Last Sunday I was returning from CR Park around 1030 pm to my Blue Den in Sheikh Sarai. Auto drivers usually demand 50/60 bucks though the distance is little less than 3km. After hard bargaining they settle for Rs.40. However, to my surprise, this particular guy asked just 30 bucks. On the way, I enquired him how his auto business was going on. He sounded quite pessimistic. He says his daily turnover is steadily falling. He used to earn 500-600 rupees on an eight hour shift. But nowadays even though he remains on road for 10-12 hours, it is becoming difficult to reach his target turnover. He made an interesting observation that waiting time at the Chirag Delhi crossing on the BRT corridor is coming down. Given the slowdown in sales, falling incomes, and increasing lay-offs, traffic on Delhi roads will further come down. A blessing in disguise indeed!
Financial turmoil, which began as a subprime housing crisis in the United States of America last August has now blown out as a deep recession affecting the economic activities across the world. Today’s headlines read Citi Bank is mulling the option of auctioning off all or parts of it. Nobody would believe this piece of news had it appeared a few months back. Citigroup is a symbol of global capitalism. It is now affected by the financial storm that has changed the face of Wall Street, forcing the sale of giants like Bear Stearns, Merrill Lynch and bankruptcy filing of Lehman Brothers and insolvency of automobile behemoth General Motors.
The impact on the real economy is now clearly evident. Latest data indicate that the number of jobless claims in US hit 16 year high. Industrial payrolls have fallen 10-straight months, pushing the unemployment rate to 14-year high of 6.5% in October. Federal Reserve says that a forecast for the end of 2009 is 7.1% to 7.5%. Independent forecasters say it might go as high as 8%. This translates to lower consumption in coming months. Imports to US will further go down. The situation is no different in Europe. Some European countries like Poland, Hungary etc are entering recession mode. UK is no exception. Japan and Singapore are also slowly slipping into recession. Union Commerce Secretary states that there would be five lakh job losses in textile sector in India in the next five months due to sharp decline in apparel exports.
Occasionally I look at the Baltic Dry Index to see the trends of shipping prices. This index tracks the price of shipping bulk cargo. It is one of the oldest indexes in the world. The index is an unparalleled barometer of global trade in basic stuff like iron ore, coal and grain. It closed at 836 on November 21, 2008. It was 11,793 on May 20 2008. In six months, it is down by more than 90%. To put it simply, the cost of shipping has dropped through the floor. Transporting a tonne of iron ore, say from India to Brazil would cost you $110 in May 2008. Now it will just cost $9. The scale of change in rates is utterly shocking.
Wheels of international shipping are greased with ‘letters of credit’ issued to buyers of bulk cargo by their banks. These guarantee the value of the shipping once it is transit but before it is delivered. The credit crunch in the banking sector is taking its toll on the availability of these routine instruments. Cargos are sitting in dockside because the finance is not available to ship them. In some cases, the imported cargo is lying in ports unclaimed. Importers are ready to forego the advance paid and the collaterals mortgaged to banks for letters of credit. Banks have turned choosy in honouring letters of credit in some parts of the world, fearing default by the issuing banks. So far, the most significant problems have been confined to the bulk commodities trade. Manufactured goods have been less affected because there is less reliance on letters of credit. Trading has reportedly come down to standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks. So there is no market value out there for companies' capital investment in their ships. Story of VK Sheth reportedly selling his stake in Great Offshore Ltd comes as no suprises.
Where will crude oil price head except down, when economic activities, be it shipping, aviation or surface transport, come to standstill?
Various estimates have downgraded India’s GDP growth to 6.5 from 9. Achieving this might be an uphill task given these developments. Government expenses are not coming down but tax collections are expected to fall below the budget estimates. There will be less money for asset creation. Private sector has already stopped/withdrawn from bidding for national highway projects. On-going projects have failing in obtaining financial closures.
IT and ITES have been badly hit due to the disappearance of financial giants from the US. With lay offs and salary cuts in certain sectors i.e. construction, textiles, aviation, tourism, capital goods, financial services, and some labour-intensive industries, there will be lesser disposal income with the households. The current turmoil is going to affect the incomes of every participant in the economic activity. The impact will be felt not only on Delhi roads but everywhere in coming days.
