Monday, December 24, 2012

Parliament passes new legislations on retail, banking and companies

For 2 years in a row the current UPA government has been sitting inactive and did not carry out any economic reforms or social reforms. Hundreds of media articles including TIME magazine had dubbed Manmohan Singh as "Under-Achiever". Worried by it the PM suddenly announced FDI in retail would be tabled in the Winter session to have it passed. The PM was under severe pressure. On one hand the world economy, particularly the US wanted speedy reforms and allow companies like Walmart to enter India on their own. On the other hand Sonia Gandhi wanted the Food Security Act to be passed. There is simply no money for that kind of welfare measure. P. Chidamabaram ever since took over the Finance Ministry has been seriously working to get the economy on track. It is precisely him who forced the PM to act.

Consequently, the Govt got very serious and wanted the Winter session to pass key legislations. So, with great guts and courage 3 major legislations were passed which will see tremendous effects in the next 4-5 years.

FDI In Retail:

Despite BJP's opposition the Congress got the bill passed due to Mayawati and Mulayam. No one knows what kind of deals were struck with those 2 M's to get their support. They criticize the Congress in public, fight elections against them, call them their enemies and support them in private. As long as these 2 M's continue like this Congress can get any bill passed.

FDI in Retail has clearly divided India especially middle class businessmen. However, both the proponents and opponents have no concrete evidence of their claims. Hence, there is nothing wrong in allowing these foreign companies. Since the clause restricts them to be set up in cities with a set population and above and the fact 30% of their produce must be sourced locally is a good clause to allay many fears. Eventually, business is business. These businesses will take 1-2 years to set up their stores and it will take another 3-4 years to see their effects on the flow of money and the fear which the opponents feel. If the businesses make no profit or find it very expensive they will shut down and go. The government took a daring risk to get the bill passed.

For more on the effects of this bill, read my previous articles on FDI in retail

Banking Laws:

The country faces a case of "under-banking". Despite around 40 banks (public and private) banking penetration is very low. The fact that the Govt plans to start Aadhar related direct cash transfer has created a case where more banking is needed. There are several corporate entities who want to get into banking industry but the Reserve Bank of India (RBI) was not ready to issue any licenses. It is too risky for RBI to issue bank licenses without a thorough background check and the current law prevents them and restricts them to do so. In the wake of global economic crisis the RBI got even more cautious in this regard and wanted the Govt to get a tougher bill passed. So, the Government joined hands with BJP and the Parliamentary Committee studied and drafted the law. The bill was finally passed with BJP's help.

The salient features of this law which will change the banking industry in the next 2-3 years include (Source1, Source2:
  • RBI gets rights to check/audit the financial records of companies entering the banking sector so it is easy to issue licenses.
  • RBI gets powers to take over the bank's board in case there is any fraud/loss of money. As an example Global trust bank merged with Oriental bank since RBI could not find takeover.
  • Now non-banking companies or corporate entities can enter banks.
  • Allow foreign banks to invest in India and convert their Indian operations into subsidiary  The Bill will allow foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty. Under current laws, they have to pay 20 to 30 per cent tax as capital gains and stamp duty when transferring branches to a new legal entity. Foreign banks now operate in India by setting up branches (all foreign banks together have about 400 branches in India).
  • Competition commission of India (CCI) will now look at mergers and acquisitions and can look into banking as well while RBI is the sole regulator yet. It is now easy to merge and acquire companies and hence several smaller banks may be acquired by bigger ones if the smaller have operations in rural areas where they have a good presence. So, setting up of banks in such areas may be expensive and merging may be more attractive.
  • The minimum capital requirement and guidelines for setting up new banks are still to be notified by the central bank. (Source)
These are some of the salient features. The bill in its nature has been welcomed by RBI and the corporate entities who want to venture into banking. Hopefully this will lead to more mergers and acquisitions leading to even better customer service and competition.

Companies Law 2011 replacing Companies Act, 1956:

It is indeed very surprising that the companies bill was lying pending since many years and several economists had wanted a law that is contemporary and in tune with the current trends of the economy. Some of the salient features of this bill include (Source1 and Source 2):

  • The concept of "One man company". This means one person can start his/her own company and such a one-man company can be truly called a "company" and not mere proprietorship. Till now minimum 2 people were required to form a company. This would enable more individuals to start their own company.
  • All companies will have a common financial year - April-March
  • Companies whose net worth is Rs.500 crore or more or a turnover of Rs.1000 crore or more must dedicate Rs.5 crore to social responsibility which is development of  their local area. Failing to do so must be explained and recorded. The bill makes it mandatory so that companies to their bit to help society.
  • Gives more powers to independent directors (1/3rd of a company's board should have independent directors who can be on a rotational basis and must be paid only sitting fees and no other remuneration)
  • A director can get only max upto 5% of company's net profit. Interestingly such a clause will help that the director cannot take a whole lot of profits with him.
  • If a company winds up then it must pay 2 years salary to its employees
  • To monitor fraud serious powers have been given to Serious Fraud investigation Office (SFIO) by the Central Govt.
  • Just like in US and UK class action suits are now a reality in India.
A lot of economic experts, industrialists have welcomed the Act since it helps in making the working of companies more transparent and accountable. Besides this was due for almost 5 decades.

