Can India set a scorching pace of growth
Finance

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 (http://indiainbusiness.nic.in/economy/economic_snapshot.htm)

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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Finance

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, Entertainment, Politics

Battlefield of Economics, Politics & Power

Recently Mumbai witnessed yet another gimmick of exchange of words, high intensity drama and its fall when three of the icons of the field of Bollywood, Maharashtra Politics & National Power confront each other – Shah Rukh Khan, Shiv Sena and Rahul Gandhi. We would be assessing the positives negatives and strengths of each of these confrontations.

On one side heavily criticized for his comments on the recent IPL auction for Pakistani players, Shah Rukh Khan had to moderate his comments and views for his upcoming movie – My Name is Khan. After being type casted as a “Traitor”, Shah Rukh Khan even though being one of the most popular names in Indian cinema had to negotiate for the release of his movie which has a budget of around Rs 38 crores. The movie distribution rights have already been sold for Rs 100 crores to Fox Studio (above the Rs 90 crores for Ghajini). Here was the battlefield for Shah Rukh Khan

Strength:

  • Popularity throughout India
  • Media Sympathy and PR machinery
Weakness:

  • Release of upcoming movie on 12th Feb
  • Potential to lose grounds in mass Mumbai audience
Positive Outcome:

  • Media hype and publicity for the movie
  • Negotiated release of the movie
Negative Outcome:

  • Befriended Mumbai Politics czars
  • Had to lose views for money

And on another, one of the biggest up comer in Indian politics – Rahul Gandhi who will someday or the other be the Prime Minister of India also had exchange of words with Sena for his support to the Uttar Pradesh and Bihari population in Mumbai & Maharashtra. His comments on the North Indian NSG men were twisted to be an insult to the Marathi Police men who fought to death in the 26/11 terror attacks. On his recent visit to Mumbai, he was welcomed with black flags but the power of being the son of the most powerful lady in the country no one could scare Rahul a bit. Also his post Mumbai visit to Bihar brought interesting twist into Politics. His equation seemed to be like this:

Strength:

  • Next leader of Indian National Congress
  • Clean Image & immense power
Weakness:

  • Potential to befriend Marathi votes
Positive Outcome:

  • Positive sympathy amongst both Marathi and Non Marathi population
  • Positive vibe for Bihar visit
Negative Outcome:

  • NIL

Coming down to Sena who seemed to have been the biggest loser of both the incidents who played political cards to gain more ground in their vote bank. Now type casted as big mouths, Sena and similar parties are being criticized for all words and no work. With Marathi aam aadmi demanding jobs instead of politics they are in a very tight spot. Their equation was like this:

Strength:

  • Iconic leaders in Maharashtra Politics
  • Activists spread across Mumbai
Weakness:

  • Over reaction to both incidents
  • All words no work image
Positive Outcome:

  • Political Censors for release of movies
Negative Outcome:

  • Successful sympathy wave by Rahul Gandhi
  • Image of being party crashers

When Rahul Gandhi used public transport to relate closer to the Mumbai residents, he could successfully create a new wave of positivity and compassion. He also created a perfect ground for his visit to Bihar to revive Congress grounds. All in all the game of Politics, Economics & Power seems to have been negotiated in the battlefield by each of the players known to be the best in their fields.

(Views are personal and Strat.in is not responsible for them)

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Planning, Politics, Strategy

Does India need a 21st century Chanakya?

“A man is born alone and dies alone; and he experiences the good and bad consequences of his karma alone; and he goes alone to hell or the Supreme abode.”

“A person should not be too honest. Straight trees are cut first and honest people fall into hot waters first.”

“As a single withered tree, if set aflame, causes a whole forest to burn, so does an unworthy son destroy a whole family.”

Chanakya (350-283 BC)

chanakyaI wish to present Chanakya, who would figure as one of the greatest strategists of all time, through these posts. Rishi Canak named his son as “Chanakya”. Being a teacher himself, he knew the importance of education..

His achievements: In his capacity as author of the Arthaśhāstra, is generally referred to as Kautilya .He was the master of shrewd act of diplomacy. He believed in four ways, namely, Enticement, Sowing Dissension, Punishment or War. Takshashila was one of the world centers for education. At a very early age little Chanakya started studying Vedas. The Vedas; considered to be the toughest scriptures to study were mastered by Chanakya in his infancy. He was attracted to studies in politics. In politics Chanakya’s acumen and shrewdness was visible right from childhood. He was a student of politics right from child hood. Known as a masterful political strategist, he knew how to put his own people in the opposite camp and spy the enemy without his knowledge before destroying him forever. Chanakya was an ace in turning tables in his favor irrespective of the circumstances. He never budged to pressure tactics by the ruthless politicians. In this way after studying religion and politics, he turned his attention to economics, which remained his lifelong friend. “Nitishastra“, a treatise on the ideal way of life shows his in depth study of the Indian way of life.