Sunday, November 23, 2008
Thursday, March 06, 2008
Mr Dollar
While disposing off old papers, I came across a news report of August 2007 that Brazilian supermodel Gisele Bundchen refused to sign a dollar denominated contract with Procter & Gamble for representing Pantene hair products. She demanded that she should be paid in euros only. According to Forbes magazine, she is the highest paid model in the world and also the sixteenth richest woman in the entertainment world. She proved to be a shrewd analyst of US dollar. In another story, it was reported that some of the tourist sites, that used to demand payments in dollars, now started demanding that payments should be in local currency.
Why this loss of confidence in dollar? Even though dollar already lost nearly 36 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further.
The US dollar’s decline since 2001 can be attributed to structural factors rather than cyclical. High dependence on oil has cost dearly. For the last several years, there is increasing demand for energy coming up from emerging markets, particularly China and India. This sustained demand for energy has been taking heavy toll on American economy. Secondly, US domestic saving rate has witnessed sharper declines in the same period, leading to deterioration of the US current account. The conviction that house prices will appreciate forever had lead lenders to extend loans without following the basic prudential norms of checking the credentials of borrowers, which eventually unfolded a crisis, whose end is not in near sight.
In the same period, Euro started showing its prowess as an alternative global currency demanding greater attention from the central bankers across the world. Some of the oil-rich countries are reported to be demanding that all contracts shall be in euro-denomination. While all this happening, US treasury and Fed Reserve remained as moot watchers to the on-going drama, giving rise to the impression that it is in the US interest to have dollar depreciate to make US exports cheaper and further demand for domestic manufacturing industry. Despite that, US goods cost a tad higher than that of emerging markets. Last but not the least important liability is the on-going low-intensity conflict in Afghanistan and Iraq, where US troops are deployed, proving to be a costly affair in terms of provision of funds.
What is the future of dollar then? Will it be able to regain its lost glory in the near future or fade away making way for an alternative currency to take its position? Or a basket of currencies rule the forex markets?
Jim Rogers, the author of ‘Hot Commodities’ says “The dollar is a terribly flawed currency and its days are numbered’. He cites the huge foreign held debt as the biggest cause. George Soros, one of the most intriguing and globally influential men of our time, goes a step further and predicts that the credit crisis would damage the dollar’s dominant role in the global economy. It is the end of a 60-year period of continuing credit expansion based on the dollar as a reserve currency. World’s richest investor Warrant Buffet is also quoted as saying in a CNBC interview that the dollar was destined to become worthless. He later corrected his statement saying what he really meant was that dollar is worth less.
Nearly two thirds of the world’s central-bank reserves remain denominated in dollars. Majority of the global trade transactions occur in dollar denomination, be it oil, gold, silver, sugar etc. China, largest economy in Asia, pegged its currency to dollar. Though Euro is the second most important currency, it is doubtful whether it would be able to emerge as a viable alternative to US dollar, given the slowing GDP rates among the EU economies. European financial institutions have been badly hit by the US sub prime housing crisis.
Though the US is yet to get rid of the sub prime crisis, the US economy’s intrinsic strength might come to its rescue in the short to medium term horizon. The immediate objective should be to focus on the macro economic fundamentals, uninfluenced by the movement of indices on the Wall Street and Forex markets.
The fact remains that strength of a currency is directly related to the strength of underlying economy. The need of the hour is to search for the refresh button. Depreciation of dollar vis-à-vis other currencies particularly those of emerging countries can be arrested in the near future if the US can cut down drastically some of the wasteful expenditure and allow foreign direct investment by sovereign wealth funds into corporate entities badly in need of equity/debt capital. Prudential norms shall guide the issuance of credit, rather than enthusiasm to invent newer and more complex credit derivatives packaged and marketed in a style depicting the Hollywood movie releases.
They say nothing is permanent. What goes up, comes down. American Dollar emerged as the global currency following the retreat of British Pound from the centre stage in the wake of World War II. British Pound remained as global currency for pretty long period till then.
Do we need a third world war to change the dynamics of the global economy? I don’t think so. If Central Bankers and oil producers decide to switch over to some other currency or a basket of currencies, then that will become a weapon of mass depreciation for Mr Dollar, making it worth less.
Why this loss of confidence in dollar? Even though dollar already lost nearly 36 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further.