The country needs even more aggressive economic laws and social laws. If the Govt woke up early and had swung into action many more laws could have seen the light. Land Acquisition Bill, Direct Tax Code, Goods and Services Tax are pending laws and the sooner these get implemented the better for the economy.

Definitely the economic experts in Parliamentary Standing Committee have done a good job in drafting these bills.

Hope the sense prevails and the Parliament passes more bills. Keep up Mr. Chidambaram..!!

Wednesday, November 7, 2012

PM launches Aadhar based direct cash transfer system

Battled by corruption on all fronts, PM Singh inaugurated the scheme to do a direct cash transfer system to the intended beneficiaries directly through bank accounts linked to the AADHAR number. This scheme is good and is a good step in the direction to plug corruption at various levels. However, it is still not passed as a  Legislation. The Parliamentary committee has objections, concerns that have not been addressed. The govt's announcement of the scheme leaves behind several questions unanswered.

Many of the concerns/questions are raised even in my previous 3 articles listed here - Article1, Article2, Article3.

As of 2012, 20 crore people people have got AADHAR numbers and 40 crore are left as against the target set for 2014. The system and its officials are making their presence felt in many villages and cities. Poor people are specially thrilled and are going out in large numbers to get the number. Here is the website (click) that gives all the information on how to enroll, what documents are needed and what the process is.

Image courtesy: source
PM Manmohan Singh looks on as Congress president Sonia Gandhi presents the 21st crore Aadhaar card to a woman.

The Govt wants to show that it wants to do something. However, no one is sure how this system will transform the problem of corruption. India's corruption is at different levels and this kind of a system will be a game changer for sure only if correctly implemented.

The media doesn't scrutinize effectively enough. How many Indians know that the experiment of Aadhar enabled wage pay under Rural Employment Guarantee system is facing difficult problems for which no effective solution has been found? Unless found the scheme should not be extended to the entire country. 

Here are some of them:

1) The system requires that a bank account opened by a person who has AADHAR must be interlinked. So, just because you have AADHAR number will not enable you and just because you have a bank account won't enable you to receive payments. Is this effectively communicated since large number of people would not understand? In Jharkhand, this created a major problem since people who had to open a bank account had to travel 10 km away. The role of Banking Correspondents (BC) carrying portable devices that can communicate with the bank servers is not foolproof system and has failed in many places. So, how does AADHAR address this issue?

2) In several places where the internet connectivity is either unavailable or unreliable is a major issue. This did not allow the verification systems to work properly with authentication servers.

3) Fingerprint recognition issues made many legitimate recipients not receive the money. Given the fact that most laborers may not have the right finger prints due to excessive labor what other mechanism should be adopted to verify? Are the guidelines that are laid being correctly followed everywhere the system is put in place?

4) How correctly can you identify the recipient is indeed the intended beneficiary? For a scheme like Rural Employment it might be easy since the person who is going to work needs would have his name registered and must be working for a certain set of hours. While making the payment his name must be associated with AADHAR number that the recipient must carry while validating/authenticating himself. This may be fairly accurate but how does government plan to transfer food via PDS (Public Distributed System) ? Clearly, as per UIDAI AADHAR number cannot tell you if you are an intended recipient of a particular service, but only verify that you are what you say. So, say a person A who is not a legitimate recipient of subsidized kerosene but has an ADHAR number registers in the government records as the beneficiary of subsidized kerosene Then person A continues to receive the benefit if he submits AADHAR details. So, even before AADHAR comes into play the very system which will contact AADHAR must be accurate. Has the government done or doing anything in this regard? Unfortunately, no. So, can this system be a game changer then?

5) It has come to the attention that several hundreds of AADHAR cards are lying in the government offices gathering dust and yet have not reached the concerned people (Source) This is mainly because of fake addresses.

Say, the UIDAI addresses all these issues. However, until issue 4) is resolved this system cannot help in plugging leakages.

