power and mystery of debt..!

This topic may appear counter intuitive as the prevailing mindset is to shun off debt. This viewpoint has passed from one generation to another that any thought of having debt is looked down with disdain. However, we have often failed to analyse the power of debt and the wonders it can do to the financial health of an entity whether it be a firm or an individual. We should be more open to debt and embrace it in our investment decisions on a case to case basis.

First of all, debt is cheaper than equity and the presence of tax shield makes it highly cost effective. Thus we can reduce our cost of capital by having a part of our capital financed by debt. Thus we can generate value even in the financing decision. If there is a worthwhile project, we should always have debt in our overall capital structure.

Secondly, a small amount of debt induces a sense of discipline with regard to cash flow management. People become more responsible and do not engage in value destroying investments. Moreover, it promotes a sense of innovation on the part of management as they start looking for new revenue streams to augment present cash flows. The end result is that the organization is stretched from its comfort zone and it gives rise to new value creating equilibrium.

Its only when the greed takes over our logic that we go for higher leverage (more than 80%) that the system yields and everything comes crashing down.

so enjoy debt within a limit...!!!

fuelling faster growth...!

Once our country used to grow at 3% per annum which was dubbed as hindu growth rate. A series of structural reforms in the last two decades have unleased entrepreneurial activities which has fostered faster growth. At present, the long term average growth can be safely assumed to be 7% per annum. But, its not sufficient for a country like India. According to some statistics, 30% of our population still live below poverty line and the state of infrastructure leave a lot to be desired. Our country needs growth in excess of 10% per annum to ensure a successful economic transition into a middle income country.

Lets evaluate some of the ways in which we can accelerate the growth rate of this country. First of all, the condition of agriculture in our condition is deplorable. The presence of small agricultural plots make it difficult to achieve economies of scale. Moreover, it even becomes uneconomical to use modern equipments on such small plots. The net outcome is low yield and ultimately low income. Moreover, the dependence of 60% of our population on agriculture aggravates the matter. A strategy needs to be devised to shift people away from agriculture. People should join together to cultivate their small plots as a single unit on revenue sharing basis.

Secondly, our industry needs to carve out a space for itself in the international sphere. It should not be based only on low cost but on an innovative spirit and desire to cover the extra mile. Finally, the government should create an environment to produce skilled workforce on massive scale to cater to the needs of the industry. Moreover, there should be focus on enhancing productivity at every step of value chain for extracting higher economic profit. An atmosphere which supports budding entrepreneurs and make people challenge existing beliefs will go a long way in creating a right framework for achieving higher growth.

Britain's commonwealth..!

The British empire has collapsed but its relic is still preserved in a grouping of some 50 countries which meet once in a year in the memory of that great empire. The commonwealth has met recently at Port of Spain to chart its future policies.The commonwealth is impotent at its worst & ineffective at its best and its opinions have no takers in the international community. it is increasingly seen as a dying organization which is counting its last few days. The countries like Canada and Australia consider it as their divine duty to serve Britain as their holy master and other countries are too poor to speak against Britain for the fear of sanctions.

India seems to be caught in a limbo with regard to its role in the Commonwealth. while, it is in India's strategic interest that this commonwealth fades away and with it the memory of British empire but geopolitical considerations require that india should continue its membership of commonwealth. It brings with it a plethora of benefits like opportunity of networking with other commonwealth countries and developing strategic relations with other emerging countries of commonwealth. Moreover, commonwealth membership provides certain trade related gains in the form of lower import duties and other benefits in the form of technology transfer.

Thus india needs to devise a comprehensive policy to ensure that we are able to benefit from the membership of the organization and at the same time ensuring our strategic autonomy to pursue independent foreign policy based on long term interests.

Are markets really efficient..?

