Few would dispute the fact that investors today are better informed as opposed to their counterparts from previous generations. The barrage of investment advice and information from various quarters is largely responsible for this phenomenon. 1. It's too early to plan for retirement It's never too early to plan for retirement. On the contrary, the earlier you begin, the easier the task will be. With more time at your disposal, you will be able to explore various investment opportunities and easily accumulate the requisite retirement kitty. The key lies in recognising the eventuality of retirement and working towards providing for it. This will hold you in good stead over the long-term 2. It's fine to take on higher risk in rising markets 4. Investing is a one-time activity SOURCE: Rediff.com
However, the prevalence of investment myths is something that hasn't changed over the years. And acting on a myth while getting invested, always has the same result -- an incorrect investment decision.
In this article, we debunk 5 popular investment myths.
If you are in your 20's and comfortably placed in terms of your career, retirement planning is unlikely to be high on your 'to do' list. Instead, buying a car, going on vacation to exotic locations and acquiring the latest gizmos are likely to have more appeal. Nothing wrong with that, but this shouldn't be at the cost of retirement planning.
How often have you heard that, particularly when equity markets are surging northwards and all market-linked investments seem like easy pickings?
The urge to 'ride the rising markets' and make a quick buck can be hard to resist. Even the resolve of the most steadfast investor can be tested. And to some it makes perfect sense -- when equity markets are on a roll, why hold back?
Here's why -- your risk profile doesn't change in line with changing market conditions. If you are a risk-averse investor, you stay the same even in the event of rising markets; similarly, a risk-taking investor continues to be one even if markets spiral southwards.
Sure, your portfolio might need adjustments based on changing market conditions. But at all times, the investments should reflect your risk profile and asset allocation based on the objectives that you have set out to achieve.
3. Why diversify? Equity is all I need
The ability of equity (as an asset class) to outperform other asset classes over longer time frames is well-chronicled. Based on the same, the conclusion drawn is that holding a portfolio comprised of just equity/equity-oriented avenues is good enough and that there is no need to diversify across asset classes.
Notwithstanding the positive attributes of an equity investment, investors are often guilty of ignoring its high risk-high return nature. Then again, the returns that you hope to clock from an equity investment would depend on (among other factors) the fund/stock that you have chosen to invest in and also the timing of your investment.
For example, several investments in tech funds/stocks at the peak of the tech boom in 2000 failed to deliver for long time periods. Hence, it is pertinent that you hold a portfolio comprising of various asset classes like fixed income instruments, gold and real estate.
This in turn will ensure that a downturn in any asset is offset by an upturn in another (since various assets have varying cycles), thereby ensuring that your portfolio is safeguarded at all times.
Assume that you have made investments in various avenues and asset classes that are right for you. In other words, you have in place an investment portfolio that is geared to take care of your financial goals. So is it time to put your feet up and call it a day as far as your investments are concerned? Not quite.
Don't make the mistake of treating investing as a one-time activity. Even the best of investment portfolios could become redundant over a period of time. This is because with passage of time, your risk profile and needs may change. Hence, it is vital that your portfolio be reviewed regularly and necessary alterations made, when required.
5. Investments should be made only for tax-planning
Surprised to read a statement like that in an article about investment myths? Don't be. It's a reasonably common belief that if you are well-heeled, you don't need to invest, except perhaps for the mandatory tax-planning investments. The underlying assumption is that a healthy financial condition at present is good enough to provide for all future needs as well. As a result, investing is perceived as an activity that can be avoided, save for the obligatory tax-panning one.
However, there is one factor which turns the above hypothesis on its head -- inflation. Simply put, inflation is a situation wherein too much money chases a limited number of goods; this leads to a fall in the value of money. Often inflation is expressed in terms of a rise in the general price level. For example, if a product costs Rs 100 at present and prices rise by 5 per cent annually, you will require Rs 105 to buy the same product a year hence.