Let us not forget in Jharkhand where the system was first tested proved to be very effective at least with respect to people who received their wages. It was quick, fast, instant and no middle man was involved. So, they did not bribe any official to get their money. This is truly the result that is expected and is indeed the spirit with which Mr. Nilekani is working. 

So, when Arvind Kejriwal talks about an effective law people must realize that it is one part of the solution. The other part is clearly eliminating as much as possible middle men who eat away the money before it reaches the intended recipient.

Sunday, September 30, 2012

Why does India face power cuts?

Every man on the streets of India - urban and rural - will say they face power cuts everyday. The number of hours may vary based on state and city. Gujarat probably is the only state which is surplus in power and and its residents hardly face power cuts both at urban and rural level. So, what is different? Why can't the entire country have the same picture? The article below explores our major problems, solutions and illustrates a shining example of Gujarat which needs to be replicated across each state.

Until early 2000 there was no interconnected grid (interconnection of power sub stations and transmission lines). Each state had its own network. The early 2000 saw the reality of a power grid that connected North, South, East, West and North East. The state owned POWER GRID runs this and is 95,000 km long. The reason the grid was established was that the grid would enable power to be given to states which are in deficit so that there is a balance. While the Southern Grid is itself not connected to the remaining 4, all the remaining 4 are interconnected. The North, West, East and North East grids supplied electricity to the respective states and the basic condition of such a grid was that no state would draw more than it proposed as excess withdrawal or excess addition would cause the entire grid to fail. Every day each state that uses this grid will submit a projected daily usage a day before its usage for every 15 min. This would enable the Power Grid to balance the supply accordingly. Despite this check Uttar Pradesh (as per news reports) drew more electricity than projected on July 30 and 31st 2012. Despite a heavy fine established on any state that overdraws the power  one of the states did it causing a mass outage in NORTH, EAST, NORTH EASTERN parts of the GRID. The Western Grid took quick action and so was spared. The Southern Grid was not affected anyways.

July 30th and 31st 2012 when there was massive power outage in Western, Northern and Eastern India for 2 consecutive days - is a shame on rising India. Mainly because one of the states overdrew more power in the grid causing imbalance and electricity grid tripping. This was so bad that airports, railways, metros, hospitals, clinics, industries everything was crippled, paralyzed and came to a COMPLETE HALT without electricity. 

  • 600 million people were without electricity - a population double the United States.
  • 18 states affected at the same time.

Let's get to some quick stats: The source of electricity and their % contribution to power grid are as follows:

Total Installed capacity: 205.34 Giga Watt (GW)

Between 2007-2012 we added only 78,000 MW while China added 4* 78,000 MW. What a difference!!!

1/3rd Indian population - has no electricity - (300 million)

Losses due to power thefts and distribution - 20-32% with world's average 15%

Net shortfall - 10%. This is huge since India's demands have far outgrown the actual generation/availability.

The contribution of coal to electricity generation in China is 77% while 56% in India. China may be polluting more but it has massive wind and solar power generating capacity, only next to USA. India has only 12% of total electricity coming from wind+ solar combined.

Clearly our problems (and solutions) are:

a) Coal power generation has not increased since coal is not being properly utilized and exploited despite   its abundant supply. Many coal projects have got struck in environmental clearances, several of them have been scrapped since the COAL SCAM erupted under our very own PM - Manmohan Singh. Coal India which owns almost 80% of coal has to sell in the market at 70% discount prices just to have the subsidy going (Source). It's a blunder and Coal India neither can invest in natural gas nor increase its production.  Government needs to break up Coal India, involve private sector in production and distribution. Let us have an independent regulator for this rather than depending upon Government's intervention.

b) There is no exponential increase in contribution from Renewable sources like wind and solar. Solar is the easiest since 360 days of the year we have solar energy. Yes, one good thing the current government has done is to launch National Solar Mission which has framed policies for solar investment. However, not everywhere one is ready to invest. The government needs to provide incentives  for local manufacturers to come with the hardware so that the investors can depend upon them with trust. It is shocking that within 3 years we added only 1000MW of electricity through solar power by using parts made in US because they get that at a cheaper interest rate(3%) unlike banks in India (14%). Clearly this is the sector that the government needs to strongly push for competition so that solar projects come up everywhere. This is the best way to increase electricity generation.

c) Our transmission and distribution losses are immense causing a lot of scarcity due to inefficiency and there is power theft at the consumer level. Many of them connect their power lines directly to distribution line and makes them unaccountable for the same. Take a look at the streets of Delhi. This is a national shame. An estimate puts (because of power theft like the one below) the loss amount to $3 billion!!(Source)

