Growth of Urban Poverty

With India achieving higher growth trajectory and acquiring the status of most promising emerging economy, have we ever thought of status of poor people in India whose conditions are deteriorating day by day? Well here I would like to discuss about that even after 60 years of independence the subject of Indian poverty still remains a cause of concern.
It’s a well known fact that even urban poverty is prevalent due to impoverishment of rural peasantry which pushes them to migrate from villages in search of subsistence living in towns and cities.

Why Indian people are poor?
Well we have answered this question several time in exams, but answering it again will take us to jovial memories of our school times!
Major cause of poverty in India is lack of productive assets and financial resources for both communities and individuals. High levels of illiteracy, inadequate health care and extremely limited access to social services are common among poor rural people. Microenterprise development, which could generate income and enable them to improve their living conditions, has only recently become a focus of the government.

Poverty map of India
Poverty is most prevalent in parts of Rajasthan, Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Orissa and West Bengal. Large population of rural India resides in India’s semi arid tropical region. In these areas shortages of water and recurrent droughts inhibit the transition in agriculture which green revolution has been able to achieve elsewhere. There is also high incidence of poverty in flood prone areas such as those extending from eastern utter Pradesh to the Assam plains and especially in northern Bihar. Poverty affects the lives of tribal people in forest areas, where loss of resources has made them even poorer. In coastal fishing communities’ people’s living conditions are deteriorating because of environmental degradation, stock depletion and vulnerability to natural disasters.
Statistics reveal that about 2/3 of India’s population live in rural areas and almost 170 million of them are poor. Poverty in India can be defined as a situation where certain sections of people are unable to fulfill their basic needs.
The economics of urban poverty
There is huge momentum in growth of big cities than smaller towns. India’s mega cities constitute of highest percentage of slum dwellers in the country. As India is transforming into more urbanized economy, more it is getting prone to urban poverty.
The reasons behind this urban poverty can be stated as below:
· Improper training
· Growing population
· Slower job growth
· Failure of PDS system
The urban poor population of India is estimated to be nearly 8 crores, while slum population 4 crores.

The complicated scenario of poverty
Urban poverty is diagnosed by following symptoms:
· Scanty household income: resulting in insufficient consumption of basic necessities, sometimes exacerbated by uneven distribution of consumption within household, between men and women and between adult men and children.
· Partial asset base : for individuals households or communities
· Inadequate provision for public infrastructure and services
· Exploitation and discrimination

Conundrum of urban poverty
Urban poverty was by far detectable due to lack of land tenure, access to affordable shelter and basic amenities, particularly health, education and social security. The bulk of urban poor are residing in extremely deprived conditions with inadequate physical amenities like low cost water supply, sanitation, sewerage, drainage, community centers and social services relating to health care, Pre School, non-formal education.
Workers who are engaged in informal sector form the majority of urban poor. Workers in this sector earn low wages or if they are self employed their income is poor. Large number of people among them consists of low skilled rural migrants or migrants from small towns. There is hardly any working regulation for these people and they earn wages which are less than specified minimum wages.
Informal sector comprises people like vegetable vendors, rickshaw pullers, maids who come to work in our homes, people employed on streets and many more. When these people come to the city, due to lack of appropriate skills they get into the informal sector. The only difference which they get in migrating from village to city is that now they come under urban poverty level rather than rural poverty.
Many people in these urban areas are homeless, without access to clean water and hygiene systems of waste disposal and they live in polluted degraded environment.

Poverty alleviation programmes
Any work on poverty of India is incomplete without mentioning of poverty alleviation programmes. So to provide all you readers full information on urban poverty lets have look at some of these poverty alleviation programmes.
Urban poverty alleviation is one of the most challenging tasks for government which calls from some imaginative new approaches in this direction. The basic need of the hour is to provide these urban poor with assistance in setting up of microenterprises there by providing them avenues for enhancement in their incomes, so that they get access to physical amenities like clean drinking water, drainage , sanitation , community centers , health care , nutrition , preschool and formal education.
The ministry of Tamil Nadu urban development is monitoring the implementation of 3 significant programmes relating to urban poverty alleviation.
· The Nehru Rozgar Yojna
· The urban basic services for the poor
· The environmental improvement of urban slums

