Thou Shall Not Quit

Try I will, I may not succeed

One step ahead, with each attempt

The fruit of success is all so sweet

The upshots of failure are not that bitter

Fight I will, till the battle is won

Strive I will, be it day or dawn

Moving mountains, with my Labour

Waking myself, from years of slumber

It’s how you define success, which is all that matters

Some say its money, some say its fame

I say it’s being happy in whatever you are doing

As when you are happy, the rest will keep flowing

In the end, when the curtains fall

All my dreams turned to ashes, all my tangibles reduced to dust

No matter how many would miss me, no matter how many would have cried

I want the world to say, there lived a man who tried

Written by Nishant Mathur, PGPM 2018, Great Lakes Institute of Management, Chennai 

(Image courtesy – tylerwedell.files.wordpress.com)

The Argentina Dilemma and threats of systematic failure By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

In 1869 the law relating to bankruptcy was introduced with the provision of limited liability. This ensures that the shareholders of a bankrupt company will be able to walk away from their creditors without paying the full debt. The shareholder wealth is never affected because of this limited liability. In the case of a country, if it borrows in local currency and is not able to repay, it can inflate its debt away. India is currently following this policy. While the real inflation rate is in double digits, thanks to deficit financing to support all social objectives, the government has massively reduced the purchasing power of rupee over time. For example, a kilo of rice sold for Rs. 20 a few years back is selling at 55 Rs. But the problem becomes different when the borrowing is done in a foreign currency.

Currently economically weak country issues bonds in foreign currency which foreigners do buy because of the risk compensating high yield as compared to the US government bonds. In the case of Argentina, the spread over the US government bonds was well over 300 basis points. So the creditor is already compensated somewhat adequately for the risk of default.

Now comes the real story. Thanks to real mismanagement Argentina is on the verge of bankruptcy. Its loans need to be restructured. This involves paying the creditors less than 100 cents on a dollar.

The owners of these bonds fall in the two categories.

(A)those who are willing to accept reduced debt with a deeply reduced face value. For example, a 100 US dollar face value bond is revised to 90 US dollar.

(B)those who hold outs insisting on full payment.

Recently the US courts decided that Argentina should make full payment to the defaulted claim to both A and B if it decides to make any payment on the restructured loans. This idea of giving equal treatments to both A and B is very tough. If all of them turn out to become hold outs, then payment is not going to be possible. On the other hand if all the creditors accept reduced payments then restructuring is possible.

The final outcome of Argentina’s debt problem has far reaching implications to all the debted countries and the creditors as a whole. Long court cases with inordinate delays and frustrating discriminatory judgment unfavorable to them. Countries which are planning to borrow overseas may find this judgment difficult to do so. We in India have an external commercial borrowing of US $ 225 and a foreign reserve of $ 310 bln. The lender will think twice before lending any more money to India and if did it will ask a very high premium. The situation transpiring in Argentina is a major threat to the financial market. The New York court’s decision must be honored. If not, what is really in danger here is the public trust in financial securities market as well as in law enforcement. The conflict between the bond holders and the government must be settled through negotiations which is only the best interest of both parties. If they fail it will set a precedence for other countries to disobey the court’s judgment and then the international finance transaction may become a cause for the total financial breakdown.

Finally, the global financial system is full of cracks waiting to collapse any time. Every country’s duty is to uphold the system which means respecting the court’s decision.

Is the Indian economy running out of stream? A reality check By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

It is often said that “the data speaks for itself”. In the case of Indian economy and its future growth, it is applicable admirably. The politicians often refuse to see the true picture and instead claim that the economy has bottomed out and now is rearing to take off. Is it? On what basis are these claims made? Why then is the data released by the Indian CSO tells a contradicting story. Here is a reality check and how it is in variance with what these politicians say.

Reality Check 1: Whether we like it or not, the global economy is either in recession or in deflation safe for a few countries. The euro zone countries, which is about one third of the global economy has entered into a major recession with a best growth possibility of sub 1 percent. The Japanese economy would love to have this 1 percent growth with persistent slowdown and deflationary tendencies, it is in no position to support the global economic growth. The US economy which is approximately one quarter of the world economy has just announced 0.1 percent growth for Q1 2014. In this global environment if Indian economy were to achieve a 5 percent growth after growth rates below 5 percent for the last 2 years, we should have a celebration. Unfortunately it will be difficult for it to happen. In this regard current Chinese economy is also facing its own asset disinflation and is trying to avoid a sub-prime crisis similar to the one that took place in the US in 2008.

Reality Check 2: The Brent crude and WTI oil prices are hitting new highs. Thanks to the Sunnis insurgency in Iraq. Currently there is no disruption both in production and distribution but the price of Brent crude per barrel has touched $ 115. Only 2 years ago it was around $ 90 per barrel. If the civil war spreads damaging the production and distribution capabilities of Iraq, then the price could soar to touch the old highs of $ 146 per barrel. India’s export bill is around $ 160 billion dollars. Every $ 1 increase per barrel costs our exchequer thousands of crores. The diesel price which is currently subsidized will have to increase or alternatively the cost will be passed on to the consumer which means higher inflation.

Reality Check 3: The non-performing assets of banks, especially the PSU banks, are at an all-time high. The loan defaulters whether intentionally or unintentionally have decided not to return the loans. The lendable funds with the banks have shrunk and besides many banks will need capital to recapitalize to meet the Basel 3 requirements. The first priority of the government will be to set the banks books straight even at the cost of growth.

Reality Check 4: In the last budget, Mr. Chidambaram predicted the budget borrowing to be about 30 percent. This itself is outrageous. Unless drastic action is taken by Mr. Modi’s government the borrowing could go even higher. Selling the public sector undertakings may generate some money but in the last 2 budgets the efforts yielded marginally. Non availability of resources will be a major deterrent to growth.

Reality Check 5: With the CPI inflation edging slowly towards double digit and the monsoon playing truant with 40 percent deficiency up to now, there is hardly only chance for the food prices to come down. On the contrary the prices of fruits, vegetables and cereals are shooting up. Given the present trend I am afraid that we may be ending up with a very low economic growth and high inflation. Honestly speaking, only a miracle can save the Indian economy.

Reality Check 6: This in fact is the most favorable possibility and can change the picture completely. Borrowing huge amounts of money from China and Japan and attracting FDI in large amounts would certainly help in the current scenario. This is our best bet as it stands today. The recent Argentine crisis with a possible credit default and the disobeyance of court order. Countries which have surplus funds will think twice before lending any money and if they did will come with all conditions.

Reality Check 7: The savings rate in our economy is falling rapidly. There are two aspects to it. One part of the saving is going into gold. A large number of Indian citizens are convinced that the only way to ensure future security is to divert the funds to gold. The interest rate provided by the banks for the deposits is abysmal and below the inflation rate which gets worse after taxes. Besides, gross capital formation is moving towards new lows. This will be a major dent to the economy.