And one way to counter inflation is by making investments in avenues that grow faster than the inflation rate, like equities for instance. This will not only ensure that the value of your money is preserved, but it can grow significantly enough for you to achieve your financial goals
Spiga
5 investment myths debunked
How is inflation calculated?
"Inflation is taxation without legislation." Milton Friedman.
India uses the Wholesale Price Index to calculate and then decide the inflation rate in the economy. Most developed countries use the Consumer Price Index to calculate inflation. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.
In India, data on a total of 435 commodities' prices is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.
CPI is a measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.CPI is a fixed quantity price index and considered by some a cost of living index.
Many economists say that India must adopt CPI to calculate inflation as CPI measures the increase in price that a consumer will ultimately have to pay for. United States, the United Kingdom, Japan, France, Canada, Singapore and China use CPI to measure inflation.
WPI does not measure the exact price rise consumers will experience because, it is calculated at the wholesale level.
Another issue with WPI is that more than 100 out of the 435 commodities included in the Index are no longer important for consumers. Even commodities like livestock feed are considered to measure the WPI. In India, inflation is calculated on a weekly basis.
World inflation - Is the worst over?
The world is alive with the sound of inflation. Policy makers are troubled and central banks have retreated somewhat from their lofty one-shoe-fits-all (read inflation targeting) policy they were trumpeting not so long ago. There are no easy solutions in sight, just speculation about policy response. We are all running helter-skelter to answer the big question - not the sub-prime crisis, or banks going bust, or even whether the US is, or will be, in a recession. Quite simply, the need is for an assessment of the future course of inflation. An examination of the past may be the first pointer. The graph shows averages of country-level inflation since 1960 with countries bunched according to their rank in each individual year. For example, Brazil was a member of the hyper-inflation club in 1990 (rank of 99) and an above-average performer in 2007 (rank of 38). The results are striking - the pattern of inflation change was not a function of inflation targeting, or even whether a country had a central bank or not! Low inflation in the 1960s, peak inflation in the mid 1970s and early 1980s (the oil and wheat shock of 1972/73 and the oil shock of 1979); and a large structural decline since 1980 with a trough in the early 2000s. Last few years, practically all countries show an acceleration in inflation. Inflation targeting or reducing/anchoring inflationary expectations did not play much role in reducing inflation; if not, what did? Most likely, the prime cause has been the important role of productivity growth in developing countries, especially the large-sized countries like China and India. With Africa and Latin America now joining the development party, subdued world inflation is more likely than not. It might be news to George Bush, but this productivity and income growth did lead to more demand for food and commodities and oil in the developing countries over the last not one, not five but last 20 years. During the same period, however, commodity prices generally declined, or worst case, stayed constant in real terms. But what happened to the forecast of low inflation in 2008? World inflation is broadly composed of three commodities: energy, agriculture and metals (both precious and other metals). The long-term pattern of commodity inflation is as follows. A trough in 1997/98 (Asian crisis), and then a rise such that by late 2007, real commodity prices were on their highs but still considerably below the peak reached in the 1980s. Simultaneously, world per capita growth exceeded 3.5 per cent per annum (purchasing power parity data) during these years - a level not seen since the 1960s. So the pattern, until 2008, has been of high economic growth, high increase in commodity prices and low individual country inflation! So what did happen? A reasonable speculation is that this recent burst in prices has more to do with old-fashioned speculation than even older-fashioned fundamentals. In this regard, the recent hysteria pertaining to the Indian rupee is relevant. Then (was it just a month ago?) the slogan was: India is a fast-growing country, currencies of such appreciate, and therefore the rupee should go to 38/US$ by June 2008. Today, the rupee is at 42.8/US$. The same explanation (story) is forwarded for commodities; India and China are growing, so demand will grow etc. etc. Just like gravity had to catch up with the rupee (notwithstanding the well grounded in fundamentals forecast of all the major investment banks, domestic and international), so is gravity likely to catch up with commodity price inflation. Trends