This is what the government is doing but we educated people also have some responsibility in alleviation of such cause:
Here I would like to share with you something: Here I quote one e.g. which is taken from my daily routine: most of the times in morning I commute to office by bus and in bus daily am accompanied by small kids of age about say 6- 10 years . You must be wondering that they might be on their way to school but that’s the plight of our country these kids daily commute by bus to supply or I guess sell magazines like India today , stardust etc etc… to retailers or they sell themselves on roadsides. You must have also seen children selling things on red lights. The point here I want to highlight is education is right of these kids, but because of their poor living conditions these kids are forced into such work.
And I know there are thousands of such examples which we all witness daily. But something needs to be done. Government is doing what it can. But we earning people also have some duties towards our society. M not saying to donate thousands of rupees in some charity or stuff. But we all educated people at least can fund education of any one or 2 children or we themselves can try to teach these kids around us in our free time. I think effort made by times of India to teach children is great work by them in this direction. This will not alleviate poverty but at least it will help in reducing it in future years to come. Iam also a member of charitable institution in which iam supporting education of women. Help provided by us in any form will be fruitful for all these poor people.
Well I think all we need to think on this and make our decisions. I hope by readings this you will at least give it a thought.

Happy –go –lucky times for oil companies

Kabhi khushi, kabhi gam….do not worry I am not changing my blog name- well this quote is for Indian oil companies who faced lot of gam and now its time for them to have some khushi.

In the present era new synonyms that are continuing to be associated with high oil prices are, global turmoil, high inflation, crashing stock markets, rising food prices, weakening of dollar and many more. Few days back prices of oil have reported a hike of $ 139 a barrel and according to estimations can reach $ 150 by July because of ever increasing demand and political tautness.
However now we witness a change in the trend- in September 2008 oil prices are near $ 109 a barrel due to falling demand from major oil consuming countries against hurricane threats to the US oil sector. This fall in oil prices has shown a sign of relief for India Inc, in times when India is suffering from lot of macroeconomic instability.

Let me here try to explain this whole phenomenon of rise in crude oil prices:
Crude oil is regarded as an element that is required for all commercial and residential purposes. In order to ensure that we have enough crude oil for our needs certain amount of money is paid to the countries from which oil is imported. These companies have a set crude oil price. The unit in which crude prices are measured is based on barrel production amount. The companies from which oil is imported can only drill certain amount of oil from drilling fields, due to this the most famous law of demand comes in to play i.e. lower the production , higher will be the price of oil. Oil prices are defined in dollars for most of the oil exporters. There is a vicious cycle of higher oil prices which leads to higher trade deficits, which in turn leads to weakening of dollar and again leading to higher oil prices. In order to explain this phenomenon lets start with rising oil prices. Suppose in the initial years rise in price of oil can be attributed to the following factors:
· Increase in demand for oil from emerging economies like China and India.
· Supply breakdown from Iraq, Nigeria, Venezuela, Russia and US Gulf coast.
· A terrorism / war premium
· Buying by traders speculating that oil prices would rise.
Now since US imports oil, now with the advent of rise in oil prices, trade deficit of US – the difference between the cost of imports and export, will increase. This is where the vicious cycle comes in; every dollar increase in the price of a barrel of imported oil increases the size of the U.S trade deficit. This is due to the fact that oil is priced in dollars in global market. Now this increased trade deficit will put pressure on the dollar which will make it weaker further, this in turn makes OPEC countries to raise dollar – denominated price of barrel of oil to make up for the dollars fall and so on.
So this is the story of rising oil prices. Now since oil is pegged in dollars, India was badly hit by rise in its prices.

Now due to slowing of demand leading to fall in prices of oil has started showing some positive sentiments on Indian stock exchange. Another relief comes in for central banks as easing of pressures on hike of interest rates. According to finance ministry we may soon witness single digit inflation numbers, which is the essential need of the hour.
Moreover if oil comes below $100 a barrel on a consistent basis, the fisc should easily self-correct by over 1% of GDP. With macro indicators improving, the next challenge will be to ensure that growth does not fall below 7.5-8%.

New sign on indian currency notes

Well after giving you such big write-ups which i know is hard to read in now busy days , i thought why should not i share this interesting piece of news with you !

From September 5th onwards our currency notes will have new sign of Dr Duvvuri Subbarao. He will assume charge as governer of RBI when office holder Yaga Venugopal Reddy's 5 year tenure ends.

What excited me to write about this news was his qualifications ( you must have guessed it by blog name) .

• IAS topper of 1972 batch
• alumini of IIT Kanpur ( physics graduate)
• completed MS in economics from Ohio state university
• completed phd. economics from Andhra university

Another attraction in his biodata is that he has worked with world bank as lead economist for 5 years and has worked in our finance ministry in the intial phases of reforms of 1990's under manmohan singh as finance minister.

But from here work for our new governer becomes tough and challenging in scenario of double digit inflation , slowdown of growth , forthcoming election year and pending reforms in finacial sector.

Lets hope he meets all these challanges . All the best wishes and till then we wait to see new signature on currency notes!