Finally, the new government’s hands are tied and will stay clueless. The UPA government has literally driven the economy into a hell hole with huge debts. Their subsidy program, a largely welfare scheme has cost our country’s growth horrendously. But in the end, who cares. At least the bottom of the pyramid benefited but unfortunately they became disloyal to the UPA in the last election. Every government honestly wants to do good things to its people. Support the poor and give them hope but economic reality dents this aspiration.

Reviving the Indian Economy: PM Modi’s Challenge By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

We are only 10 days away from the budget. The last 10 years of UPA government had committed so much to welfare and subsidies that it will take a great leader like Modi to stand up and say we cannot afford this luxury anymore. Let us look at some facts.

1. Start with food subsidy provided

FY 2012 – 2013                     85000 crores

FY 2013 – 2014(RE)              92000 crores

FY 2015 (Interim Budget)     115000 crores

Can Mr. Modi bring down the subsidy? Possibly not; People receiving are used to who are currently beneficiary will protest.

2. Let us now look at under recovery (Government pays on behalf of consumer).

Kerosene Rs. 32.87 per litre

Gas Rs. 432 per cylinder

Fertilizer subsidy Rs. 67970 crore

All the subsidies added up to 10% of the total budget including the NREGA. Mr. Modi will have to reduce the under recovery to reduce the budget deficit. Will he bite the bullet and do it? Let us see.

3. Let us look at the budget borrowing

It is approximately 30% of the budget. If our household is run like the government, we would have become bankrupt long ago. Reducing the borrowing it will be a herculean task. In the short-run Mr. Modi possibly cannot.

4. Let us look at the taxes

Marginal relief for tax payers is currently around Rs. 2 lakhs. Mr. Modi has no money to increase it even though some are asking for the limit to increase to 5 lakhs. Let them continue to dream.

5. Regarding Corporate taxes

Exemptions amounts to 68000 crores which is the amount foregone in FY 2012 – 2013. Can this be sustained? Remains to be seen.

Observation:

1. Mr. Modi’s hands are tied. He has to find additional source of money. He can try to sell more of the PSUs. Otherwise the deficit will increase even further. Currently it is around Rs. 5 trillion out of a budget of 16.5 trillion Rs.
2. Both the failing monsoon and the spiraling oil prices are going to affect his budget. Being a strong leader, he should not play to the gallery but must act in a determined way to get the economy back on track. He should tell the people “no free lunch”. It was almost like the parents telling a child who is asking for an extra allowance. PM Modi must be transparent regarding the true finance of the country and advise them to lower their expectation.
3. Mr. Modi should not get swayed by popular opinion but instead take the harsh measures necessary to put the economy back on track. However in the last 1 month he has already back tracked on the railway budget and the sugar support price.
4. Continuing to be people friendly by offering freebies will not be the hallmark of a good leader. Tough measures are needed even if it makes the growth to come down temporarily.
5. Inflation is our worst economy. He should address this problem immediately. Study the supply chain carefully. Threatening the commodity market will not yield the result.

The entire population of India is watching him to hand over goodies to them. If he did then he may win a few more supporters but the country will become much poorer for that. Sir, you mean good. Put a lid on the budget, people will understand. If you don’t do it, nobody in future can do it because you have a comfortable majority which is rare in the Indian politics.

Deficient monsoon and Commodity Prices By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is an ongoing conversation between the student and the professor.

Student: I know you teach trading in commodities. Please tell me the impact of monsoon on the commodity prices.

Professor: Monsoon is a massive see breeze blowing in from the sea. In India, we call it South West Monsoon. The breeze is from the high pressure area to an area of low pressure and is formed over land due to intense heat. Recently, extended winter in North India interfered not only with the heating of land but also the gradient. What do we have now? According to the news, the month of June passes with a rainfall deficiency of about 40 percent. The EI nino is blamed for this deficiency. Monsoon impacts the plantings. Currently Kharif plantings have been severely impacted by this deficient rainfall across the country. The worst affected are cotton and oil seeds. As a commodity trader, you will notice that the prices of these are moving up. A trader would buy these contracts hoping that this misery persists.

Student: Professor, I want to learn how to speculate in commodities. Can you give me a rough idea of how to go about?

Professor: I understand that you have no time to attend my classes. Anyway let me try. Currently the Kharif crops involve the following commodities planting. Historically the amount of land under cultivation should be as follows (measured in hectares).

Sl. No	Commodities	Amount of land under cultivation (in lakh hectares)
1	Rice	35.44
2	Course grains (a)   Sawar (b)   Bajra (c)    Maize	13.39 1.41 1.4 8.47
3	Pulses (a)   Tur (b)   Urad (c)    Moong	6.33 2.03 1.19 1.84
4	Oil seeds (a)   Ground Nut (b)   Soya bean (c)    Sesamum (d)   Sunflower	7.04 4.26 1.06 0.8 0.53
5	Cotton	35.86
6	Sugarcane	44.52
7	Jute and Mesta	8.18

 

A speculator like you would want to watch the developments of the monsoon and read the reports of the various commodity houses to know which commodity you should bet on. The monsoon is supposed to have set in Kerala on June 1. This year it got delayed by 5 days. After a good start it slowed down and the amount of rain required is not available. Unless the monsoon revives in the near term, we can see the prices of specific commodities moving up because the farmers may decide not to sow them enough. This creates scarcity and so the prices move up.

Student: Are you saying that I can speculate on the price and if I am correct the price appreciation enjoy a handsome profit.

Professor: Why not? That’s how the commodity market works. The worst thing is when the future prices moves up, the retail prices will also move up which means, the inflation rate will move higher. It is a tough time for Modi and his team to keep a lid on prices. They will definitely try to intervene in the commodity markets to stabilize the prices. Will they succeed? Let us see.

Student: What else should I understand?

Professor: You must know that the global commodity market work in sync and so price appreciation in one market will push in the others also. Well, this is not the appropriate time for us to discuss this in loose terms. Take my course. You will learn all about how to take advantage of the price volatility.

Student: Thanks Professor. Let me think about it.

Oil Prices and Futures Market By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is an ongoing conversation between the student and the professor.

Student: Professor, I read in the papers that the price of Brent Crude oil has touched 115 dollars a barrel. Will it hurt India?

Professor: Of course it will. The main reason for this price hike is because of the civil insurgency in Iraq. The price of crude oil went up 4.5 percent ($5 a barrel) in just one week. The Sunny insurgents (ISIS) have already taken over Mosul, the second largest city in Iraq. The Baiji refinery that provides diesel and gasoline to Iraq is also under siege. A scarcity is in the making.

Student: Will there be a ceasefire soon?

Professor: Very unlikely. You see the Sunnis want to carve a separate state. (They call it Caliphate) where all the Sunnis could live and practice their Shariat law. This is their dream similar to that of Martin Luther King of US who wanted the black and the white to live and work together in harmony and Nelson Mandela of South Africa who wanted the abolition of apartheid. The Shia’s are providing the opposition and willing to fight to death to kill their dreams. So there is a blood bath going on.

Student: Professor, every time a crisis develops of this nature, the oil prices go up. Why?