in world inflation will likely dictate domestic inflation. Except for oil, the major commodities of the world are already in a downward slide. The attached table tells the story. First, agricultural commodities (the source of the political problem with inflation) have already declined (from their peaks made just weeks ago) by significant amounts. As of May 16, wheat prices are off 39 per cent; soybean prices (for edible oils) are off 13 per cent. Even rice prices, after catapulting just a few days ago, are off 16 per cent. On average, food prices are off 15 per cent from their highs. The same magnitude of decline is witnessed in the metals space, precious or otherwise. But what about the price of oil? The oil complex remains at its highs; after making a new high just a few days ago, the oil complex is off 2 to 4 per cent, i.e. no decline. The present oil price is some 20 per cent higher than its highest real price, ever. If one adds the value of the dollar (up 3 to 10 per cent from the lows against major currencies) then oil remains the only glaring exception in the commodity space. In this regard, it is pertinent to note that the Dow Jones Transportation average is up 17 per cent for the year - just slightly less than the increase in the price of oil! If other commodities are any guide, then the identity of which market is smoking what will soon be known. When international commodity prices come down, domestic inflation will also come down. There is very little demand pull left in India; the monetary authorities have achieved their objective (right or wrong) of considerably slowing down the economy. Wage growth, an indicator of demand pull inflation, is barely keeping pace with inflation; bank credit growth has also slowed down drastically; and real interest rates are among the highest in the world. And until very recently, our exchange rate had also appreciated close to the maximum in the developing world. None of this was successful in insulating India from importing world inflation; indeed, our acceleration of inflation, while lower than China, has been on the high side in the developing world. So India has lost out both in terms of lower economic growth and higher inflation. What is the appropriate policy response to this inflation? Patience. Inflation will likely decline, and by fall 2008, the world (and domestic) inflation could be stable, and lower. Growth should also be accelerating at that time. Better for Indian policymakers to step back from the brink, say that they are doing everything that is advisable and possible, and let prices unfold. And plan for elections in the winter! SOURCE: Rediff.com
Welcome to the 'recession'
It's getting harder and harder to deny that the economy is in recession.
Warren Buffett, the world's most famous investor, proclaimed this weekend that "we are already in a recession."
Former Federal Reserve chairman Alan Greenspan told the Financial Times on Monday that there is a greater than 50% chance of a recession.
But with all due respect to the Oracle of Omaha and the Maestro, they are not telling us anything that the average American consumer didn't already know: this economy stinks.
Whether the economy is technically in recession is missing the point. Consumer confidence is anemic. Home prices continue to fall. The unemployment rate has risen sharply over the past few months. Food and energy prices are soaring.
In fact, gas prices have run up so much that Americans are even starting to give up on their love affair with the automobile: the Federal Highway Transportation reported yesterday that Americans drove 11 billion miles less this March than a year ago.
We may not find out for several months if the National Bureau of Economic Research, the official arbiter of recessions, decides to label this economic rough patch an actual recession. And the economy may not ultimately decline for two consecutive quarters, a shorthand definition.
Gross domestic product eked out a 0.6% gain in the first quarter, according to the first reading of that figure released last month. An update is due out Thursday and economists have a revised forecast of 0.9% growth.
So the most pertinent question now for consumers and investors should not be if we will enter a recession but how long will it last?
Buffett and Greenspan are divided on that question. Buffett, speaking in the German weekly Der Spiegel, said that the recession "will be deeper and longer than what many think" while Greenspan said to the FT that "the probability of a severe recession has come down markedly."
So how can two financial legends have diametrically opposed views on the economic outlook? Well, these are confusing economic times. Even the Federal Reserve seems to be uncertain of what's next.
On the one hand, the credit crunch that paralyzed financial institutions late last year and earlier this year seems to be ebbing.
Wall Street has been responding well to this development: the S&P 500 is up about 7% since mid-March, when investor fears were greatest. That's right around the time that JPMorgan Chase (JPM, Fortune 500) agreed to "rescue" Bear Stearns (BSC, Fortune 500).