The US dollar’s decline since 2001 can be attributed to structural factors rather than cyclical. High dependence on oil has cost dearly. For the last several years, there is increasing demand for energy coming up from emerging markets, particularly China and India. This sustained demand for energy has been taking heavy toll on American economy. Secondly, US domestic saving rate has witnessed sharper declines in the same period, leading to deterioration of the US current account. The conviction that house prices will appreciate forever had lead lenders to extend loans without following the basic prudential norms of checking the credentials of borrowers, which eventually unfolded a crisis, whose end is not in near sight.
In the same period, Euro started showing its prowess as an alternative global currency demanding greater attention from the central bankers across the world. Some of the oil-rich countries are reported to be demanding that all contracts shall be in euro-denomination. While all this happening, US treasury and Fed Reserve remained as moot watchers to the on-going drama, giving rise to the impression that it is in the US interest to have dollar depreciate to make US exports cheaper and further demand for domestic manufacturing industry. Despite that, US goods cost a tad higher than that of emerging markets. Last but not the least important liability is the on-going low-intensity conflict in Afghanistan and Iraq, where US troops are deployed, proving to be a costly affair in terms of provision of funds.
What is the future of dollar then? Will it be able to regain its lost glory in the near future or fade away making way for an alternative currency to take its position? Or a basket of currencies rule the forex markets?
Jim Rogers, the author of ‘Hot Commodities’ says “The dollar is a terribly flawed currency and its days are numbered’. He cites the huge foreign held debt as the biggest cause. George Soros, one of the most intriguing and globally influential men of our time, goes a step further and predicts that the credit crisis would damage the dollar’s dominant role in the global economy. It is the end of a 60-year period of continuing credit expansion based on the dollar as a reserve currency. World’s richest investor Warrant Buffet is also quoted as saying in a CNBC interview that the dollar was destined to become worthless. He later corrected his statement saying what he really meant was that dollar is worth less.
Nearly two thirds of the world’s central-bank reserves remain denominated in dollars. Majority of the global trade transactions occur in dollar denomination, be it oil, gold, silver, sugar etc. China, largest economy in Asia, pegged its currency to dollar. Though Euro is the second most important currency, it is doubtful whether it would be able to emerge as a viable alternative to US dollar, given the slowing GDP rates among the EU economies. European financial institutions have been badly hit by the US sub prime housing crisis.
Though the US is yet to get rid of the sub prime crisis, the US economy’s intrinsic strength might come to its rescue in the short to medium term horizon. The immediate objective should be to focus on the macro economic fundamentals, uninfluenced by the movement of indices on the Wall Street and Forex markets.
The fact remains that strength of a currency is directly related to the strength of underlying economy. The need of the hour is to search for the refresh button. Depreciation of dollar vis-à-vis other currencies particularly those of emerging countries can be arrested in the near future if the US can cut down drastically some of the wasteful expenditure and allow foreign direct investment by sovereign wealth funds into corporate entities badly in need of equity/debt capital. Prudential norms shall guide the issuance of credit, rather than enthusiasm to invent newer and more complex credit derivatives packaged and marketed in a style depicting the Hollywood movie releases.
They say nothing is permanent. What goes up, comes down. American Dollar emerged as the global currency following the retreat of British Pound from the centre stage in the wake of World War II. British Pound remained as global currency for pretty long period till then.
Do we need a third world war to change the dynamics of the global economy? I don’t think so. If Central Bankers and oil producers decide to switch over to some other currency or a basket of currencies, then that will become a weapon of mass depreciation for Mr Dollar, making it worth less.
Saturday, February 23, 2008
Indian Tiger
While Dutt sahib was selecting couple of titles for Shivjash at the Saighals bookstore in South Ex last Sunday, I was, as in any other bookstore, looking for the original version of Benjamin Graham’s Intelligent Investor. I could not get that one but my attention was grabbed by the elegantly kept ‘Riding the Indian Tiger – Understanding India the World’s fastest emerging market’ by William Nobrega & Ashish Sinha. The Introduction ‘History of India in eight pages’ is very informative. I decided to buy it. Though I was reading a few pages a day during the last week, today I determined to complete it in one go and it in fact kept me glued till the last page.