Typhoon of Rising Food prices

Present era of 2008 is stormed by rising food prices world wide. The aggregation of rising energy prices , use of food crops for biofuels and torpid food aid have threaten food security of many developing countries.

Globally agricultural commodity prices were significant during 2004-06: corn prices rose 54 %, wheat 34%, soybean oil 71% and sugar 75%.But this trend hastened in 2007, due to continued demand for biofuels and drought in major producing countries. Wheat prices have risen more than 35 percent since the 2006 harvest, while corn prices have increased nearly 28 percent. The price of soybean oil has been particularly volatile, due to high demand growth in China, the U.S., and the European Union (EU), as well as lower global stocks.
Estimated results of food and agriculture organization of United Nations shows that the high food prices of 2006 increased the food import bill of developing countries by 10 percent over 2005 levels. For 2007, the food import bill for these countries increased at a much higher rate, an estimated 25 percent.
Let’s find out in detail what the causes of such a scenario……are……….
As in case for every product demand and supply theories apply, food prices are no exceptions. However no one particular factor can be blamed for rise in prices. Contributions of some unfortunate conjunction of activities over past years have led to mounting prices.
· Meat mania
With the increasing wealth of emerging economies like china and India, there is escalating demand for meat in these countries , which in turn intensifying the demand for cereals to feed the animals. The demand for grains and chapattis is always associated with population growth, which has been remaining flat during the past years, meaning slow growth in population. However demand for meat linked to economic growth. Generation of higher incomes in countries like china and India have made people enough rich to afford meat and other food products. For instance if we look at the history, during 1985 average Chinese consumer ate 20 kg of meat a year ; now he eat more than 50 kg.

It takes 7 to 8.5 pounds of grain to produce a pound of beef and 5 to 7 pounds of grain to produce a pound of pork.

· Ethanol for American cars
Another and one of the most dominant reasons behind mounting of food prices is surging demand for ethanol as fuel for American cars. If we look at the figures it can be figured out that in 2000 around 15m tones of American maize crop was into ethanol ; in the current year it is likely to be around 85 m tones. America is one of the largest maize exporters and now it tends to use more of its maize crop for ethanol rather to fetch trade surplus in its balance of payments by selling it abroad. Ethanol has not only contributed to the rise in prices of maize crops but also accounts for rise in prices of other food crops. Partly this is because maize is fed to animals, which have now become more expensive to rear. Partly it can be due American farmers, who are anxious to take advantage of biofuel boom, went out all to produce maize this year, planting it on lands which have been used previously for wheat and soybean.

In the current year overall downfall in stockpiles of all cereals will be about 53m tones The increase in the amount of American maize going just to ethanol is about 30m tonnes. In other words, the demands of America's ethanol programme alone account for over half the world's unmet need for cereals. Without that programme, food prices would not be rising anything like as quickly as they have been. According to the World Bank, the grain needed to fill up an SUV would feed a person for a year.

· Unfavouable weather conditions
Global climate change brought about by the rising temperature of the Earth is the fourth major cause. Altered weather patterns have been accompanied by floods, tropical storms and droughts all over the globe. Australia, normally a big exporter of wheat and rice, is in the grip of a multiyear drought and has seen its grain production plunge.
· Export restrictions
Some major countries have introduced or have increased export taxes or bans and other restrictions on domestic products to keep down domestic prices. This in turn will lead to adding surmounting pressure on prices. Many countries have imposed food –price controls of some sort. Argentina, morocco, Egypt, Mexico and China have put restrains of domestic prices. A dozen countries include India, Vietnam, Serbia and Ukraine has imposed export taxes or limited exports. Governments of all these countries are trying to safeguard their people from rising prices of food. From such policies some will benefit while others have to bear the repercussions of it.
Obviously, farmers benefit—if governments allow them to keep the gains. In America, the world's biggest agricultural exporter, net farm income this year will be $87 billion, 50% more than the average of the past ten years.
Other recipeient of such policy benefits are in poor countries. Food exporters like india , south africa will gain from increased exprot earnings. Countries such as Malawi and Zimbabwe, which used to export food but no longer do so, also stand to gain if they can boost their harvests. Given that commodity prices have been falling for so long in real terms, this would be an enormous relief to places that have suffered from a relentless decline in their terms of trade.
In emerging economies lot of income inequality prevails between cities and countryside over the past few years. As now many countries have gone through transition phase of shifting from agraian based economy to more industrial and services oriented , urban wages have score off the rural ones. The Asian Development Bank reckons that China's Gini coefficient(measure of inequality) rose from 0.41 in 1993 to 0.47 in 2004. If farm incomes in poor countries are pushed up by higher food prices that would extenuate the gap between incomes of cities and countryside. But will this happen?
Lets look at the answer to it…………………….
According to the World Bank report, 3 billion people live in rural areas in developing countries, of whom 2.5 billion are involved in farming. That 3 billion includes three-quarters of the world's poorest people. So on the fundamental basis the poor overall should benefit from higher farm incomes. In practice many will not. There are large numbers of people who lose more from higher food bills than they gain from higher farm incomes. Exactly how many varies widely from place to place.
From the above context the major losers from high food prices are big importers.this will include Japan , Mexico and Saudi Arabia. A more deeper look shows that these countries might can afford but worry is about countries like Bangladesh and Nepal and Africa who will face higher import bills. Developing countries as a whole will spend over $50 billion importing cereals this year, 10% more than last.