And the Fed also seems to think the worst may be over on Wall Street. It has indicated that it probably won't cut further its benchmark federal funds rate, which currently sits at a relatively low 2%.
That should be good news for investors. In a note to clients Tuesday morning, Harris Private Bank chief investment officer Jack Ablin pointed out that since 1984, the S&P 500 has gained, on average, 21.5% in the 12 months following a final Fed rate cut in a cycle. "History suggests that the S&P 500 enjoys strong gains once the Fed puts their interest rate ax away," Ablin wrote.
A sustained upswing in stocks could go a long way toward lifting consumer sentiment, especially since many consumers have seen the value of another key asset, housing, fall in the past few months.
But the central bank is also growing increasingly worried about inflation in food and energy dragging down the economy. The Fed's series of rate cuts have weakened the dollar and some economists suggest that the greenback's sluggishness is the main culprit behind the spike in commodity prices.
Even one of the Fed's policymakers shares that view.
According to the minutes of the Fed's April policy meeting, released last week, Dallas Federal Reserve president Richard Fisher suggested he "was concerned that...lowering the funds rate had been pushing down...the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity."
The Fed also updated its economic forecasts for 2008 last week and the picture isn't pretty: the central bank reduced its growth target for the year while also boosting its forecast for both inflation and unemployment.
So which is it? Is the downturn almost over because banks are recovering their footing? Or is the recession only beginning thanks to runaway price increases at the supermarket and pump?
Personally, I think it's an encouraging sign that, despite many economic problems, consumer spending has held up relatively well during the past few months. In addition, the government reported today that new home sales, while still at a historically weak level, rose unexpectedly in April. Any signs of life in the moribund housing market has to be viewed as a positive
And as I've argued in several recent columns, the fact that many big corporations have ample amounts of cash that they are using on mergers as well as to buyback stock and increase dividends is a good thing. Unlike prior recessions, Corporate America may help to keep the economy afloat even if consumers pull back.
SOURCE:
CNNMoney.com
Indian companies borrow $31 b abroad last fiscal
Chennai, May 7 625 companies have borrowed nearly $31 billion (or about the equivalent of Rs 1,20,000 crore) through external commercial borrowings (ECBs) during the last fiscal (2007-08), according to information released by the Reserve Bank of India. In the previous fiscal (2006-07), 921 companies had borrowed $25 billion abroad.
Indian companies have steadily increased their borrowing overseas over the past four years. In the last fiscal, their external borrowings appear to have been a substantial chunk of their overall borrowings (about 40 per cent).
According to data provided by the RBI, the Indian industry (small, medium and large) accounted for about Rs 1,67,000 crore of borrowings from banks last fiscal.
There was a drop in the number of companies borrowing abroad in the middle of the last fiscal.
Bankers were just beginning to talk of declining credit offtake in the local market then. And given a situation that saw more dollar inflows (portfolio and foreign direct investment), it was thought that the RBI was trying to nudge companies to borrow locally. Companies have since resumed overseas borrowing, leading to a 25 per cent increase for the full year.
About 55 companies borrowed nearly $4.47 billion in March alone.
Reliance Petroleum, Adani Power and Essar Oil were among the biggest borrowers, each raising $500 million in that month.
SOURCE:
The Hindu Business Line
Cash crunch? 8 questions to ask yourself
Uncertainty is at a high. Estimates by different institutions of how much the Indian economy will grow in 2008-09 range from 7 per cent to 9.5 per cent. Other indicators, too, reflect this state of affairs.
If there is a single number that encapsulates, if unreasonably, the sentiments in the Indian economy, it is the BSE Sensex. From around 21,000 in mid-January, it crashed to 15,000-levels by the end of the month. This was not due to a slowing economy, but was a harbinger of things to come. Now, three months later, the Sensex is in the 15,000-16,500 band, down over 20 per cent.
| 8 important questions |
What kind of hike will I get this year? What should I do with my home loan? Should I dump my stock portfolio? Should I invest in equity shares now? Should I stay invested in MFs? |
This weak sentiment spilled over to real estate. A report by investment banker Merrill Lynch says that there were few takers at a government auction held in March to sell five parcels of land at Mumbai's Bandra Kurla Complex.
