Re-inventing the motive of profit – “ Conscious Capitalism “

A synonym being used for the free Enterprise economy in today’s time is popularly known as “Entrepreneur “ – A mastermind behind creativity, imagination, and generation of ideas with driving progress in business, society and world.  Using their imaginative diagnosis they come out with remedies and possibilities that never existed before to embellish the lives of billions.

Taking this picture of an entrepreneur in mind, I intend to introduce a new thinking which has been evolved by John Mackey , Co CEO , Whole foods Market and Raj Sisodia  in their  popular  book “ Conscious Capitalism.”

Before we explore this concept lets us go back in history and understand the meaning of capitalism. Traditionally we have heard capitalism as an economic system which underlines ownership of means of production or privately controlled economy and always been characterized by fact that companies exist only for profit motive. Concept of capitalism has never been in the good books of intellectuals, who often have described capitalism with words like cheating consumers, spreading inequality, increasing the gap between rich and the poor.  Capitalism role as a villain for masses has been created due to the myth of profit maximization, which originated with the industrial revolution earliest economist due to incomplete information on business success.

However this book on “conscious capitalism” is an initiative to break this myth by making the entrepreneurs a true hero of free capitalist economy who starts business not only to maximize profits but utilize their energy and enthusiasm as fuel to generate extraordinary value for the customers, team players and stakeholders. The crux of the book lies in to restore the true meaning of capitalism, which has been damaged by misconception of profit maximization.  To reestablish its true essence one need’s to understand the meaning of being “conscious”.

As said by Fred Kaufman “To be conscious means to be awake, mindful. To live consciously means to be open to perceiving the world around and within us, to understand our circumstances, and to decide how to respond to them in ways that honor our needs, values, and goals.”

The same need to be applied to business and institutions. A conscious business is one that is beyond the return on investment, which exists for a purpose, a predefined goal and which is responsible to deliver value to all is stakeholders.

It is not always necessary for a business to have a purpose for making the world better place, but a conscious business have to reflect something of , value that it stands for and promises to its stakeholders. Bill gates did not start Microsoft with the goal of becoming the richest man in the world. He saw the potential of computers to transform our lives and was on fire to create software that would make them so useful that eventually all of us would own one.  He followed his passion and in the process became the richest man in the world – but that was the outcome, not his goal or purpose.

By rendering services to its stakeholders a business strengthens involvement and loyalty with its stakeholders and builds connection based on reciprocity rather than a transaction or manipulation. They exist in the real world, by dozens today but soon to be by hundreds and thousands. And this defines this new age concept of “ Conscious Capitalism”  – a growing epitome for business that simultaneously creates multiple kinds of value and well being for all stake holders: financial intellectual , physical , ecological , social , cultural , emotional , ethical and even spiritual . It reflects a deeper consciousness about why business exists and how they can create and build more value.

John Mackey and Raj Sisodia base the concept of capitalism on its four principles or tenets:

·      Higher purpose: A motive much beyond the profit maximization, integrating the interest of stakeholders.

·      Conscious leadership: Conscious minds to understand relationships between all of the interdependent stakeholders.

·      Conscious culture and management:  Popularly can be called as CAT – C- care , A – Authenticity , T – transparency . Three are very important for employees and stakeholders.

·      Stake holder integration: Positive –sum thinking – positive sum game to create win for all stakeholders of the business.

One should not consider conscious capitalism as similar to corporate social responsibility. A successful business does not necessarily need to do anything different to be socially responsible.  When a business aims to build value for it stakeholders it is itself acting in a socially responsible way.  To put this in a different way let me take the example, which is very well quoted and explained by John Mackey and Raj Sisodia on “HCL technologies” one of renowned organization in Information Technology . The company was recording good profits but at one point in time was not growing in terms of its market share. The challenge to put the company on growth trajectory was taken up by Vineet Nayar , CEO with many radical ideas about leadership and management.

He initiated this on the basis of his three growth Mantras which brought in the change in the culture of the organization and which in turn reflected in their increased profits and market share. Out of these three the first one was radical transparency- HCL initiated a system on their intranet site where in any team member is free to ask question of the leadership team at anytime , the idea behind this was to create more transparency in the organization , where everybody is aware of the challenges being faced by the company. Second mantra of Vineet Nayar was open 360 degree feedback, anyone is free to give feedback on anyone else in the company which helped the company in identifying good candidates to be promoted to broader roles and the last but not the least was the reinventing the role of CEO – Nayar using the intranet site opened up a section called as “My Problems” which was the platform for all team members to read the strategic challenges being faced by the company and freedom to respond to them with solutions. This helped him in bringing the culture of fresh and strategic thinking, which led HCL to be the company recording a profit of $3.53 billion in 2011, despite of the difficult global economy.