The travail of agflation
Food prices are tipped to rise 50% in another 5 years. The delinquent behind this is agflation.
The up surging prices of bushels and barrels are interrelated. Like the price of agricultural commodities the prices of oil and metals have increased substantially in the past few years. Food prices world over are rising so quickly that a new term has been invented to describe the inflating prices of breakfast staples and dinner favourities i.e. agflation.
As we have already witnessed the causes of this global agflation above, apart from this agflation is also causing headaches for central banks. In most countries when central bank takes appropriate steps of monetary policy to control inflation they exclude food and energy prices. Both are sensitive and erratic to supply shocks. As central banks try to control demand they tend not to react to price fluctuations caused by see-sawing supply.
The major sufferers of agflation are the developing countries as residents of these countries devote large percentage of their personnel expenditures on food. This is reflected in the heavy weighting given to food in the commodity baskets used to measure inflation in developing countries. For instance in America food carries just 14% weight in consumer price index ( measure of inflation) ,china accounts for 33% , south africa 25% , phillipines 50% and india it is 46%. Insuch countries rising prices of food which gives more weight to food in their CPI will lead to high inflation levels all over. In addition, if food prices stay high, and if consumers spend less on other goods, other parts of the economy might suffer. Good reason, therefore, for central bankers and others to hope that the pain of agflation is not shared too widely.

The world food crisis and financial markets
The primary concern underlying current food crisis is not physical lack of food but rather its unaffordability for growing number of people due to rapidly mounting prices.
Among the immediate factors causing the rapid worsening of the food crisis, a major role is played by the explosion of speculative investment in basic commodities such as oil and grain, itself bound up with the difficulties facing US and world financial markets and the decline in the US dollar. Thriving speculation by hedge funds and other big market players has increased costs, encouraging private firms to further bid up prices in a competitive drive to amass as much profit as possible.
The basic reason behind upsurge in prices of agricultural commodities is that big investors have pulled out of tradional investments and credit markets due to bursting of US housing and credit crisis. Speculative capital has shifted investments in more profitable avenues.
The one such aveneue of profitable investments is commodity futures. This involves finacial bets that prices of basic goods such as oil , grains and metals will continue to rise. Since these futures are used as benchmarks for actual trading in the physical commodities, their heady rise has helped sharply pull up market prices for the commodities themselves.
Is this speculation or investment..?
In technical terms speculation is referred to as purchase of something in the hope of gaining profits from change in its price. In this context2 forms of speculation are visible.
1. The purchase / hoarding of commodities in expectation that their price will continue to rise.
2. Purchase of agricultural commodities future and options – essentially, bets that prices will either rise or fall – purely as investment strategy (rather than as a way to manage risk related to the sale and purchase of commodities.
At the end of March 2008, according to Citigroup, investors worldwide held an estimated $400 billion in commodity futures contracts—about $70 billion more than at the beginning of the year, and twice as much as in late 2005. These investors include commodity index funds, commodity trading advisors, hedge funds, and exchange-traded funds. Many of them are trying to assemble commodity portfolios that replicate the performance of major commodity-price indexes, such as the Standard & Poor's/Goldman Sachs Commodity Index and the Dow Jones/AIG Index. They are doing so for two reasons. One is that commodity investments generally increase in value when other classes of assets decline. The second is that many investors believe that the commodity markets are in the midst of a "super cycle"—a long-term trend that will drive prices higher for years to come.
While we have seen number of reasons for rising food prices, there is growing concern that supply and demand do not explain the accurately the speed and severity of price increases. Blame of rising food prices is being put on flood of speculative capital into the U.S commodity future markets , which attract lot of capital from worldwide and set global benchmark for prices.
According to Bloomberg, quoting the Forward Markets Commission, volumes on the National Commodity Exchange, which trades futures contracts in 48 commodities, reached $226 billion in the year ended March 31, 2006. That was more than the $184 billion of shares traded on the Bombay Stock Exchange in the same period. Forward and futures trading had been promoted on the ground that it helped traders deal with market uncertainty by hedging their transactions, and stabilised prices for the final producers. However, the surge in futures trading could not be explained by pure hedging requirements, and obviously reflects an increase in speculative activity.