In this June 13 file photo, an electrical linesman repairs cables in the middle of a spider web of  illegal subsidiary wires around the main cables in Allahabad, India. Stealing of power is a frequent phenomenon in Indian towns.

d) Private players cannot sell electricity to customers directly (unlike Gujarat which does allow).

e) State electricity boards (SEB) are running under losses total adding to Rs.2.46 lakh crore in 2012 (Source). But why do states end up in losses? This is because many states offer free electricity to farmers or at a very low subsidized rate. The tariffs are not regularly revised and they depend on bank loans that is difficult to repay. All this in the name of vote banks of the poor. This is practiced by almost all political parties across various states. The government recently waived half of the debts SEB has and the other half SEB will issue bonds to the banks -on the condition they strive to make them profitable. Almost all SEB are bankrupt excepting Gujarat which is running surplus. But really what SEB's need is not government's money, but a way of increasing its capacity.

A classic example is seven years ago TamilNadu was a power surplus state but now is bankrupt because the DMK government gave free electricity to farmers.

How is Gujarat having surplus electricity and how is it having low distribution losses (Business Today Source) ?

  • Multiple sources of electricity add to the electricity grid of Gujarat. Wind, Solar, coal, natural gas, water - all exist in the state. Most of these are run by private companies which can sell the generated power to consumers and to the state electricity board. So, it has more than the state's demand every year (for the past 6 years or so).
  • The farmers get NON FREE 24*7 electricity to their homes and at fixed times to their fields separately. They are not mixed. This is called Jyotigram scheme launched by the CM Modi way back in 2003. Since the farmers are assured of electricity for both homes and fields, they have not hesitated to pay for the same as against free electricity which is erratic and unpredictable. This is done through separate feeders for fields and homes - a feat that only this state has it and is working marvelously.
  • It raises tariffs periodically to that industries don't mind paying since they get uninterrupted power supply
  • 2200 km gas grid connects the industries and provides them with electricity through natural gas.
  • Set up 5 police stations across the state only to catch electricity thieves and disconnected anybody who was getting un metered electricity. This brought down transmission losses from 35% to 15% (Times of India)

So, where do we see going in the future?

If our current power cuts has to be avoided, more electricity needs to be added to the grid. Uncertain monsoons and absence of several dams make hydro unreliable, inefficiently exploited coal makes coal unreliable. The only way out is to have more solar parks, solar energy and wind energy. The private companies which can invest in this must have a way to directly sell this to customers so that it creates a competition between state boards and private companies thereby benefiting customers. The customers at least in cities will pay more if they have to provided they get uninterrupted power supply. Every state must take the feeder separation mechanism so that its own board won't run into losses. People need to stop electricity theft and take accountability for the usage.

This complex picture of electricity in India is worrisome. One needs to keep in mind that we are generating electricity but it is still far short in proportion to the demands. If we continue at this rate even 20 years down the lane we will experience power cuts everyday.

Our PM fought for nuclear deal. This deal has headed nowhere except bringing Congress back to power. The nuclear power is far more complex, requires great regulation and safety mechanisms and can take years to set up one. We can't wait for that long. Solar and Wind are the answers which India abundantly gets. If a couple of states have shown this, the entire country can.

Sunday, August 12, 2012

Journey of the Rupee- 1947-2012

The below article is intended to get an idea of how the rupee has traversed from 1947 until now. This has been written such that a common man can understand without being an expert in economics. However, with this intent the article tries not to cover too many factors or terminologies that can go too deep into economics. Hence, it is a brief explanation of the currency.
Each market sentiment that can control the rupee can be written and explained at lengths running into several pages. I have tried to simplify as much as possible.

Some basics:

Every country has a currency and the currency rate also known as exchange rate is always relative to some other currency or object such as gold. No currency rate stands in isolation. In the early 19th century gold was that object to which currency was evaluated.

1) When the value of any currency increases w.r.t other currencies then the currency is said to be appreciated. An appreciated currency for that country means its imports become cheaper and exports doesn't fetch good money.
2)  When the value of any currency w.r.t other currencies then the currency is said to be depreciated. A depreciated/devalued currency means imports get costlier and exports fetch good money/profits. So, if a country exports more than it imports, then to fetch profits it can devalue its currency. Say if the country feels that its exports are not fetching a good value it can resort to devaluation.

As an example, say Indian rupee v/s Dollar. 1$ = 4 Rs. Now, if India changes to 1$= 10 Rs. then anything India exports to other countries would fetch it a good value, but all that India imports would become expensive.

Note: Excessive devaluation or Excessive appreciation is not good for any country.