Professor: For 2 reasons. (1) The production of oil could be hampered by the war and so an artificial scarcity is created which will push up the oil prices. (2) The oil futures market where hedgers and speculators are there to seek protection and to profit respectively from the volatile market. The hedgers for example may be importers of oil and they buy the oil futures to ensure availability of oil and at a price they are comfortable with. The speculators on the other hand want to push the price sky high to reap speculative profits. These 1000 barrel Brent crude and WTI contracts are traded in the ICE and CME markets in the US. The volume of trade is very huge revealing the intensions of the traders and speculators.

Student: Why should the retail market be affected?

Professor: When the traders see the prices moving up in the futures market they know that the price will eventually move up in the retail market. It is this expectation that results in the price changes in the retail market.

Student: Can anyone prevent the prices of oil from moving up?

Professor: That is why you should study macroeconomics. For example, in the case of oil you will know who are the producers and consumers in the world and how political and economic events play a big role in the price movement. For example in the last Iraq war, the oil pipeline going through the Kurds territory was blown and this caused the price of crude oil to spiral up. The speculation took the price to $ 146 a barrel before the bubble burst.

Student: Now let me ask you a question about India. Will the events in the middle-east affect us?

Professor: You bet your last dollar it will affect us seriously. We import large quantities of oil from Iraq. If there is an interruption in supply, the price will shoot up. Also all flows through the gulf of Hormuz will stop creating scarcity. If the insurgency spreads through Iran, the gulf-shipping will be affected badly. With every dollar of price hike per barrel our oil bill jumps up by several thousand crores. To protect the consumer, if the subsidy in increased, then the budget deficit will increase significantly. On the other hand, if the cost is passed on to the ultimate consumer, prices at the petrol pump will jump higher and so this will push the inflation rate higher.

Student: What really can government do?

Professor: They can perhaps hedge. Hedging costs are sometimes quite prohibitive and this discourages them from hedging. Look, when things are not in your control what can the government do.

Student: Professor I will go and read up about oil and oil future. Thanks for the conversation.

Professor: Let me caution you. When you read some of these reports, check who has written it. Some really wish the price could go higher. It is a zero sum game. For example, Russia and Saudi Arabia will be celebrating because they are the big exporters of crude oil and also will want the price to go up. Countries like India are major importers and so we have to pray to the lord almighty that the civil war should end soon and that the prices revert back to its normalcy. But you see we don’t have a choice. As they say “Beggars cannot be chosers. Take it or leave it”.

Malaysia @ Greatlakes, an interesting student interaction

What makes a B School truly global is the exposure it provides to its students to understand their foreign counterparts, opportunities to understand cross-cultural diversity and ways to connect with the future managers at a global level. On July 17, Great Lakes Institute of Management hosted a group of Business students from the MARA University of Technology who had come all the way from Malaysia accompanied by their professors and family.

Universiti Teknologi MARA (UiTM) is the largest university in Malaysia in terms of size and student enrollment. Great Lakes is considered as one of the reputed institutes globally by UiTM because of its unique curriculum and international exposure provided to its students. It is with this fair outlook that they chose to visit Great Lakes during their visit to India. Students from UiTM gave presentations that revolved primarily around globalization and its Asian impacts, and compared the growth of Malaysia with India. Several aspects were discussed including the studies showing that Malaysia being able to reduce their poverty level from 40% to nearly 2% within a span of 30 years. Later, audience asked some queries on the Malaysian growth model and its various possibilities of implementation in India.

We, Great Lakers were curious to find out what image the Malaysian students had on India. When we questioned them what comes to their mind hearing the word “India”, we got some really interesting replies. The list included Tajmahal, spices and even Rajnikanth. The Malaysian students happily acknowledged that their perception about India changed after feeling the real essence of India.

Discussion moved to comparing global B Schools, especially Ui-TM and Great Lakes. Dr. Hj Yeop Hussin, Associate Professor at UiTM, Bidin said, “We already have exposure to Malaysian, Chinese, and Vietnamese B schools. Great Lakes is definitely comparable to most B-Schools in various aspects and very much a Global B School. That’s why we never had any doubts while choosing Chennai and Great Lakes as our destination.”

Dr. Asry Yusoff, Associate Professor at Ui-TM remarked that Great Lakes infrastructure and hospitality itself are clear differentiators. “Great Lakes founder and Dean Dr. Bala V Balachandran has done true wonders for Great Lakes to emerge as a front runner among the B schools”, he added.

The seeds for a long lasting relationship between Great Lakes and UiTM have been planted and would certainly flourish over the years to come. The changing business scenarios along with the new business education trends are making such B-school interactions an absolute necessity for polishing the global leaders of tomorrow.

Jyothish Jayan V (PGPM 2015)

Great Lakes Institute of Management

 

 

The war and its cruelty: A stark reality By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

The world is turning out to be an inhuman place filled with fear and hatred. Recently in the name of religion, hundreds of Iraqi’s citizens were killed. Several thousand were also displaced. A pitiable sight which is shown live on TV especially when women and children are sitting in the hot desert, not knowing when the Sunni insurgents will come on the scene and slaughter people. The same thing is happening in Ukraine where innocent people are butchered because of the political ambitions of Russia. We need to look at history to understand how the destruction and pain continue to persist. Jan 28, 1914, exactly hundred years ago, the First World War began in the Balkan town of Sarajevo. A 19 year old Serb nationalist, Gaurilo Princip fired fatal bullets at Archduke Franz Ferdinand, the heir to the Austro-Hungarian imperial throne and his wife. Within a matter of weeks, the leaders of Germany and Austro-Hungary used the assassinations as a reason to justify a war which grew to become what then was called as World War 1.

What happened? Before it ended in November 11, 1918, 37 million people were killed. The Ottoman and Austro-Hungarian empires were destroyed. The imperial throne of Germany and Russia crumbled into bloody revolution. One hundred years later, another region that has been forcibly held together for centuries by the British and later the Americans is on the verge of disintegration. Iraq and Syria were once prominent ottoman provinces are becoming slowly extinct.

The middle-east as we know today is an artificial creation by the Britain and the French through an agreement referred to as Sykes-Picot agreement. This created countries such as Iraq, Syria, Lebanon, Jordan and Israel. This was done much against the wishes of the areas Arab inhabitants. Within months of agreement, the war broke out and the British were fighting the insurgents of Iraq. The so called war lasted nearly 50 years until Saddam Hussain appeared on the scene.

America entered into Iraq in 2003 unsolicited and stayed until 2011. Nearly 250000 people of Iraq died in the war. Why would the US get involved in Iraq? Is it a fight to retain democracy? Hell no. Is it oil? Yes. The American senate and Congress are currently debating as to whether to reenter Iraq to maintain peace among the various religious sects. People who study history will clearly understand that any war initiated by an outside country will not be winnable especially if it is a civil war. Iraq is the second largest producer of oil and so is strategically important to the US and so are playing a role in the internal politics of Iraq.

The war among the various sects in the middle-east stated 50 years ago is an ongoing affair. So it will continue with for many years to come. The aspirations of Sunnis and Shias who live everywhere in the country will not rest until one is eliminated and in the end like in 1914 hundreds of thousands of people will have been killed for no other reason other than holding a different religious belief.

