Wednesday, December 31, 2014

EXCISE DUTY REVOKE...UNJUSTIFIED -INDIAN AUTOMOBILE INDUSTRY

I don’t understand how the Indian government’s rationales behind any sector decision are being formulated particularly when that Industry or sector is growing. As a macroeconomic researcher and as journalist I hold the right of pointing to the mistakes being committed which will have a long term affect on the industry or economy. We have seen historically these types of mistakes have been committed by the government and the industry suffered a prolonged crisis. The point of discussion is that not only the particular sector gets banged against the wall but also the ancillary industries also gets  affected and the affects rolls out to employment opportunities either drying up or pink slips are being handed over.

Last year UPA government hiked its duties on SUV’s and now again the same thing is being proposed by the current government. When crude prices are low and very much supportive for the Indian buyers to buy their dream car then does this rate hike proposal sounds better. In these low crude prices its prudent to go for duty reduction so that automobile sales increases which leads to ancillary industries demand and growth simultaneously. When crude prices are low and we all know that crude prices would remain on the lower side then its clear that people would plan to buy automobile. Increase in volume would result multiple taxation earnings for the government as volumes pickups in raw material consumption and production of various end user based products.

If we make a quick look towards the automobile market performance we witness clearly that over the last couple of years slow down of the Indian economy followed with high interest cost and prices have deterred the buyers from the market.

We should not forget that automobile is one of the asset classes which is directly linked with interest rates. Hence when we all projecting for a rate cut over the next 1 years time frame, at the same time when crude prices are low the reducing or keeping the taxes unchanged would have spooked more buyers resulting more production and consumption.  That’s why I raised the question on the very beginning about the rationale behind the hike/revoke of benefits of duties and taxes for the automobile when the industry is very much well positioned for growth.

We are all talking about Indian economic growth and using very strong phrases and theories but did we ever calculate the place from where this growth will generate. If, domestic people are unable to buy ,then how the government earns its revenues from slow moving industry. Now this same statement also eradicates the economist theories who are justifying the rate hike to fill up the government pocket through high taxes incomes. Now when we are increasing the taxes and duties of an industry then obviously the demand of the product will take a hit. Now at the same time the government is inviting FDI investors to start manufacturing in India. If the market becomes less competitive then how it makes senses for them to start manufacturing here. We always forget that an economic or an industry growth does not happen only based on one sided policies.  When the Indian IT industry grew it grew riding upon the wheel of SEZ which was a tax sop based incentive scheme promoting business for the Indian economy for the long term.

Increasing taxes on various industries and products to increase government revenue is a wrong theory in today’s market conditions. When global economy is under severer slowdown then domestic consumption is the best strategy to grow the business. We are just killing the industry and the ancillary industries associated with the same. Now theory has erupted while is discussing the same with my friends. They said that if duties and taxes are being hikes or benefits are being revoked then the same would adjust somewhere as luxury goods and inferior goods have a game to play. In today’s economic era inferior and luxury goods has lost its meaning since technology has replaced the productivity and availability of the goods. Further auto mobile is the best way to grow and develop business and grow the rural connectivity. The initial price hike might appear to be negligible but it always has a long term affect on the industry and economy. Increasing duties of cigarettes is justified but not on automobile industry which is linked with multiple industries and employments.

Tuesday, December 16, 2014

WHY RBI ..DONT FIND RATES CUTS?

Indian markets are the roller coaster ride and many investors are in the grid lock of higher risk and profit appetite. Well this phenomena is not new for the market players but the words which I hear openly in the market is that majority of the focus is now going towards Raghuram Rajan where a huge pile of expectation have been built of reducing the interest rates. Well we are just trying to save the stock market and its earnings in exchange of poor macro economic conditions prevailing and waiting outside the gate in the next year. The Indian stock market correction was bound as valuations and fundamentals have been widening enough so big that hardly anything could justify the same. We are here to find the gaps and make you understand the same.

The biggest reasons behind Rajan not going for an interest rate cut are several. We are just trying to look at one side of the story and not looking over the long term things which are waiting in the wings. In continuation to my last article where I conveyed that where and why manufacturing will find growth is the biggest question.
  • Exporting countries of India are all in the slowdown phase and under intense low consumption level of goods and services. They are more prone to savings. Low crude prices are a boon for any country that is in the category of import but what about the exporting countries. If crude prices fall more slowdown would be stronger for the global economy as exporting countries would be in deep crisis.
  • I told in my last article that one cannot expect a prolonged low crude prices as exporting countries run their economic balance sheet on crude prices. Now with low crude prices budget cuts and slow down of consumption has just began similar over their economies. This adds more mileage to the slowdown of the world economy. So export of India also takes a hit.http://www.ianalysis.co.in/2014/12/why-and-where-manufacturing-would-be.html
  • Now coming back to India-we are not fools in this digital world where we all know that Indian economy despite of its strong growth outlook and various positive vibes is very much dependent on export. If weak global economic indications come into the picture domestic people will also become skeptical in their consumptions. This is what is now happening.  
  • Further profit booking is a part of the game particularly when the cobbler on the street side plans to invest in stock market. High hopes from Rajan to cut down interest rates are going to play a catastrophic effect on the economy in the long term. When sales are going to happen as exports are dried up and struggling then the best way to revive the EPS and PE of stocks is to go for cut down of interest rates which will results small to high level of benefits in earnings.
  • But once the interest rates are be lowered we will find companies making a beeline for re-adjustment of their current debts and interest payments which will create pressure on the banks books and also on the economy in the long term. It’s something like Tax payers money will go for wild toss where corporate would make money at the cost of that segment. Further Basell III norms will be implemented across the globe where liquidity flow will be affected. I covered this aspect also in my previous articles.
  • Further it cannot happen that FII’s will be only doing investments and will not be booking periodic profits. If we make a comparison of the FII’s inflow with other economies we will find a simple answere about the long term trust they have in our markets. Remember the current global economic condition gives them negligible scope for investments in other economies /markets where they can get a healthy ROI. India is the best bet for investments but for long term.
  • Under Basel III the massive capital support required to meet capital adequacy norms cannot be funded by budgetary support alone. That’s why the Union Cabinet last week allowed public sector banks to raise up to Rs 1.6trn from markets by selling down the Govt. stake to 52% in a phased manner. Of the 27 PSU banks, the Govt. directly controls 22, while SBI is a majority holder in the remaining 5.
  • These norms come into effect from 31 March 2019 and require banks to maintain minimum Tier-1 capital of 7% and another 2.5% of common equity as Capital Conservation Buffer. Accordingly, public sector banks would require total equity capital of Rs 2.4trn by 2018.  Now if interest rates go down then NPA will shoot up or the loan re-adjustment books of the banks would swell up. This will make the banks as well as the investors to be less attractive for investments.
  • What we are asking Rajan to do is that create an economic bubble like US where low borrowing cost would push up consumption and revenue which will not last for a long time. In this digital economy no one is fool.Political pressure might get the work done but long term would be quite dark.
  • As exports are not going to pick up in the nearby, adjustment of books would not fetch much return to the economy except to the Stock Market in the short term. Don’t forget that our tax payers money have been used to liquidate the banks whereas the corporate played their dirty game of re-adjustment of loan books and converting into will full NPA. In the last four years, the Govt. has provided total budgetary support of Rs 586.3bn with the current fiscal’s target pegged at Rs 112bn.
  • The government can pressurize to go for rate cut but that would only lead to short term respite. If global slowdown becomes prolonged then at that point of time rate cut could be the appropriate at that point of time. Credit off take easy but getting results from the capital is the toughest things which are now very much prominent.
The best way to avoid this type of sudden profit booking or slowdown based crisis is maintain the asset allocation and often book profits which results to rebalancing your portfolio. We often ignore these things and the same I have also covered in my previous article.