Merrill Lynch also estimates that sales volume of residential property in Delhi NCR fell by 50-70 per cent from last year, more than its earlier estimate of 40 per cent. There have been declines in other cities like Hyderabad, Chennai and Bangalore too.
Meanwhile, inflation has been climbing. For the week ended 29 March, it hit a three-year high of 7.41 per cent (before falling to 7.14 per cent the following week due to base effects and easier edible oil prices).
In response, the Reserve Bank of India [Get Quote] increased the cash reserve ratio by 50 basis points to suck out some liquidity from the system and check inflationary pressures.
All this is a far cry from the smooth upward path that India had been on since 2003-04, with growth ticking along at over 8 per cent. But now, the average Mr Jain is worried.
However, Rahul Bhargava, 48, an entrepreneur in Mumbai, has worked out his finances to deal with the situation. He says: "I have invested 90 per cent of my portfolio in equity." Doesn't the turmoil in the bourses affect him? "Since my investments are for the long term, I don't have to worry about these blips; in fact, they give me a chance to pick up value stocks," he says.
Bhargava took a loan to buy his house in August 2006. But he is cushioned from rising rates as he opted for a fixed rate. Moreover, both Rahul and his wife Poonam are 'conservative' spenders. The Bhargavas are sitting pretty.
But they are somewhat of a rarity. Here, we have dealt with eight questions that are bothering most people by addressing the underlying worries.
SOURCE:
Rediff.com
Powered by
Where to Invest Now
The views in the market are terribly varied. Everyone has their own take on where it is headed. We present you with three broad scenarios. Then we leave it up to you to decide which view you personally tilt towards.
The mind of the Pessimist
The slowdown of GDP growth gives the impression of a fatigue swimmer flailing for shore. Inflation keeps raising its ugly head. Elections are looming, bringing with it uncertainty which the market hates. And, globally, the threat of a
The mind of the Realist
No one knows where the market is headed: Up, down or range bound. On the one hand, we do have the
GDP growth has slowed down from 9% rates, but will continue to clock around 8% per annum. Not bad at all. But the battle with inflation continues and political uncertainty, thanks to the nuclear deal and elections, is here to stay.
Stocks are available at great bargains. And there will be more market slumps throwing up some good buys. But then who knows if the market will ever rally substantially to give a good return on investment? That's reality. No one knows what to expect anymore.
The mind of the Optimist
Living in an era of globalization, we are bound to get hit. But there is ample activity within the country to soften the blow. Domestic demand, increasing employment numbers, rising incomes, a growing middle class coupled with mounting customer credit and increased infrastructure spending will keep the economy on a roll. The demographics, in terms of a young population, are strong enough to ensure that consumption growth will be a key driver of the economy over the long run.
The capital market is sensitive to global dips and short term volatility is something we must get accustomed to. The factors driving the market are long-term and structural in nature. Within this structural run, there will always be shorter-term cycles (over the long term). And within different cycles, the sector leadership may differ. But the fundamentals of the economy remain strong and the prospects upbeat.
Valueresearchonline.com
GMR team takes charge of Istanbul airport services
Turkish authorities have handed over operations of the terminals for cargo, ground handling services and refuelling facilities at Istanbul’s secondary airport, the Sabiha Gokcen International Airport, to a new consortium formed by construction company Limak and GMR Infrastructure. The handover makes GMR the first Indian company to operate an airport abroad. The group has also begun work on expanding the project from its current capacity of 3 million passengers to 15 million.
Unlike the airports in Delhi and Hyderabad, revenues for the GMR consortium will accrue entirely from non-aeronautical sources. The aeronautical revenues, which are obtained by charging airlines for landing and parking, will accrue to the Turkish government.
