Can India set a scorching pace of growth

India’s Growth Potential – A macroeconomic perspective

If there is one word the world can’t get enough of – it is Growth! Growth is the amazing factor in financial equations which makes companies stocks go crazy and countries future look crazy. Ofcourse this is particularly true for India which along with China has led the world growth in the past few years.

Can India set a scorching pace of growth

Can India set a scorching pace of growth

India is such a big and massive country that dividing its growth into sectors is not an easy task. Still the Ministry of External Affairs has given us numbers for various sectors (

India grew by 6.9% during 2011-12, which is lower compared to 8.4% growth achieved during 2010-11 but is still pretty good (Data from GoI). The chart from World Bank shows slightly different figures but the theme is still the same. Indian population is growing by 1.4% during the same period. To keep things simple I would adjust the growth down by 1.4% to account for this population growth.

Its also interesting to note from the website that “growth rates of over 8 per cent in the sectors of electricity, gas and water supply, trade , hotels , transport and communication, and financing, insurance, real estate and business services. MOSPI expects slow growth in the sectors of agriculture, forestry and fishing (2.5 per cent) , manufacturing (3.9 per cent) and construction (4.8 per cent). The growth in the mining and quarrying sector is estimated to be negative (-2.2 per cent).” And here lies the reason why the world is betting on India for the next growth wave for the world! Over 8% growth rate in the sectors where consumers are in the driving seat! Indian consumer is coming out and demanding there share from the world and that is going to have a multiplying effect on the economy.

What is needed right now?

Good policies to help manufacturing compete with the rest of the world and be able to provide the goods to the Indian consumer. India does not want to become just an importer of goods but wants to make goods for their own consumers.

Emphasis on Construction and Infrastructure: The growth rate of construction and infrastructure need to rapidly increase in India to make up for the past decades and provide way forward. This will not be easy but its success is going to determine the next few decades for India. India has an advantage here but is not realising it. Many countries in EU and China have already developed their infrastructure, driven their growth numbers by infrastructure spending and are now trying to push their consumers to use this infrastructure and consumer to lead the next cycle of growth in the economy. In India we are seeing the opposite trend where the consumer wants to consume but is hampered by the infrastructure and here lies the opportunity. As we get the infrastructure ready it will contribute to the GDP numbers but the consumption it leads to will create a multiplicative effect on GDP.

Will it happen or not? We will see in 10 years! If you have any comments then do share below.

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Business, Finance

US debt problem-Part 1

US lives on money borrowed from other governments. America’s budget deficit is not a new problem but has rapidly evolved to crisis levels .Expenses exceeded revenue in all but 5 of last 47 years. This is a problem, and the problem – measured by rising losses and a rising debt load – is getting worse. So let us look at this problem in detail:

1. US Debt problem is larger than you think:

See the actual numbers below:

(Image source: )

Break up of US Government Spending:

As seen from the figure; social security, medicare and medicaid are biggest entitlements; almost 75%.

2. The size of the debt is highly sensitive to economic fluctuations :A deviation of 1 percent of average GDP growth over the next decade increases or decreases the U.S. deficit by roughly $3 trillion on a cash basis over 10 years. America’s reliance on short-term debt exposes it to interest-rate volatility.

3. Higher debt could affect American competitiveness:Federal debt may raise the cost of borrowing for domestic-based American companies.  When the government runs large deficits, it  competes for funds that could be invested in the private sector. Higher costs for capital and  limited access to investment will impact the  borrowing costs of companies as well.

In the next article we will explore possible solutions to this problem. Stay tuned!



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Business, Finance

Why Quantitative Easing is not good for Emerging Markets?

Federal Reserve Chairman Ben Bernanke’s Federal Open Market Committee announced a third round of quantitative easing (QE) QE3  on September 13,2012  to stimulate the economy. Quantitative easing (QE) is basically a monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective.