A former member of US Army Special Forces, William obtained MBA from Leuven and BA from Ohio University. He is President and founder of the Conrad Group, a consulting firm specialising in emerging market strategic planning, advisory services for institutional investors. His understanding of Indian subcontinent, its culture, society, economy, strengths & weakness is displayed in full vigour in the Riding the Indian Tiger. At the outset, one feels whether he is obsessed with India and Indians and singing its music. As you go through the pages, you will come across an elaborate chronicle of the unfolding Indian growth story and the author’s authority on the subject.
After explaining the size of the markets in general and financial markets in particular in first two chapters respectively, William embarked on a journey to compare India and China. He believes that India would ultimately outperform China. He says India’s strength lies in three Ds. They are Democracy, Demography and Determination. Democracy is an entrenched institution in India with participation rates that are higher than the US. To further his augment, he cites the World Competitive Report 2006- 2007, published by the World Economic Forum. Property rights, judicial independence, and freedom of the press are three important facets of a democracy. The report ranked India above China on all three parameters and gave it a rank of 43, compared to China’s 54. In fact, India ranked higher than Russia and Brazil as well who come in 62 and 66 respectively. The report stated that China’s most worrisome development is a marked drop in the quality of its institutional environment, as witnessed by the steep fall in rakings from 60 to 80 in 2006, with poor results across all 15 institutional indicators, spanning both public and private institutions. Factors that influence the institutional environment ranking are property rights and quality of the judicial system, among others. Comparatively India attained a rank of 34 in institutional environment, close to the United State’s 27. On freedom of press ranking, India is at 26 whereas China is placed at 99.
Second D relates to Demography. China is aging as India is getting younger. Williams quoted the BBC report of 1994 which stated that China’s over-65 population was the fastest growing in the world. The report further noted that the aging of China’s population is outstripping its economic development. The sad part is that China’s population is becoming old before it attained significant economic development. On the contrast, India has the largest population in the world of people 25 or younger, and by 2015 there will be 550 million teenagers in India. It is described as demographic dividend. The irony is that our failure to contain the growth of population is slowly emerging as our strength, whereas China’s success with ‘one child policy’ is going to gradually dilute its economic prosperity in the near future.
On the Determination front, though the discussion is short, it throws out an important point. Chinese are very determined and industrious people. However, most of the large companies in China are state owned and until that country adapts democratic institutions the totality of China’s entrepreneurial spirit and its economic capabilities would not be realized. Whereas India is a country of entrepreneurs and they are beginning to realize the true extent of their capabilities in a liberalized economic setting.
Apart from the above, Chinese manufacturers have been operating on razor-thin margins – 15 percent or less, in some cases. If the Chinese government is forced to allow its currency to appreciate, or if the US and other countries place an equivalent tariff on Chinese goods, Chinese manufacturers will go out of business overnight.
In chapter 4, the author explains that with the government accelerating various economic and social reforms, there are golden opportunities lying to be untapped in the infrastructure sector. In chapter 5, William takes us through an elaborate list of growth-driving sectors in India like high tech manufacturing, distribution & logistics, pharmaceutical and medical devices, financial services, education, renewable energy, agriculture, fashion apparel, media & entertainment, hospitality and leisure, private health care etc..
Chapter 6 & 7 are focussed on the important aspect of understanding the psyche of Indian businessman and customers. The case studies of PepsiCo and McDonalds are very well illustrated, similarly the failures of French Pal Peugeot Ltd, German BMW, Australian Kerry Packer etc. The failures were attributed to lack of India research and planning.
Williams concludes ‘The Tiger begins to roar’
When you think about India, imagine a boulder. When you first attempt to move a boulder it will not budge. Then, after some time, you begin to rock it back and forth, slowly gaining some forward momentum. At a certain point the boulder will begin to roll – slowly at first, but continuously gaining speed. Before you know it it’s not possible to stop the boulder, and the path it takes can no longer be influenced by external forces. India is like a boulder, for many years the economy remained stagnant and resistant to change, stifled under the misguided direction of a socialist government and a command economy – but now it’s starting to move.
A well researched and lucidly written book by a non-Indian on India’s journey is a fascinating read to all those who wish to keep in touch with the economic developments taking place around us. Of course, those who want to do business in India and render services to this nation of billion plus people, it is a must read. For those interested in assessing whether India is China plus/minus something, it throws new insights.