The airport company will make its money from activities such as retail, cargo, selling aviation fuel and passenger service fees, which are not from the core aeronautical sources. International passengers flying from the Sabiha Gokcen airport pay e12 each, while domestic passengers pay e3 and the revenue goes to the airport operators. The new operating company has recently renegotiated contracts with all the airport concessionaires for a new deal with them.
The airport is competing with the much larger Attartuk airport, which is Istanbul’s primary airport. ``The Attaturk airport is saturated and aircraft are delayed because of congestion and high turnaround time,’’ says GMR group chairman, corporate and international business, GBS Raju. Sabiha Gokcen airport is also being marketed as an attractive cargo hub to freight forwarders and cargo airlines, an area almost entirely ignored by the larger airport, he said.
Duty-free shopping will account for almost 25% of the airport’s revenues, he said. An average passenger spends about e12 at Sabiha Gokcen, compared to e3.5 at Delhi’s Indira Gandhi airport. The airport revenues are likely to go up substantially when the new terminal is complete, since it will have much larger retail space, Mr Raju said. The upgrade will cost about e250 million (about Rs 1,575 crore) and will include a 60-room hotel.
It will be commissioned by 2009. Turkish PM Recep Tayyip Erdogan, on Saturday presided over the ground breaking ceremony for the upgrade. He also urged the consortium to complete the project ahead of its scheduled time. The Turkish government has embarked on an aviation policy to encourage competition to the state carrier Turkish Airlines in an effort to bring down air-fares and improve air-services through the country.
GMR, which won the bid after intense rounds of bidding in July last year, is part of a three-member consortium that includes Turkish construction company Limak and Malaysia Airports Holding. The consortium had to slug it out with four other bidders including Germany’s Fraport, Venice Airport from Italy, TAV of Turkey and Chicago Airport. The winning bid was for e1.93billion, which will be paid over 20 years. The GMR group has already tied up debt for the project from ABN-Amro and Turkish banks.
SOURCE:
Economictimes.com
DoT skews 3G licence rules to biggies' favour
It could be curtains for the clutch of new telecom Companies planning to bid for 3G licences. The draft auction plan, prepared by the department of telecommunications for each circle, puts the new and smaller players at a disadvantage.
The department will auction five licences for each circles. Companies planning to bid for the 3G licences include NTT
DoCoMo, AT&T and Deutsche Telecom. Big domestic real estate Companies like Unitech and Videocon have also submitted bids.
The draft auction plan states that if there is a tie between bidders, the one with a higher subscriber base will go through to the next round at the expense of the one with a lower base, which will be put on the waitlist.
If the subscriber bases of two bidders are the same, then the one with the higher adjusted gross revenue in the quarter prior to the auction would continue, while the other bidder would move to the waitlist.
Similarly, the DoT plan says if there is a tie between bidders where one of them happens to be an existing service provider in the concerned service area, the company should be permitted to participate in the next round as the existing one can roll out the network faster.
This means new telecom players who do not have a licence to operate services would be at a disadvantage vis-à-vis the incumbents in the bidding. Among the existing players, the ones with a higher subscriber base and network spread would have an advantage over smaller players.
The move is sure to be resented by the new and smaller players because in the light of a 2G-spectrum crunch, these players have banked on the 3G services to enter the field.
As is known, initially, only 25 Mhz spectrum would be available for bidding, with five players getting 5 Mhz each.
SOURCE:
The Financial Express
Story of the assumed Great Depression
In for a penny, in for a pound. And several Big Time pounds may be in for being not just wrong, but massively wrong. Over the last several months, there has been a constant drumbeat announcing the impending doom. It all started out quite innocently. The US current account was under stress, the dollar too high. Then came the sub-prime crisis. From an also ran to the housing crisis, it became the main event. Estimates of banking losses of around $400 billion are now widely accepted. This event started the forecasts of the great US depression. Everybody chimed in and wanted to be the first to claim credit for the forecast, heck reality, of the housing sub-prime inspired US depression. Forecast a no-brainer recession, indeed Depression. The perfect buy, rather sell!