Indian scenario
Rising inflation… reaching to a level of 12.8 % is a burning issue.
The issue has cause serious worry for policy makers political circles as well as consumers who are facing shrinking purchasing power. The whole sale price index have reached to a 13 year high of 11% on june 7, 2008. The WPI index was close to 4% at the end of 2007 and it has taken just 6 months to reach current level. The volatility in the economy has put the political position of the government into risk , forcing it to take measures like complete elimination or sharp reduction in import duties and ban or increase in export duties of few commodities like rice, steel and cement. However, despite these measures, inflation is well above the comfort zone of both the RBI and the finance ministry. The high inflation rate has seen the government coming under pressure, with both its supporters and the opposition encircling it over the price rise issue. Meanwhile, there is an increasing hubbub from some to impose a ban on futures trading in essential commodities. The case for a ban is mainly on the ground that speculation in futures trading is largely responsible for the price rise.
The most obvious question that comes before us is whether futures trade is actually contributing to a rise in prices or not?
The futures market performs twin functions of efficient price discovery and provides with management to various constituents. The exchange markets have evolved over the years to provide efficient platform for the producers and consumers to extenuate their underlying price risk associated with particular commodity. Price discovery which is a key for any market would become more efficient if number of participants are large and comprises both of hedgers and non-commercial users. As typically the hedgers (producers & consumers) would prefer to take a risk neutral stance while trading on the exchange and would always want to hedge their price risk using the futures markets. However, if both parties remain risk averse, in any economic activity, it becomes very important for somebody to take the economic risk required so that a particular activity is carried. The activity so carried out may not be tangible in the traditional sense of how Keynes would like to define the GDP, but this is more service oriented and the agent willing to undertake this activity is defined as "speculator. Looking at the overall economic situation in India, these economic agents are bashed for carrying out their work. Unfortunately their role in future markets is not well judged. The current rise in prices should be analysed from a both national and international perspective. Internationally, the world has seen a sharp rise in the prices of all commodities, including food items, particularly cereals. Almost each and every economy is facing the problem of price rise and inflation, and India is no exception to this trend. At the national level, prices have also increased more because of supply side problems. These basically relate to years of neglect of the agricultural sector, resulting in general stagnation of agricultural production, productivity and the non-creation of buffer stocks to meet exigencies.
Indian agriculture is characterized by problems of low level public investment particularly in irrigation facilities , low yeild per unit area exhaustion of the yield potential of new high yielding varieties of wheat and rice, unbalanced fertiliser use, low seeds replacement rate, unavailability of extension services and an inadequate incentive system. It’s a fact that reforms need to be carried to address supply side constraints and improve food security. Making futures trading the scapegoat and imposing a ban on it is not realistic on part of the government and will give negative signals to investors. Such a ban will hamper the growth of the market system in India, which already lags other developed economies in this regard. The market is in a nascent stage and must be nurtured for it to yield its full potential benefits. A ban will do just the opposite, Developing a well-regulated market is the only way forward to integrate better with global market, as each economy depends on international market for trade. Even a country like China, with its controlled economy, has a rampant futures market.
Evidence shows that: prices of rice, wheat and tur have increased despite of ban .In fact, rice prices had increased by over 20 per cent since the ban. Against this, the prices of sugar and potato have remained constantly stable since last year even as they continue to be traded on the futures market. A UNCTAD study conducted in five leading exchanges of the developing world, including India and China, suggests that the impact of these exchanges have remained positive and they can contribute in the development of physical infrastructure, imparting transparency and empowering farmers while maintaining quality standards. In an another study by NCDEX, a leading Indian commodity exchange, it has been shown that prices of essential commodities traded in the futures market have increased at a slower pace than of those that remained outside the ambit of futures trading.
Thus its seems to conclude that india is facing a trend of imported inflation i.e inflation due to global rise in food prices.
While it is difficult to ascertain the effect that the Indian economy may face in the future as result of a closer linkage with the global economy, the challenge is to be better prepared to tackle our fundamental weakness, which is the ailing agricultural sector. The banning of futures trade is not a solution for rising prices; instead we must approach issues objectively.
While the commodity markets in the West and in China have achieved the status of price-setters, the Indian commodity markets struggle to stand on their own