Monday, December 15, 2014

GLOBAL REAL ESTATE BUBBLE...BURST TO BE CATASTROPHIC

In continuation to my articles on Asset Bubbles today I will present you all one of the asset class which has a global bubble and is just on the sidelines of getting burst. It might take 1 year or may be next 3 years from now to burst, depending upon the size and the level to which the asset class can be carried on till the last minute of the great show.

The global real estate market is on the verge of the biggest collapse which will be prolonged slow growth trigger for the global economy. Under the tag line of Infrastructure the every country has developed and invested heavily on the sector. Even after the collapse of the US big giants like Lehman Brothers and many companies who were involved in the mortgage business. But the lessons learnt from the same seem to be of no effect as after the crisis of 2008 many countries invested their stimulus back into the real estate market.
The current slowdown of the various economies in terms of significant drop of manufacturing and consumption demand has lead to plummeting investment climate for these countries. Now unemployment is also high for example in Euro-zone countries we find unemployment’s:

Now the youth unemployment who are the buyers of the real estate are very much shocking than the common unemployment rate. Strong number of unemployment leaves option of not getting married and not having children’s . This leads to no demand of houses for the new young generations. We all know that young fellows within the age of 22-25 prefer to leave their parents and develop their own families etc.


Now tell me form where will you get growth in real estate and how the ancillary industries like steel, cement,  employment, taxes revenues will remain unaffected from the slow down and bubble burst. Further, significant drop of new investments in real estate cuts down the demand for the ancillary industries which leads to a significant drop the demand and consumption leading finally to slow growth.

Further the weak wage market in US and in many other economies leave negligible scope for investments in real estate either in the form of Hedge funds products, ETF,FOF or direct real estate. Weak faith on government economic revival policies followed with skeptical and conservative approach of consumption and more prune towards savings leads negligible investments in real estate.

But this high unemployment forces them to stay with their parents and hence no demand for homes. We must understand that there is a physiological change among the culture and life style due to the recession which began in 2008. 

Currently over the past 5 years we have kept the legacy of high burden of debt followed with mortgaged assets and less owned assets for the next generation. Dowjones made new historic highs but with a legacy of debt. The same things applies for all the developed economies where rising debt burdens are more compared to the scope of owing a new asset.

Now come to story of Asia where China has created one of the historic bubbles of unsold inventory of real estate with a long term vision that these inventories will be absorbed over the long term. Now if china dreams that whole of the world will open their shops and offices only in china then that’s a big flaw.

Growth, business expansion and research analysts predication of numbers followed with manipulation of numbers are the reason behind the huge surge of inventories build on the gossip of economic growth and expansion. The capitalist minds have created bubble of slow growth for the world economy in the long term. Developers are currently sitting on 5.6m units of unsold property, according to official statistics, a figure that has almost doubled in the space of two years. Working age decline is also going to add fuel to the decline of real estate market as less buyers would be there to buy.

Now real estate along with not bring slow down for the world economy but the ancillary industries like steel, cement, employment and etc would find significant slowdown. Putting all these together where the growth will come when manufacturing itself is collapsed.

Lest measure the depth of bubble of China’s real estate:
  • Revenue dropped a shocking 75 per cent, with prices down 52 per cent.
  • For the first time in years, when they put up land for auction, local governments suddenly found themselves with unsold parcels.
  • In the past six months, almost 20 per cent of land for sale failed to find a buyer.

Now come to the biggest part of the bubble burst where common men who are outside the real estate game of capitalist will suffer, is through the banking channels. Just imagine when Zero interest rates have failed to bring buyers then just imagine when the cash flow of these real estate developers have dried up then what type of debts these developers are  having on the books and the banking exposure to them. Further through Real Estate Investments trust investors risk and its liquidity aspects are on the highest point which is hard to be measured.
  • REIT IPOs globally exceeded US$20b in 2013, 55% higher than the pre-financial crisis peak in 2005 and more than double the total seen in 2012.1
  • The first half of 2014 saw a further US$6.8b raised globally, primarily due to the high level of activity in Spain
  • The size of REIT IPOs has been remarkably consistent every year since 2009, with transactions averaging approximately US$300m.

The size and the investors are too big and global liquidity have been entangled in such way that it will take decade to wash out the stains of the collapses. These REITs might have been able to provide short term returns but in the long term when the bubbles are going to go for a wild toss then the world crisis will be a prolonged one.

Further the gate of globalization has opened up the competitiveness of real estate market across the globe. Chinese buyers might find China to be old and their real estate market to be priced too high. They plunge into European real estate market or US real estate markets as prices are too attractive over there. In the same way Indian real estate market might look to be cheap compared to the developed economies across the globe. In key Asian cities such as Singapore, Hong Kong, Beijing and Taipei, real-estate prices are extremely high by comparison to some of the U.S.'s best markets, including New York and San Francisco. Today’s buyers have wide option but that leads to a significant bubble creation as one cheap price might lead to exploitation for the economy or market. Well the history and the present history as plethora of examples where the same is being exploited.  

A list of convoluted Real Estate crosses border deals followed with foreign appetite for investments in cross border deals:
  • U.S. real estate is attracting massive foreign investment.
  • In October, Kensington Realty Advisors Inc. and SEDCO Capital, a Jiddah, Saudi Arabia-based firm, purchased a 97-unit assisted-living and memory-care facility in McKinney, Texas.
  • In August, the Canada Pension Plan Investment Board committed US$500 million to a joint venture with real estate investment manager Goodman Group that invests in U.S. warehouses. That commitment brought the fund's total allocation to the Goodman North American Partnership joint venture, launched in 2012, to US$900 million.

If residential segment finds stagnant growth then the commercial segment is betted highly.  But now it seems that both the bets are going wild and any one bubble burst at any part of the world would create catastrophic collapses as all deals are entangled with one another’s economies.  One example of exploitation and how investors across the globe are fooled is that foreign capital has been boosting prices in the 25 biggest U.S. office markets since the fourth quarter of 2012 — a low point in the cycle — with prices growing 8.8% in the second quarter of 2014 up from 3.2% growth in the fourth quarter of 2012, according to data from Jones Lang LaSalle.


Well the conclusion which can be drawn is that bursting of these bubbles would create wave of Tsunami across the global liquidity and will bring forth one of the strongest decline for the global economy in the long term. Keeping the current scenario is mind all it can be said that 2008 was a trailer and the picture is yet to be released.

Saturday, December 13, 2014

ASSET BUBBLES TO EXPLODE...JUNK BONDS OF U.S

Many debates are humming around about the present slow down and its birth to the biggest recession of the world economy in the coming days. The biggest question is that how this child of recession would born and its long term aftershocks on the global economy. In my research I have been doing experiment where I have found that recession would happen from 2 ways 1) Slow down or death of manufacturing and conservative consumption which leads negligible demand of goods and services and 2) Through the burst of the bubbles of various assets classes where the impact would be like Atom Bomb affect on Hiroshima and Nagasaki.

The first bubble which is expected to burst out is the energy market bubble which has created a double affect. Slowdown of fresh investments and significant high level of Merger which would create long term monopolistic affect on the world energy market. This would sound to be a distant dream but history says that when there are collapses in particular industry or assets classes where cost of operating itself turns to be a burden over the sales price. This leads to close down of business or rather selling the same to someone and creating a monopolistic market in the long term.

