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.