There has been long debates about the efficiency of markets. The markets ensure proper allocation of resources through signals like prices. But, they are far from perfect and have many shortcomings. Information asymmetry among market participants plays an important role in the so called perceived inefficiency of markets and as a result, people may attribute different values to some stuff. Secondly, the markets depend heavily on the laws of demand and supply that we often come across products with exaggerated prices due to mismatch in demand and supply.

The idea that prices tend to rise during conditions of short supply promotes hoarding and black marketing of essential stuff. Thirdly, people have different reactions to events in markets depending upon their risk appetite.For example, a fall in price can be a signal to buy for one investor but it may also lead to selling spree by other investors. Finally, the presence of herd mentality tends to exaggerate a given market signal and the tendency to move in herds causes huge volatility in stock markets. But, inspite of all these shortcomings, markets are the best tool to generate wealth as they provide incentive for hard work and allocate resources to sectors where returns are maximum. They offer least resistance path for mankind for conducting economic activities.

india & pakistan: fight to poverty..!

These two south Asian countries may be poor but they find no difficulty in amassing huge wealth for purchasing costly fighter planes ,warships etc. According to some estimates, both these countries spend about 10% of their GDP for defence purposes. Its a different thing that they spend hardly 2% on public health services and about 4 % on education sector. This penchant for military power have made them miserably poor. Most of their citizens struggle to maintain a decent standard of living.

People spend out of their pockets to finance their education and medical services, which should have been done by the state for a newly independent country. The return on investment in defence field is practically zero as most of the equipments are imported from Israel or Russia and thus this defence spending doesn't boost indegeneous science and technology. Such huge sums if invested in education or health services would have provided huge benefits to the citizens of these countries. Their cities are the dirtiest in the world and only God can tell about law and order but the desire to show one's military prowess have left them nowhere. The shame of housing maximum malnourished children and diseased people doesn't deter them from spending billions for useless military extravaganza. They can have some sort of diplomatic alliances to ensure security just like japan instead of spend money uselessly. The focus on economic development rather than military development will reap rich dividends.

correcting global imbalance ...!!

The high savings rate in few asian countries paint a completely contrast picture in relation to the dearth of savings in the west particularly the US. The habit of excessive consumption in the west partly financed by debt had sown the seeds for this crisis. The tendency of high expenditure especially for non-productive purposes can be really dangerous for a country in the long run. The presence of social safety net and unemployment benefits might have contributed to this sort of behavior . It has contributed America running trade deficit with many Asian countries. Such huge deficit may adversely affect its dollar which may suffer prolonged depreciation spanning decades. Its high time that Americans start saving and stop spending money for wasteful purposes.

Secondly, the high savings rate in countries like china have a role to play in the other side of the story. Instead of depositing huge foreign exchange reserves in US 's treasury bonds, the money can be spent in importing goods from US and buying other assets abroad. However, this stingy attitude on the part of chinese has led to hoarding of cash by one country and it can initiate liquidity risk on a global scale. Most of this distortion is due to artificial undervaluation of yuan by chinese state authorities. It is hoped that china will play its due role in correcting this global imbalance to foster sustained economic growth.

price wars and consolidation in the telecom sector..!

The entry of new entrants in the telecom sector has taken the competitive intensity to new heights with unprecedented fall in call rates . It has been some kind of a rude shock to existing players who had formed cartels to preserve their interests in an unfair way. This competition will drive innovation in the firms as they will try to come up with value added services in an attempt to have a diversified portfolio of telecom services. The pressure on margins and expectations from the shareholders will bring about greater efficiency which will help to reduce unproductive costs. Its a shining example of the success of liberalization and capitalism.

Moreover, near zero variable cost and high fixed cost enables this industry to achieve economies of scale and as a result the marginal cost of serving an additional customer is very low. Thus the entire operation has become a game of high volumes. But with pressure on margins , increased competitive rivalry may set the ball rolling for mergers and acquisitions whereby bigger players would like to go for hostile takeovers of smaller firms. It should be ensured that Indian telecom sector remains competitive where no single player should be allowed to dictate market prices and trends.

privatization of railways..!