The idea behind Quantitative Easing is that the central bank uses this supply of newly created money to buy up government bonds and other financial sector assets. The purpose is to drive down yields on bonds and provide more financial sector liquidity. It is used in economies where the use of normal expansionary monetary policies has become impossible. In such economies, normal monetary policies no longer work because  base interest rates have already been reduced to such an extent that it is not really possible to lower them any further . The need for such aggressive monetary actions in recent years can be traced to the U.S. real estate bubble, which burst in 2007, and to the more-recent sovereign debt crisis in the eurozone.

QE pumps money into the economy and increases liquidity. This  flood of new money due to QE won’t find a home domestically, it will find places to settle down in many of the emerging markets. Are investors going to want to keep their money in U.S. dollars that are earning nearly 0% interest when they could be shifting that money into emerging market currencies where they could earn 5%+ per year?  Hence, quantitative easing will significantly increase capital flows into emerging markets.Apart from this, Emerging markets have been a popular target of excess capital for a number of reasons:

  • Their overall ability to take on debt remains strong
  • They have experienced minimal balance sheet impairment compared to developed markets
  • They have relatively innocuous levels of pre-existing leverage

So what are the ill-effects associated with Quantitative easing in emerging markets?

  • Inflation and Currency fluctuation: If capital comes into emerging markets too quickly due  to QE, it drives up their currency exchange rate and has the potential to create strong inflation in a short amount of time.  Emerging markets are generally very dependent on their exports, and if a country’s currency gets very expensive, all of a sudden its exports are less attractive.  Therefore, there are many negative effects that U.S. quantitative easing has on emerging market economies.
  • Threats of retaliatory measures:The consequences of QE could be a first-order concern in monetary policymaking. This practice can affect foreign exchange in a way that may disrupt trade flows and prove counterproductive . QE  has led emerging markets to go on the offensive against the United States, and many countries have begun intervening in the foreign exchange trading markets in an attempt to devalue  their own currency values.  If country’s begin intervening in the market on a regular basis, it could create severe imbalance and dangerous conditions.
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The Problem with Multiples in Valuation

A multiple is simply an expression of market value relative to a common statistic that is assumed relative to that value. They are often used for quick comparisons between companies. Enterprise multiples often express the value of entire enterprise whereas equity multiples express the value of  shareholder claims on business.

But multiples have their own problems.

Multiples combine a great deal of information into a single number. Combining many value drivers into a single number can lead to erroneous interpretation.

Multiples are difficult to compare. The results also depend on type of multiples used. P/E ratio gets distorted by the capital structure of the company, All else being equal, the company with a lower debt will have a higher P/E ratio. Enterprise multiples on the other hand are not affected with that distortions and hence TEV/EBITDA is used by most sophisticated investors.

If the multiples are too low for a company, the probably the company is being compared with a wrong set of peers. For multiples analysis, the relevant companies are those that compete in same markets and have similar growth prospects.

It is seen that in mature industries multiples vary little among peers. Even if companies outperform their competitors , there is a convergence of growth and returns hence it is difficult to predict which companies will actually outperform. Hence, a company’s multiples are largely uncontrollable.

Hence generally multiples are used in conjunction with other valuation methods like DCF.

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Why is the US expensive as compared to India?

Ever wondered why a simple haircut in India costs much less as compared to the US? Or why nannies can be really expensive in US as compared to India?But a laptop costs almost the same in India and the US. Why this difference exists? Why are prices of some goods and services the same whereas they vary widely in case of others?

The reason for this can be explained by what economists term as the “Balassa Samuelson effect”. The Balassa Samuelson effect captures the relationship between real exchange rate and productivity.It states:

  • The traded good has the same price in both countries
  • Productivity in traded goods determines wages
  • Wages determine the prices of nontraded goods

Lets understand it in simple words:

The reason why the prices of some goods like laptop don’t vary is because if they vary, it would create opportunities for arbitrage. If you bought a laptop in India for $1,000 and sold it in US for $1,500; then eventually price in India will be raised to $1,500.Laptop is a traded good and hence its price does not vary much across countries.