Coming to asset bubbles we find currently that since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero.  Now when oil prices are around below $60 the cost of servicing the debt has became a question of billion dollars. Further junk bonds issued by the oil companies have grown significantly over the last couple of years. The total value of junk bonds in energy companies has reached $210 billion, roughly 16% of the $1.3 trillon junk bond market. The current low price of crude would spook investors to sell them as zero return has approached to these bonds. This figure is four times the share of 4% in energy junk bonds ten years ago. Many junk bond issuers now do not have enough revenue to pay high, if any, yields. Speculative capitals have caused the huge surge of investors to come and invest.


 The booms of the shale production have been the trigger followed with zero cost of borrowing of US would has resulted so much investments .Unemployment is also going to take toll in the nearby as low crude prices erases the profitability margins significantly. Employment in support services for oil and gas operations has surged 70% since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34%. Hence  a significant threat also boils over here for the US economy. Investors pulled nearly $1.9 billion from funds dedicated to low-rated corporate bonds in the past week. Energy companies sold $50 billion in junk bonds through October.

Bigger than the fall of Crude prices I find the bond market is under extreme threat which would create wave over the volatile currency movement in the coming days. ETF, Hedge funds would be under significant threat as stupendous outflow or redemption is going to happen in the coming days. Junk bonds has played stupendous role after the 2009.
Now lest measure the affect of the low crude prices and its junk bond market affect on the upcoming years can be measured from:
  • Energy accounted for more than 15% of the high yield market, making it by far the largest industry (healthcare is the second largest at approximately 8.5%).
  •  Energy accounts for approximately 11% of the U.S. investment grade market (based on the Barclays U.S. Investment Grade Corporate Index).
  • The sub-sectors that are most sensitive to commodity prices – Exploration and Production (E&P) and Oilfield Services – account for roughly 4% of the investment grade market (versus approximately 9.5% of the high yield market).
  • In the equity markets, energy accounts for approximately 8.5% of the S&P 500 Index.
Flight of capital has begun from the junk bonds to the secured bonds of the US treasuries. We should prepared for an currency wave and turbulence for the global equity markets as flow of capitals takes new directions. This is just one of the part of the bubbles across various asset clasess. In my next series I will be coming up with many more such threats to the global markets.
Written By Indraneel Kripabindu Sen Gupta & Hardik Bhatt.

Wednesday, December 3, 2014

WHY AND WHERE MANUFACTURING WOULD BE HEADING

My article might look like an philosophical but I have tried my best to give very normal outlook. Low trust on the government policies leads to restrictive consumption as people are more inclined to save rather than spend. 2008 recession might be over according the stock market players but in real economic terms it not. Just mere looking at investments in stock market and inflow of capital and some cooked number of statistics influenced by government and bankers might be a good way to increase confidence but people are sceptical at heart. Recently manufacturing data of few economies came up where it is clearly indication that there is significant drop or stop of manufacturing. Why manufacturing is coming down despite of so much positive vibes created by banker, politicians and stock market players.My worry is not restricted to short term but long term.
  • One who has burnt his house will fear from the slightest view of the flame in any corner of the world. Consumers are reluctant to got for spending as weak government and political system fails to segregate capitalism and sustainable economy.
  • Bankers, politicians and stock market analyst are working hard for short term results but the long term is least bothered. The vicious cycle runs in this way that every present government is busy in proving his abilities at the cost of common man across the globe. We never think what we will keep for children over the next 20 years 2034.
  • The real picture of the economy over the next decade will be very conservative outlook and approach by the people over their consumption planning across all segments.
  • This conservative approach is well reflected now but is being hardly made aware as the same is being disguised by market players.
  • Human Behavior and culture is changing and we are witnessing the same in term of drop in manufacturing and consumption.These are above the cooked number of the various economies.
  • The circulation of liquidity in the system has become restricted to a certain segment of the market and this well reflected that no wage hike or full time job availability is negligible.
  • Hence every is prune to more savings and less towards consumption. Balance of life and controlled life behavior has emerged from these well exploited people over the last decade by the various economic and government policies.
  • The biggest observation of the present time is that manufacturing is not going to pick up across the globe and cheap labour followed with technology based-cost efficient consumption has replaced the global landscape of consumption.
  • Low cost of production and technological support has brought marginal costing of production to Zero.
  • Very soon in 2015 we will witness liquidity injection by many economies where momentum of economic growth is declining and again the liquidty will flow into risky assets which will further instigate the riskiness of the various asset classes.
  • New highs for Dow Jones, FTSE, Sensex, Gold, Crude, Commodity and all other assets classes in 2015 but will that lead to increase in wages and employment.
  • If there is no one to buy any good why companies will manufacture? MANUFACTURING IS BOUND TO COME DOWN.
  • Dow Jones can scale new heights provided they continue with Buy Back of Shares and increasing the shareholders wealth over the time.Today 70% of the US corporate earnings lies outside of US.
  • This is the result of Exploitation planned and executed by US.
  • The world economy has invested less into socio-macroeconomic long term investments. This is proved through Britain where over the last 3 decades applied mathematics have been removed and pure mathematics have been employed. This has resulted no progress in Research and Development.
  • If we search many economies like this we would many cases which are the prime reason for these economies to collapse. Only Capitalism won’t be sufficed.
  • Today we are witnessing digital restriction in many economies. Over the next 10 years we would find restriction on free trade and restriction on migration policy. All these will be done to protect and bring back the resources back at home. If today US citizens are unemployed one of the basic reason is that all of the manufacturing has shifted to China and hence no jobs for the US citizens. Can anyone explain me why I will not place restriction when my own people are way heading towards starvation?
  • Technology has changed the culture of trade and business at the same time it has changed the economic structure of the world.
  • Export driven economies like China is today set for an all time low level in GDP growth. How sensex and Nifty will earn high levels when exporting countries are dried up and revenues are not going to come. Do you want me to believe that cost efficiency products of India will replace Made in America, Made in China, Made in Europe etc. Even I buy this point but how long you expect that these economies will bear the cost of International Free trade policies. Remember these international policies were created to exploit other economies.
  • Just like US opened the gates of China in WTO in 2001 and later on after a decade that exploitation is costing US billions of dollar. Hence one day these will come to an end.
  • We need socio-economic investments and capitalism should be restricted .Everything is not business.I am more worried about the long term rather than the short term.
  • Over the next 10 years we will find stringent migration policies and Trade policies where consumption will happen under 'Made in My Country'.
  • When their are so many things do you think that RBI should cut down rates only for the heck of corporate earnings to grow.If their is no export market then where the goods will be sold. Does rate cut is required for that Rs 7500000 cr debt to be re-modelled so that again the NPA could be lowered for the short term and create a collapse in the long term jut like US.
  • If profit grows then it makes sense for rate cut.But who will buy the products. Inflation might increase at any point of time which will spook commodity prices. Hence to offset that price hike we are asking for rate cut so that corporate profit increases and banks take the hit on a later date. Stop the crony capitalism.Vote bank games of individual states should be kept aloof from these so dynamic market and economic movements of the global market. 

Monday, December 1, 2014

WORLD ECONOMY SLOWS CHINA TO BE THE BIGGER SLOWER 2015

Well in my previous articles I have writing about a recession factor which is now becoming prominent. In my research trying to give signal of the financial and economic collapses which are coming to various economies which are significant threat to the world economy.  The slowdown of the world economy has come off really and the recession phase is going to begin as per the indications of the various indexes across the Globe.

  • China's HSBC/Markit PMI touching a six-month trough of 50.0. The official version was scarcely better, slipping to 50.3 in November from October's 50.8.