It appears that time has come for government to consider the privatization of railways. Its not hidden from anybody that railways are being operated below the actual potential. The railways have huge assets with them but the lack of proper incentives and competitive framework is responsible for dismal show by this sector. Moreover, the quality of service and security cover leave a lot to be desired. The problem cant be solved by just pumping money in this sector and a change of policy is required.

The government can allow private corporations to operate different divisions on a revenue sharing basis. The competition between different operators may keep the fares low with improved quality of service. A regulator can be appointed to ensure fair play among various players and and thereby preventing cartelization. Moreover, a penalty can be imposed if the service level falls below a certain benchmank. This will help the government to generate huge revenues from the sale of licences through bidding and subsequent sharing of revenues . The improved quality of service will benefit everybody and the presence of competition will ensure new innovations in this sector. Thus , it can be a win-win situation for everybody.

dont let a crisis go waste..!!

We should never let a crisis go waste. They are the periods when we evaluate our past performance and come up with ways to produce unprecedented changes to give a new shape to our future. Such situations energize our grey cells and make us think and challenge our existing beliefs about ourselves. The end result is that we come out as a stronger person than ever before with a new vision towards the world. The new insights developed help us to understand the world in a holistic way which could not have been possible in the absence of such situations.

Its also true in the case of countries. India suffered its worst financial crisis in 1991. We had to pledge gold to IMF to finance our imports. However, that insult woke us up and we decided to implement economic reforms . India has become a fast growing economy with enormous potential. We would have never reached here had we not encountered those obstacles in 1991.

The recent financial crisis has given this world an opportunity to revisit the basics of finance and question some of its assumptions underlying various risk management theories. The world will come out of this crisis with important learnings which would make us wise in our future endeavours.

mockery of justice..!!

The recent incident with regard to the son of a high profile politician indicates the state of affairs of judicial and police system in the country. Its only in books that that all citizens are equal before law. In reality, the depth of a person's pockets and his political contacts matter a lot as to type of treatment that will be meted out to him by law. Its only on poor people that the provisions of law are implemented with full force while the rich can get away with bribing here and there. Its no wonder that we rarely get to see any influential person being tried for his wrong doings. The initial action on the part of government and police with regard to a corruption case is just an eyewash to deceive the common public.

This state of affairs has made our country a market place where judicial decisions can be bought and sold just like some stuff in a vegetable market. This problem basically reflects that extent of corruption in our public life. But, most of our governments are mute spectators as corruption is the primary motive of their business of politics and only revenue generating method to finance their clandestine activities. Our country needs a strong revolution against corruption to wipe out this menace.

Brands: irrational outcome of a market

Brands have become holy grail of marketing and many marketing professionals spend a lot of time and money for creating brands. They use measures like brand equity for measuring the value of a brand . High brand value enables them to charge premium for their products. Finally, consumers are ready to pay extra for such branded products. Brands serve little economic function and are waste of time and money.

Firstly, the huge amount of advertisements and celebrity endorsements that go for creating a brand is a complete waste. Such expenses don't add real value to a product and form a part of its cost structure thereby making the product more expensive. They can be better utilized in creating new products and thus providing real benefits to society. Consumers are also to be blamed for this as they are eager to pay higher margins for branded products. However, we have thousands of similar products in our markets which basically serve same function and it becomes necessary to differentiate one's products . Branding is an easy and acceptable tool to create an impact in the minds of consumers and thereby generating increased sales. But, society pays a huge price for it and a proper balance needs to be found.

existence of societies..!!

Societies have been in existence for milleniums. They form the building block of most cultures . While cultures tend to have unique language, food habits etc, the differences between societies are more subtle. There are unwritten rules of conduct and people are expected to follow certain norms. People who dont conform to such practices are often subjected to social ostracism. In some cases, a person may be expected to share the ills of the society in the name of social unity. Most of such societies are conservative in nature and are more interested in preserving some antique practices for reasons only god knows.