But services like haircuts are not tradable. You won’t fly from US to India just because a haircut is cheap. Similar you cannot hire an India nanny to look after US kids. So for non –tradable services like salons, restaurants , baby sitting there is a local market. In case of US, the incomes are high and people can afford to pay more. So the price levels for these services are high in US. But how are incomes determined? Balassa-Samuelson effect states that productivity in traded goods determines wages. For countries with higher worker productivity, they can trade their goods abroad and hence get richer. Prices can also vary within a country. A haircut may cost more in places where rentals are high versus the place where rentals are low. This is because land is a key non tradeable good and prices of land vary widely across the country based on supply and demand.

Apart from Balassa Samuelson effect , price levels are also determined by exchange rate.  For countries who try to depreciate their currencies to make exports attractive, the services are cheaper than they would be without the depreciation. A classic example of this case is China.

If we had to boil all this — Balassa-Samuelson effect, exchange rate down to a simple statement: it might be this: All things equal, prices rise fastest in the places where rich, talented people want to be.

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Business, Finance, Politics, Public Issues

US and India Relations – A tale of two democracies

(One more guest article by Ankur Singh . You can read his previous article here. Ankur will soon start writing on as a regular author. Do you want to write on too? Read this for details )

US and India Relations – A tale of two democracies –

Democracy, as its meaning suggests, is all focused for the welfare of people. And its two most celebrated practitioners are India and the US. Both are the world’s largest democracies with plural societies tolerant of diversity. However, both of them are now bound on a journey that may twist the very fabric of this system.

The social and political conditions in both countries have never been amazingly similar as they are now. Both countries have witnessed a nation-wide public movement (Lokpal and Occupy Wall Street). Both the governments are struggling with economic and financial problems. Important elections are due next year in both countries. And finally, governments of both countries are entrapped in a mire of allegations and stalemates.

Let’s start with US. The government formed a super-committee that had representatives from both republican and democratic party who were expected to suggest a solution to the debt crisis of the country. It was also decided that the suggestions made would bypass the conventional rigmarole and would be implemented expeditiously. However, the committee tossed up its hands on 21st November and left millions of Americans disgusted.

Now let’s see the Indian scenario. A few days before, key industrialists like Mukesh Ambani & Ratan Tata emphasized on fast decision-making on the part of government. This statement was made in front of representatives from both Congress and BJP. However, our parliament seems unperturbed. The 1st two days of winter session of Parliament have been disrupted by opposition  with no significant output. Plethora of reforms (some good and some adequate) are lying in the pipeline. But neither our responsible government nor the constructive opposition have accomplished anything.

The reason for stalemate in both countries is the lack of social responsibility on the part of politicians. As the elections are close, the opposition parties could not let the government get their policies right. That could mean severe damage to the vote-banks. I am sure that similar thing will happen if the parties’ positions are swapped (ruling party becomes opposition and vice-versa). This vicious cycle may go on leading to delay in a number of welfare schemes over the decades. However, none of the parties are violating any rule of democracy. So, we can’t complain.

So did our constitution-framers made a mistake? Should we resort to system like that of China which is undemocratic and partially capitalist but has yielded much better growth results than both US and India? Perhaps not. Perhaps, the current events may just be once in a while scenarios. But the current situation definitely calls for some changes in the decision making. “What those changes could be” is an open question. Please express yourselves on this issue. Notes from the Editor: This is an article contributed by Ankur Singh – A guest strater. Ankur works as aStrategy and Operations Analyst with Deloitte Consulting and studied at Indian Institute of Technology, Delhi earlier. The article serves as an eye opener about the value added by Engineering Entrance Exam coaching centers in the Indian Education Ecosystem. We look forward to more insights from Ankur in the coming months. Also, the views expressed are author’s own and neither supports or opposes them. is a forum for thought provoking discussions and will continue to remain so.

