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.