Shakespeare had said: “All the world’s a stage...” Yes, we are mere players but irony often enters the characters when we say our lines, especially in the theatre of finance and economics. The year 2009 will be remembered for several such ironies that are in the realm of the theatre of the absurd, and the focus here is on the top 10 stories that add spice and intrigue.
The financial crisis that started in 2007 was still the subject of continued debate. Institutions were blamed and finally it was decided that the culprit was Alan Greenspan who loosened the strings too much and too soon, which engendered the bubble. But once the crisis came in, memories were taken back to the Depression when nothing was done and the crisis was exacerbated. Not surprisingly, Ben has lowered the rates again to virtually zero. Is this the beginning of another bubble?
The RBI basked in its own glory by behaving as if it knew all the time that securitisation and collateralised debt obligations (CDOs) would lead to a financial crisis. They claimed that India came out unscathed because we were prudent. Was this really the case or was it that we have now gone in for sophisticated products because we could not understand them? Few knew beyond the textbook what CDOs were all about, and hence not being affected by the crisis could be simply because we never tried them out. With RBI controlling every aspect of banking right from interest rates to where money should go, we can actually never go wrong. Right?
A fallout of the crisis was that CEO salaries came under the scanner. CEOs of some of the companies that were bailed out through public money had the temerity to give themselves hefty bonuses, which is the ultimate arrogance of capitalism. Indian government officials hence had a field day getting back at the private sector, which had objected to the Pay Commission’s proposals a couple of years back by lambasting the CEO pay structure.
Next, Dubai was a case in itself. Once touted as being a potential global financial centre, we had a case of the government refusing to honour the debt of one of its own undertakings. Clearly a financial centre in the 21st century cannot be created by building Taj Mahals.
The monsoon became a major issue, and right up to September all our leaders kept saying that it would revive which was based on optimism rather than belief, until the IMD declared 2009 a drought year. Not to be deterred, we have been told to carry on with our chins held high as the rabi crop will be good. Do we have any reason for such an assumption?
Notwithstanding the fact that agriculture has failed, we have taken solace in the double-digit industrial growth rate and the fiscal stimulus package to now believe that GDP growth will be closer to 8% than the more humble 6% just one month back. A rare display of the conjurer’s magic wand in North Block?
The capital market matched our irrational mood swings. It was down to 8,000-levels in March when we claimed we did better than the world through the crisis. Then it soared to cross 17,000 when we had more bad news pouring in such as inflation and drought. But, good news like good industrial and GDP growth failed to excite it further. We still have to understand the way the Sensex and Nifty move.
Inflation was a crazy phenomenon and debates ranged over whether this was deflation or dis-inflation, and as economists had a roll on this subject, we have suddenly seen prices shooting upwards and no one knows what can be done as one has realised that banning futures trading, imposing strict stock limits, lowering duties and taxes can just not increase production. There are evidently no short-term solutions here.
The derivatives markets had a mixed package. While the commodity market rejoiced when wheat futures was restored, it had to sulk when sugar was banned. Interest rate futures have once again run into rough weather unlike currency futures, which have been a major hit clocking volumes of close to Rs 25,000 crore a day. Can there be a derivative product on risk of failure?
Lastly, while the mood seems to be upbeat (for the right or wrong reasons) a major shadow has been cast by Suresh Tendulkar, who has estimated that 37.2% of our population is below the poverty line. Is he right? We’ll have to wait a while to find out.
Thursday, December 24, 2009
Sunday, December 13, 2009
t’s optimistic to expect change in supplies soon: Mint 12th December 2009
Except by getting physical supplies, you can’t control inflation in any other way. says Madan Sabnavis, chief economist at the National Commodity and Derivatives Exchange Ltd: ravi Krishnan
Mumbai: Wholesale food prices rose at the fastest in 11 years to scale 19% for the week ended November 2008, fuelling inflationary expectations. Mint spoke to Madan Sabnavis, chief economist at the National Commodity and Derivatives Exchange Ltd about the reasons for the steep rise and the likely policy impact. Edited excerpts:
What are the reasons for this high increase in food prices?
It’s caused by a combination of three factors—the first is that kharif output has been officially stated to be lower than what it was last year, major gaps being seen in food grains, oil seeds and sugar cane. Second, the carryover stocks in case of pulses, oil seeds and sugar cane are not high enough. So we have stocks of only rice and wheat which are officially maintained by the Food Corporation of India. So, therefore, we don’t (have) any kind of stock, which can help us tide over this crisis. Third, are we in a position where we can import products where the harvest has not been satisfactory?