In spite of all such drawbacks , most societies are very stable and are successful in withstanding occasional hiccups. First of all , people perceive their societies as some sort of safety valve and moreover,it provides them a platform to be in their comfort zone when things change at a fiery pace in the outside world.

The law of infinite interactions among the members of a society make them abide to its norms and behave as a well knit unit . Societies will continue to exist and shape human destiny in unknown ways.

the process of change...!

Its often difficult to bring about change in an individual,organization or a country. The baggage of past seems too heavy to be erased completely. In most cases, the absence of help from outside prevents the change from taking place. Its possible to design an elaborate change process but the lack of required 'activation energy ' prevents a person from jumping to the next level and with passage of time the person or society remains trapped in old habits.

However, there is a change dynamics which is evolutionary in nature and it affects everyone continuously. However , this process is slow and is primarily due to interaction between two cultures and changes in habits due to technological advances. But we can't rely on this process to rectify certain ills and shortcomings of our societies.

However, it is felt that it is possible to bring about change if a consistent and conscious effort is made and the problem is tackled at the root instead of attacking the symptoms. A very strong intervention is required to break the vicious cycle of old habits which may involve learning new skills and analyzing the old thinking in new lights . However,most change processes are painful and lengthy and the deficit of patience often comes in the way bringing about the full change.

what really matters: IQ or passion ?

It is often suggested that people with high IQs are the ones who achieve success in life but the history is replete with cases where success was achieved by people who had tremendous zeal and passion to do something. There have been cases when people with superior IQs have failed on account of lack of passion to achieve something. The passion to do something come from interest level in one's profession and it motivates a person to acquire the necessary skill sets and with the passage of time the person become an expert due to multiplier effect between his interest and the effort exerted by him. The person begins to enjoy his work and an intuition gets developed which gives him new insights about the trade. This phenomena spurs innovation as people come up with new ideas which can only come in a free thinking , enthusiastic person.

On the other hand, being caught in a wrong profession which does not match with one's interest level is gateway to failure. It leads to boredom and lack of desire to achieve something. Ultimately,it often affects the personal lives of people who often find themselves at the wrong side of spectrum. Every person on this planet is capable of achieving great heights if he truly follows his heart and submerses himself in his area of interest. The idea of following others without checking one's own interest and skills can only lead to failure.

vande matram issue..!!!

It appears that there is something really wrong with way leaders of different communities have been viewing our national symbols. Recently, in a meeting organized by leaders of one religious group ,some orthodox and highly irrational resolutions were passed in an age what we call as 21st century. It appears some people find it difficult to adjust to changing times and remain stuck in old dogmas.

First of all, a resolution was passed to oppose representation for women in legislative bodies. it was claimed that such reservation would create social unrest and may hamper the security of women. Its high time time they realize that women are also citizens of this country and have equal rights . They should remember that its not Afghanistan and therefore should refrain from passing such stupid resolutions.

Secondly,some leaders of this community have some objections towards vande mataram as they feel that they are not permitted to worship their country. Its really painful that they are more concerned about such issue rather than economic and social well being of the people. Our country has more important issues to be be tackled rather wasting time over such issues.

india's population: finally some sign of a plateau.

India's population has touched 117 crores and is expected to surpass china in the next 3 decades. However, the growth rate has been declining and is about 1.55% per annum. The fertility rate which was about 5 in the 1950s has come down to 2.78 and is expected to touch the magical replacement rate of 2.1 by 2040. It is believed that the population will peak by 2050 and then it will remain stable or there can be small decline . The population of japan, Russia, and some eastern european countries are already in decline phase due to adverse demographics and falling birth rates.