Future of global food crisis
Having a look at how global supply and demand changed between 2005 & 2007, it may appear to ones mind that nothing much spectacular has happened that could spark off these price increases than actually observed. Yet, there has effectively been a gap between growth rates of demand and supply wide enough to cause prices to rise significantly on markets where neither supply nor demand (can) respond flexibly and swiftly to price changes – at least not in the short term.
According to the experts sharply rising costs for food staples and fuel are leading to deadly clashes in impoverished countries and likely will continue for some time. According to a world bank report Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline, but they are likely to remain well above the 2004 levels through 2015 for most food crops.
Prices of foods will continue to rise until there is a new balance between food production, bio fuel production and a new price balance.
World agriculture is facing new challenges that, along with existing forces, pose risks for poor people’s livelihoods and food security. This new situation calls for policy actions in three areas:
1. comprehensive social protection and food and nutrition initia­tives to meet the short- and medium-term needs of the poor;
2. investment in agriculture, particularly in agricultural sci­ence and technology and in market access, at a national and global scale to address the long-term problem of boosting supply; and
3. trade policy reforms, in which developed countries would revise their biofuel and agricultural trade policies and devel­oping countries would stop the new trade-distorting policies with which they are hurting each other.
In the face of rising food prices, both developing and developed countries have a role to play in creating a world where all people have enough food for a healthy and productive life.

Decelerating Global Economy

Nowadays alphabet R has become centre of attention all over the world. The word causing tension in, minds of all policy makers is recession. The global economy is on a stringy spot, stuck between aggressive slowing demand in advanced economies and surging inflationary trends in emerging and developing economies.
The growth slowdown is on a run
The global growth deceleration which started last summer has taken a flight. Global growth decelerated to 4½ percent in the first quarter of 2008 (measured over four quarters earlier), down from 5 percent in the third quarter of 2007, with activity slowing in both advanced and emerging economies. With weakened industrial production, pulling back of business and consumer sentiments in advanced economies and sluggish business activities in emerging economies indicate further slowdown in second half of 2008.
Accordingly, global growth is projected to moderate from 5 percent in 2007 to 4.1 percent in 2008 and 3.9 percent in 2009.
Indicators show that growth figures for United States in 2008 would moderate to 1.3%. The economy is estimated to contract moderately during second half of 2008 as consumption would deteriorate by rising oil and food prices and tight monetary policy, before it start gradually to recover in 2009. Growth projections for other advanced economies such as Euro and Japan will also put up a show of slowdown in second half of 2008.
Growth in developing and emerging economies is also on verge of slowdown. Growth in these economies is ease to around 7% in 2008-09, from 8% in 2007. In China, growth is now projected to moderate from near 12 percent in 2007 to around 10 percent in 2008-09.

Global economic outlook
Global economy is in the grip of slowdown. Weakening of economic growth around the world reflects the fallout from sub prime crisis and financial market turmoil. A recession has been strongly approaching United States, now question arises about its severity and length. With this also other developed countries is expected to go slow. And this slowdown is occurring in period with ample of inflationary pressure, complicating the job of macroeconomic policy makers.
US accounts for quarter of global economy and has important trade and financial linkages around with almost every economy around the globe. Therefore any kind of slowdown of US economy leads to chain effect in other economies.
The proximate cause of the US recession is its housing sector. Construction of new houses has fallen sharply, reflecting an unwinding of an oversupply of houses. Exacerbating the construction downturn are rising mortgage default rates -- particularly the sub-prime ones -- and falling house prices. Flowing on from all this is an intensifying credit squeeze -- put simply, banks and lending institutions have become extremely cautious, denying loans to some borrowers who have projects that would have been funded in other, less turbulent, times. The housing and financial market developments are mutually reinforcing. As a result, the IMF's baseline scenario has the US economy dipping into a mild recession in 2008.
Sustained growth in emrging economies
However projections made by IMF do not predict a drastic decline in the emerging economies. This is broadly consistent with” decoupling theory” which holds that major emerging economies – namely India and china and smaller ones such as NIE’s or ASEAN 5 – have matured enough so that US recession might not effect them as much as in the past.
For e.g. turning our focus to some of these emerging economies, we find that Chinese economy continues to grow forward. However growth will slowdown from 11.5% to 10% this year and next. On the policy front, the key action that should be taken—but that the Chinese authorities have so far refused—is a significant step appreciation of the renminbi against the dollar and in real effective terms, combined with policies to stimulate domestic demand.
In the rest of emerging Asia, growth will likely moderate somewhat in 2008 and 2009 but stay above 6 percent, with India continuing to grow at nearly 8 percent.
In Latin America, Mexico will suffer spillover effects from the slowing US economy, and growth this year is likely to fall to about 2 1/2 percent before recovering modestly in 2009. In contrast, Brazil should be able to sustain growth of nearly 5 percent, despite the strong appreciation of the real against the dollar. Growth in Argentina and Venezuela is expected to slow from the high rates of recent years, bringing down the growth rate for all of Latin America to about 4 1/2 percent this year and slightly less in 2009.