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What do job cuts in European banks mean for India

The Washington Post today reported the following about Credit Suisse, the Swiss investment bank –

Credit Suisse <CSGN.VX> will cut another 1,500 jobs and scale back its capital-guzzling investment banking business as it seeks to meet tough new regulations, it said on Tuesday after reporting disappointing third-quarter results.

Nomura , the Japanese investment bank maybe cutting twice the number of jobs as compared to its Swiss competitor –

Japan’s Nomura Holdings <8604.T> posted its first quarterly loss in 2-1/2 years on Tuesday due to a sharp drop in investment banking revenues and tripled its cost-cutting target to $1.2 billion in a setback to its overseas expansion plans.The debt crisis in Europe has ratcheted up pressure on Japan’s top brokerage to tap the brakes on a global expansion that started with its purchase of the Asian and European businesses of failed Wall Street bank Lehman Brothers in 2008.Nomura lifted a cost-cutting target to $1.2 billion from the $400 million announced in July in a move that will likely lead to hundreds of more job cuts on top of the roughly 400 it set out to reduce in September.While Nomura did not give details of planned job cuts, its chief financial officer, Junko Nakagawa, said 60 percent of its cost savings would come from Europe, where it is losing money and has 4,500 workers, or about 13 percent of its total staff.

While these job cuts really may mean not much to the average Indian, these signify changing winds in the global market, something that has started since the fall of Lehman in 2008. Firstly, these signify tumultuous times in the European markets, with the economies floundering under the impact of potential bankruptcy of governments.

Secondly one has to understand that European job cuts will impact in certain ways the backend support ops as well. Possibly some job transfer to India may happen as well.

Thirdly, if job cuts are happening in Europe now, will a similar situation happen in India in future? And if Yes, how is the country going to guard against it? Thats also something that needs to be considered.

What do you think on this? Let us know.



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Business, Finance, Strategy

Rupee weakens – More capital to flow into India

Today I just checked Google for the latest Dollar to Rupee conversion and this is what I found out (alongside) . Clearly, the Rupee is depreciating, and majorly against the dollar. So what is happening globally?

Due to the grim outlook for the global economy, in the short term, everyone wants to remove their investments from emerging markets and invest into safer bets. And the investor community thinks that investing in the US dollar is the safest bet out there. So what is expected? Clearly, in the near term, the current account deficit is expected to widen. Right now, the deficit stands at around 2.6% of GDP and can widen by 0.4 to 0.6 % depending on the volumes of investment outflows out of India, unless of course the RBI decided to intervene.

However, there is another side to this as well. Capital flow into India will strengthen. As we all know, the NRI community dominates among the top 5 percentile earning population in terms of money earned. NRI investors are definitely going to see this depreciation as an opportunity to invest in India – either in property or in insurance or simply in fixed deposits. What does that mean? A lot of money will flow back into the country since the investors outside India are going to get more value for their money in India. This is going to affect markets in many ways. Money that will make it into the Real Estate will make the Real Estate sector more resilient to price dips – something for which Indian consumers are hoping for. Money going into the investments sector is going to give banks the capacity to give more loans and that may lead to (hopefully) the lowering of interest rates – depending on the volumes getting into the sector. A lot of money will also be pumped into the PE / VC industry and consequently into startups. Overall, one tends to think that the current panic is a short term thing and over the long term, still India’s fundamentals are pretty OK and rupee will stay between 48-52 Rs to the dollar in near term.

What do you think? Let us know in the comments section.

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Business, Entertainment, Entrepreneurship, Finance, Marketing, Strategy, Technology

Movies Stock Market – A Solution To Piracy?

Recently an exchange to trade box office success of movies received approval from US market regulators according to Yahoo. Personally I believe this is an amazing idea and I had in fact pitched it as a presentation during an internship as well.

