next wave of financial sector reforms..!!

The first wave of reforms introduced in early 1990s helped us to achieve high GDP growth rates. Our economy became competitive and there was significant increase in our exports . The inflow of FDIs and FIIs has promoted the growth of our industries. The opening of the insurance and telecom sectors were major decisions in the last decade. The reduction of import and export duties resulted in increased trade and made our economy more competitive.

However, a lot of reforms are yet to be initiated . First of all, our banks are highly incompetitive and operate on old business model. Most of our banks in the public sector are highly inefficient and the presence of large number of small banks makes it difficult to achieve economies of scale . we require few banks which are large in size and can compete on the global scale and thus reforms in our banking sector are long overdue.

Secondly , we need to rationalise our indirect tax system. Different rates of taxation across our states keep us away from having a single economic market and make it difficult to optimize our logistics .It is hoped that GST will go a long way in establishing a common market . The direct taxes like income and corporate taxes should be moderated to give a boost to entrepreneurial activity. The labour reforms are equally important but a sensitive issue in a developing country like india. The capital account convertibility can be attempted in a gradual manner. The rationalization of huge subsidies granted on oil and fertilisers should be pursued without politicizing it . All this requires a strong political leadership and willingness to work for our long term interests rather than playing

votebank politics

higher education in india..!

The state of higher education in india is highly deplorable. The course curriculum of most of the universities are not updated regularly and the lackadaisical attitude of students and faculty have given rise to a system which is basically concerned with clearing exams .Neither students nor teachers have desire to delve deeper into a topic and in most cases ,the so called learning is superficial. There are universities where same questions keep appearing in exams year after year.

We cannot expect decent R&D with this state of higher education. Most of the government labs are practically defunct and the research undertaken is for namesake only. Moreover, the state of our country has given rise to a culture where our so called bureaucrats are held in higher esteem rather than people involved in science and technology. Its no wonder that a large section of our youth dream to become a bureaucrat rather than a scientist involved in pursuit of knowledge.

Our higher education is in urgent need of reform. There should be stress on concept building and real life applications rather than cramming facts . Otherwise, our huge demographic dividend can turn out to be a nightmare as we will never become competitive in the absence of indigenous innovation.

the scourge of naxalism..!!

Naxalism seems to be on rise in many parts of eastern and central india. There has been a spurt in naxal-related violence in recent times . Some parts of west Bengal and jharkhand have emerged as epicentres of naxal related activities. It has emerged as some sort of national movement against the state whereby poor people in remote villages are indoctrinated with their philosophy. The struggle is somewhat motivated by the communist ideology of establishing a nation where resources are equally shared by all people. However, the method which these people have chosen is certainly not in good taste. The incidents like violence in lalgarh or the recent stopping of Rajdhani express does not find favour with the common man.

The issue needs to tackled from various angles. First of all, a serious attempt should be made by the government to bring these people into the main stream of the nation by providing education and other infrastructural facilities in the underdeveloped areas. Secondly, the government should seek to identify and monitor the sources which fund these naxalite activities. Finally , we should be ready for swift and strong retaliation in case of violence by these groups.

japan: in perpetual recession.!!!

The Japanese economy seems to be in a state of constant recession for last two decades. All attempts by the government to stimulate the economy have failed. There was an asset bubble which burst in the late eighties and it led to accumulation of toxic assets in the books of many Japanese banks. The Japanese government was slow to react to the crisis as there was reluctance on the part of the government to accept the gravity of the situation . The initial response was to sweep it under the carpet . However, what followed was something unparalleled in economic history of the post world -war world.

The economic problems have been compounded as a result of deteriorating demographic profile of the country. The population of Japan has been declining since 2006. The burden of ageing population has placed heavy burden on state finances.

The interest rates in Japan are close to 0 % and even such monetary tools have failed to stimulate the economy. Japan needs to do a serious thinking about its future if it wants to preserve its status as a world economic giant. Otherwise, this great nation of hard working people will get relegated to the list 2nd tier countries.

the building of the next oil bubble..!

Oil has risen to $80 per barrel in anticipation of economic recovery in the US and Europe. There appears to be an element of speculative activity behind the recent rise. Much of the excess liquidity has been used to for speculation in the oil market. Its not a good sign for the world economy as high oil prices can derail the recovery process. It appears that there are some vested interests in middle east and Russia which are behind the recent rise in oil price. Such high oil prices provide them with windfall profit which in turn is used to inflate the oil bubble. It appears that with this pace oil may touch 200$ per barrel by 2012.