For the free world, it is the output of oil and the price per barrel is of concern. Death of fellow human being never mattered and never will. As it stands, the middle-eastern countries would keep buying weapons both from the US and Russia, by using their oil money only to kill each other, while in our parts of the world hunger and poverty will continue to ravage our citizens. Every time you put a diesel or petrol in your vehicle, think for a minute where the sale proceeds of your purchase is finally heading to. Of course to fight a war among themselves. Can any peaceful country make efforts to stop it? No, because there is money to be made out of the situation. With war, oil prices will continue to go up. Traders in oil will make a fortune. Defense contractors will enjoy the bonanza. The middle-eastern children in the meanwhile look to the sky to protect themselves from the US drone dropping on their head. This indeed is a stark reality of today. Finally, let us at least pray for a minute to save the lives of these innocent people.

Where have the good hearted people gone?

 

Argentinian Bond: Default Lesson in History By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Student: Sir, can a country default on debt? If so what recourse does the lender have?

Professor: Difficult question. But let us look at what is happening now. Argentina owes 2.3 billion dollars to foreign bond holders and has just announced that it cannot pay. This is the default on debt.

Student: Scares me. What happens to the country’s credit rating?

Professor: What can the country do? They simply cannot repay. Argentina has done this before in 2001. At that time, it froze all bank accounts, devalued its currency Peso. This lead to country wide riots and a recession followed. Now this time recession may not be the outcome but a hike in the inflation rate is possible which will lead to a hike in the interest rate. In fact President Cristina Fernandez Kirechner government has called the investors, to negotiate a settlement.

Student: This means what?

Professor: You can take Argentina to court. The investors know this and will accept settlement. This could include

1. Paying off the debt over a longer period of time
2. Reduce the payment amount by offering discount
3. Lower or cancel the interest rate and revise payment
4. Give more loans to ensure that the previous loan is returned

Student: Professor, should India worry?

Professor: Yes slowly, but we are getting there. The debt level around $ 430 bln is increasing but we have foreign reserves to pay the interest. As of now we have $ 310 billion dollars of which nearly $ 200 billion dollars is FII money which could move out if the stock market doesn’t produce the return they want.

Student: I will keep my attention to these developments. Thank you sir.

 

Japan’s multifaceted crisis: Is there a solution? By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Prime Minister Shinzo Abe is slowly running out of options to get his economy which is in permanent recession. The discussion between the professor and the student follows

Student: Professor, what seems to be the problem in Japan? Their GDP is struck around 5 trillion US $ for the last 15 or so years.

Professor: No, growth literally due to the host of problems. First is the issue of ageing population. Because the workforce is shrinking, by 0.5 percent, a year, nearly all growth must come from productivity gains. Labour is a serious problem here. How do you augment the workforce? Japan must persuade women and pensioners to get back to the job. First the Japanese government is not enthusiastic about bringing more immigrants. With nearly 40 percent of the labor in the low paid jobs is not the cure all for the situation. Without action in this regard, the GDP growth rate will be around 0.5 to 1 percent. Second, Abe decided to pump the prime and wanted to double the monetary base with an inflation target of 2 percent. Last year Japan spent 110 bln dollars extra and this nudged the economy growth rate past 1.5 percent. But he also increased consumption tax from 5 to 8 percent and this is pushing the economy back into recession. The announcement of tax increase pushed the consumer to do front load purchase and this helped the GDP to grow by 6.7 percent in the first quarter. But it has since run out of steam. Third Japan decided to lower the corporate tax to 35 percent. This is to attract new investment which is not happening immediately. We need to wait and see. Fourth Japan has loosened rules for agriculture land ownership by breaking the stranglehold of the agricultural co-operative. So you see any government can go so far to revive the economy but the ball is currently in the consumer’s court. Will the Japanese change his or her life style and start spending to push up the economy? It remains to be seen.

Student: You think the government policies will work?

Professor: Hard to say. Pumping the prime pushed the yen from 78 to 104 to a dollar, a massive devaluation. The growth didn’t take off. They pumped in more money. The growth took off but started tapering off. They are trying hard to push the inflation up to get the economy out of recession. Having said that, Japan must accept now that it is a fully grown economy. They don’t spend much on defense probably that is where the solution is. Let us wait and see.

Student: Thanks Professor.

Macro Economics: A dismal science By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Student: Professor, in the class you mentioned that macro-economics is a dismal science. You didn’t mean it. Did you?

Professor: I meant. I will explain. Currently there is a civil war raging in Iraq. The Sunni insurgents are fighting a non-winnable war with the Shias. In the meanwhile, the output of oil in Iraq is dropping rapidly to fall below 3 mln barrels a day. The prices of WTI and the Brent Crude today are around 108 $ and 115 $ a barrel respectively. While the oil exporters are gloating over the price increase, the oil importing countries are hurting badly. As far as we are concerned, we spent $ 165 bln dollars on oil imports last financial year. Given the price increases, we will see both our trade and budget deficits piling up for FY 14-15.

Student: Is oil that important component in our inflation rate?

Professor: You better believe it. The government has a choice. The government can either pass on the increased cost directly to the consumer, in which case the rate of inflation will increase further. Alternatively, the government could continue to subsidize by increasing the budget deficit which eventually have to be paid with interest by your generation. Dr. Rajan has targeted to keep the inflation rate at 8% for FY 14-15 and 6% for FY 15-16. His target will be missed certainly. He may be forced to increase the Repo rate at a time when the economy is faltering.

Student: Professor, can the inflation rate go up?

Professor: It is difficult to judge.  We have a big supply chain between the producer and the final consumer. There are too many intermediaries including the transportation and warehousing. The cost of goods produced will increase at each level of intermediaries and the resultant final product cost at the retail level will have spiralled up significantly. You just need to look at the vegetable prices today. There are almost double as that of last year.

Student: Professor, they say that el nino effect will also be negative news as far as the rate of inflation is concerned. Is it true?

Professor: In the first three weeks of June, we have been told by the meteorological department that the quantum of rainfall for this period is 46 percent deficient. This will push up the cereal prices substantially. Besides, all cereal prices are correlated. If the price of rice go up, it will push the prices of wheat, Ragi, Bajra, etc.

Student: Sir I understand now why you call the macro economics a dismal science. We always believed in the traditional demand supply theory along with the price equilibrium. You are telling us now that there are things beyond that.

Professor: You must understand that macro economics is about the price giver and the price taker. When a scarcity is created due to a host of reasons, the price giver (For example, producer) is jumping with joy. He can push up the cost and pass it to the price taker (For example, consumer). This is a continuous process. There is never an equilibrium and everything is transient. We need to be prepared for these volatility. For example, if the civil war becomes a full scale war involving the Kurds, Sunnis and Shias across the Syrian, Iraqi, Iranian and Turkish countries, there is no telling how high the oil prices could go up. All predictions therefore should be accepted with a pinch of salt.

Student: Thanks for the informative session. I understand now as to why it is such a challenge to predict the future prices of any commodity.