  • Brazilian manufacturing activity shrank in November for the seventh time in eight months, with the Markit/HSBC PMI dropping to 48.7 in November from 49.1 in October.
  • German manufacturing PMI revised down to 49.5 in November
  • US Chicago Fed's national activity index fell to 0.14 in November from 0.47 in October
  • US consumer confidence index fell to 88.7 in November from a downwardly revised 94.1 the month before.
  • The U.S. manufacturing sector slowed in November to its lowest rate of growth since January, according to Markit, with the final November PMI falling to 54.8 from October's final reading of 55.9.
  • The US Institute for Supply Management’s factory index was little changed at 58.7 last month, the second-strongest level since April 2011, compared with 59 in October
  • Japan's economy slipped into recession in the third quarter as the impact of a hike in sales taxes lingered longer than anyone expected.


I am having writing very aggressively about china since 2008 and in between I shared the article about the transition phase of the economy from export to domestic consumption based economy. We have been hearing the story that Chinese economy is getting slow down but we dig further to find out where the slowdown is coming and how even after such  strong stimulus package after 2008 crisis. In this year we find that the economy is turning into a nightmare for the Asian economy in the long term. The bubble of asset classes is small now as another round of liquidity might be injected in 2015 to fool the world market that growth fuel is still left within China.Unsold Inventory shows the picture of the depth of collapse.

Chinese economy has wasted around $6.8 trillion in investments in the last 4 years. Well we need to figure out how big is this?  $ 6.8 trillion -which is two years of output for the entire German economy. It's more than four times as much as is invested in S&P 500 index funds. Half of the investments between 2009 and 2013 have created the problem. Well the investments have been into such projects (infrastructure) that is of no use to increase the GDP growth of China. The $6.8 trillion calculation was made by Xu Ce of the National Development and Reform Commission, an economic planning agency, and Wang Yuan of the Academy of Macroeconomic Research, a think-tank under the commission. The breakup of the wasted investments stands to be estimated totalled 7.9 trillion yuan in 2009; 5.4 trillion yuan in 2010; 4.7 trillion yuan in 2011; 10.6 trillion yuan in 2012; and 13.2 trillion yuan last year. That amounts to 41.8 trillion yuan over the past five years, or $6.8 trillion at the current exchange rate.

In one of my recent report I depicted that China has gone very strong on government corruption and is chasing the government official’s funds. Well according to the report of National Development and Reform Commission $ 1 trillion out of this $6.8 trillion have been pocketed by the various people of the government. Combined employment by government and party organs, including government agencies and public institutions as well as party bodies, including those employed at the central, provincial, and sub-provincial level, is about 40 million. This is greater than the population of many states.
The $6.8 trillion waist has been created by developing Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape. In short Chinese investments have become less productive for the same. China economy is not bidding higher prices for crude and this is also one of the reason behind the fall of crude prices. Further Automobile industry and steel industry in china is under sever blockage as excess production is hardly being absorbed. Further India being replaced as the next destination of Investments china is under severe threat.

A year ago, a Reuters analysis of proprietary data about so-called trust loans—made by non-bank financiers which  do not have to abide by the interest rate restrictions placed on the state-owned commercial bank reflected  that more than 41% of all such debt issued in 2012 went to companies most likely to be using it to roll over old debt. Trust loans were the largest segment of the so-called shadow banking system in China. Hence circulation of capital into system has stopped and re-modeling of debt is the game being played to fool the world economy. Over capacity of production has resulted in turn increases of deflationary pressure, as too few companies have the pricing power to increase profits.

This first chart, showing the investment cycle of China’s main industries which in total are trending down, says everything.
Currently China is busy in making a proposal for another round of stimulus and this would create bubble which will burn Asian markets in the long term.  Export has dried up and outflow of capital from china has increased. This is quite evident from the numbers where China’s foreign exchange reserves fell by $100bn in the third quarter – the largest drop ever, despite a trade surplus and foreign direct investment inflows. China had registered a $51bn outflow beyond the current account in the second quarter, according to balance of payments data, and September numbers suggest a $122bn outflow for the third quarter, according to Kevin Lai of Daiwa Capital Markets in Hong Kong. Injection of liquidity steroids have already began and recently the PBOC last week confirmed it pumped 769.5 billion yuan into select banks in the last two months and twice lowered the rate it pays lenders on 14-day repurchase agreements.For the past two years, President Xi Jinping has been engaged in a wide-ranging anti-corruption inquiry that has engulfed thousands of officials. This has lead many business houses to move out of China in the form of JV and Merger and Acquisition.

Well next year the growth projection would be cut but to fool the world market steroids of liquidity and higher projection of consumer based consumption might be displayed. First, although corporate debt is very high by historical and international standards, household debt is very low at 25% of GDP, while government debt, at 59% of GDP including central and local government debt. 

In the year 2000, real estate accounted for around 5% of China’s GDP. By 2012 it rose three times to 15%, according to the IMF's calculations. It certainly did not decline in 2013 and 2014, despite Beijing working overtime in forcing a market correction. Together with construction, real estate directly accounted for 15% of 2012 GDP, a quarter of fixed-asset investment,14% of total urban employment, and nearly 20% of bank loans, according to the IMF. This chart shows in the 12 months to September housing prices got smoked across all regions – housing prices across the country have declined.

This chart shows the previous downswing in China’s housing prices as well as the sharp drop off experienced this year which Westpac said respondents to its MNI China Consumer Sentiment Survey are “now expressing considerable caution regarding the near term prospects of the market”.Hence Infrastructure base sectors are witnessing tremendous slow down as cement, steel, iron and other ancillary industries are witnessing no demand. 

As I said earlier that Asian markets would be prepared well to absorb one of the burst of the bubbles. But before bubbles get smart the size is too small as another rounding of liquidity to be injected into the system of china.

Sunday, November 30, 2014

BEAT THE MARKET...INVESTORS MISTAKES...SERIES 1


 Investor behavior changes when the bull rally of the market begins. In my latest research I have found the various angles of the investor behavior which bring miseries and pains later on after plunging into the equity market syndrome of Beat the Market. I will be discussing the same in elaborate fashion in couple of series. I request my readers to read the same since it will be of great help to avoid the traps and temptation mistakes. I will explain you how we tend to become long term investors and end up with losses.

Investor appetite is back on the street where even the cobbler on the street is looking forward for parking his money into equity markets to make something more than the Piggy Bank or the savings account rate of interest. After a lackluster equity market over the last 3 year and a weak economic growth created a well strong hunger among investors to look for some better returns. The fact is that we are not looking forward for better return but we are looking for the investment options where we take more risk beyond the capacity and make over the opportunity lost returns over the last 3 years.
I hear that investors discuss that we lost the opportunity to become rich during 2004-2008 but this time we will not afford to repeat the same and hence plunge into the equity markets to become rich. Pledge your house, pledge your gold and redeem all your fixed deposits and savings and invest in Equity. This was the strategy played by the equity investors during 2004-2008.   Margin funding the best weapon of tempting investors to pledge everything and take over exposure over their risk taking capacity have been one of the most common devastation tools of the equity investments. When market falls investors don’t have water in their eyes to cry out. I have seen in my last 11 years of experience that many families got ruined due to the excessive greed and breaching too far from their risk taking capacity.

