Wednesday, May 27, 2015

Prof. Vaidyanthan's ideas - 3. India Unincorporated

Indian academic discourse tends to copy American terminologies verbatim.

In US out of total businesses 80 % is due to big corporates. The remaining, i.e. small businesses are therefore called residual.

However in our country the share of so called "residual" or "unorganized" sector is more than 70 %.

India's is the only country where more than 50 % is called "residual" or derisively called "Unorganized Sector".

The so called "Unorganized sector" contributes more than 60 % of India's GDP.

Also note that two major passions of Indians: Bollywood and Cricket both are considered to be "unorganized".

Government bodies and archaic regulatory bodies are "Organized"

Let us talk a bit about so called "Organized sector" or India Incorporated.

There are around 7.8 - 8 lakh companies that together contribute around 15 % of our GDP. Out of these only 8000 are listed in stock market. out of these 8000, more than 50 % did not even have a single transaction.

So much for media obsession with stock market.

for all practical purpose, only 150-200 companies are active on share market and their contribution to economy is not more than 5-6 % to India's GDP.

Two major problems that affect India's UnInc (New name given by Prof. Vaidyanathan):

1. Lack of cheap credit
2. Harassment due to archaic laws.

Credit requirement:
The small shopkeepers / Juice vendors etc: Their requirement is primarily that of working capital. It may be noted that this segment has a requirement of around 12 Lakh crores annually, out of which 10 lakh crores is required as credit. The default rate is extremely negligible in these cases.

Since no banks / institutional mechanism exist to give credit to this large segment, they are forced to take credit at as high as 0.5 % interest per day that works out to  15 % per month, which is huge.  

Some if they are lucky get credit from Chit-funds or moneylenders at extremely high rate of 3-4 %, which also amounts to a very high interest rate of 36-48 %.

Tuesday, May 26, 2015

Services Sector - Not only IT

This is another common wrong perception that most of us have.

Service sector is not only IT.

In fact Restaurants, Truck Operators, Retail shops make 80 % of services sector.

This group is wrongly called "unorganized" sector.

(Thoughts of Prof. Vaidyanathan)

Increased Share of Derivatives - An insight into US crisis

Derivatives became a popular instrument by 1986-87. Derivatives do not represent any real wealth.

Steadily investments in these derivatives went on increasing. Derivative total turnover was 1 billion $ or so in 1977.

Steadily there was huge investment in these derivatives. At the peak of economic crisis in US in 2007, the investment was to the tune of 3.7 trillion $ a day. Total unsettled derivatives at the peak crisis were to the tune of 596 trillion $.

The actual transactions represented by these derivatives were only 15 trillion $.

These derivatives represented no real wealth, no real worth, no real income, no real wages.

 These were main reason of sudden collapse of US financial market.

(Taken from speech of Shri Gurumurthy)

India - Regaining its status or emerging economy?

It is fashionable to use the term "Developing" or "Emerging" economies for India and China. As if they were never developed in the first place or as if they are "emerging" from eternal doom.

Factual status is that India and China are simply regaining their original status in world economy.

Some facts from the study of Brazilian economist Paul Bairoch:

1. In 1750 China contributed 33 % of world's GDP and India contributed 25 % of world's GDP. At that time UK contributed only 1.8 % and USA 0.1 %.

2. As India slipped to colonization its share towards world's GDP continuously declined:

 - By 1800 India's share in world's GDP dropped down to 20 %
 - By 1830 ...............................................dropped down to 17 %
 - By 1880 ...............................................dropped down to  8 %
 - By 1900 ...............................................dropped down to 1.7 % (less than 2 %)

In less than 150 years India's economy collapsed.

By 1900 China contributed only 6 % of world's GDP.

US and UK that contributed less than 2 % of world's GDP in 1750,  contributed 41 %  by 1900.

3. When this study of Paul Bairoch came out, there was a huge outcry. A prominent western economist Angus Madison was asked to research this fact since 1 AD.

4. Madison's initial article refuted Bairoch's study but eventually corroborated his study. His study showcased the following:

1 AD: India at 34 % was the biggest contributor to world GDP. China was next.
1000 AD: India 28 %. China next.
1400 AD: India at first position. China next.
1500 AD: India at first position. China next
1600 AD: China at first position. India next.
1700 AD: India regained. China next
1750 AD: China at first position. India next.