Corruption and Economic Growth By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is the ongoing conversation with Joe and Swami.

Joe       : I recently read ane Indian paper  in the internet which contained news mostly about scams, corruption and the court trials about accumulated wealth of individuals.

Swami: I am not fully informed on this topic. But it is clear that the amount involved is almost the size of GDP growth rate of India.

Joe       : Can you tell me why this is happening and how it is attractive as a news item?

Swami: Generally in India, the paper readers enjoy news that can create a conversational topic. Movie and corruption news is at the top of the list. We don’t talk much about the weather since it is always the same most of the time.

Joe       : Psychologically how do you justify corruption? Isn’t it shameful for an individual to engage in this?

Swami: We don’t view it that way. The other day I was in Singapore. In front of every immigration officer, there is a tray filled with candies and passenger, if they do desire, can take one or two for his or her personal use. But I saw an Indian lady, grabbing a handful of candies. I also saw the immigration officer noticing this with a big grin on his face. I found out later that she was a co-passenger in my flight. I asked her out of curiosity whether she was a low sugar patient and needed this amounts of candies to bring her sugar level to a comfortable level. She answered and I quote “I picked it up to distribute it to my grandchildren”. I said I understand but then I asked myself what I understood.

Joe       : Really. Why would you ask this question when it is not your business and what did you understand?

Swami: It was my impetuous behavior. I am always nosy and don’t get good sleep if I don’t get involved in other people’s affair. But I can explain to you as to why corruption is a big economic activity in India. If you have some patience, listen to me.

Joe       : Go ahead.

Swami: In India it is a common habit to save heavily to meet future expenditures namely for children’s education, retired parents upkeep and to meet ones retirement expenses. This is an enormous responsibility and the salary will hardly meet the current expenses. This puts a pressure to hoard. This culture of saving for the rainy day meeting different types of family obligation puts a great pressure on us to cheat wherever and whenever possible.

Joe       : Sorry to hear that. Can this not be stopped?

Swami: It is easy for you to say. Obama care takes care most of everybody’s medical expenses. Your social security system offers a decent sum of money for old people to survive and they don’t have to depend on their children. Your medicare program takes care of their medical needs. We do not have any social security program. So while in power, we use the opportunity  to gain some extra money by violating the rules and we justify saying that this is the only way to accumulate enough money to pay for our future expenses, says the civil servant. The politician spends enormous amounts of money for his election. It is not that every candidate wins the election and when it happens they try to amass as much money as they can. There is never an upper limit on corruption. They take away together hundreds and thousands of crores of rupees illegally from the government budget. The money taken away reduces our growth rate substantially.

Joe    : Now I understand. Thanks Swami.

 

Indian Economy and the Railway Fare Hike By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

We Indians are the most optimistic people with a very high irrational expectation. We think that a public sector undertaking company can continue to do badly as long as the deficit financing is possible. Look at the case of the railways which is incurring losses in many crores every day and the earlier UPA government allowed this to continue. Finally, Modi government decided to bite the bullet and Jacked up the passenger train fares by 14.2 percent and the freight rate by 6.8 percent. The season ticket holders using the suburban trains have been asked to pay nearly twice the amount for their monthly season tickets.

Why did this have to happen? The new government was expected to bring down the cost of living including travel. Those who believed this are completely out of touch with reality. Our railways are in a big financial stress. They are strapped of cash. Their effort to use the public-private partnership to raise revenue for them has not worked well. The question that should be asked is how to run the trains without adequate financial support. Mr. Chidambaram’s budget provided 30000 crores in the vote on account budget. Obviously this is not enough. Why? Nearly 70 percent of the budget is already earmarked for salaries. Further the measure of operating expenses as a percentage of revenue has gone up to 90.8 percent of revenues as against the expected 89.8 percent in FY 14-15. This is primarily due to the increased tariff on electricity.

When the hike was announced, the opposition parties raised an alarm in a chorus. They know well, that the railways require huge investments outlay to upgrade the signaling system and to strengthen the railway tracks.

What then is the lesson for a common man?

1. There is no free lunch. In order for the trains to run we need to increase the revenue through higher ticket prices and freight rates.
2. If the increased cost of running the trains is not reflected now, it will have to be done later. At that point in time the travel cost will have to move up significantly higher.
3. Don’t blame the present government. They are only trying to bring the reality home.

Even after the increase, the Indian railway travel costs are miniscule by the global standards. It has one of the biggest networks in the world and we citizens enjoy our travel immensely and hence the volume. Let us not become peevish and in fact, we should be willing to pay the price which is required. If sufficient funds are not allotted, there will be a major compromise in the security and the quality of service. Let us accept the price hike without complaining.

There are certain things the railways can do to enhance its revenue. They can for example add a compartment with 50 to 100 seats to each important train and offer the seats in auction. For example, an airline ticket becomes very costly, if the ticket is bought near to the travel date. The highest bidder should be allotted the seats. To improve the utilization of the compartments, they can develop a turnaround model by minimizing the travel time between destinations. This will increase the number of trips the rolling stock (compartments) can be used during the financial year and hence higher revenue. The airlines in India are already doing this.

The basic motto in all pricing activities is at least to recover the operating cost by periodically adjusting the fares. The price of ticket closer to travel should become more expensive and market driven. Also there must be an end to all subsidies and the railways must build a sinking fund to replenish the trains and for maintenance of tracks. They can issue bonds, name it infrastructure railway bonds and use the proceeds for improving the productivity and efficiency of services. Some public-private sector partnership will go a long way in this regard. The railways can also bring in FDI.

 

The continuing saga of Iraq civil war By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is an ongoing conversation between President Obama and the Secretary of state Mr. John Kerry.

President: John, do you think that it is a good idea to talk to the President of Iran? After all we have a shared common interest in Iraq.

John    : I don’t think it will be easy to have a meaningful dialogue with the president of Iran. We have already called his country “axis of evil”. The middle easterners are strongly emotional. They will remember our remark for a long time. Sir, we need to really look into the intentions of Iran before we talk to them. Our dialogue needs to be carefully calibrated to understand where they come from.

President: Where do you think they come from?

John    : Sir, I have this hypothesis. In the middle-east religion and its practice occupies foremost and the country comes only after that. The middle-eastern people are mostly Shias, Sunnis and Kurds. Their infighting is always related to creating a caliphate, a state where their religious practices could be continued without the others bothering them. The Shias and Sunnis haven’t seen eye to eye on any issues over their long history. They are born fighters and will sacrifice their life for the cause of their religious belief. Now why is this relevant?

The Sunnis (ISIS) are coming after Mr. Maliki, the current Prime Minister of Iraq who is a Shia. Mr. Maliki, since in office for the second term has treated the Sunnis badly and expected them to be meek. Yes they were for a while. After all Saddam Hussain, a Sunni was their leader and he bestowed all good things to them. We killed Saddam, destroyed his party Baath and installed a Shia leader. We dismembered the army and created a new army committed to preserving the Shias majority. But these soldiers had mixed feelings about their role and so was not seriously committed to defending the country. They ran for their life when attacked and gave up their military postings. Sir, you see the Sunnis onward March to Baghdad is intact and so we can expect a big battle in the next few weeks.