The institutions and individuals who chimed in with their few billions worth would convince anybody. George Soros, Mark Mobius, Jim Faber, the IMF, Goldman Sachs, JP Morgan, Morgan Stanley, Alan Greenspan, all said that a recession was a near reality and a Depression a distinct possibility. If not a Depression, then a prolonged recession; if not a prolonged recession, then sub-par low levels (around 1%) of GDP growth as far as the forecast could be made. These names are legendary and I apologise for missing other BIG names, but the fact is that the names of super distinguished market players forecasting a radical change in US growth patterns would fill this entire page, let alone my column. Merrill Lynch went so far as to write, just a few weeks ago, that damn the data we are already in a recession. A consistent and near lonely exception to this doom today, doomer tomorrow assessments was Macroeconomic Advisers, a firm led by Dr Laurence Meyer, formerly of the US Fed. This firm has consistently maintained that not only will the US avoid a recession, but that the recovery will also be sharp. There are a few other lonely outfits (Oxus!) but really the cupboard is near empty.
Associated with calls for a US depression was the conclusion that those who had argued about globalisation and global decoupling were wild-eyed optimists or ones at some distance from reality. The world really had not changed, and if the US went into a deep slump, everybody was threatened Big Time. But what happened, or has happened to date? The US has grown for two successive quarters at the snail pace (formerly Japanese and European pace) of 0.6 per cent per annum. Japanese industrial production growth has accelerated; this according to the new 2004 base. European growth has continued on its 2% plus pace, though the ECB's obstinate adherence to an outdated monetarist model may force Europe to face a cost of lower than potential growth, and with no offsetting gain on the inflation front.
China's GDP growth has declined marginally from above 11 per cent to "only" 10.5 per cent. Korean growth continued, as has growth in several parts of Latin America and Africa. Indian growth has been hurt much more by a highly contractionary exchange rate and interest rate policy than by the US slowdown. The current 8.3 per cent growth is well below last year's 9 + per cent growth, and considerably below its realisable potential of 10 per cent GDP growth.
If more than a marginal slowdown has not occurred in non-US world growth, then the important question is "Why Not?" And that question will be reinforced if the US avoids a recession, as seems likely. There are two independent explanations for the possibility that the experts have got the future of the US economy horribly wrong. The first explanation is that the US-centric gloomsayers have not appreciated how much the world has changed -- just as their Indian counterparts who believe in karma so how can the world change? Today, India and China alone account for as much world growth as the US economy itself. This simple statistic explains the "stabilisation" possibilities in the modern world, and why the world economy is likely to prevent the US economy from entering into a recession. Just look at US export growth. The Great Depression Redux -- forget it.
There have been other pointers towards a no-US recession. None of the traditional leading indicators are "working" according to history; retail sales, payroll employment, unemployment, industrial production, purchasing managers indices are well above levels associated with entry into a recession. The forecasters may have concentrated on just one variable, housing, which has been the worst since the Depression. Extrapolation from this one, albeit important, statistic may turn out to be fatal (for the forecast).
But why is the world economy so resilient now and different than earlier points in history? This will likely be a popular research subject. But there are pointers, explanations. A strong contender would be the large presence of the newly emerged middle class in the developing world, and especially because of their size, the middle class populations of India and China. The middle class is many virtuous cycles rolled into one middle -- high and increasing consumption of infrastructure and durables, high productivity growth, high incomes and even higher savings and investments. It is the actions of the middle class that provide stabilisation in the world economy, and its growth.
The middle class is a long-run factor. The world financial markets were close to breakdown just a month or so ago. While the rest of the world's central banks missed the big picture, not so the US Fed led by Prof. Ben Bernanke. His timely interventions, and a worldview of what works and what does not, has most likely helped avert a global financial meltdown; if such a meltdown had occurred, it would have affected all of us quite severely. If Bernanke is successful in his policies (and my bet is yes) then a historical place for him next to the world's best ever central banker, Paul Volcker, is assured.