Madison's study broke the myth about Western work ethics and established that colonization and exploitation was largely responsible for crash of Asian economies and rise of western economies.

(These ideas are taken from lecture of Shri Gurumurthy and my Guru Prof. Vaidyanathan)

Friday, May 15, 2015

An interesting insight on Production approach taken by various countries

Ever thought about Production / Operations approach taken by various countries??
Are goods really "produced" in China?
An excellent video by an ex-Harvard Economics Professor. (Dont restrict yourself because of his political views. This video is quite insightful)

Thursday, May 14, 2015

Prof. Vaidyanathan's Ideas - 2. Importance of FII + FDI

In India 94 % of investment is due to domestic savings. So much for the disproportionate attention given to FIIs and FDIs that only contribute less than 7 %. By the way in India less than 1 % of this savings goes to share market, So much for the obsession with share market.
Also note that out of 94 % domestic savings, more than 85 %- 90 % is contributed by household savings.

Prof. Vaidyanathan's Ideas - 1. Not a Global Financial Crisis

1. It is wrong to say that it is a "Global Financial Crisis". It is a European crisis or an Anglo-Saxon crisis.

2. In 1990s, so called G-7 contributed to 52 % of Global GDP, whereas emerging economies (China, India, Brazil, Indonesia etc.) contributed only 34 %.

3. By 2012, situation reversed. Now so called "Emerging Economies" contribute to 62 % of Global GDP and G-7 only contributes 52 %.

4. In next 8-10 years this share of G-7 will come down further to 25 %.

5. This reduced share is what is the "CRISIS" is all about.

6. So this is not at all a crisis for us. It is a crisis for so called first world countries.

Some points on why this has happened and the answer lies in sociological issues rather than financial or economic issues:

1. In West savings are very less. Household savings are less than 1 % . Culture of credit is increasing.

[In India 94 % of investment is due to domestic savings. So much for the disproportionate attention given to FIIs and FDIs that only contribute less than 7 %. By the way in India less than 1 % of this savings goes to share market, So much for the obsession with share market. Also note that out of 94 % domestic savings more than 85 % is household savings.]

2. Disintegration of Family Structure. Nuclear Family becoming proton families (single parent families):

52 % of kids are born out of wedlock.

In Blacks and Latinos this percentage is as high as 80 % .

This single parent culture was initially favored by Open Market supporters.

Joint family --> 8 members watch may be two TVs.

Nuclear Family each having 2 members (say) --> 4 TVs will be purchased.

So Market would prefer smaller families.

However this break down of family had an effect on society. The discipline of Father was not there. Kids were roaming. No focus on studies. School dropout rate increasing.

Unemployment rates became very high. Total lack of skills. youth was unemployable.

State had to support unemployed persons --> an increasing burden.

3. Decline in Population: Europe during First World war had a share of 25 % of world's population. This share has already come down to 10 %. This is going to go down further to a low as 1 %.
This means that earning population that will pay taxes is going down.

In short the so called Global Financial Crisis is going to continue.

Mergers and Acquisitions among Startups


Inflation in general cools down - WPI also reduces

Wholesale price index (WPI)-based inflation for April fell to a new low of -2.65 percent, the sixth successive month of deflating prices.

Given the weakness in industrial output and downtrend in inflation, expectations of a rate cut by the RBI at its June meet have risen. 

Tuesday, May 12, 2015

Cabinet clears 5% disinvestment in NTPC, 10% in IOC

Cabinet Committee of Economic Affairs (CCEA) approved 5 percent divestment on  NTPC and 10 percent stake sale in  Indian Oil.

Earlier this year, the government divested 5 percent stake in  REC through the offer for sale route, mopping Rs 1,550 crore. It was subscribed 5.53 times with retail participation at 902 percent, finance minister Arun Jaitley said in a tweet. 

In Budget 2015-16, FM has set divestment target at Rs 69,500 crore. This step is likely to fetch Rs. 8500 crores.

Index of Industrial Production Falls

The Index of Industrial Production (IIP) has fallen to a five month low of 2.1 percent as against 5 per cent registered in February.

What is IIP?

The index of industrial production (IIP) data, gauges the economic activities of the country. The fall in this index shows that demand has slackened, mainly due to falling consumption demand and moderation in electricity generation.

another reason could be absence of fresh investments.

Consumer Inflation cools down

Consumer Inflation in April cools to 4 month low of 4.87 % from 5.20 % a month ago.