Risk taking capacity has two aspects one is the level to which one can bear the loss to his capitol and secondly how much one can absorb the same in real terms.  Taking over risk is not character of the Indian equity investors but it’s a GLOBAL phenomena. If we get back to 2008 we will remember the company name madoff which got bailed out. Investors burnt their fingers since they did not get into the details of the company and its operations and just invested as it was able to beat long term bonds and short term bonds from 2001 to 2007. The same story here that looking more from the safe investments and investing 100% into the same. We forget that there is word called Asset Allocation which needs to be maintained at every step. In my recent interaction with a group of investors I learnt that Asset Allocation is for bad times of the market and economy and when the economy and market looks like India currently then we need to invest 100% into equity to get maximum return out of the same.

Well I leave the above testimony to be justified by my fellow readers. What I am trying here is that we are again getting carried away and focusing aggressively on equity and forgetting the rules of asset allocation. In my 11 years I have found that emotions play a vital role behind the equity investments across the globe. Risk is always neglected and emotion takes 100% hold while doing investments. We love to hear to discussion where winning stories of profit making is being discussed. We stimulate our hormones through these success stories so that we breach our risk and plunge into 100% equity investments.

We need to figure out why we take these rational decisions for investing. Well we are all trying to beat the benchmark index and create  a separate investment return or rather I would put this that beat the market and common man risk taking capacity. Fund managers across the globe have been taking the same route as beat the common index and breach new height of risk taking capacity is the essence of the game. We share stories of profits where money has doubled but we never turn towards the losers. We investors follow a  pattern while doing investments. We start with good news but we end up with our lives,

Fixed Deposits and Bonds are the places where we find rate of interest of highly risk products around 11% to 14% carrying without any ratings. Whereas good rating FD products carry a rate of interest of around 9% to 10%. But we all know that we all prefer to invest in 11% to 14% based FD products. We never tend to understand why the company is paying so high and what business and what are their financial conditions. Now a argument would come where one will say that we are common man traveling in train and etc, how we will know the same. More over weak education over the last 3 decades has eroded the knowledge power of the investors hence it become quite dark for these investors to know such things. Brokers take the advantage of the same and play with the investors.  The best examples of these plays are the Insurance products which have been sold as miss-selling just by taking advantage of your low knowledge base.

Investors have adopted the same habit which they apply while going to a restaurant asking the waiter which food item is the best. We must know that as a lawyer, doctor require special knowledge for their own profession in the similar line you need to know about investments. The biggest mistake we do while doing investments is that with limited knowledge and intelligence and no special Information we try to play beat the game market. Our equity investments are just like surgeons who do surgery without knowledge of surgery.  

Thursday, November 27, 2014

OVERSEAS MUTUAL FUNDS INVESTMENTS...LOOK BEFORE YOU LEAP.

In continuation to my previous article on Fixed Deposits today I will be sharing some insights on the Mutual Fund New Fund Offerings. The Indian market has set the tune of the market to create new historic highs and we will witness the same frequently in the coming days.  This is the time when NFO come into market to garner funds from investors and deploy the same based on various strategies in to the market through Mutual Fund.  There was time when infrastructure theme based mutual funds used to be sold. Investors made returns from these funds initially but once the concept became too much common the preference of the same started losing.  Infrastructure funds were later on identified as no less than to diversified equity fund.  After 2008 crisis we found that overseas based funds started coming into the market. The prime reasons behind such concepts are that we all know that Indian being an emerging economy FII’s and domestic investors have been aggressively investing. Further you can copy anyone but before you paste think twice.

Due to this overseas funds were unable to garner funds from their FII’s and Domestic investors (due to cash strapped and austerity measures). Hence they came up with Fund of Fund concept to garner funds. Slow down of Europe and weak growth of US has created a nightmare for the overseas fund managers. Now juts tell me you have invested in any Japan based FOF or theme based funds now with the current recession for Japan what type of return you expect. In another instance you did an investment in FOF or theme based fund in Europe, now with the current slowdown of the European economic growth what type of returns do you expect the market of Europe and the funds to provide. We need to understand that your money is  going to be invested in their country, in their company so we need to know who are buying their products based on which the sales numbers would come and profit would generate. If you don’t find the answer to this then simply drop the investment idea despite of how much training and spoon feeding have been done by the sales personal.
Absolute Returns of Overseas FOF or Theme Based Fund launched in India 

Among these entire overseas funds or concept based funds, few funds have managed to survive and provide decent returns in the long term. The reason behind is that the concept of the fund and theme of the fund was the game player. Credit goes to the fund manger too but performance of other funds has created big question mark on the overseas funds or theme based funds which are coming to India. Poor performance of these funds creates problems for the investors where goal planning has been married with the scheme for the investor. We should know that currently Indian economy is going to be one of the highest destinations of investment compared to other economies. When we do investments we need to understand the underline economic growth factors rather than trusting blindly on the market growths or equity earnings expectations. If I find that Indian corporate earnings would grow by 15-20% over the next 5 years then why should I bet on someone else? Greed is good but with limitations.

The thumb rule is simple if economy growth corporate profits would grow over the long term. Many argument would come for short term hiccups based investment double stories but remember they are short term and very few are fortunate to win the dice. Risk has to be taken but now playing dice but with full knowledge based investments. Many arguments would come that it’s time for diversification and we should move behind the borders of doing investments. Well in that case these investments need to be sold by saying that doing investments in Europe and the return from the same may take a decade to get. We all know and we can all remember about what is being told while these overseas FOF/or theme based funds are being sold.

 Try to understand the underline theme and imagine how the growth will come and from where. Numbers are easy to fool compared to logical reasoning. Stop doing investments based on rumors and herd based philosophy. The one who is sharing the success story of investments in these type of investments might have done the same when the recession of 2008 was ruling. We are today at 2014 and soon we will be in 2015 hence times and things both have changed. You can copy anyone but before you paste think twice.

Monday, November 10, 2014

INDIAN INVESTMENTS AND EQUITY MARKETS A OPPORTUNITY IN 2015

Predication is a part of analysis but it should be taken as the ground realty of unforeseen future. Indian economy has set the stage for a strong economic growth over the next 5 years. The initial affects are visible but a stronger picture would come out in 2015.We have already noticed and heard the Make In India is the new manufacturing music being heard across India and Globe . We are set to create a stupendous growth for the Indian economy. In relation to that I find the India stands to be one of the most favorable destinations of investments in terms of generating a higher return on Investments compared to developed economies. For equity markets I have tried to highlight only two of the few majors blows that’s will change the shape of the global investments.

Make In India is an opportunity for the Global Economy to Survive.

China is currently going through a slow down phase as exports have taken a hit and its economic policies are now focused towards internal consumption driven. Moreover china currently is going through high labour cost followed with gaining population in the middle class segment.  Hence china is no longer the cheap country in terms of manufacturing. Further to this there have some stringent measures of vigilance over the foreign companies which has also spooked the thought of shifting manufacturing base out of china. India is having low cost of production due to cheap labour cost followed with an abundant supply of young manpower compared to other economies. If we look at the chap cost comparison between china and India we find that in India manufacturing cost stands to $0.32 where as china stands to be $3.52 according to Boston research. Further in the research its being found that China’s estimated manufacturing-cost advantage over the U.S. has shrunk to less than 5 percent. Brazil is now estimated to be more expensive than much of Western Europe. Poland, the Czech Republic, and Russia have also seen their cost competitiveness deteriorate on a relative basis. China is going to loose many many manufacturing jobs since  in a research  it has been found that in2004, China’s average manufacturing costs were estimated to be 6 percent higher than Mexico’s, according to the BCG index. Mexico is currently around 4 percent cheaper on average. Chinese manufacturing wages have nearly quintupled since 2004, while Mexican wages have risen by less than 50 percent in U.S. dollar terms. 