For the Middle East, high oil prices will help keep growth strong in the energy-exporting countries. The larger and more diversified economies of Egypt and Israel should also maintain growth rates in the 5 percent range.
High commodity prices will continue to benefit many African countries, and growth in the region appears likely to continue at least at a 5 percent rate.
Slowdown in other industrial countries
If we see among industrial countries other than United States, growth will slower from 2 3/4 % advances of 2007 to barely more than 1 1/2% this year. There is significant risk of recession to be in Japan and Italy. The impact of the yen's recent appreciation and weakening of exports to the United States, together with deteriorating sentiment among Japanese businesses and consumers, could push GDP into a couple of quarters of negative growth, even if year-over-year growth remains slightly positive. And the Japanese policy authorities have little room to provide offsetting stimulus.
In Canada, growth this year will likely fall a little below 2 percent, under the impact of slowing US growth and a strong Canadian dollar. However, solid income growth from strong export revenues should keep domestic demand relatively robust, and the Canadian authorities have considerable room to ease policy should that appear needed to forestall very weak growth or recession.
In case of united kingdom growth is expected is slowdown by less than 2%.But this is not entirely unwelcome in view of the need to curb inflationary pressures, and the Bank of England has opulence of room to abate further should that appear warranted. The Reserve Bank of Australia has continued to tighten in recent months and would surely welcome the forecasted slowing of growth to 3 percent this year.
The euro area is no exception to these industrialized countries. Growth is expected to slowdown to 1.6%. This slowdown will affect all the countries of this area. The Italian economy is in sluggish phase and is at risk of going into the grip of recession. Growth tends to remain stronger in Germany, affirmed by good export performance in the face of weak consumer demand. France will lag slightly behind Germany, while Spain will slow considerably due to a sharp downturn in home building. The slowdown will probably be reflected in a small uptick in unemployment and will be unpopular with most politicians. However, with inflation running well above the ECB's tolerance rate of 2 percent, the central bank is likely to see the slowing of growth more as a solution than as a problem.
Plague of inflation
Inflation is spreading like an irretrievable disease in both advanced and emerging economies. In many countries pushing force behind this higher inflationary trend is higher food and fuel prices. Oil prices have surged substanially against the previous records in real terms , due to supply concerns and limited spare capacity and inelastic demand, while driving force behind food prices is bad weather conditions and strong growing demand.
This kind of inflationary environment makes the job of all macro-economic policy makers all the more challenging. In addition to this history also gives the ground of pessimism. The last time the world economy faced the inflationary shock generated by commodity boom in 1970. It ended in period of high inflation and unemployment, slow growth an episode which was named as inflation. And recessions that involve major damages to the financial systems and housing markets tend to last much longer than other recessions, with the Great Depression of the 1930s being the most extreme example of how bad things could get.
Advanced countries centeral banks are in major dilema with current inflation figures which rose to 3.5% in may 2008. The increase in inflation is more marked and broader in emerging and developing economies with figures reaching to the peak of 8.6%. In these economies, food and fuel make up a larger share of consumption baskets and sustained strong growth has tightened capacity constraints.
Peeping into future of these advanced economies inflationary pressures are likely to be refuted by inflationary presures and with commodity prices to stablize , the inflation figures will start to moderate by 2009. In emerging and developing countries, inflationary pressures are surging faster, fueled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 percent and 7.4 percent, respectively.

Financial markets turmoil
Financial markets all over the globe are facing tough times. This current financial turmoil is being regarded as key source of uncertainty in United States for present economic situation with spillovers in Europe, Japan and emerging markets. Among this global turmoil the markets for credit instruments and financial institution which deals in such instruments have suffered the most.
Now one needs to find out what caused such a trigger to financial markets.
Before probing the cause’s one thing that is needed to be noted is the turmoil has been most severe in US financial markets and institutions. In United States the main difficulties arose from subprime mortgages and financial instruments involving such mortgages. Analyzing on broad gamut credit markets has become illiquid and dysfunctional. The extent of this crisis in credit markets is even more remarkable in view of the exceedingly aggressive actions taken by the Federal Reserve and the important but less aggressive actions of other leading central banks.