Note: Every country has tools and reasons why it would want to appreciate or depreciate its own currency. The explanation of these is beyond this blog article. All countries have done one or both of these many times to suit their economic interests.

If one wants to read more about what affects exchange rate one can read here.

Quickly 3 more terms below:

Current Account = imports value + exports value.
If the sum is +ve then it is SURPLUS and if -ve then it is DEFICIT.

Capital Account = amount of foreign ownership of domestic assets - amount of domestic ownership of domestic assets.

Balance of Payment (BoP)= Current Account + Capital Account.
if  (BoP) is +ve, good for the country.

In case of India - in 1966 and 1991 BoP was too negative to withstand.

A little background on how Dollar became the world's currency:

Post World War II, US had the highest manufacturing capacity in the world, which meant it was the largest exporter in the world at that time. So, almost the entire world depended upon US goods. So, its currency was very critical in world economy. Till 1944 US evaluated its currency to price of gold. The reason being US had the highest gold content. So, the dollar was tied to gold and it was $35 for an ounce of gold. In 1944 US had so much influence on world economy that almost all countries agreed to follow fixed rate system for their currency and their currency was tied to the dollar. The dollar in turn was pegged to gold. In other words this is what happened to India in 1947. 

1) Although India's currency was tied to UK's Sterling, US dollar continued to play a role and almost all country's currencies were pegged at gold (gold price itself was in Dollars). 
2) India made its currency fixed rate regime.
3) Fixed rate regime helped US because it knew it would get a predicted value for the goods it exported to India and no fluctuations means their profit was secured.
4) For India, it meant inflation could be kept low.
5) Unlike today where the dollar-rupee fluctuates daily, the fixed rate made the fluctuation almost once a  year or once in 2 years.

So, with this background let us read some significant events in Indian rupee history post independence.

1947: 1 Rs =1 Sterling.

1948-1966: 1 US$= Rs.4.79
With its economy growing, high industrial growth, high agricultural growth and high foreign currency (Sterling and US dollar) India was somehow able to prevent any financial crisis. However, India being under a fixed rate regime account deficit began to build. Read below to understand both these terms.

1966: 1 US $= Rs. 7.50
India had fought war with Pakistan. Just within 5 years India fought two wars with its neighbors(1962 with China and 1965 with Pakistan) and this had drained a lot of money and had built up huge deficits - meaning it imported more than exported and to pay for its imports it did not have money at all. Due to its war with Pakistan, US cut off all its aid to India. The only condition under which India could get the world aid and more specifically US aid was if India devalued its currency.

India like many other developing economies at that time was under a fixed rate regime. Under a fixed rate regime the government or its central bank always ensures that the currency remains at a constant rate (subject to some small percent of tolerance). The main advantage of fixed rate regime is that it ensures that the country's currency rate is fixed that exhibits stability so that other countries which want to invest in it can do so without thinking of any fluctuations. It also helps to keep inflation low. This system worked for India for some good amount of time mainly because a) there was good amount of foreign aid or money into the country b) most people were poor and fixed rate helped in maintaining a low inflation.

In economics or in politics there is no one mechanism to solve a problem. Economics is far more dynamic than one can think. In 1966 the industrial production and agricultural production was very low. Companies or private sector companies (handful then) showed negative growth. The govt could not borrow from it either. A drought in several parts of the country in addition to the wars had caused huge demand for goods, but less supply situation thereby causing high inflation. Since India was under a fixed rate regime high inflation made its goods more expensive. So, say if US or UK were to buy Indian goods they had to shell out more dollars or pounds respectively.  For more on fixed rate one can read this article here

In a fixed rate regime the country has to have sufficient foreign currency since it should have the capacity to absorb or supply the currency in the market. That is why in a fixed rate regime the country has to stock foreign currency. In India in 1966 this particularly was the opposite. There was no foreign currency left.

[Why adequate foreign currency is required in a fixed rate regime?

Say, for some reason in India there is excess demand (less supply) for dollars. Now, the RBI must not allow the fixed rate to change. So, it starts selling dollars/supplying dollars into the market to meet demand in exchange for Rupees. By doing so, the foreign currency depletes. Beyond a level the depletion can smell doom.

On the other hand if there is excess demand for Rupee, RBI can absorb it by selling/supplying rupees for dollars thereby building up foreign currency.

So, one can see depending upon how demand and supply change RBI must do this to keep the fixed rate as fixed. This is not sustainable since the country cannot always be assured of foreign currency/reserves in its hand.]