 Make In India is going to be game changer for the world economy as manufacturing in India will result to more profitability particularly when there is slow down in the developed economies. Hence shifting manufacturing out of china on a gradual basis would be profitable for these companies who will set up their plants in India. Mr Modi’s dream of Make In India is based upon the success of story of Gujarat which contributes 13% of the manufacturing compared to the total of 21% In India during the tenure of his Chief Minister of Gujarat. Its time to take advantage and also make advantageous for the overseas investors to invest in India.

Equity market valuations and Short Term major Triggers…..
On the other hand an equity markets valuation is around PE of 18.5 and has huge potential to climb from these levels of 28000. The simple reason behind the same is that historic highs of PE were calculated when the revenue growth was around 20% whereas now the same is around 10-12%. Hence increase in revenue would push up the PE and hence the market of 28000 is very low. But this revenue growth will happen gradually as inflow of capital would increase.  Low commodity prices and crude prices are boons of the Indian economy but still they might be short lived, despite of that long term prospects of Returns on Investments are much higher compared to developed economies.
Indian government is already taking steps to simplify the labour rules and land acquisition rules which would make easy for outsider to create his manufacturing base. Infrastructure investments would find a clear way since it will get linked with Industrial development. We are in the rally of making India global hub of manufacturing. Slow down in Europe and US volatile economic recovery leaves less thrust for investments in these economies and also lucrative nature of the same. Europe is having huge young generation unemployment hence they are finding difficult to get jobs. Indian economy is open to all of them and that’s why Mr. Modi also asked the overseas communities to come to India and work for the country. Hence inflow of human capital is going to be another trigger which needs high attention.  India is going to be the next destination of work and island of technical knowhow’s.

The equity markets across the globe are also going to witness one of the radical changes in terms of investments and inflow of capital into the financial streets. These are few of the triggers which will happen and would create opportunities for the Indian market and economy to take a safe bet.
Basel III: This will change the game of the banks across the globe where liquidity system will take different shape DIRECTION. This regulation asks banks to hold more cash for payment of debt. Thys will have to invest in low interest rate bearing securities and risk free products. This leads to outflow of capital form risky assets and cooling down of asset bubbles across the globe. This will lead to  correction of the global markets across asset classes which will be an opportunity where toxins of the market would get flushed out. It raises billion questions about how the investment process of the banks would shape after the Basel III implementation begins.

Volcker Rule: This will be creating a big problem for the US merger & acquisition market as it restricts banks form betting on their own money. This includes hedge funds and private equity funds. The Volcker Rule proposal has two main components: a prohibition on proprietary trading by covered banking entities, and a prohibition on covered banking entities investing or sponsoring a hedge fund, or private equity fund, or other ‘similar fund’. This will be change the landscape of speculative investments ball game of the US economy and will flush the global economy from speculative hot money invested from 2008.This is going to be another opportunity for the Indian investors to find short term correction and invest in the same.


I restrict my self to these high powerful rules which will be implemented from 2015 and its effect on the global economy. Keeping the above rationales the best solution to get good return from investment is to invest in Indian economy. India have been loosing despite of low cost of production due to weak regulation and cumbersome business process. Mr. Modi is all set to remove the bottlenecks. He is indirectly asking global economy to come and join India to save the massive slow down of the global economy.

Monday, November 3, 2014

REPUBLICANS OR DEMOCRATS...ALL IN VAIN FOR U.S ECONOMY


Well I am no one to say about what’s going to be the election results of US but I find that Republicans has a strong point to come but that would not solve the economic problems of US. Since, the biggest debts in the history of the world have been created by joint share of the two.  We are back to the phase of listening promises but we failed to identify that these promises cost the economic growth in the long term.Who ever wins its a different ball game to run the economy.

Lest get into the details about the basic economic problems which have been created by the both of them over several decades. After the global economy took a rock bottom hit in 2008 the US federal debt swelled to $16.8 trillion growing up by $6-7 trillion.  The outflow of interest payments on that debt burden presents a formidable challenge for US taxpayers. Forget the principal, they have to pay $220 billion annually just in interest. According to the US National Debt Clock, the US government has a $16.8 trillion debt, which comes out to be over $53,000 for each US citizen.

 Aging population has swollen the government social pay packages which has no scope of being withdrawn in the future. Aging population also reduces the scope of inflow of funds for the government in form of individual taxes. Now let’s measure the volume of obligations of commitments and promises by the US governments over the decades.

According to the Boston University economics professor Laurence J. Kotlikoff, who served on President Ronald Reagan’s Council of Economic Advisers- spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. Don’t be shocked here. The US Department of Education approved $714 billion at the end of 2012, which is a significant jump from the $104 billion issued at the end of 2007.  But with the US economy failing to generate new jobs, many of these now college graduates lack the financial means to return their debt. 
Now lets come to the game of hopes used by Republicans to fight democrats where I find that democrats would find a win position either in this election or 2016. The social security bills and defense a bill which has been used historically by the US government has turned reverse on the economy itself that where Democrats have been cornered by the Republicans. Ebola and the late actions on ISIS have been one of the setbacks of the economy.  One of the biggest promises by the President directly and indirectly have been that he will get back the jobs of offshore into back in the country. In 2000, 30% of GE's business was overseas; today, 60% is. In 2000, 46% of GE employees were overseas; today, 54% are. Latest to the bandwagons- Boeing Coon  said it would move the majority of its defense services and support work out of Washington state to other U.S. cities, affecting the jobs of about 2,000 of its 5,200 defense employees in the Puget Sound region. Stringent labour laws forces the Americans to offshore the business and make their own business profitable. This proves that too much social security leads to a severe shock for the US economy. Further domestic taxation laws are so cruel that US offshore companies don’t want to pull back their funds into their own economy. Part time jobs don’t create employment but it indicates lag in policy reforms.  

The proof of the pudding is that the largest U.S.-based companies added $206 billion to their stockpiles of offshore profits last year. The multinational companies have accumulated $1.95 trillion outside the U.S., up 11.8 percent from a year earlier, according to securities filings from 307 corporations reviewed by Bloomberg News. Foreign profits held overseas by U.S. corporations to avoid taxes at home nearly doubled from 2008 to 2013 to top $2.1 trillion. Even as governments around the world cut tax rates and try to keep corporations from shifting profits to tax havens, the U.S. Congress remains paralyzed in its efforts. The response of U.S.-based companies over the past few years has been consistent: book profits offshore and leave them there. Well borrow at Zero and add numbers before the Zero. Hence Zero Interest rates were of less respite to the US economy and more to the offshore business. The corporate tax rate in the U.S. runs as high as 35 percent, but companies don’t pay U.S. taxes on profits earned abroad as long as that money remains offshore.  Another social benefit or an economic loss is the question of trillion dollars.

Congress hasn’t acted because of disagreements over whether to be tougher on U.S. companies operating abroad amid broader disputes over government spending and taxation. The stalemate has prevented the U.S. from tapping a pot of money that President Barack Obama and the top Republican tax writer in Congress have eyed for such projects as rebuilding highways.

Conclusion:
Whoever wins the most important decision to be taken by the government is not to hike interest rates and reduce the corporate tax so that circulation and flow of capital happens and there is no catastrophic affect on a sudden affect of economic factors. The government should not be biased for social benefits linking it with elections and powers. Stringent rules and regulations and simplifications in terms of labour and business laws are required so that US manufacturing gets back on its wheels. It has less to do with money and more with lenient policy reforms.   Whoever wins fiscal deficit, high outflow of interest cost and burden of social benefits are the legacy which will keep US economy to struggle over the decades. Part-time jobs don’t reduce unemployment as it’s the indication of the biggest instability of the policy reforms to create jobs and investments.