At a time when the Dark Ages were looming large, the existence of a university of Takshashila’s grandeur really makes India stand apart way ahead of the European countries who struggled with ignorance and total information blackout. For the Indian subcontinent Takshashila like today’s IITs , IIMs & other important Educational Centres ,stood as a light house of higher knowledge and pride of India. Here it would be essential to mention briefly the range of subjects taught in the university of Takshashila. (1) Science, (2) Philosophy, (3) Ayurveda, (4) Grammar of various languages, (5) Mathematics, (6) Economics, (7) Astrology, (8) Geography, (9) Astronomy, (10) Surgical science, (11) Agricultural sciences, (12) Archery and Ancient and Modern Sciences.
The university also used to conduct researches on various subjects. This perhaps explains great scholarly work done by Chanakya in various fields. Chanakya has been misunderstood by a lot of people, mainly the modern western scholars. But Today India is in a similar situation which Chanakya encountered. The country had been ravaged by Alexander and there were numerous petty kings looking after their own interests. The nationalistic pride had disappeared, and people were not proud or even aware of their ancestry. Chanakya appeared on the scene and united Bharat under the rule of Chandragupta Maurya. He was fearless, not afraid of death, disgrace or defeat. He was compassionate to the poor and kind, evil to deceit. His writings which clearly show his fearlessness in the pursuit of Truth has been echoed over 2000 years later when Swami Vivekananda cried out, ‘Arise, Awake, sleep not till the goal is reached.’

Chanakya’s life is full of paradoxes.He plotted and overthrew governments, as a saint. Some have even gone as far as to say that he was evil. If re-establishing the truth and the glory of Bharat is evil, then perhaps even Gandhiji would be accused of overthrowing the British and getting independence of India. If remaining calm during war is not a mark of a yogi, what is ?

Moving to 21st Century: Today in India , we find several Chandraguptas waiting to be discovered, encouraged …..unfortunately , so few like Chanakyas. We find terrorists blatantly using Indian land to create havoc, but nobody with dogged perseverance of Chanakya to root the evil of terrorism. Perhaps today’s Chanakya would come from the IAS, the police, even someone from the corporate world. What needs to be done is great initiatives need to be supported by the community. For India to emerge as a super power in the 21st century, India needs visionary thought-leaders, like Chanakya. (would appreciate views from readers on this)

I wish to conclude Today’s piece by mentioning following thoughts by Chanakya.

“As long as your body is healthy and under control and death is distant, try to save your soul; when death is imminent what can you do?”

“As soon as the fear approaches near, attack and destroy it.”

More about Chanakya’s Kutaniti sometime later…

This article is written by Sudhir Chandra. He has 25+ experience in Indian MNCs and is passionate about history, strategies and much more.

For facts refer following links:
1)http://www.hinduism.co.za/Chanakya.htm
2)http://en.wikipedia.org/wiki/Chanakya
3)Teleserial Chanakya
4) http://www.brainyquote.com/quotes/authors/c/chanakya.html

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Business, Entrepreneurship, Finance, Marketing

Runup to Budget 2009: Stock market and Mango man (aam aadmi)

This is a strat.in ‘Runup to the Budget 2009’ series. Every day from now, till Monday, readers can find a finance related article uploaded at 5 pm IST . The articles will be unconventional, innovative and present a refreshing perspective. This is the first article in that series: With this article, we also welcome our new strater who wrote to us on the Write a post page, Amit Namjoshi, from Pune university. He is currently a Design Architect at Tech Mahindra.

economist_m‘An Economist’ according to a popular joke ‘is a trained professional paid to guess wrongly about the economy’. Of course this joke wouldn’t be funny hadn’t there been an element of truth in that statement! So should Mango Man (Aam Admi) rely on the predications by the Stock Pundits and Economist? In 1993 the OEDC or the Organisation for Economic development & co-operation analysed forecasts made between 1987 and 1992. Their conclusion- predictions were abysmally inaccurate so much so that they would have done a better job at prediction for inflation and gross domestic product had they simply guessed that the numbers in each year would be unchanged from last!

common_manFor Mango man (common man) yes that’s me; it is essential to understand the fundamentals of Economics before I go any further! A first step- begins with one of the core idea in economics known as the ‘Efficient Market Hypothesis’ (EMH). According to EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

