities between Fixed Income instruments and relationships in real life? Before you start guessing let me simplify the task by defining the two terms. By fixed income instruments, I mean those financial instruments that help you earn low but fixed returns on your investments thereby reducing your risk. The most well known example is bond. On the other hand by relationships, I mean those existing between a boy and a girl or a man and a woman. I am counting out those arising out of family ties, friendships or those existing between same sexes. In better words let’s limit ourselves to those relations that might culminate into marriages.

Union Budget 2010

(This article was originally written for the CNN-IBN blog)

Burgeoning fiscal deficit, inflation breathing down your neck and the promise to keep the growth story intact, not the best time to be the Finance Minister. Pranab Babu had his task cut out. How does his respond? Does he come up with a populist budget (the WB election issues are there) or he buckles down the pressure exerted by the India Inc.

Let’s try to analyse it under different heads:

 

Tax: 

The new income tax regime ensures that the salaried middle class ends up paying less and the upper middle class lesser. We were just discussing fiscal deficit by the way and the deficit will now go up by 26000 cr. Tax savings by an additional amount of Rs 20,000 for investments in long-term infrastructure bonds are now allowed but is it enough considering the major portion of the savings still finds its way to the savings bank account. I think the FM has missed out here. The excise duty inches up 2% (on car and SUVs) and the oil prices shoot up not because revolutionary deregulation has become a reality but basic duty on petroleum products has been enhanced. So FMCG companies gain as the middle class spends more but who loses out, it’s him again, the ‘aam aadmi’, who doesn’t earn enough to be taxable but still relies on kerosene. Though there was a relief from the service tax front as it stay put at 10%. Raising the rate of Minimum Alternate Tax (MAT) from 15 per cent to 18 per cent of book profits could be the cause of complaint for the infrastructure firms. 

Reforms: 

GST, the tax reforms aimed at uniformity, transparency, widening the tax net and that has found favour in more than 100 nations still seems to be in the dock as no concrete roadmap was announced. Labour reforms, oil deregulation, fertilizer subsidies, the most hotly debated topics considering the existing scenario didn’t get the due attention. So, it seems the structural deficiencies causing deficit are here to stay.

 

Agriculture: 

Nutrient based fertilizer subsidy is a step in the right direction but unless followed up with more radical steps so that the benefits directly reach the farmer, it could be the case of too little too late. Providing project import status with a concessional import duty and full exemption from service tax to installation and commissioning of mechanised handling systems, pallet-racking systems, cold storage, cold room and processing units in mandis and warehouses will reduce the wastages during handling and storage. It’s high time we looked at agriculture as a source of revenue by taxing the rich farmers and passing on the benefits to the marginal and landless farmers. 

Infrastructure: 

It was noteworthy that forty-six percent of plan allocations in 2010-11 will be for infrastructure development. It goes to show that the FM has realised that for the sustainability of the Indian growth story, infrastructure has to be robust. Tax breaks on investments in long-term infrastructure bonds is a welcome step. The major concern would be proper execution of such projects. 

Social Sector: 

Increased allocation to rural development initiatives like National Rural Employment Scheme, Bharat Nirman, Rajiv Awas Yojana for slum dwellers etc shows that Bharat will no longer be neglected vis-à-vis India but the major cause of concern with such schemes have been corruption and leakages in the system. Unless these issues are properly dealt with, they would be a burden on the exchequer. The NREGS too needs to go beyond funding temporary activities like digging up wells, check dams etc. It could be used to develop permanent assets for irrigation. Provision for further capital for regional rural banks will help in credit penetration as well as stop fund leakages as targeted beneficiaries can be directly paid through bank accounts. National Social Security Fund has been created for workers in unorganised sector. This is modest beginning but a much needed initiative nevertheless. 

Other Initiatives: 

Clean energy cess on coal produced in India, concessional duty on solar power rickshaw developed by Council of Scientific and Industrial Research, increased allocation for new and renewable energy are a proof of the progressive thinking of the government but it needs to be sustained to be effective. The higher education was neglected by the FM that too considering the immense possibilities of PPP in this sector. The continuing shortage of skilled workforce should have rung a bell or two by now. 

All in all a budget that will yield positive results if the initiatives are effectively implemented. Else it could be the classic case of, ‘Too much boast, little toast”.