The international community should join hands together to help the world get rid of oil mafia. Moreover , a forum of oil producing countries can be created for ensuring the stability of crude prices. Such steps can help the world economy in the short run whereby poor countries are protected from recurring oil shocks. However, in long term we need to develop alternative sources of energy to avoid our reliance on oil. Solar and nuclear energy have huge potential and they can even reduce our emission of greenhouse gases and may go a long way in providing us a clean source of energy.

disinvestment..!

The new government has realised the merits of disinvestment and has sold stakes in NHPC and oil india limited through an IPO offer. It has plans to sell 10% stake in SAIL. BSNL is expected to come up with an IPO within 6 months. The earlier left supported government couldn't proceed on disinvestment due to strong protest from left-wing parties. Such funds generated can be spent on social sector whereby the benefits can directly reach the masses. The proceeds from the stake sales are deposited in a special purpose vehicle known as National Investment Fund. Such stake sales subject these firms to market discipline and increase their market capitalization. It puts management to constant scrutiny as they can be judged on parameters like share price and EPS.

However, there are certain issues which need to be considered to make this disinvestment story a real success. First of all, it should be ensured that state assets are not sold at thrown away prices. Secondly, employees of such companies must be taken into confidence before such stake sale as fear of job loss often make them oppose such disinvestment. Thirdly, government should try to have its IPOs priced in a way such that retail investors realize listing gains on the first day of trading.It will increase the marketability of new IPOs.

india's telecom story..!!

Telecom sector has been undergoing a revolution for last few years. Its an example of what competition and right regulatory framework can do to a sector. At present, India has more than 400million mobile subscribers and it has become the fastest growing market of mobile phones in the world with 10 million additions each month. The appropriate regulatory framework allowed private sector firms like Airtel and Reliance to play leading roles in shaping up the mobile telephony business in india. In recent times we have seen many foreign companies having plans to start operations in india. This sector can serve as an example to other sectors as how the judicious combination of right policy and environment can help to achieve accelerated growth.

However, the slow pace of bureaucratic decision making has affected the technological upgradation of the sector. We are still caught up in the 2G mobile telephony and the introduction of 3G technology seems to be trapped in red tapism. Moreover, there appears to be some discretion on the part of ministry as far as allocation of spectrum is concerned and it is not a good sign if we want to promote our country as an ideal business destination.

WTO: stumbling blocks to Doha round.!!

It has been close to a decade since Doha round was launched in 2001 to ensure free trade between member countries. In spite of numerous negotiations between the developed and developing countries, there has not been any convergence of thoughts on major trade issues. The US and Europe are not ready to remove subsidies available to their farmers and have been demanding greater market access for their goods in developing countries. The developing countries led by india and china have termed such demands totally unfair as they feel that they are not able to export agricultural products due to subsidies available to western farmers. This has affected the livelihood of a number of farmers in Asia and Africa. Moreover, it has severely depressed the income of these farmers. Therefore , it is unwise for developing countries to open up their markets for western goods when they face huge trade distorting subsidies in the case of agricultural products.

Its time for western countries to be pragmatic in their approach and should implement free trade in practice rather than giving seminars about the benefits of free trade. There appears to be consensus in the international community to hasten the Doha round and seek its early conclusion by 2010. However, it all depends on compromises which different countries will have to make to enjoy the benefits of free trade in true sense

CEO's compensation

There has been a heated debate in media about huge pay packages drawn by top corporate executives. This debate was initiated by our corporate affairs minister as a way to generate support for his so called "austerity drive". It was not received favorably by the industry which has been of the opinion that shareholders are the best judge for deciding the compensation of top corporate honchos. The argument given by the government is that such huge salaries create social unrest due to rising income inequality. The government has not been able to get rid over its socialistic past which gave rise to a culture which never recognised talent resulting in massive brain drain. However, with the passage of time ,our government realised the positive impact these MNCs can have on our economy which led to the liberalization of our economy in early 1990's.

Moreover, bureaucrats and politicians have not been able to digest such huge pay packages in MNCs. Everyone knows about ways in which these people have been using state machinery for personal benefit. They occasionally come up with beautifully coined words like 'austerity drives' to deceive the common public that taxpayers's money is being put to optimum use. Its high time that our government stop cribbing about CEO's salaries and start focusing on improving the productivity of government institutions which will inturn ensure high salaries for its bureaucrats. Any attempt to put artificial caps on pay packages in the private sector will be counter productive as it will result in brain drain and flight of capital from this country

google vs microsoft: new frontiers..!