President: You mentioned about Kurds. Who are they?

John    : Sir, Kurdish Regional Government (KRG) manages rich oil fields. They earlier seized power and captured Kirkuk, a major city in Baghdad. Mr. Masoud Barzani, the KRG President has long coveted Kirkuk which is seen by many Kurds as their Jerusalem. After Saddam Hussain, they bickered over how to share the ostensibly federal wealth. However most of Iraqi’s valuable oil fields are located in the South and currently controlled by Shia.

President: You are adding a new dimension to the Sunny Shia conflict.

John    : Kurds story involves Turkey. Turkish Kurds, a very large number want to be a player in the dialogue is if there is any between the Sunnis and the Shias. Mr. Ahmet Turk, a Kurdish nationalist, a major of the border forces, wants to have a tête – a – tête with Mr. Maliki regarding the share of land and resources.

President: As I see it, there are many countries involved directly or indirectly with this resurgency.

John    : Yes sir. The players with whom we need to discuss have different agendas and they have strategies to achieve them.

President: It is late in the evening and so we will continue this conversation as I need time to assimilate it. Good night.

Sovereign Debt and restructuring By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is a conversation between a student and a Professor.

Student: I have a few questions to ask about sovereign debt. Is this a right time?

Professor: Go ahead.

Student: Is it true that no country can go bankrupt?

Professor: Yes or no. If all the borrowing the country does, involve local currency which it has the power to print, there is no question of bankruptcy. All debts with interest will be repaid by printing money. On the other hand if the borrowing involves a foreign currency, say US dollar, there is a possibility the country could face bankruptcy, if it does not have enough dollars to pay the interest and principal. Having said that, Seldom do countries go bankrupt. At worst they will have their loans restructured.

Student: What is restructuring?

Professor: Assume a country borrowed 50 million US dollars payable in 5 years with a rate of interest 4% per annum. The country has to pay an interest amount of 2 million dollars every year for 5 years and return the 50000 dollars it borrowed at the end of the 5^th year. If it is not able to pay back, then such a loan could be restructured.

Student: Sir, how is this done?

Professor: Tell the country to take another say 5 years to pay. A lower the interest cost. Assume that the country owes 55000 dollars (50000 principal and 5000 interest) they may now change the loan size to 55000, like a new loan with possibly an interest of 2 percent. This is a common practice in Indian banks where the non-performing assets are currently bulging up.

Student: Can the lender take the borrowed country to the court?

Professor: Yes, but the court must have a jurisdiction over the country. Recently there are interesting developments and I will appraise you on that.

Student: Sir, it is exciting.

Professor: The case in question is Argentina which has a terrible record of repaying its loan. The US appeal court has called Argentina “a uniquely recalcitrant debtor”. This country has made default a national habit over the last two centuries making you wonder why anyone would lend to it. On June 30, 2014 there is a scheduled interest payment on a set of Argentina bonds that its government wants to pay. But the court is saying that the interest may not be paid unless the country pays all it owes on bonds it defaulted on some years ago. Something Argentina says it cannot and will not do.

Student: Will Argentina obey the US appeal court?

Professor: It remains to be seen. As it stands, there is no legal procedure to resolve debts of destitute countries. There is no court to approve a restructuring plan that will wipe out some debts and convert others to equity as there is for companies.

Student: Sir, you said in class that India carries $ 430 billion dollar debt against the 310 billion dollar reserve. Do you foresee a problem for India?

Professor: Probably not. We have never defaulted before. In 1991, we came close to it but we hypothecated Gold and paid the loan with interest. Having said that, our current account deficit is a constant headache. Most of the monies that come in are FII money nearly 200 bln dollars of them. It is very short-term. If and when these guys pull their money out, both our stock and currency market goes for a toss. In 2008 they pushed down the Sensex from 21000 to 8000 in a very short period of time.

Student: Why don’t we behave like Argentina? Borrow, promise but never pay.

Professor: Yes possible but the international rating agencies will downgrade us. We are currently at BBB^– an investible grade but it could be easily lowered to BB⁺ which is a junk status. We don’t want that right.

Student: Yes sir and thanks for this conversation.

Insurgency in Iraq: Should the US get involved?: Part-2 By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is an ongoing conversation between President Obama and Secretary of State John Kerry.

Obama: Now, tell me how we should approach Iran?

John      : Sir, shortly after the September 11 attack, George Bush received an offer of help from Iran. We then shared a lot of vital information about the al-Qaida movement. Then we fell apart. Now time has come to get together again to prevent the insurgent Sunnis from taking over Baghdad. Sir, we need to build a new relation with the Iranian President Hassan Rauhani.

Obama: That is a good idea. What do you think they will suggest we do?

John      : Already senior officials in Iran are in favor of military invention. They feel that this is the only way they can stabilize.

Obama: After the intervention and get rid of the resurgent Sunnis then what?

John      : This is where a new problem will come up. We shouldn’t for a moment think that Iran has amended its ways. They ultimately want to join hands with the Shia’s in Iraq and this is not what we like to happen. The war between the Sunni and the Shia is ordained. They will kill each other fighting until one of them establishes its surprimacy. Once we allow the Shia to strengthen by eliminating the Sunnis, there is a high probability that the Shias may go after the kingdom of Saudi Arabia which is run by the Sunni royalty. Also if it becomes evident that we are supporting the Shias the entire Sunny population will want to settle score with us through terrorism and so we should exercise great caution.

Obama: What then is the solution?

John      : Sir, we need to send some military advisors to study the ground reality. They will be able to give you a complete picture of the insurgency, the size and damage of the assault and the potential outcome. But sir, I need to caution you I am particularly concerned as to why this problem has cropped up now. I feel that there is a political agenda of Russia is behind it. We are currently planning to reduce our budget allocation to defense significantly (Please read the article in the US budget). Now this has come up. All our sanctions against them because of their Ukraine involvement not received kindly. They are also aware that our popularity rating in the country is currently is very low. So by inciting the civil war with money and weapon, we will be forced to get involved. If indeed we fall into the Russian trap, the entire world will be accusing us the big bully. Sir, my advice to you is to go slow and keep everyone guessing as to how you are going to handle the situation. We must recognize the following fundamental truths which are as follows.

1. The Sunnis and the Shias is enemy forever.
2. Their Jihad will involve complete elimination of the opponent namely Shia’s will want to kill all Sunnis and vice versa.
3. The remaining ones must follow the Shariat law.

On our side, we will continue to talk peace as the possible solution. This will never happen while the slow attrition of the moslem community will take place. They also believe that dying for their religion is a noble cause and the parted souls will receive great honor in heaven. Talking logic and rationality to a mob who wants to lynch their enemies is a meaningless exercise.

 

Obama: John you seemed to know a lot about Sunnis and the Shias. Tell me when will they mature as human beings filled with compassion and understanding.