Wednesday, October 29, 2014

CRUDE AT $120 WITHIN MARCH 2015

We are all jubilant about the crude prices have come down to $85 and it’s expected to come further below as per reports of the big giants of the world market. But I find the crude prices to shoot up to $100 by December and $120 by March 2015. Low crude prices theory is based upon that Europe, US and China are under the phase of slow down and hence there is not much demand as compared to the productivity.

Well these theories are good for academics but not for intelligent animals. Low crude prices are no doubt beneficial to the Emerging economies who are importer of crude like India. Surplus funds from low crude prices leads to investments in progressive segments but the game is for a very short lived phase. Many people have now thrown the question on RBI about cutting down interest rates as crude prices are low and hence fiscal deficit is coming down further Indian economy is entering into the proper channel of FRBM .I find RBI has negligible position for cutting down interest rates. We must not forget that THE collapse of the Soviet Union in 1991 had many causes but the prime among them was the fall in the price of oil, its main export, by two-thirds in real terms between 1980 and 1986.
  •  Iraq, Syria, Nigeria and Libya, oil producers all, are in turmoil as the price of Brent crude fell over 25% from $115 a barrel in mid-July to under $85 in mid-October.
  • With oil at $115 a barrel, Saudi Arabia earns $360 billion in net exports a year; at $85, $270 billion. Its budget has almost certainly gone into the red
  • Venezuela’s-Every dollar off the price of a barrel cuts roughly $450m-500m off export earnings. By Deutsche Bank’s calculation, the government needs oil at $120 a barrel to finance its spending plans—higher than before the recent tumble.
  • Iran needs oil at $136 a barrel to finance its spending plans,
  • Brazil wants a high oil price to attract investment to its ultra-deep offshore (prĂ©-sal) oil reserve
Hence its well clear that world economy would be facing more slowdown if the prices of crude falls to below $85 level. Now the cold war between Russia and US is now quite visible. US is playing with crude since its increasing its production so as replace the entire middle east by 2018 and that to save the dollar from getting replaced as a reserve or trading currency in the coming years. It’s a threat for which US is aggressively producing crude. China and Russia are doing internal trades based on their own currency and avoiding dollar. Now we all know that Russia exports crude in exchange of food items and other necessary consumption based items. Now with the present level of crude of $85 leads a significant threat to the economy in the long term. Moreover with winter season in Russia creates huge market of demand for food and other consumption items. Hence Russia would find intense difficulty.

Sovereign funds size of the Middle East and Arab world in terms of exporting of crude has swollen to a mammoth level. This is a threat for the US and European economy as the biggest question of funding of various militants group is question of trillion dollars.  For me this is an assumption and the best reply for the same lies with my readers.  The most astonishing part is that Libya has started production of crude despite of so many tension raises the eye brows of billions. Libya would somehow be pumping 40% more oil at the end of September than it had just a month earlier? Supply rises by 810,000 bpd, led by Libya On the other hand Saudi Arabia’s decision to boost output to protect its market share and hurt American shale producers and see off new developments in the Arctic was also a big shocker.

Further Russia has aggressive planning for its military and defense and the funding of the same is dependent on the crude export at the price of $130.

We Indian needs huge amount of storage facilities where cheap[ crude can be stored and can be consumed later on which will also give the biggest advantage to the Indian economy when crude prices increases in the international market where as India could enjoy a low price particularly for the agricultural sector. We need to plan storage facilities and develop alternative energy for the agriculture sector so that we can get out of the clutches of the crude prices. The recent report of the big cats of the world market that crude prices can come down to the level of $75 has been said since  in the US, the weighted average marginal cost of crude production at the shale-dominated onshore plays is about $73/b. Hence they are not making a loss. Further the report have been released since they want the world market to create massive short position in the near term and make zoom up rally in the long term something which happened to gold during Feb-2013. Another big winner, paradoxically, will be the U.S. oil industry. Fears that the price plunge will force cutbacks in production appear very premature. In fact, if Congress gets its act together and lifts its forty-year old ban on oil exports, we could actually see a spurt in production.

The other big winner will be the U.S. consumer. Americans are already seeing the impact at the pump, with gas prices averaging $3 a gallon. If the price of Brent crude falls to 80 dollars a barrel, that’s the equivalent of a $600 annual rebate for every American household  and a $1.8 billion daily windfall for the world economy.

US economy will face slowdown and Europe too but do you think that Indian markets and economy would grow particular the ones who are dependent on export. Moreover these developed economies knows very well that if crude prices goes up to the level of $120 then inflation will swell and interest rates would not come down and rupee as well as economic growth will be under intense pressure to grow. Hence the best way to create problems for this new government and economy is crude prices. Hence its quite easy to derail the growth plan of the present government and bring slow down. This is why we need huge storage facility and also intensive growth for alternative energy particularly to the solar sector.

This month's output is OPEC's highest since November 2012 when it pumped 31.06 million bpd, according to Reuters surveys. Involuntary outages, such as in Libya, kept output below OPEC's nominal 30 million bpd target in earlier months of the year. Iraq, like Libya, has also managed to increase supplies despite fighting in the country. Oil output rebounded due to higher exports from Iraq's southern terminals and increased output from fields in Kurdistan. An advance by Islamic State fighters nearby crude wells is an significant threat for the crude to grow.
After reading the affects about the losers due to the falling crude prices do you think that they will remain silent’s and will not do anything where crude will shoot up to the level of $120. A return to sub $100/b oil also comes as oil executives confront growing investor calls for more capital discipline to defend revenues against ballooning oilfield service bills. Creeping industry costs and fast-growing costs of accessing more remote, complex sources of oil and gas and have played a key role pushing breakeven costs perilously close to current oil prices. The London-based group said that collectively, the world’s oil majors are looking at a potential capital spend of $548 billion over the period 2014-2025 on projects that require a market price of at least $95/b. Hence if oil companies start losing billions then unemployment would increase which will create massive prolonged slow down. Do you think that these exporting economies would afford that at the cost of low crude prices?

The battle is now between US and Russia and Middle East countries who export crude. This is further proved from the latest US air strikes in Syria targeted oil facilities controlled by Islamic State (Isis) in a deliberate attempt to wipe out a lucrative source of income for the rapidly expanding jihadist group. The Islamic State, which now controls an area of Iraq and Syria larger than the U.K., may be raising more than $2 million a day in revenue from oil sales, extortion, taxes and smuggling, according to U.S. intelligence officials and anti-terrorism finance experts. The Islamic State is probably the wealthiest terrorist group we’ve ever known,” said Matthew Levitt, a former U.S. Treasury terrorism and financial intelligence official who now are director of the counter terrorism and intelligence program at the Washington Institute for Near East Policy. Hence that’s the reason why crude prices are coming down but the biggest question is that how long the price will be falling. The war for Crude is cruel and I fear India should not get burnt. That’s the reason I am focusing and urging more on increasing the storage facility of India for crude.

According to the Iraq Energy Institute, an independent, nonprofit policy organization focused on Iraq’s energy sector, the army of radical Islamists controls production of 30,000 barrels of oil a day in Iraq and 50,000 barrels in Syria.By selling the oil on the black market at a discounted price of $40 per barrel (compared to about $93 per barrel in the free market), ISIS takes in $3.2 million a day.

 My point is that why we should get into this problem and why not aggressive look for freeing up the agri-sector from the dependency of oil and focus on solar power.US is squeezing up Russia and Middle East so as to cut down the funding. Now do you think that RBI will cut down interest rates and take the hit later for rising crude prices?