Microsoft is about to come up with its new operating system windows 7 in couple of days. Moreover, it has already launched an upfront assault on Google by launching its own search engine, Bing ,few months ago. In a bid to diversify, it is targeting new revenue streams from online advertisements . Microsoft appears to be a company which has grossly underestimated the power of internet and it is evident from the lack of viable revenue generating online products in its portfolio. However, it has realized its folly as can be seen in its desperate bid to go online and utilize the potential of internet. The real innovation from Microsoft came about a decade ago, when it launched windows OS meant for personal computers. The product was a huge success as people found the OS simpler to use and it became the most popular operating systems of personal computers but success breeds its own problems like complacency and lack of passion to come up with next breakthrough.

On the other hand , Google has utilized the potential of internet to the maximum extent. Most of its online products are available for free to the end users with economic viability ensured by the revenues from advertisements. The launch of its internet browser ,google chrome ,was a big success and it even plans to come up with an online operating system for personal computers which will be available for free to end users. Thus, a robust business model backed by an innovative spirit has enabled it to grow in leaps and bounds.

The upward journey of Rupee..!

There has been significant appreciation in the value of indian rupee in the last couple of months. It has appreciated close to 10% against dollar from its lows of 52 Rs/$ reached at the end of may.The rupee is expected to stabilize around 40Rs/$ by the middle of next year. This turnaround has been primarily due to huge inflows of dollars in the form of FIIs. A reform oriented government and the prospects of high returns has been able to attract foreign investors .Moreover, the stability of the indian economy amid this financial turmoil has made india one of the favoured destination for investments.

However,the appreciation of our currency has its own pros and cons. On one hand, it has made our imports cheaper and has been a boon for industries which import their raw materials from abroad. However, the appreciation has adversely affected our export competitiveness as our exports have to be priced higher in dollar terms due to decline in value of dollar against rupee. This makes it difficult to compete against other low cost manufacturers like china. Finally, such wide fluctuation in the exchange rates result in huge uncertainty and increase the cost of doing business.

climate change : hoax or reality.!!

There has been increase in public awareness about issues related to climate change and the steps needed to mitigate the impact of climate change. However,its not for the first time that the surface temperature of the earth has increased. Our earth has faced several cycles when the temperature of the earth has risen on account of changes in solar activity and such events have often been accompanied with fall in temperatures which resulted in ice ages. The last ice age on this earth occured around 10000 BC. Therefore , we need to be sure whether the recent increase in earth's temperature is due to human activity or some natural phenomena. Otherwise, we may end up spending huge sums of money trying to tame some unknown phenomena.

However, recent evidences indicate that human activity is one of the primary reason behind the increase in earth's temperature in the last couple of decades and these are largely attributed to the growing presence of greenhouse gases in the atmosphere. We need to take steps to avoid our reliance on fossil fuels and there should be binding emissions norms for industrialized countries of the world. On the other hand, more funds should be allocated to research activities for the development of renewable sources of energy. The kyoto protocol was a significant step in this regard and the entire world is banking on the Copenhagen summit in Dec, 2009 for some concrete outcomes whereby different countries are given targets for reduction in their greenhouse gases depending upon their abilities. Otherwise, the day is not far off when our greed for development will become one of the reasons for the destruction of human species.

india & capital account convertibility

Indian currency is partially convertible. It means that indian rupee is convertible on current account but not on capital account. There has been talks in academia and industry that it should be made fully convertible which will allow free movement of capital. Moreover, it will raise the status of indian currency and it may become one of the reserve currencies in a decade or so. But ,there are some concerns about flight of capital from this country which will aggravate the situation in a capital scarce country.

The issue came in the merger talks between India based Airtel and Africa based MTN. There was stress on dual listing by the south african government as one of the conditionality for merger. The dual listing would have meant capital account convertibility and its not allowed in India. Thus, we have missed several business opportunities due to lack of capital account convertibility.

The government needs to implement capital account convertibility in a time bound manner. We need to fulfil the criteria before we can go for full convertibility. First of all, we should have sufficient foreign exchange reserves to avoid getting trapped in a situation where we dont have foreign exchange reserves to finance our imports as there may be temporary flight of capital. Secondly, we should get our infrastructural bottlenecks removed to ensure good investment opportunies for our investors. Such precautions, if taken ,will enable us to have a smooth ride to full convertibility

india & china..!!

China has once again raised the issue of arunachal pradesh by protesting the visit of Indian prime minister to the state during an election campaign. India has reponded to this provocation by insisting its inalienable right over the state. Moreover such war of words are inconsistent with the long term relations between the two asian giants. It has been china's strategy to use offence as an instrument of state policy. The pace with which china has been strengthening its military is not hidden from the world. The attitude of china towards taiwan is well known and there has been attempts by china to force its neighbours into submission. However, it begins to cry foul when the issue of Tibet is raised in international forums.