Now, look at the precarious situation India was put into in 1966. High inflation, low production, low amount of money to pay for its imports and its exported goods are expensive for US and UK. To make matters worse India asks for US help. Under these circumstances US asked India to devalue its currency so that its goods can become cheaper for US in exchange for its aid. US supplied India wheat which was so much necessary for the very survival of India. So, Rupee was now - 1 $= 7.57 Rs.

Aug 1971: Rupee's link with Sterling broken; tied to US Dollar directly

Dec 1971 : Dollar devalued, Rupee tied to Sterling again.
US devalued its own currency because of its own economic crisis. Subsequently all other currencies were affected. India instead of devaluing its currency broke its ties with Dollar and linked back with Sterling because Sterling was more stable.

1975:  1$ = Rs.8.39 
India links rupee to 3 currencies with a margin of 5% - Dollar, German Mark, Japanese Yen. No longer Sterling was important to India.

1985- 1$ = Rs.12

1991: 1$ = Rs.17.90
Just like in 1966, 1991 was a year where India saw high inflation, low industrial and agricultural output, low foreign reserves. It had become so bad that India had money to pay only 3 weeks worth of imports. India still continued to be a big importer than exporter. India never encouraged exports openly; no incentives were given. Everything that was imported had high tariffs and licenses. All these made imports expensive and with no foreign reserve left .India had to devalue its currency just to ensure foreign currency and goods flood the market (since devaluation would make other countries export more to India in lieu of getting better money/value for their goods).

1993: 1$ = Rs. 31.37
Indian rupee was finally floated. So, fixed rate regime ended and rupee now began to flow with the market sentiment. In a floating rate regime the market forces determine the value of a currency. However, if the rupee floats beyond acceptable limits RBI can step in to control it. The floating rate cannot ensure inflation  be kept under check. However, the market confidence in the economy wholly determines it. Market confidence depends on how the government opens up channels for increaseing competition and capital flow from outside. In the early years the confidence in the economy began to increase. This led to currency remaining in the 30's.

Because of this devaluation imports became costly and exports fetched a higher value. These profits in turn were used to offset the high cost of imports and Indian goods became competitive (watches, motorcycles, cars etc).

Early 2000-2005:- 1$= Rs. 44-45
This period India saw high growth, high industrial production, high growth of software services, huge inflow of dollars. This helped Rupee be stable. Huge capital inflows, high foreign direct investment created foreign reserves enough to balance current account deficit. Basically there was a greater confidence in economy and a lower rupee boosted export profits. With the removal of licenses and tariffs imports became cheaper.

2006-2007: 1$ = Rs.39
High growth of 9% made dollars flood even more. So, to contain the flow of dollars, RBI allowed rupee to appreciate. The excess money was what UPA 1 Government used for Rural Employment, Farm loan waivers etc.

2008-09 1$ = Rs.49-50
This was because dollars began to deplete due to global economic crisis and India was able to register high growth because of domestic savings and consumption.

2010-12 1$ = Rs 50-Rs.56
In the last 2 years the government did not begin to find methods to make foreign investment any easier. High inflation and high interest rates made borrowings expensive. India still continues to be a huge importer. The largest component that India imports is crude oil. Crude oil is dependent on global markets. However, the government continues to subsidize kerosene and other products to poor people causing a huge deficit to build. Unless foreign capital is brought in this would be unstable. It is simple economics that it is wise you spend more only if you can find ways to earn even more. However, with not a single positive step to revive the economy and keeping away from tough decisions has made the economy unstable at this time.

The range of Rs.40-45 is stable for Indian exports and imports. Any further devaluation/appreciation is a big problem.

India will never switch back to fixed rate since it is unsustainable. Floating rate regime is suited since government or RBI intervenes only if necessary. No one can truly understand the floating exchange rate dynamics, however certain indicators as explained above give a pattern of where the rupee is headed to. The most important aspect of policy making must be to attract money so that they build up a reserve and then use the reserve to bring equality in society. Unfortunately, the very man who started the economic liberalization is unable to revive the economy. The readers know who I am referring to - Dr. Manmohan Singh.

The band or range within which rupee fluctuates is very important. A drastic appreciation hurts exports and a drastic depreciation hurts imports.

One must note that the RBI can only act as a facilitator but the real market is run by stockholders and investors and they go by confidence index of the country's economic policy.



Wednesday, July 4, 2012

The troubled Indian economy

India has become synonymous with land of missed opportunities. Between 1984-1991, 1991-96, 2009-12 India has missed opportunity one after another to set its economy and infrastructure right. During these years while China opened up and went aggressive with its growth agenda, India stood behind caught up in political mess. Forget going into what happened during these years. Of concern is the last 2009-12. UPA II has ceased to exist making decisions. No major policy reform, no major legislation passed. Caught in its own trap of corruption, coalition politics, Manmohan Singh Govt is probably the worst India has seen in years. Look at media everywhere (national and international). From New York Times to Times of India everyone is talking about Narashimha Rao and Vajpayee about economic growth. No one wants to talk about Manmohan Singh as PM. One of the sheer problems is indecisive, leaderless leadership.

