Europe back in the dark ages?

European crisis paints a dark picture of the global economic health. The long list of consequence has hit each and every country, India included. While the world hoped that EU bails Europe out of the crisis, the Brussels summit has not dome much to inspire confidence. The standoff between UK and the EU does not bode well for Europe.
But lets go back and look at how the story started. In the aftermath of the housing bubble that finally led to the 2008 crisis, slow growth became the norm.  Greece, which had been spending way beyond its limit, without much care of the widening deficit, was the first to feel the pinch. Last February, Greece, a primary default candidate, under pressure from neighbors, approved of austerity measure to cut down on the budget deficit. The government spendings were decreased, tax rates increased.The targer was to bring down the deficit, which had risen to 13% of the GDP by 2009, to about 3%. But every coin has a flip side. With the austerity drive, and no fundings, the growth slows down. And with that, so do the taxes, and as a consequence, the deficit widens. But Greece had no other option. The credit rating of major Greek banks slipped. With Spain and Portugal also giving signs of instability, fears of a European crisis widened. The credit rating of Spain slipped to double A, and as Greece agreed to become the first EU country to be bailed out by EU and IMF,and euro plummeted,  the writing was on the wall. Ireland too faced the music, with a credit down-rating following austerity measures approved by the tiny nation. The consequence of all this is that the country's bonds have become unstable and the investors stay away for the fear of volatility. The ECB (European Central Bank), hence, has had to buy the government bonds of Spain and Italy.  The concept of Euro bonds, issued by EU as whole was discussed. But Germany was vehemently opposed to it, and naturally so, for joining hands with Greece and others would make borrowing more expensive for it.
The summit at Brussels was held to arrive at a consensus and formulate policy that prevent any further repeat of the situation. France and Germany called for cutting in limits of overspending, that is a stringent deficits, and penalties for the violators. It also called for a unified corporate tax rates. These features, in essence lead to loss of sovereignty for the EU members. The countries,alone, cannot decide their policies. And this loss of sovereignty is the point that UK has picked up and used for vetoing the treaty. London was against the increasing power of EU.
How does this affect India? We have already seen that the dollar has grown in strength with respect to rupee on back of crisis in Europe and the instability in India. The FDI and FII, coming from Europe might dry up. With the austerity measures introduced by many European countries, the exports would suffer. India has borrowed over $ 160 billion from Europe. There is a good chance that loan rollover might not be possible due to the reforms and measures being taken. The inability to borrow might hurt the already falling rupee.

Weathering the Durban Storm

Jayanthi Natarajan. Even before I write a single word, I would like to pay my respect to the Indian minister of forest and environment. Whatever be the outcome, the fact that she stood her ground in face of stiff European pressure and dwindling group of supporters speaks volumes about her courage. The marvelous oration skills on display won applauds from one and all.

Back to the topic. Even though a lot of people believe that "Durban platform" has been successful, I would beg to differ. But first lets see what happened in Durban. The Kyoto protocol's first period is coming to end in 2012. Hence a new deal was needed. But what is Kyoto protocol? It is basically a binding contract on most of Annex-I countries to put a limit on their harmful gas emission. The failure to do so would lead to an even stiffer bound(30% more) on the emission for the second period. All countries apart from the US agreed to sign the deal. Now that the first period was coming to an end, the plan for the second had to be drawn.

What happened there was that the countries compelled by protocol, led by the EU demanded a binding limit be imposed on countries like China and India also. Both the countries refused to do so. I agree with that. If we go back in history, we see that in 1970s, when the first hints of harmful effects of CFC were conjectured, the European countries refused to buy the argument and failed to reduce the emission fearing a slowdown in growth. Only in 1987 meet at Montreal was an emission cut obligation signed. That, after it was proven that there is an hole in Ozone layer above Antarctica. Perhaps the EU forgets its own faults. To be an economically developed continent, it never bothered about the climate. So how can it advocate for bindings on the developing countries? The BASIC nations, led by India vehemently opposed the EU's argument. The body blow cam when Alliance of Small Island States (AOSIS) and Least Developed Countries (LDC) gave their support to EU. The only reason for this could have been that they were more bothered about the $100 bn green fund which they wouldn't have got if the emission target weren't finalized.The other important feature was the proposal to sign a new treaty by 2015 which would be enforced by 2020.

The good news is that India managed to get "equity" in the deal- equity means that taking into account historical emission, the global emission target cuts would be imposed which basically translates to the fact that there would be stiffer targets for developed countries than for developing countries.

What are the main drawbacks of the conference? The US, one if the largest emitter of harmful gases is still not a part of deal. Russia and Japan refused to sign the second agreement.Canada, a signatory of Kyoto has failed to meet the target, and consequently withdrew from the treaty. What  has emerged from the meet is a set of promises that are meant to just reassure everyone.  Persisting with the equity feature would be a challenging problem for developing countries as the developed nations would push for the negation of this. Deciding the emission limits would be the toughest task for both the developed and developing nations.

A new treaty would come into act by 2020. Scientist say that by the end of the century, the temperature would rise by 4 C. We are trying to run away from responsibility. There is a serious need to address the issue of climate in a more constructive way. 

As we wait for political consensus between 190+ countries, beware that the ozone hole above us grows in size with every passing second. 