The answer is yes and no. Yes, we can import something like sugar, but the international prices are also ruling at a very high level. (But) for something like pulses, there are limited countries which grow pulses and could supply us like Canada and Burma. They also have their own seasons and until those seasons coincide (with ours) and we can get those imports in, we will continue to be afflicted with these kind of problems.
Besides, another reason (for the high inflation) has been the high rise in the prices of vegetables, in particular. Here we have been quite severely affected by the floods in Andhra Pradesh and Karnataka. So what we are really looking at is the next crop of vegetables, which should be probably coming in a month’s time or so. It’s only then we could hope to have some relief.
Do you think it’s going to fan inflationary expectations?
Normally what happens in October, November, December, prices of agricultural products would tend to come down, for the simple reason that we have the arrivals (harvest) coming into the market. But unfortunately what we have seen this year is that week-on-week inflation is also going up. Which evidently means that we are having severe problems in terms of supply. So, to expect a change to happen very soon is a bit optimistic.
So, this is supply side inflation and monetary policy wouldn’t have any impact.
Today, when I am talking about inflation being a supply side phenomenon, when it’s because of shortages—by increasing the rates, RBI (Reserve Bank of India) is not going to bring down the prices, because I don’t have the supplies of the commodities. Except by getting physical supplies, you can’t control inflation in any other way. But the fact that high inflation leads to high inflationary expectations, which is the case today, will prompt RBI to take the monetary policy option. Sucking out liquidity will not make too much sense. So, if RBI wants to send a strong message that it wants to control inflation, it will have to be through interest rate movements.
Mumbai: Wholesale food prices rose at the fastest in 11 years to scale 19% for the week ended November 2008, fuelling inflationary expectations. Mint spoke to Madan Sabnavis, chief economist at the National Commodity and Derivatives Exchange Ltd about the reasons for the steep rise and the likely policy impact. Edited excerpts:
What are the reasons for this high increase in food prices?
It’s caused by a combination of three factors—the first is that kharif output has been officially stated to be lower than what it was last year, major gaps being seen in food grains, oil seeds and sugar cane. Second, the carryover stocks in case of pulses, oil seeds and sugar cane are not high enough. So we have stocks of only rice and wheat which are officially maintained by the Food Corporation of India. So, therefore, we don’t (have) any kind of stock, which can help us tide over this crisis. Third, are we in a position where we can import products where the harvest has not been satisfactory?
The answer is yes and no. Yes, we can import something like sugar, but the international prices are also ruling at a very high level. (But) for something like pulses, there are limited countries which grow pulses and could supply us like Canada and Burma. They also have their own seasons and until those seasons coincide (with ours) and we can get those imports in, we will continue to be afflicted with these kind of problems.
Besides, another reason (for the high inflation) has been the high rise in the prices of vegetables, in particular. Here we have been quite severely affected by the floods in Andhra Pradesh and Karnataka. So what we are really looking at is the next crop of vegetables, which should be probably coming in a month’s time or so. It’s only then we could hope to have some relief.
Do you think it’s going to fan inflationary expectations?
Normally what happens in October, November, December, prices of agricultural products would tend to come down, for the simple reason that we have the arrivals (harvest) coming into the market. But unfortunately what we have seen this year is that week-on-week inflation is also going up. Which evidently means that we are having severe problems in terms of supply. So, to expect a change to happen very soon is a bit optimistic.
So, this is supply side inflation and monetary policy wouldn’t have any impact.
Today, when I am talking about inflation being a supply side phenomenon, when it’s because of shortages—by increasing the rates, RBI (Reserve Bank of India) is not going to bring down the prices, because I don’t have the supplies of the commodities. Except by getting physical supplies, you can’t control inflation in any other way. But the fact that high inflation leads to high inflationary expectations, which is the case today, will prompt RBI to take the monetary policy option. Sucking out liquidity will not make too much sense. So, if RBI wants to send a strong message that it wants to control inflation, it will have to be through interest rate movements.