SOURCE:
Rediff.com
Inflation at 7.57%; likely to go up to 8%: Experts
Data released by the government on Friday showed the wholesale price index rose 7.57 percent in the 12 months to April 19, above the previous week's 7.33 percent and outstripping market expectations of an annual rise of 7.38 percent.
The government and central bank have rolled out a string of policy changes in recent weeks as inflation has soared.
In the latest move, the Reserve Bank of India on Tuesday raised the cash reserve ratio (CRR) by 25 basis points to 8.25 percent, its highest level in seven years, and said it was ready to act again if price pressures continued to build.
Wholesale inflation now stands at its highest since November 13, 2004, when it was 7.68 percent. The latest rise was largely driven by higher prices of foods, metal products, and industrial fuels.
Economists expect the central bank to focus on draining inflation-fuelling cash from the system, while the government moves to fix supply-side problems.
"Across the board price pressures are there. We are yet to see the impact of monetary and fiscal measures," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "These pressures would continue. The RBI will continue to focus on liquidity management as a monetary policy approach."
Speaking to reporters in the southern city of Bangalore, Finance Minister Palaniappan Chidambaram said inflation would be contained but people would have to be patient.
The markets remained cool to the data with the yield on the 10-year federal bond steady at 7.89 percent, while the rupee was at 40.64/65 per dollar, slightly weaker than 40.63/64 beforehand.
The Congress Party-led coalition, under pressure from its allies, also unveiled new measures on Tuesday to tame inflation and guard food supplies, slapping export taxes on basmati rice and some steel products. Policy planners the world over are grappling with soaring food and raw material prices.
But India, which has about 260 million poor, is especially sensitive to rising prices as food accounts for a much higher proportion of people's expenditure than in developed economies.
Fighting inflation has become a top priority for the government as it heads towards a general election due by May 2009 and a series of key state polls this year.
COMMENTARY
Shubhada Rao, Chief Economist, Yes Bank, Mumbai: "Across the board, price pressures are there. We are yet to see the impact of monetary and fiscal measures. Year ahead, these pressures would continue and 5.5 percent will be a challenge. The RBI will continue to focus on liquidity management as a monetary policy approach."
Economictimes.com
Reliance Petro may recover costs by ’10
Reliance Petroleum Limited (RPL), a subsidiary of Reliance Industries Limited (RIL), is expected to recover its costs in the first 2.5 years of its operations. The Jamnagar refinery of RPL, with a refining capacity of 580,000 barrels per day, is expected to be on stream in the third quarter of this fiscal.
According to sources close to the company, RIL estimates a net income of Rs 8,190 crore in the first full year of operations in FY10. The refinery has a capital cost of Rs 27,000 crore. The refinery, promoted as an export-oriented unit (EOU), is likely to be commissioned by September '08, after which RPL would benefit from the shortage in global refining capacity.
According to a Mumbai-based analyst, RPL's superior product mix, coupled with advanced secondary processing, would enhance its GRMs, above industry benchmarks. These factors, along with the 100% tax-break on export earnings for the first five years of commissioning, would support healthy financials.
The proposed refinery is expected to be superior to both regional refineries and RIL's existing refinery with regard to its superior complexity and improved yield of value added products, added RIL officials. They also said that the refinery would be able to supply ultra low sulphur gasoline and diesel to meet tighter fuel emission norms and flexibility to handle heavier crude, implying savings on crude cost by taking advantage of the wider differential in heavy light crude.
In the past two decades, the refining capacity remains under investment but demand for petroleum products has increased. Demand from countries like China, India, other emerging nations and the US has led to scarcity of refining capacities across the globe. This robustness in market expansion has resulted in average capacity utilization of 88.9% in the past year, as against 84.7% over the past five years.
SOURCE:
The Financial Express