Recently there was a cartoon published all over internet where Manmohan Singh is taken to a dentist and the dentist says - "Atleast here please open your mouth". This is such a sarcastic reality that the PM doesn't speak. He doesn't express toughness. He doesn't take any bold moves. He is an epitome of softness that only is weakening India day by day, minute by minute.

The current state of economy is such that India's growth story is torn apart and there is no confidence in its political set up. In the past 2 years the government instead of taking any concrete measures in land legislation, tax reforms, FDI in retail has moved all the investors away. Indian currency is the worst Asian currency in the  past 2 years. India's growth is the worst amongst the growing BIRC (Brazil, India, Russia, China) economies. At a point where even China's growth slipped, India did not make any use of this opportunity.

Let's look at the numbers although numbers purely don't describe much, but give a sense of where the country stands.

  1. Rating agencies such as Fitch, S&P have downgraded India's economy from stable to negative
  2. Rupee has depreciated to its worst levels in history and to the worst levels in Asian currency. Imports are more and capital inflow is so less the rupee has to depreciate to keep the country's forex reserves to an optimum level. (See this image below got from this article)

  1. The last quarter India's growth slipped to 5.3% from 8-9% seen from 2004-09.
  2. Fiscal deficit of 9% (Amount of money spent than earned is huge and is in billions). Simply, Sonia Gandhi doesn't realize and she still wants to give away hard earned money to the poor people in an unorganized manner. She has no interest in creating opportunity for the poor, but only keep feeding them. She just doesn't want any economic reforms. She only wants that the poor continue to get food and money and keep voting Congress back. The country simply doesn't have that much money to spend.
  3. Current Account deficit is 4.9% (amount of imports more than exports). We don't have a tendency to increase the number of goods that can go as exports, but keep increasing number of imported goods. Only when the government can create a market allowing exports to grow like tax reforms, policies that would drive small businesses to thrive - will this reduce.
  4. Despite global economic crisis, India rose between 2007-09 simply because of domestic demand and huge savings of its population. However, now domestic consumption has slipped due to high inflation, high interest rates on borrowing anything - car, home, land etc.
  5. Extremely shameful industrial growth of 1.9% - lowest seen in decades. Cost of land is so high, cost of rent is so high, no uniform and fast mechanism of acquiring land, unwanted environmental clearance bureaucracy has made new industries to struggle.
  6. Growth in ports, trade, hotels, transport, communications fell to its lowest since 2005 (drop from 7.7% to 5.5%)
  7. Infrastructure growth dipped to 4.2% from 6.5% last year.
  8. Agricultural growth dipped to 1.7% from 2%.
India's economic growth rate slows
Image courtesy: Planning Commission, India
The numbers courtesy: Business Today


If India doesn't take steps to bring in capital how will the economy and its own domestic industry survive? India needs huge capital brought into the market so that it can invest further. This money was hugely available between 2000-2008 because country was growing at a rapid pace, its infrastructure (roads, power, water supply projects) was booming. The confidence inspired money to be brought from outside. Now, it is not so. Everyone is worried to invest in India. The RUPEE has fallen because of this. 

For this India needs to 
  1. Open up retail investment - this as explained in my previous article
  2. Implement the GST (Goods and services tax) as soon as possible - so that there is a uniform tax market in the country making easy for an investor to invest anywhere.
  3. Cut down interest rates so that rate of borrowing is low amidst high inflation.
  4. Reduce subsidy billion which runs in 2.5 lakh crore - kerosene and diesel. Free up diesel prices.
  5. Implement Land Acquisition Bill which eases the provisions under which land can be acquired and adequate compensation be given to the land owner.
Here is a graph that best explains India and China in terms of doing business:(source)
For all of this we need a sound government. The best economic brains in the Government have proved to be of no value and the PM appears totally out of control. 

All is not bad in our economy, but if we don't act we slip further and simply we don't have time for this.

Can the government show any action? I really doubt. Either this government has to go or Manmohan Singh has to show animal spirit (which he himself admitted that the country must grow with)

Tuesday, May 8, 2012

World's largest solar PV park opened in India

India has huge demand for electricity. Coal deposits are depleting day by day and our hydro electric projects and dams are costing a lot and many of have them have not seen the light of the day. They are on paper for the past several decades.