Bombshell in Indian stock markets
India is not any exception, in the era of economic integration with world economy, the ripple effect of global financial turmoil can also be felt in India. With sensex, crossing 20,000& plus, the brokers, trade pundits predicted new highs for 2008. And their predictions started to become true with sensex crossing 21000 mark on 8th January 2008. But this jovial period was short lived. The mounting sensex suddenly took a different route of dropdown. Sensex witnessed a biggest absolute fall in history, shedding 2062 points intraday. It closed at 17605.35, down 1408.35 points or 7.4%. This fall was sparked off by weakness in global markets. These markets crashed on the account of broad based sell off that emerged in the global equity markets. Fears over solvency over major western banks rattled stocks in Asia and Europe.
Now what can be the reasons for such a trend?
Let’s try to figure out answer for this question.
Analyzing the financial figures it turns out that first month of financial year 2008-09, turned out to be positive for investor, with BSE index closing at a gain of 10.5%. A combination of firm global markets and technical factors like short covering were the main reasons for the move up in the market.
April was last month when sensex closed in green. There after there is no stability found and sensex mostly ending in red. Sometimes sensex gained 600pts but the very next day it tumbled by 800 pts and this trend till now seems to be never ending. All the predictions made by analyst, trade pundits, brokers have failed. This see-saw game played by sensex is initiated by high inflation rates, mounting crude prices tightening RBI policies, weak industrial production data, and political uncertainties and sentiments of domestic as well as FII’s. The only positive sign which came as sign of relief was depreciation of Indian rupee which enlightened the IT sector and UPA gaining confidence. At current phase sensex is revolving around 14000 to 14500 and it’s hard to predict in which direction it will move.

The market declined sharply when hike in fuel price were announced by government 4th June 2008. This fueled the possibility of reaching inflation into double digits. The BSE sensex declined 843.39 points or 5.24% to 15,572.18 in the week ended 6th June 2008.
Presently we witness market tumbling after the RBI announced further hikes in repo rate as well as CRR both increased to 9%. Also blasts of Ahmadabad and Bangalore adding to the worries and enhancing negative sentiments.
Currently hike and seek is being played by crude oil prices and inflation & RBI are effecting are markets to great extent. It seems to quite surprising that epicenter of sub prime crisis is US and tremors are being felt in India also. The loss of market cap in US is 14% vis-à-vis 38% in India. Even after analyzing these causes of financial there is lot in more store for Indian story. Or else $ 200 billion institutional investors would have fled to safer waters.
Exports account for 14% of India’s GDP, India is less sensitive to external shock than many Asian nations. Savings in India have risen to 35% on the growing GDP base: 17% of this is in gold, commodities and real estate while rest 18% represents financial savings. Even this is skewed towards deposits both banking and non banking, while percentage of savings in share and debentures is just 6.3%. If there is increase in percentage of this to 25%, there would be in total $ 40 billion diverted to capital markets. So even after a facing such financial turmoil, we can hope for a positive market.
Uncertainties surrounding global economy
· Oil prices kicked off to$150: mounting of oil prices will put central banks in a fix. With no control over oil prices or oil supply central banks counts upon slowdowns to reduce inflation pressures. How these high oil prices add further fuel to the fire to an sensitive global economy dealing with weak consumer demand, taut credit and slow income growth. These higher oil prices cut demand in long run, but in short run we have to bear this trend of high global inflation.
· Skate into global recession: already hitted by US and European housing woes, Asian countries may face another round of turmoil from it. If demand pulls back in shock, we could be well into a recession before policy can stop the glide. Geographic and/or asset diversification would likely do little to protect investors as all markets ride the slump together.
· Stagflation: though today’s conditions are widely different from those of 1970’s, but there is a constant fear of economies falling in to the grip of 1970’s stagflation. However such a cycle would be painful for bond and equity markets, but it should be for shorter period than 1970’s experience.


Policy framework to curb inflation
Policy makers are going through a tough time. They have to maintain two things of curbing inflation plus also being mindful of downside risks to growth.
Many central banks have tightened monetary policy stances but interest rates in emerging and developing economies generally remain negative in real terms, particularly in countries where exchange rate management has limited monetary policy flexibility.
The risk of second-round effects from the surge in commodities prices and continued stress in financial markets complicates the response to the slowdown, particularly in advanced economies. The case for policy tightening in these economies is stronger than before the recent oil price increase but still not established, given that inflation expectations and labor costs are projected to remain well anchored and growth momentum is weak. However, inflationary pressures need to be monitored closely. In many emerging economies, particularly those that continue to operate above trend growth, monetary policy needs to be tightened combined with greater fiscal restraint and, in some cases, with more flexible exchange rate management, in order to reverse the recent build-up in inflation.
In summing up it can be said that though this US slowdown crisis will affect every economy’s growth trajectory. In an attempt to cushion economies from ill effect of this crisis, it is desirable that steps should be taken to increase demand.
As far as Indian economy is concerned it will get affected but impact would be moderate on India’s growth story. India is now far headed from period of 1970’s , shocks wont be hampering its growth story.