John    : The peace among them is out of question forever. Look at Pakistan. The Sunnis are bombing Shia’s mosque and vice versa. It appears as though that there is a grand scheme of things. Their skirmishes will eventually become a full scale war. Sometimes I wonder whether we should have left Saddam Hussain to continue in power. During his term it was relatively peaceful. Did we make a mistake getting involved in the middle-east? Should we be continually engaged with our army’s presence? What do these wars cost to us? Really what do we gain by getting ourselves involved? These are important questions we need to address eventually. Once we become self-sufficient in energy, we need not care about these immature imbeciles. Sad as it is, let it be. The famous song “Que sera sera whatever will be will be” will aptly fit the situation.

 

Insurgency in Iraq: Should the US get involved?: Part-1 By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

President Obama and John Kerry, the secretary of state ar having a detailed discussion about as how to deal with the explosive crisis that is growing day by day and threatening the security of the entire Middle East. This part of the discussion will bring out the issues and the challenges that are emanating from Iraq.

Kerry         : Mr. President, we need to have a serious discussion about whether to involve in Iraq immediately as the ISIS is keen on taking over Baghdad.

President: What exactly is the problem and why is it presenting itself now? We have serious internal issues to deal with and should we get involved with Iraq either?

Kerry         : Yes sir. The Islamic state of Iraq and the Levant (known as ISIS) namely the sunny resurgent are on a rampage capturing one city after another in Iraq and with the intention to topple the Shia led government of President Maliki. They are already taken over militarily the cities of Mosul and Erbil which are located in the north western Iraq. Their troops are moving towards Kirkuk, Tikrit, Sainarra with the ultimate aim to take over Baghdad. If there is no intervention they will have captured Baghdad and dethroned their President.

Obama     : We should not allow this to happen. How can we stop the insurgents from toppling the government? Should we militarily intervene to achieve our objective? We are the one responsible for putting the Shia leader Mr. Maliki as the president. So we should get involved to protect him. Do you agree with me?

Kerry         : It is not easy to get reengaged. In 2003, we invaded Iraq and occupied it and the entire world viewed it as a mistake we paid a heavy price for it. We lost 4500 American soldiers and billions of dollars. About 2500000 Iraqi’s died in conflict. Our intervention could elicit revenge attacks against western capitals.

Obama     : John, what are the courses of action available to us?

Kerry         : We have always insisted in forming a national unity government formed of Sunni, Shia and Kurds. The 11000 or so fighters of the Sunni forces ambition is set up a caliphate (statehood). They are trying to achieve this like the al-Qaida fashion namely through violence.

Obama     : But John if we keep quiet, the Sunnis will create a jihadist sanctuary-cum-statelet stretching from Iraq across the border to Iraq. Should we be supporting Mr. Maliki, the leader of Iraq and fight the insurgents?

Kerry         : Sir, it looks like a temporary solution. Jihad’s are by nature highly emotional and recklessly committed. If we engage in a war with them they will make sure to kill as many Shia’s as possible.

Obama     : I remember that after we dismembered Saddam Hussain’s Baath Party, we thought that the enemy is eliminated. So we went about rebuilding the Iraqi’s military forces by recruiting soldiers who believed in Iraq as a sovereign nation.

Kerry       : Sir, The problem is that these people are temporary soldiers. The first sign of a life threatening fight they will leave the battleground and rush for cover. Sir, If I recall correct we have spent 14 bln US $ over time to build this irresponsible army.

Obama     : Does it make sense talking to Syrian and Iranian president regarding putting a lid on the war?

Kerry         : Sir, the Syrian leader Mr. Bashar – al – Assad is a shite. We ourselves are uncomfortable with him and want to eliminate him like Saddam Hussain. Seeking co-operation from him will be the dummest idea. He is our real enemy and he is also the enemy of ISIS. So let us forget about that regarding engaging Iran. I am equally uncomfortable. Remember we call the Iranian leader axis of evil. He may be willing to talk to us for a price.

Obama     : Having spent many years fighting in Iraq for an inclusive government, we cannot abandon this objective now. Mr. Maliki army is disintegrated marching towards Baghdad. It sounds illegal and the entire world will look at us as an incapable and irresponsible country who refused to defend a country who they undertook to take care suddenly dumbing them because we have decided not to get involved.

Kerry         : OK sir. It is now clear. We need to talk to the Iranian leader about a possible intervention. It is not easy to do that. The political differences between Iran and the US remain immense. Nevertheless we need to pursue this course of action.

Obama     : We learnt our lesson. Since the Arab uprisings began more than 3 years ago, the policy debate has been which side we should support in the conflict and we agreed to stay neutral. Therefore, we will talk to Iran and Iraq if necessary and eliminate the insurgents our intention is not intervene but given the circumstances we have no choice.

Kerry         : Yes sir. We will do.

Obama     : By the way does Putin have anything to do with this uprising?

Kerry         : It is a challenging and a mind blogging question. I will think about this sir. Have a good day Mr. President.

 

Finance Minister Jaitley’s Challenges: The Forthcoming Indian Budget By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

According to the daily newspaper, the Indian budget will be presented to the parliament by our finance minister during the second week of July. This will supersede ”the vote on account budget” presented by Mr. P. Chidambaram in February 2014. Before the budget is prepared, Mr. Jaitley would need to take a serious look at the last UPA budget. He will easily make the following observations.

Observation 1: Of the 100 Rs. planned to be spent in the budget, 29 Rs will be the borrowed money and hence the deficit. The accumulated debt (sum of all deficits over the years) is above 70 percent of GDP. Any further increase will make our country a basket case or a banana republic.

Observation 2:The total income tax collected hardly amounts to 11 Rs out of 100 rupees to be spent. This is a shocker. Only 2.5 to 3 crore out of the population of 125 crores file tax return. Where have all the others gone. Are they not earning or exempted because their income is derived from agriculture?

Observation 3: The steady decline in the economic growth rate is during the last two years is affecting the tax money collected from the corporates. We are an emerging economy and count on the corporates to fill the coiffeur. Instead they want more tax deductions and subsidies.

Observation 4: The country has to honor the bonds it had issued previously and other debts. 18 Rs out of 100 Rs to be spent is the interest charges for the previously borrowed money.

Observation 5: The non-planned expenditure which includes salaries paid to the civil servants and the pension for the retirees will eat away 11 Rs out of every 100 Rs spent. The pensions payments are inflation indexed and will keep the deficit go higher and higher.

Observation 6: This will shake the finance minister. This was a strategy UPA used to win the elections namely subsidy which is government will bear the expenses of many so called essential items beyond a certain price level. We have this scheme for fertilizer, kerosene, diesel, food price etc and this takes away around 10 Rs out of every 100 Rs spent.

Observation 7: This is an off budget one. The domestic savings rate which used to be above 38 percent of GDP has been declining steadily over the last few years to drop below 30 percent. People are squeezed because of the high inflation rate prevailing in the economy. The purchasing power of the rupee has depreciated tremendously over the last decade while the income for people is edging up marginally. The domestic savings rate in future will have only limited contributions towards the economic growth rate.

Observation 8: The most important input to industrial growth is the gross domestic capital formation. This also seems to be declining steadily. Hence the number of new companies formed may be restricted by this limitation and it will have a major impact on the new job creation.