Agriculture slows, but decouples: Dec 11, 2009 : Financial Express
The 0.9% growth number in agriculture for Q2 of this year has spoilt the otherwise joyous party that spoke of growth in GDP of 7.9%. But, does this number matters? The answer is that the second quarter of the financial year is not agri-intensive, and while less than a fifth of the agricultural output emanates from this period, most of it is in the nature of residual farm output as well as forestry and fishing. Agriculture is basically a two-season phenomenon and would typically cover the third quarter (kharif) and fourth quarter (rabi). Therefore, the number of 0.9% is not startling even though it is lower than that last year (2.4%) which may be partly attributed to the base year effect.
It must be pointed out that the first two quarters contribute to just over 40% of agricultural GDP. Around one-third of our agricultural GDP comes from the third quarter while over a quarter comes from the fourth quarter. Hence, the performance in the next two quarters will really be more decisive.
The ministry of agriculture has already indicated that there are problems on the kharif front caused by the triad of late monsoon, drought and floods (in some regions). Rice output is to decline by 18%, coarse grains by 20%, pulses by over 7%, oilseeds by 15% and sugarcane by 9%. This virtually means a sharp decline in farm output in the third quarter. Considering that the kharif season accounts for around half of total foodgrains and 65% of oilseeds production, we are really talking of a double digit fall in farm output. We are also aware of the major fall in production of vegetables, which has led to the exorbitant increase in prices in the last four months or so. If the ‘market guess’ of 15% decline works out, then overall growth in this sector could slip to between -4% and -4.5% for the first three quarters. The disturbing aspect of this decline is that it spans all major products such as rice, jowar, bajra, maize, moong, ‘other pulses’, soybeans, groundnuts, sesame, sunflower, castor and sugarcane.
What does this mean for the full year? There is an increasing dependence on rabi and we have heard bold statements that the rabi crop will compensate for the loss in kharif even before the latter fructified. The rationale was that the late arrival of the rains would substantially add to the water table level .that would aid rabi production. Further, it was felt that the farmers who lost their income would possibly sow early or grow more rabi crops to make up for the deficit. Also, it was argued that the floods in Karnataka and Andhra Pradesh would assist the growth of rabi crops. All this may partly be true, but the more important question is whether or not this will help to alleviate the damage.
Given the relatively lower importance of rabi in oilseeds and an equal share in foodgrains, we need to have substantial growth in Q4. Can this happen? Wheat had reached a record of 81 million tonnes last year and to make up for this loss, would have to touch 93 million tonnes, which does not look realistic. The same holds for oilseeds that have to grow by 26% to maintain overall oilseeds production at last year’s level. Even the more optimistic minds would not really take a chance with these numbers.
Therefore, it would be reasonable for one to expect a decline in overall production by the end of the year, notwithstanding the major rabi crops succeeding in the last quarter. Putting numbers on farm output is fraught with risk as no one really knows how the harvest will turn out to be. Very often such conjectures are based more on hope than conviction.
A positive development over the years is however a certain kind of decoupling between agriculture and the rest of the economy. The high growth in social and public services, which is the mirror image for fiscal stimulus, can make up for this loss of output. Industry, too, appears to be more urban-centric and is gradually getting divorced from the farm sector. Therefore, while at the margin the rural folk dependent on agriculture for an income may cut down on demand for industrial products, the urban class has made up for this loss, as it is supported by higher wages (already seen) and booming stock markets, (which provides liquidity to spend).
It will not, therefore, be surprising to have steady growth in real GDP coexist with a negative growth in farm output, high industrial growth, booming service sector and low WPI but high food inflation and higher poverty levels. ..
It must be pointed out that the first two quarters contribute to just over 40% of agricultural GDP. Around one-third of our agricultural GDP comes from the third quarter while over a quarter comes from the fourth quarter. Hence, the performance in the next two quarters will really be more decisive.
The ministry of agriculture has already indicated that there are problems on the kharif front caused by the triad of late monsoon, drought and floods (in some regions). Rice output is to decline by 18%, coarse grains by 20%, pulses by over 7%, oilseeds by 15% and sugarcane by 9%. This virtually means a sharp decline in farm output in the third quarter. Considering that the kharif season accounts for around half of total foodgrains and 65% of oilseeds production, we are really talking of a double digit fall in farm output. We are also aware of the major fall in production of vegetables, which has led to the exorbitant increase in prices in the last four months or so. If the ‘market guess’ of 15% decline works out, then overall growth in this sector could slip to between -4% and -4.5% for the first three quarters. The disturbing aspect of this decline is that it spans all major products such as rice, jowar, bajra, maize, moong, ‘other pulses’, soybeans, groundnuts, sesame, sunflower, castor and sugarcane.