Crashing around the ears-the strange case of the Indian rupee

The rapid fall of rupee has befuddled even the best of the economists. How come the currency of the country which was growing at a phenomenal rate is sliding at such a rate? Or for that matter why has 2011 been an year to forget for the fourth largest economy of the world?

Here are some of the reasons why the rupee fall has been so expeditious. The government has been unable to meet its fiscal deficit target of about 4.6%. What is fiscal deficit? Every government lives beyond its mean by reaping more than it sows. Fiscal deficit captures this anomaly. It is the difference between the revenues generated and the expenditures incurred by the government. The revenue generated do not include the borrowings of the government. India has been successful in meeting its fiscal deficit targets for the last few years on back of robust economic growth. Apart from 2008-09, when the financial crisis led to overshooting of the estimate, the record so far has been unblemished. But it is widely expected that India would miss the target by about 1%. While it does not sound such a big number, when converted to rupees, the gigantic number you stare at makes you understand the reason for worry. So what happens when you miss your targets? The market sentiment becomes negative. Investors stay away from your market. Also, the fact that US dollar is growing strength does not bode well in these times. With Europe deep in crisis, and recovering, US is being seen as safe haven by investors. The widening trade gap, with India now importing approximately 30% more than their exports does not inspire much confidence either. In September this year, government overshot its estimated borrowing of about 1.67 trillion dollars by almost 0.5 trillion dollars. Add to this the political turmoil in the country, where each day a new scam is unearthed and the government's inability to manage these and you understand why the negative perception is on the rise. Some Indian businessmen themselves are admitting that they would rather not invest in India. All in all, not such a good outlook for India.

What happens when your currency gets devalued? Why should you  and me be bothered? The reason is simple. All imported goods are going to be expensive.  So machine parts get expensive and hence you see all automobile companies raising their prices by about 1-2% in the coming January. This will undo all the efforts taken to reign in inflation which fell to 4.35%  last week.The impact can be seen in prices of gold also. While there has been a huge fall in the price of gold this week with it falling to about 1500 dollars/10 gram, the impact has been cushioned in India because of the falling rupee. Medical care, imported food products, automobile spares, foreign travel-these and many such sectors take a blow. The positive side is that exports grow. Companies like Infosys, TCS stand to gain in such a situation.

What to do so that the wrongs can be undone? The main problem is that with Europe in crisis, gold prices falling, and weakening Indian rupee, investors are sticking to their dollar bills. It is once again being seen as the  most trust-able currency. With the demand of dollar growing, and no circulation leading to decrease in supply, it is becoming more expensive. There is a need to attract FII and FDI into the Indian market so as to spur the investments and improve the market sentiments. The government move to introduce FDI in multi brand retail has met with much resistance with its implementation delayed till at least March. The good news is that FDI limit in single retail has now been upped to 100%, though with some riders. We an increase short term rates to attract FII's to invest in India. And then there is the most intuitive one, selling the Forex reserves. India has about 300 billion dollar as reserves. But I, for one, think its not such a great move. We have to realize that this is not the money we have earned, but what we have purchased. Already, we have the foreign loans repayment the next year, with due payments up to 150 billion dollars. This should not have been a problem, but these are difficult times. With the economy not doing well, lenders may not be willing to confer the money. And if the move fails to pay-off and the Europe government bonds are downgraded, the investors might withdraw money from all markets and stick to dollars. This would lead to further devaluation of currency and the foreign loans might become a difficult issue.

So we have to look before we loop. I have full faith in RBI Governor D. Subbarao as he has shown this year that he is capable of taking hard decisions.

FDI in retail-what's in store?

A keenly debated topic, I don't think it needs an introduction. UPA government's suggestion to allow FDI in retail has caused quite an uproar.
The segment most affected by this move is the retail section-the kiryana store owner who runs his shop in the nearby market. They fear that the predatory nature of chains such as Walmart would eat into there business and leave them without any livelihood. Fair point, this. But what they miss out on are several invisible points. Stores like Walmart require a huge land area. They are typically built on the outskirts of the city. With the price of petrol touching sky, who would bother to drive and buy stuff from here even if they are at a discounted price? Ahh...the predatory pricing...what we tend to forget is that while these big stores have to pay sales tax, the local kiryana store can easily escape it. So even by giving lesser discounts, these small-time retail stores can survive. Add these arguments and the shopkeeper's nescient arguments lose their base.
Now lets look at why we need FDI in retail. India is world's second largest producer of fruits and vegetable. Sounds great, no? But what do we do with it? We have a very poor cold storage infrastructure. This means that there is a great loss of food both in terms of quality and quantity due to inadequate facilities for storage. The end loser here is the farmer who does not get the price he deserves. Coupled with the intermediaries who flout all kinds of rules, the farmer bear the brunt of losses, earning less than half of the price that you or me, as customers pay.
By removing this chain of intermediaries and coming up with there own storage system, it is the poorest that are bound to gain the maximum. And for normal customers, this step would ensure a better quality product at a competitive price. And lest we forget, in these times of financial uncertainties and the continuous weakening of rupee, injection of foreign investment would be a shot in the arm for the economy.All in all, a win-win situation. But unless the UPA allies like Trinamool Congreess remain stubborn, the dream in the poor man's eye would always lie beyond the horizon.