Why I think movies can be a good exchange market?

  • Solution to piracy! I think the exchange can actually help in reducing piracy by making common public a shareholder in the movie. People will be much more inclined in reporting piracy if their own financial interests are being harmed by piracy.
  • Number of participants: The success or failure of a movie is not in the hands of few people (like sports). The box office success of a movie depends on thousands of moviegoers! Although critics can enhance / dampen the success of a movie but they can’t dictate it. All exchange traded products require the presence of large number of market participants to ensure markets are not manipulated.
  • Natural Sellers: Movie producers, distributors, movie halls and investors are natural sellers on the exchange. They can hedge a part of their investment via the exchange.
  • Movie Fans, Natural Buyers: Movie fans will like to buy the movies in anticipation of movie doing well. Ofcourse a lot of people will want to buy Twilight Eclipse Opening Box Office rights and it can be actively traded.
  • Seed Money to upcoming producers: As far as I understand (and I may be wrong), new upcoming producers find it hard to raise funding and such an exchange can actually help them! The article on yahoo mentioned that big movie houses were against such  an exchange and this could actually be one reason for their disapproval.
  • Invest in a single movie, not the production house: Investors currently have no way to express a view on the success of a single movie, and have to take view on a production house and hope that all their movies turn out well. By having single movie futures we can remove this.

What are your comments? What do you think about this idea? Please do let us know…

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Business, Entertainment, Finance, Public Issues

BP Oil Spill: Why even $20 billion isn’t enough?

BP has made a blunder. No doubt about that! So we shall not even discuss it here. Is only BP responsible? We shall also not discuss it here. Now that BP has agreed to pay $20 billion in payments to the US Government, the main question which people are asking is …. whether $20 billion are enough? Here are some arguments why they are probably not!

  • Tourism Industry in the Gulf of Mexico: According to CNN, tourism is about 46% of the Gulf economy i.e. over $100 billion! Has the spill destroyed the tourism industry? Yes, No, Maybe? If ‘maybe’ then till what extent and how much will the loss be? The state governments are saying that the beaches are not closed but will this save the tourism industry? With photographs of wildlife soaked in crude all over the internet, will anyone realistically go to the gulf for tourism? State tourism departments are saying that they are getting cancellations as far as 3 months out. Cancellation rates are being said to be around 50%. If we do back of the envelope calculations and assume 6 months of tourism disruption and 50%  cancellations then it give us $25 billion of tourism revenue lost!
  • Unemployment: In a state with 12% unemployement (according to CNN) the after effects of the spill will likely cause more layoffs. With a major overhaul of oil & gas industry and decline in tourism industry, unemployment will spike. This can have major impact on the society near the gulf and can cause various problems. Ofcourse Government will have to take care of the situation but the costs will be very high.
  • Real Estate Decline: A natural follow-up of this has to be another shake-up in the real estate valuations around the gulf. Just when US is recovering from 2008 recession, this is not something that anyone will look forward to.
  • Clean-Up Costs: Exxon Valdrez spill occurred in 1989 near Alaska and it was an oil tanker leak! According to Exxon they spent over $2 billion in clean up costs. Looking at the scale of current oil spill plus adjusting for inflation, this will amount to atleast $5-8 billion.
  • Wildlife Loss: One of the biggest losses caused by this oil spill is loss of wildlife and natural environment. This loss is invaluable and just can’t be measured. The loss of fishes, birds, vegetation and ecological balance cannot be brought back by money! If we can just learn a lesson from this tragedy of not taking nature for granted then it would be a small step towards redemption.
  • Oil & Gas Loss: The spill will probably cause stoppage of drilling in deep sea water! This is a good step for all of us in the long term, however in short term it probably means supply shortage and higher oil prices. Because of  negligence of one company, some poor soul will have to pay extra for travel!

Ofcourse too many issues and very little explanation. Hope you enjoyed the video though.

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