India is generally considered as an overpopulated country which does not have adequate resources to sustain such a huge population. The reduction in growth rate is a welcome sign as it will make it easier to eradicate poverty , disease and illiteracy. However, there should not be coercive measures from the state to control the population as it can result in female foeticide as we have seen in china where there is huge disparity in sex ratio. Finally, the improvement in socioeconomic condition generally make people go for smaller families. Thus, the stabilization of the population of a country is a natural process which closely follows its economic development.

Asian economic community..!

There has been a debate in recent times to form an Asian Union with a single currency . The initiative was taken by japan with the intention of creating a economic giant challenging the might of the US and Europe. Such a union would ensure low tariff rates among member countries and promote trade and capital flows. Moreover, it can make Asia immune to western financial disturbances to a certain extent.

There are several obstacles which can hinder this development. First of all, different asian countries are at different stages of development and they require specific monetary policies. A single central bank might not be able to fulfil conflicting interests especially in the case when the business cycles of these countries don't match. Secondly, the political relationship between many asian countries is not amicable and it may result in sabotage tendencies like having huge fiscal deficit and financing it by printing money which can lead to inflation in member countries.Thirdly, asia represents a large landmass and it would be difficult to monitor the implementation of single currency. Finally, the nationalistic sentiments in many asian countries would make it difficult for them to part with their national currencies and cede authority to some supranational central bank.

Are 5 year plans still relevant..?

The economic character of the world community has become increasingly capitalistic in recent decades whereby markets rather than governments decide the pace of growth of a particular sector.The capital flows to that part of the economy which generates maximum returns for the stake holders and the presence of large number of market participants ensures that the market remains rational in the long term. The problem with planned economies is that its difficult to decide the amount of capital required for the development of an industry and in most cases the absence of appropriate technological support may make such investments go down the drain. As a result, planned economies generally achieve low growth rates.

However, the role of government is very important when it comes to providing basic facilities to its citizens like drinking water, education and health services. The market has little incentive in undertaking such tasks as they require huge investments and returns are not attractive. It requires a detailed planning with regard to the expenditure of scarce resources in an optimum manner.So, 5 year plans have a very important role to play in a developing country like India.

derivatives in India..!

Derivatives, which were the underlying cause behind this financial crisis ,are being embraced by India. Derivatives fulfil certain needs of the market i.e hedging economic exposure or speculating in commodity market. They enable market to achieve depth and ensure real price discovery.

RBI has recently come up with guidelines with regard to the introduction of credit default swaps(CDS) and currency futures in currencies like yen and euro . There was huge demand for such instruments by Indian business community to hedge risks on account of default on loans. Moreover, India's exports have increased substantially to Europe and Japan and there was a real need for futures in these currencies.

India reintroduced interest rates derivatives after a gap of 6 years . The interest rate futures which were first introduced in 2003 had failed to take off on account of design and pricing problems. It will help corporates to hedge risks associated with uncertainty in interest rates and increase liquidity in the bond market. However, our country has to go a long way before we develop a mature market in the derivatives segment. It requires a strong legal framework where contracts are honoured and an institutional set up to back the market participants.

Europe: on its way to become a federation..!

Europe forms the western part of the Eurasian landmass and its separated from Asia by Urals mountains. It has been undergoing massive political transformation in recent times. The formation of European union was a significant milestone in this regard. It has established Europe on the same league as nations like US , china and Russia. Europe no longer wants to be seen as a cluster of countries involved in political rivalry. It had become necessary to project this image to tackle the hegemony of the US and its continued interference in Europe's internal affairs. Its trying to prepare itself to face competition from emerging countries like china and india. The adoption of euro ,as a single currency, of most of the EU members has given Europe a big say in international economic issues.

The recent Lisbon treaty paves the way for the formation of European federation. It calls for the establishment of a post of European president who will represent national leaders in major international negotiations. It has established norms under which the European parliament and its central bank will have final say on certain issues. It will ultimately lead to the formation of a single entity which will be a heavyweight in international arena.