What does this mean for the full year? There is an increasing dependence on rabi and we have heard bold statements that the rabi crop will compensate for the loss in kharif even before the latter fructified. The rationale was that the late arrival of the rains would substantially add to the water table level .that would aid rabi production. Further, it was felt that the farmers who lost their income would possibly sow early or grow more rabi crops to make up for the deficit. Also, it was argued that the floods in Karnataka and Andhra Pradesh would assist the growth of rabi crops. All this may partly be true, but the more important question is whether or not this will help to alleviate the damage.
Given the relatively lower importance of rabi in oilseeds and an equal share in foodgrains, we need to have substantial growth in Q4. Can this happen? Wheat had reached a record of 81 million tonnes last year and to make up for this loss, would have to touch 93 million tonnes, which does not look realistic. The same holds for oilseeds that have to grow by 26% to maintain overall oilseeds production at last year’s level. Even the more optimistic minds would not really take a chance with these numbers.
Therefore, it would be reasonable for one to expect a decline in overall production by the end of the year, notwithstanding the major rabi crops succeeding in the last quarter. Putting numbers on farm output is fraught with risk as no one really knows how the harvest will turn out to be. Very often such conjectures are based more on hope than conviction.
A positive development over the years is however a certain kind of decoupling between agriculture and the rest of the economy. The high growth in social and public services, which is the mirror image for fiscal stimulus, can make up for this loss of output. Industry, too, appears to be more urban-centric and is gradually getting divorced from the farm sector. Therefore, while at the margin the rural folk dependent on agriculture for an income may cut down on demand for industrial products, the urban class has made up for this loss, as it is supported by higher wages (already seen) and booming stock markets, (which provides liquidity to spend).
It will not, therefore, be surprising to have steady growth in real GDP coexist with a negative growth in farm output, high industrial growth, booming service sector and low WPI but high food inflation and higher poverty levels. ..
The thesis on Dubai we must not buy: Financial Express:Dec 03, 2009
The emirate meltdown can pose a big problem for India, and others:
There is a feeling of déjà vu in our official reaction to the Dubai crisis when we say that India will not be affected. If one recollects, we had said the same thing in 2007 when Bear Stearns went down as we scrambled to find out how securitisation and CDOs worked. We retained our high position when Lehman came down and it was only when the meltdown took place that we realised that even though our financial sector had stayed indoors all the time, our feet still got wet; and the rest, as the cliché says, is history.
The Dubai crisis, once again linked with real estate, means that the state does not have money to repay $59 billion that Dubai World owes. One is not really sure of the guarantee provided by the state, as the stance now is that the government was not a party to the bonds issued by the government-owned company. There are two aspects here. The first is that the government has the money but is not willing to help its own company, in which case the future of government-run companies will be questioned, as it is normally assumed that when we put our money in a public sector bank or undertaking, the government provides a guarantee somewhere. The other is that the government is distancing itself merely because it does not have the dollars, which is more serious. The issue is either of credibility or solvency, or a little of both.
The question is what would happen in case the government defaults. Dubai will seek help from the other Emirates, especially Abu Dhabi, and if it succeeds, the problem will become less acute. However, the broader issue is one of confidence, considering that Dubai was touted as being a global financial and gold hub given its natural advantages. Singapore will surely score in this respect and there is a major reputation hit for Dubai.
Did we see this coming? Not really, because while everyone knew that there were repayments due and that the economy was not insulated from the global meltdown, its inability to service debt was never seriously discussed, even though there were some feeble signs thrown by the rating agencies earlier in the year when the credit rating of several banks and government-backed issuers were put on the negative list.
Is India isolated? Absolutely not, because we are going to be affected quite clearly, though the.magnitude could be a matter of conjecture. First, we have over $50 billion of remittances coming in every year, with this region supplying over a quarter of it. Second, we have over 4.5 million Indians staying in the Gulf and several jobs will be in jeopardy in case of a default and its backlash. Third, our trade with the UAE may not be very significant at around $30 billion per annum, but given that exports are primarily food products being consumed by the Indian population, there will be some impact. Fourth, while construction and project companies claim to be secure, it must be remembered that several of our engineering and construction companies have contracts in the GCC region, which will be affected either directly by defaults or indirectly through lower business in the future. Fifth, banks lending to companies in Dubai, either directly or to companies which have projects lined up in this country, would have to revisit their accounting books.