In this conventional view economy is like a bath of water. At a microscopic level the individual atoms / molecules are constantly active a sight of chaotic movement. However at the surface for the commoner all of it seems to be calm where the water is still, in a state of equilibrium. Tilt the bath to the right and the water molecules will adjust their position to seek equilibrium. In terms of economy we relate that to, lowering of interest rates resulting in rise in borrowing and spending. This in turn stimulates the economy; which will quickly settle in at a new equilibrium. Therefore by this conventional view it should be impossible to outperform the overall market through expert stock selection. But there is a catch; no amount of equilibrium can explain the crash of the stock exchange of 1929 or the infamous black Monday of October 1987. Mathematical research in the past 2 decades proves this point. The 90’s saw researchers use computers to take an in depth look at these fluctuations. Gene Stanley from the Boston University investigated the fluctuations in the famous standard & poor’s 500 index (share prices of 500 large corporations of the NYSE). The study considered data from 1984 to 1996, Stanley and his team came to the conclusion that price change becomes about 16 times less likely each time you double the size.

So can we devise a pattern that can fit these fluctuations? Perhaps we can. The Power law pattern– in algebra it is any curve for which the height changes in proportion to the horizontal distance height = (distance)2. A few examples of power laws are the Gutenberg-Richter law for earthquake sizes (the Richter scale that logs the magnitude of an Earthquake), Pareto’s law of income distribution and scaling laws in biological systems (miniature models that are scaled down). To make it easy in the context of an example lets look at earthquakes. If there are two types of earthquakes type A and type B the law simply shows if type A earthquake releases twice the energy of type B, then Type A earthquake will happen 6 times less frequently. In the case of economic data studies by Stanly and team though the numbers don’t seem to add up the geometric pattern certainly does. The power law implies that there is no such thing as a typical fluctuation and therefore the large up and down swings are not at all unusual. What about volatility (calm and spike on a graph) in the market? Stanley and team found out that the market is far calmer at sometimes then others and if we look at fluctuations in volatility even that varies to a wide degree. To put in other words even volatility is volatile!

So when equilibrium seems to be the order of the world (remember the water bath) then the wild fluctuations fly in the face of efficient market hypothesis. Why is it that the orthodox economic theory falls flat when fluctuations should be more like the bell curve (as stated by Bachelier in 1900 a bell curve is a graph that looks like a bell)? But that is clearly not the case.

So what then are the causes of this mystery? For one market involves people; perhaps that has something to do with this phenomenon. Economist Thomas Lux in 1999 invented a game of stock exchange with only one kind of stock and three kind of brokers- pessimist( believing the market prices will fall), the optimist (believing the market prices will go up) and the fundamentalists (traders who stick to buying undervalued stock and sell over valued ones). However the game had one key aspect people; they can affect one another. Since humans can influence one another the division of traders was not fixed a pessimist could be influenced to be an optimist at times or the fundamentalist might just take pessimistic view of the stock on view of the strong trends as they are also highly influenced by meme (meme consists of any idea or behavior that can pass from one person to another by learning or imitation). The result – measuring the stats of the fluctuations Lux found them to match the ‘real thing’, a power law revealing a great susceptibility to fluctuations.

10978-royalty-free-clipart-illustration-of-orange-businessman-putting-a-dollar-sign-puzzle-togetherWhat does this mean for the average investor? Despite the confident predictions of the bulls and bears of the market, mathematical analysis and their indications, the existence so called ‘trends’ in the market in spite of all of this there is simply no way to predict any stock market. The power law for price fluctuations indicates that even the rough magnitude of fluctuations is unforeseeable. In a market organized to the Critical point (a critical point specifies the conditions at which a phase boundary ceases to exist. Water becomes vapor at 100 degrees Celsius is an example of its critical point) even the stock market crashes are ordinary though we should expect them infrequently. We have seen financial markets are wild at heart because opinions expectations, greed, pessimism, optimism of one investor can affect those of the other.

So what can we make of this, is there any way in which we can truly predict the market? And what if anything can the governments and governing agencies do get us as close to the world of accurate predictions? More importantly the world is now much more of a ‘global economy’. And therefore the current crisis brewing in one economic power house ‘United States’ entail a story of a global recession. Every day I wake up to the news of predictions from the who’s who of the stock market, the pundits of economics about the possible recovery however now I perceive them with a lot more skepticism and I realise I am passing a meme to you as well!

….. Mango Man (Aam Admi)

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