A former member of US Army Special Forces, William obtained MBA from Leuven and BA from Ohio University. He is President and founder of the Conrad Group, a consulting firm specialising in emerging market strategic planning, advisory services for institutional investors. His understanding of Indian subcontinent, its culture, society, economy, strengths & weakness is displayed in full vigour in the Riding the Indian Tiger. At the outset, one feels whether he is obsessed with India and Indians and singing its music. As you go through the pages, you will come across an elaborate chronicle of the unfolding Indian growth story and the author’s authority on the subject.
After explaining the size of the markets in general and financial markets in particular in first two chapters respectively, William embarked on a journey to compare India and China. He believes that India would ultimately outperform China. He says India’s strength lies in three Ds. They are Democracy, Demography and Determination. Democracy is an entrenched institution in India with participation rates that are higher than the US. To further his augment, he cites the World Competitive Report 2006- 2007, published by the World Economic Forum. Property rights, judicial independence, and freedom of the press are three important facets of a democracy. The report ranked India above China on all three parameters and gave it a rank of 43, compared to China’s 54. In fact, India ranked higher than Russia and Brazil as well who come in 62 and 66 respectively. The report stated that China’s most worrisome development is a marked drop in the quality of its institutional environment, as witnessed by the steep fall in rakings from 60 to 80 in 2006, with poor results across all 15 institutional indicators, spanning both public and private institutions. Factors that influence the institutional environment ranking are property rights and quality of the judicial system, among others. Comparatively India attained a rank of 34 in institutional environment, close to the United State’s 27. On freedom of press ranking, India is at 26 whereas China is placed at 99.
Second D relates to Demography. China is aging as India is getting younger. Williams quoted the BBC report of 1994 which stated that China’s over-65 population was the fastest growing in the world. The report further noted that the aging of China’s population is outstripping its economic development. The sad part is that China’s population is becoming old before it attained significant economic development. On the contrast, India has the largest population in the world of people 25 or younger, and by 2015 there will be 550 million teenagers in India. It is described as demographic dividend. The irony is that our failure to contain the growth of population is slowly emerging as our strength, whereas China’s success with ‘one child policy’ is going to gradually dilute its economic prosperity in the near future.
On the Determination front, though the discussion is short, it throws out an important point. Chinese are very determined and industrious people. However, most of the large companies in China are state owned and until that country adapts democratic institutions the totality of China’s entrepreneurial spirit and its economic capabilities would not be realized. Whereas India is a country of entrepreneurs and they are beginning to realize the true extent of their capabilities in a liberalized economic setting.
Apart from the above, Chinese manufacturers have been operating on razor-thin margins – 15 percent or less, in some cases. If the Chinese government is forced to allow its currency to appreciate, or if the US and other countries place an equivalent tariff on Chinese goods, Chinese manufacturers will go out of business overnight.
In chapter 4, the author explains that with the government accelerating various economic and social reforms, there are golden opportunities lying to be untapped in the infrastructure sector. In chapter 5, William takes us through an elaborate list of growth-driving sectors in India like high tech manufacturing, distribution & logistics, pharmaceutical and medical devices, financial services, education, renewable energy, agriculture, fashion apparel, media & entertainment, hospitality and leisure, private health care etc..
Chapter 6 & 7 are focussed on the important aspect of understanding the psyche of Indian businessman and customers. The case studies of PepsiCo and McDonalds are very well illustrated, similarly the failures of French Pal Peugeot Ltd, German BMW, Australian Kerry Packer etc. The failures were attributed to lack of India research and planning.
Williams concludes ‘The Tiger begins to roar’
When you think about India, imagine a boulder. When you first attempt to move a boulder it will not budge. Then, after some time, you begin to rock it back and forth, slowly gaining some forward momentum. At a certain point the boulder will begin to roll – slowly at first, but continuously gaining speed. Before you know it it’s not possible to stop the boulder, and the path it takes can no longer be influenced by external forces. India is like a boulder, for many years the economy remained stagnant and resistant to change, stifled under the misguided direction of a socialist government and a command economy – but now it’s starting to move.
A well researched and lucidly written book by a non-Indian on India’s journey is a fascinating read to all those who wish to keep in touch with the economic developments taking place around us. Of course, those who want to do business in India and render services to this nation of billion plus people, it is a must read. For those interested in assessing whether India is China plus/minus something, it throws new insights.
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