There are two other areas that have to be explored. The first is that if repayment is sought by off-loading US federal bonds, there would be reverberations in the US, which will mean excess selling that can drive up rates, something which the Fed has been trying to eschew for a long time. The other is whether there are similar bubbles elsewhere in the world where the Dubai model of rapid growth through the creations of world’s ‘first’, ‘tallest’, ‘largest’, ‘only’ landmarks through high leverage exist. The creation of such empires, admittedly in retrospect, is a reflection of financial opulence with little character.
The lessons are the following. The first is that one needs to examine closely any fast growth story that is based on high growth sponsored by leverage. The second is that overseas investors will be wary of putting their money even in state-owned outfits as government guarantees appear to be porous. The third relates to rating agencies, which will again have to constantly send out signals to the world and warn of a crisis. The fourth is more of a question, and it is a puzzle with no answer—the latest issue of Economist talks of the high levels of debts in some developed countries. How is one to view them now against the backdrop of this seeming crisis? ..
There is a feeling of déjà vu in our official reaction to the Dubai crisis when we say that India will not be affected. If one recollects, we had said the same thing in 2007 when Bear Stearns went down as we scrambled to find out how securitisation and CDOs worked. We retained our high position when Lehman came down and it was only when the meltdown took place that we realised that even though our financial sector had stayed indoors all the time, our feet still got wet; and the rest, as the cliché says, is history.
The Dubai crisis, once again linked with real estate, means that the state does not have money to repay $59 billion that Dubai World owes. One is not really sure of the guarantee provided by the state, as the stance now is that the government was not a party to the bonds issued by the government-owned company. There are two aspects here. The first is that the government has the money but is not willing to help its own company, in which case the future of government-run companies will be questioned, as it is normally assumed that when we put our money in a public sector bank or undertaking, the government provides a guarantee somewhere. The other is that the government is distancing itself merely because it does not have the dollars, which is more serious. The issue is either of credibility or solvency, or a little of both.
The question is what would happen in case the government defaults. Dubai will seek help from the other Emirates, especially Abu Dhabi, and if it succeeds, the problem will become less acute. However, the broader issue is one of confidence, considering that Dubai was touted as being a global financial and gold hub given its natural advantages. Singapore will surely score in this respect and there is a major reputation hit for Dubai.
Did we see this coming? Not really, because while everyone knew that there were repayments due and that the economy was not insulated from the global meltdown, its inability to service debt was never seriously discussed, even though there were some feeble signs thrown by the rating agencies earlier in the year when the credit rating of several banks and government-backed issuers were put on the negative list.
Is India isolated? Absolutely not, because we are going to be affected quite clearly, though the.magnitude could be a matter of conjecture. First, we have over $50 billion of remittances coming in every year, with this region supplying over a quarter of it. Second, we have over 4.5 million Indians staying in the Gulf and several jobs will be in jeopardy in case of a default and its backlash. Third, our trade with the UAE may not be very significant at around $30 billion per annum, but given that exports are primarily food products being consumed by the Indian population, there will be some impact. Fourth, while construction and project companies claim to be secure, it must be remembered that several of our engineering and construction companies have contracts in the GCC region, which will be affected either directly by defaults or indirectly through lower business in the future. Fifth, banks lending to companies in Dubai, either directly or to companies which have projects lined up in this country, would have to revisit their accounting books.
There are two other areas that have to be explored. The first is that if repayment is sought by off-loading US federal bonds, there would be reverberations in the US, which will mean excess selling that can drive up rates, something which the Fed has been trying to eschew for a long time. The other is whether there are similar bubbles elsewhere in the world where the Dubai model of rapid growth through the creations of world’s ‘first’, ‘tallest’, ‘largest’, ‘only’ landmarks through high leverage exist. The creation of such empires, admittedly in retrospect, is a reflection of financial opulence with little character.
The lessons are the following. The first is that one needs to examine closely any fast growth story that is based on high growth sponsored by leverage. The second is that overseas investors will be wary of putting their money even in state-owned outfits as government guarantees appear to be porous. The third relates to rating agencies, which will again have to constantly send out signals to the world and warn of a crisis. The fourth is more of a question, and it is a puzzle with no answer—the latest issue of Economist talks of the high levels of debts in some developed countries. How is one to view them now against the backdrop of this seeming crisis? ..
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