We should build huge reserves/storage of crude at these low levels and also work hard to develop solar power energy based energy supply for agri-sector to control the affect of rising crude prices.Also remember that what ever losses happens today will be coped up in the long term.So their is less space to smile.

Wednesday, October 15, 2014

INDIAN MANUFACTURING DREAM...UNDER A TOSS

The Indian manufacturing segment is on the path of massive revolution where ‘Make In India’ is being invited. In my research I find some socio economic areas where improvement and cautious approach is required to be adopted by the Business Chambers of Commerce and also by the Indian government and regulatory system.  We are inviting FDI investments and investors to open shops here. We are proud to invite but how much trust the business houses like CII,FICCI, ASSOCHAM has in these initiatives. Since they have been the biggest suffers over the last 5 years in terms of policy actions. We are not criticizing the concept or the dream but we have a long way to go and achieve the same. We are indirectly asking FDI to create India as an exporting hub.  But, how well we are prepared for an instant flow of the FDI’s in India. We are not discussing about infrastructure growth but we are discussing about other prime socio-economic factors which will support in real terms for Make In India.

In India we have witnessed the trend of slow project progress and high escalation cost as we all know that certain percentage of the project goes as bribery to the various people in the system to start the project. Bribes to the politicians and high levels of corruptions have been the land mark of India. We have one of the traditional processes of getting approvals for starting a business and getting necessary approvals for the same. The new companies ACT 2013 might have been some relief but still red tape policies take its own course of action. The below data shows the rank of India among doing business easily in India:

Hence the above data cleanly states that in order to Make In India successful we need to climb down many steps down. Manufacturing segment faces the biggest problem of labour Union and Power shortages. Last year in a research by FICCI it was found that over the last 2 years deficit of electricity have been 15% of the peak levels which translates into a loss of $64 billions to the economy.  India has installed capacity of 250 Giga watts but produces only 160 GW. The recent coal scam and the Supreme Court verdicts create stupendous problems for the manufacturing base to grow in India. Its easier to dream and think but we don’t have the basic infrastructure to support the same. Now the biggest hurdle will begin and this Make In India would turn out to be sour when infrastructure as well as FDI investors opens their shops simultaneously and policy delays and setup delays creates problems for the rest. We must remember that initially their will be some peanut investors who would come to India to taste the waters. Once they found the water is full of salt rest of them will stay offshore and the Dream will end up somewhere and will become a strong point for the opposition party of BJP in the near term.

Law and order is one of the key areas where every state should come up together to make this Make in India initiative to be successful. We must remember that we have already witnessed TATA NANO –Singur matter and hence efficient system and stringent measures should be implemented so that these type of things don’t happen which damages the scope of the Make in India to grow. One of the most important things is that we are inviting FDI investors for opening manufacturing base in india but where they will open their shops and what type of facilities would be promoted by the state governments. We have 29 states in India currently and hence we need joint effort by every state-politicians to come together to create this Make In India. But we have found in history that every state competes with each other due to so many regional political parties holding key position of individual’s states. The game of bribery and manipulation starting from land deals etc begins from these state level competitions. We need joint effort and equivalent facilities being provided by every state and not providing any scope of exploitation.

Now coming to the labour reforms and policies have been totally in jeopardize over the last 60 years. The recent case of Maruti is enough to say about my thoughts. The Trade Unions played extensively their political game and many politicians have come from being only an illiterate Trade Union fellow who was active in fighting and creating problems with promoters of the company. The Indian economy has a plethora of examples where managers/employees have been burnt to death in the hands of the Trade Unions. We need labour laws which will not be cheap proposition for using the labour as well as the labours would not take things for granted. There is requirement of flexibility and every state should understand this concept. If we look at the historic pattern of lock outs and strikes we find impreesive numbers currently but still lot needs to be done.

India's labour laws have continued to be cited as "archaic" or regressive and they are many –44 different laws on labour at the central government level, often with contradictions.  In my research I find that Central Government rules and regulations have little scope to play here and much of the responsibility of the labour laws is in the hands of State Government.  Just take the example of West Bengal which just got ruined in the hands of the trade unions over the last 3 decades in the hands of the CPIM through these trade unions. Every business and Industry were compelled to exit the state and get into some peaceful state. If someone says that Gujarat, Hyderabad , Banaglore has grown  phenomenally then one must remember that their trade union policies were flexible and were well controlled. On the other hand state government has taken some active steps to improvise the labour reforms police which would create significant growth of these states in the long term.


There have also been cases where respective state government has made the law more stringent, for example West Bengal. Such states, where laws are more rigid, have done relatively poorly. The need of the hour of this decade is that we need flexible labour laws and friendly for both the players. We need zero politics to be mingled in these policies. We must understand that today the citizens of India are more literate and we need to stop think for our vote banks biased approaches. If you want India to be an exporting hub for the global world then we need flexible, unbiased and friendly labour policies.

Schemes like NREAGS were all created since there was lacks of skill development and technical education level where the huge manpower/labour could be utilized for manufacturing base. If there were more focus towards skill developments and asking the NGO’s that one NGO will get taxation benefits only when he is a part of Skill development then this should have created a well sustainable labour force over the long term. I used the NGO over here since they have more rural presence than any other segment across India.

The government has a target of skilling more than 500mn people by 2022, aided by the National Skills Development Corporation (NSDC), which has been given the objective of skilling 150mn by 2022, and rest through various ministries. Of this, 50mn is targeted in the 12th 5-year plan. NSDC is a Public-Private Partnership (PPP) which acts as a catalyst in skill development by providing funding at low rates(grants, equity, soft loans) to enterprises/companies/organisations (skilling partners) that provide skill training. The skilling programs are developed in consultation with the industry.

Poor basic education creates repulsive affects on the labour force which creates the mindsets of comparisons of pay scale with others. The below data clearly indicates the poor level of education in different segments of labours in India:


 The above data clearly shows that we need chain of actions for the skill developments and hence we need PPP models to come active in skill development. On the other hand its being found that always whenever there is some growth of the Indian economy there has been a wide disparity of income between the labour force and the capitalist. Well what I want to focus is that the pay structure of the labour force should be compensated adequately and skill based and education/training lead compensation should be the key parameter for labour pay in any manufacturing base. It true that Indian labour cost is cheap but don’t make it so cheap that trade unions gets a ground to play and some foul people become politicians over the next 5 years.

Complicated Trade Unions rules and regulation, leads to small attraction of manpower of less than 10 workers/employees SME segment. SME segment is one of the fragile sectors and hence they are the key long term economic powers but this power is very much scared of Indian labour laws. Further complicated inspection and various regulatory aspects create more fear and hence schemes like NREAGS comes into play.

We are promoting exports indirectly through Make In India.  If India needs to be global manufacturing hub then we need reforms not only on infrastructure but also in our minds sets and approaches. We need to upgrade the skills and education levels of the manpower of India. We need continuous supply of resources which will keep the manufacturing alive. We need negligible biased approach of the state government and also in-depth co-operation of making make in India to be successful. We need state governments to come forward and look for the long term benefit of the Indian economy rather than competing within 29 states.  Remember that India adds 12mn people to labour force every year. Job creation statistics from the NSSO (National Sample Survey Organisation), and cited by the BJP (party leading current Government), show that between 2004 and 2012, India created 15mn jobs. This was much lower vs c.60mn jobs created during FY00-05. Hence we have a long way to go and we don’t want that Make in India goes for a wild toss. In my next article will cover the impact of Cost Audit and Costing methods removals on the Make In India dream.


  © Blogger template 'Minimalist H' by Ourblogtemplates.com 2008

Back to TOP