Observation 9: The non-performing assets of Indian banks, especially the public sector ones is increasing rapidly. The money lent is basically struck in non-worthwhile investment. The finance minister must find a way to recapitalize the banks and introduce conservatism in lending.

Observation 10: The El nino effect is expected to decrease the amount of rainfall this summer. Agriculture sector which is around 15 percent of the GDP is not going to do well due to scanty precipitation. The farm sector will need a big support.

Observation 11: The number of postponed infrastructure project, which stayed piled up during the UPA government, for want of money is very high. Many of these projects should be today’s reality. And hence must be completed at all costs.

Sir, please don’t get carried away by the falling growth rate. What is important is to restructure the economy and if necessary pay the price for it through higher taxes, reduced budget. When properly explained, the Indian tax payers will accept additional burden by way of increased taxes. But if you decide to continue with the Chidambaram’s budget, you will be only dragging the economy into a hell hole with no recovery. Instead, bite the bullet and engage in serious budget cuts and reallocate the funds to ensure greater productivity. Please don’t underestimate the average Indian’s commitment to the country. This is your choice. Best regards.

We don’t understand Macro Economic Theories any more, any help By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is a conversation between a student of macro economics and his professor.

Student: Sir, you said that tapering of the quantitative easing will pave way to higher inflation because it will dry up liquidity and it is not happening. Why?

Professor: I honestly don’t know why? When I made that statement it looked logical.

Student: Sir, I also read that the US GDP for the first quarter was 0.1 percent and I read today that the IMF cut its growth forecast for this year to 2 percent below the 2.8 percent it predicted in April 2014. Also they said that full employment will not be achieved until the end of 2017.

Professor: It is becoming quite a challenge to predict as there are too many uncertainties. The consumers who contribute 72 percent to GDP change their consumption habits all of a sudden and the economists are not able to predict the change in their behavior.

Student: Sir, since attending your class I have been watching the behavior of government bonds across the world. You predicted that the yield on the government bonds of countries will eventually move up. But it is not moving up. For example, US bond field has dropped from 3 to 2.5 percent and the euro zone bond yield is around 1 percent. What has happened?

Professor: The world is heading towards deflation. Japan has been in deflation for 15 years. Euro zone inflation rate is 0.5 percent and is heading lower. Their unemployment rate is shooting up. US survived the deflation because of QE1, QE2 and QE3. But then how long can you keep the economy survive on borrowed money? Euro zone countries just lowered the interest rate and are waiting to do their quantitative easing to save their economies from going into full blown deflation.

Student: You kept telling us that the Indian economy is in doldrums and so should not expect the Indian stock market to perform well. But the market is hitting new highs every day. But you also mentioned that if Modi wins, the market is bound to get a boost. What is your view now?

Professor: The FIIs who are the largest players in the market have invested several billions of dollars in the market after Modi’s election and hence the rally. They always call the shots. They are the price giver while the retail investor is a price taker. They will stay in this market as long as they continue to make high returns. It is not easy to predict as to how much money they will bring in at any point in time but it is always their call.

Student: Are you saying that the FIIs determine the future of Sensex?

Professor: Yes, they suck in the retail investor make them invest and later create volatility. The retail investor runs for cover and looses significant portion of his capital by selling during volatility.

Student: Robert Samuelson in Washington post wrote that stocks and bonds are mixed and conceivably sending contradictory signals on the economic outlook.

Professor: You see, these days because of deflation the private banks are rushing to buy the government bonds which is driving the yield down. They are afraid to lend to the companies since the default rate is increasing. Borrowing to invest in the stock market enjoys low rate of interest. In fact dividend on some of the good stocks is much higher than the cost of borrowing. Finally, predicting human investment behavior is quite a challenge. Just because I know a little bit of macro economics doesn’t mean a thing about predicting how the investor will behave. The upsurge in liquidity which is happening now due to large FII investments upsets all predictions.

Student: Like every other retail investor, I want to chase the rainbow. I know that 8 out of 10 retail investors loose money. But I can’t resist the temptation and so I will invest some of my money in the Indian stock market.

Professor: Good luck. You must have heard the expression “fools rush in when angels fear to tread”.

Iraqi insurgency, US mess up and the oil prices By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

We live in a strange world. The strength of ISIS is unknown as more and more Sunnis from Syria, Saudi Arabia, Iraq along with the released Sunni prisoner of wars are getting ready to topple the Shia government headed by Nauri-al-Maliki. They already have occupied the city of Mosul, which is the second largest in Iraq. Reports say that they have local and financial networks and the Iraqi security forces don’t stand a chance.

The main culprit is the US, which bungled badly. Their foreign policy and intervention in the Iraqi affairs without understanding the under current is now paying the price. After toppling Saddam Hussain regime in 2003, the US forces disbanded Iraq’s long standing army. They removed all the officers who belonged to the Saddam Hussain Baath Party by spending $ 14 billion dollars over eight years in an attempt to build Iraq’s security forces from scratch. They focused on quantity and not quality. They did a shoddy job in training the Iraqis who were least motivated but for the regular monthly salary. The main problem is that these Iraqi soldiers have lost their morale and their faith. They lack the grit and commitment. Zaid Ali, former US advisor and author of the book “The struggle for Iraq’s future” says and I quote “There is not enough of the qualified professional fighters to take on ISIS and the trained guards cannot stand up to them”.

The legacy of American missteps and its failure to develop committed security guards is now unfolding. The smaller Jihadi force are much stronger in their commitment as compared to the security forces and the billion dollar weapons of them are currently in the hands of the ISIS.

Prime Minister Maliki is in a hot seat. All the major political parties in Iraq see him as the main reason for this insurgence. His coalition won 92 of the 328 seats in parliament, putting him ahead of other blocks in the recent March election. The battle ground is expanding. It started with Aleppo, Syria’s second largest city, then expanded to Deir Essor then on to Raqqah a possible city for ISIS to form the government. The city of Baiji is where the largest refinery is being fought over currently. In the meanwhile, Mosul the second largest Iraqi city has been taken over by ISIS. Another city Fallujah has also been taken over by ISIS. Currently the battle is in Kirkuk and Tikrit. Given the present trend, ISIS troops may get mobilized and go after Baghdad in the next few weeks.

Now the ball is in the US court. Is Obama going to send his troops? He has already committed to reducing his defense budget significantly. Will he get the Congress support to reemploy his forces in Iraq? Already the Iraq’s daily oil production had fallen by about 8 percent from its peak of 3.6 million barrels a day.

We in India should develop a long run strategy to store oil in large quantities like the US and China. Sudden disruptions can create a havoc in the oil market and there is potentiality that the oil prices could reach 146 dollars a barrel (currently US $115). As a country, we have no control over both the supply and its price. We are vulnerable but inaction can be catastrophic. As oil price shoots up, the oil companies will want to buy dollars as a hedge. This may push the Indian currency downwards. We have seen enough of this in the past. Let us hope that Iraq’s political situation returns to normalcy in the near term.