India needs to adopt a proactive approach towards china. It should be made clear to china that there is no point in cribbing about arunachal pradesh and both countries need to adopt a realistic approach to solve this border dispute. India needs to be assertive about its right over aksai chin,a disputed region in kashmir.

This 21st century belongs to these two countries and they should not squander away the opportunity by just focussing on border disputes. It will pay rich dividends if they can work together in soving major problem confronting humanity like terrorism,climate change, energy security etc.

stability vs efficiency..!!!

There has often been trade off between stability on one hand and efficiency on the other hand in many physical systems and its true even in the case of financial systems. Lets explore it in the case of banks and the reason why they are bound to fail from time to time . Banks have often been leveraged to the extent of 10:1. Banks require huge capital to enable them to have size which ensures profitability.

It is difficult to fund such high capital requirements only through equity. Moreover,a complete equity funded bank will have its cost of capital too high that it will not be able to compete with other banks which have lower cost of capital on account of leverage . An equity funded bank can easily withstand losses as it has no debt obligations.Thus a bank which is entirely funded by equity will be most stable ,i.e it might never fail but it will be inefficient as it might not be able to compete in the market.

On the other side of the spectrum, we have high leveraged banks which have debt to equity 10:1 . Such banks are highly competitive in the market but are highly unstable as they are quite liable to fail as even a small loss can erode equity base and make it default on its external obligations. Such high leverage also enables them to produce high return for their equity investors. The pressure to produce higher returns often induce Boards to go for higher leverage.

Its for society to decide whether they want a system which is highly stable but may not fulfil their expectations or a system which has an inherent risk built into it but is efficient in serving the people at large.

India needs dictatorship..!!!

Do we deserve democracy in this country? It appears that our country has not graduated to the level to have a democratic form of government. We have implemented a highly distorted form of democracy where the freedom to bypass laws and norms of a civilized society is equated with personal liberty. People who get elected are often found to be champions of corruption and they have more of a presonal agenda rather than the desire to serve the country. Often, votes are asked on the basis of caste , colour, sex and religion and sometime it arouses a feeling of sympathy for these countrymen who have been exploited by our political honchos with their carefully crafted oratory .
In same cases whenever they did come with some good acts like enacting of anti smoking legislation, our citizens hardly have any problem in flouting such rules. Somehow, its in our culture, might be to do with our colonial past ,that we dont follow laws unless forced to do so by coercion. It does not mean that we indulge in human right violations as is the case in China but human rights shouldnt become a signal for the mess of corruption and chaos which we have created in this country where hardly any person occupying high office is prosecuted for any offence all in the name of our so called "fundamental rights". Its high time we change our habits or be prepared to suffer in this system till perpetuity.

financial tsunami..!

Its sure that the world will not see another "great depression of the 1930s". The massive stimulus package implemented by the different countries at the right time has been able to lift this world from this financial mess. Its estimated that the world will witness GDP growth rate of about 3% in 2010. The stock markets have risen almost 50% since march 2009 in anticipation of economic recovery. However, the recovery is going to be weak for a year . There will not be sufficient reduction in the unemployment till 2011.

Moreover,this flood of cash has overliquified the system. i.e there is excess liquidity in the system,which if not managed properly can give rise to another economic crisis in the future. Already, there is talk of impending inflation in many developing countries. The world leaders will have to devise a right strategy to close the tap ,i.e tightening of the state expenditure once the world economy gets on track.

However, it must be ensured that there is no premature removal of stimulus package as it may prolong the recovery process. However, the countries which are running huge fiscal deficit must get their house in order at the appropriate time so as to avoid getting caught in another crisis in an attempt to mitigate the impact of this tsunami.

decline of a civilization...!

The Indian civilization has been under decline for about 1000 years. No wonder we have been under foreign rule for 700 years until 1947 when we managed to regain our independence. Initially we failed to face the challenge from foreign muslim invaders who who took advantage of persistent disunity among our countrymen and ruled us till 1757. Therefter we had to face the music under the British rule. There was belief in those times that Indians lack the capabilities to rule themselves.

Its the same country which had given birth to scientists like Aryabhatt, Brahma Gupta, Varahamihir who made significant discoveries in the field of science, mathematics, astronomy etc. A sense of reasoning used to dominate public debate rather than following old dogmas. Our country used to account for 25% of the world's GDP. We had strong trading relations with Europe, gulf countries and china. We were the pioneers in number of industries in that era.

But as time passed ,we lost our sense of reasoning ,became attached to superstitions. People fought with each other on petty issues like caste and language. The process of decay accentuted with the resulting poverty as it corroded our moral system as people resorted to all sorts of ways to meet their basic needs. The present state needs no explanation.

Lets hope that we regain our former position and rise above the humiliating mess of archaic systems which we have created for ourselves.