While the whole country is reeling with power crisis Gujarat is the only state which has excess power and is selling to other states. The villages get 24 hour electricity and a dedicated line for their irrigation purposes.

When PM Manmohan Singh announced National Solar Mission - the idea was that within the next few years our electricity production from renewable sources must increase to 15%. It now stands at 6%. Currently 2/3 of 900MW that is being generated from solar energy comes from Gujarat. It has become the home of close to 10 largest solar parks in India followed by Rajasthan and Maharashtra. 

While the PM fought for his prestige claiming that Indo-US nuclear treaty will bring electricity the plan is still on paper. Nuclear energy is expensive and requires great precautions. Solar on the hand is emission-free, pollution-free and natural. Per unit cost of solar was about Rs.15, but Gujarat has reduced to Rs.8.5 a price close to thermal power sources.

14 months ago several US companies laid down the proposal to set up a solar park - one that also houses largest photo voltaic plant in the world. 14 months later the park is open, is the world's largest and capable of producing 600MW. The state government has already connected this park to its electricity grid. This park alone can prevent 8mn tonnes of CO2 emissions every year.

Big Picture : The Gujarat Solar Park at Charanka in Patan district , India
This picture was published in the Guardian newspaper.

This link will give you all the largest solar photo voltaic parks in the world.

Watch this interesting video that shows how the place has been transformed as an economic boom city because of this solar plant.

2000 hectares of land at Charanka is now larger than one in Golmud Solar Park in China that can produces 200 MW. Charanka is on the border of India bordering Pakistan. As this businessgreen report says that Charanka receives 330 days of sunlight and there could have been no better place than this to tap sun's energy. What a way to go to tap a natural source!!

The other important innovative project that has taken shape is covering of Narmada canal with solar panels that serve twin purpose - generate solar energy and prevent water evaporation. This is the first of its kind in the whole world.

Of course there is also a proposal where residents can put solar panels on their rooftops and then sell the electricity to Gujarat government. Not very sure how this would successfully work.

One thing is sure. More projects of this kind can only lower price of solar energy making it more affordable.

Why can't rest of India learn from this? Why not Indian Government seriously invite private players more aggressively to do something like this? After all there are so many such Charanka's in India even if they don't receive sunlight for 330 days.

Image courtesy: Google

Tuesday, March 13, 2012

Pics of New Indian highways and roads

This is my 5th article on Indian highways and roads. As the road expansion continues across the country, Gujarat and TamilNadu continue to have the best roads. While many states are catching up, there are several others not. While no city can boast of having planned and good roads we continue to struggle with bad or average roads. The biggest problem in city roads is not even the road anymore but the uncontrollable traffic that far exceeds the road capacity.

While the Golden Quadrilateral was completed a long time ago, the North-South-East-West Corridor is more than 80% complete. In addition to this several highways are being currently done across several cities. While we cannot feel good about our city roads our highways are good to drive on. Some stretches are unbelievable in cleanliness, maintenance and width. So, here I paste some pictures of the new highways or roads. These pictures are definitely different from my other articles.

While these new highways are far from perfect they are good to drive on long distances. It is a change that is very much visible.

Our expressways continue to slowly grow. We are now from 200km to 600km. The most awaited expressways are going very slow- Ganga Expressway, Pathankot Ajmer, Bangalore-Chennai 6 lane, Ahmedabad Vadodara Expressway. No one knows when these will get completed. The Land Acquisition Bill is still not passed and that is seriously hampering our highway growth. All the pros and cons I mentioned in my previous article still apply to the expanding roads.

PICS COURTESY: Skyscrapercity, Google Images


Srinagar Leh


Yamuna Expressway (not yet completely opened - expressway from Delhi-Agra. Right now it is badly congested on the main NH that is a part of Golden Quadrilateral)

Lucknow-Kanpur, Meerut
 Jhansi-Kanpur (NH-25)


Rajasthan - Mt.Abu, Bharatpur, Gujarat-Rajasthan border, Udaipur

Gujarat - The best roads:
Halol-Godhra, Rajkot-Jamnagar



Pimpal-Dhule, Mumbai-Nashik


NH-4 near North Karnataka

Thrissur, Kerala



NH-45 (Chennai-Ulundarpettai,Perambalur)

AP - Hyderabad Ring Roa, Chittor roads


Maharashtra-Chattiagarh Border, Jharkhand-Dhanbad

Muzzarpur-Purnea, NH-31 going from Bihar to Assam

Madhya Pradesh:

Dewas_indore, Shivpuri-Jhansi

The pace of road expansion must double as it is very low considering the rate at which the economy is growing.