Conscious capitalism thus view business as an ongoing and adaptive system, which aligns profitability through higher synergies unlike CSR, where share holders have to sacrifice for the society adding a ethical burden to business goals.

To sum up when we talk about conscious business building value for stakeholders is treated as one of the core business philosophy and operation model. This model of conscious business brings in the system of social cooperation, which tends to transform lives and bring opportunity for billions on planet still living in poverty.

The whole premise of conscious capitalism lies on a business which views its human capital as resources but not as sources; A resource is like a lump of coal you use and its gone. A source is like the sun – virtually inexhaustible and continually generating energy, light and warmth. A conscious business endows people and captivates their best contribution in service for its noble higher purposes.

                              

Protect from Protectionism

Virus of global meltdown has made world to dance over its tunes. In amidst of all this, western countries are resorting to an antivirus called “protectionism” to fight this financial meltdown.

Before going into gist of this post, Lets have brief look on Protectionism:
According to Wikipedia : Protectionism is the economic policy of dampening trade between states through methods such as tariffs on imported goods , restrictive quotas and various other government restrictions aimed at discouraging imports and prevent foreign take over of local markets and companies. In short it is the opposite of free trade and globalization.

History
Being the” super power”, all good and bad things related to world economy are initiated by USA. In one of my earlier post “fight of words: R vs. D” I had mentioned about Hawley –Smoot Tariff, which came into forth during times of great depression of 1930’s. As business were slowing down in order to protect its own industries American government created “Hawley –Smoot Tariff in 1930’s , which meant to charge high import tariffs on imports , this led to deterioration in global trade leading to economic retaliation.

Present situation
Free movement of goods and services across nations was one common link on which all economists since World War II had agreed upon. Current crisis have hiited so hard that western nations: the leaders of globalization and free trade, are spreading a new wave of isolationism.
With Barrack Obama admistration coming with a stimulus package of $ 800 billion which contains a clause “Buy America” has led to agitation among other economies. This “buy American clause which has taken heap all over imposes restrictions on use of non- American material in all public work programmes that will be funded by stimulus package. Similar sort of protectionist policies are also be followed in Britain with government infusing funds in banks to keep them solvent and insisting that funds to be used nationally.

This sort of protectionism will have adverse impact on world trade. For short term countries mite benefit from such measures but in long run this would impede their global competitiveness. Protectionism will increase cost of production and will result in inefficient allocation of resources. End result of such a policy would be only benefit incompetent industries which can’t compete at international level, whereas efficient industries will loose the most out of them.
For instance it mite be the case that, that steel, cement manufacturers may benefit from the “buy American” clause but technology sector which consists of biggies like Microsoft, Intel, Apple, General Electric and so on will take a back seat if in retaliation countries like China, India and other emerging markets who have trade relation with America impose tariffs on goods produced by these companies.

In comparison to 1930’s protectionist policy, present day policy is more discerning. Though in current slowdown fewer tariffs have been raised, but modern protectionism comes with tighter licensing requirements, import bans and anti dumping measures. Rich countries have played clever by introducing discriminatory procurement provisions in their fiscal stimulus bills and offered subsidies to ailing national industries.

International trade has covered a long journey from 1930’s period to current day crisis. And we all believe that world has less to fear from protectionism in present times. Over the period a strong safeguard system in terms of international agreement has been built which maintain tariffs in limit. The global supply chains which have integrated national economies together tightly have made it difficult for government to raise tariffs without harming producers in their own country. However these safeguard systems may fail when there is intense use of anti dumping, use of domestic subsidies and other kinds of swarming protection. Most of the countries are in position to raise tariffs as their applied rates are below maximum allowed by WTO commitments. They may tend to do so on risk of disrupting the global supply chains.

U- Turn of Globalization

It’s a well known fact that slowdown in trade is result of ongoing global recession. Even in earlier slowdowns trade has fallen on account of slowdown in demand , but current downfall in trade is arbitrary i.e. that though trade has fallen in volume , the striking feature is that it has depressed on account of falling prices and stronger dollar.

Most economists argue that tremendous growth in global supply chains is responsible for such fast dropdown in global trade. It means that countries not specialize in final products but in products used in process of production. For e.g. in earlier times truck made in America which had used American steel and parts would enter trade data only it was exported. But now if that truck uses Indian, and processed in other country then slowdown in demand in America would effects its counterparts also.

Therefore in this sense Buy America clause mite turn out to be bust for American economy. For instance if take a look at auto sector. The American government is working hard to provide big stimulus to save its auto industry. However most of these manufacturers have global businesses and to protecting an automobile company in one country would affect its operations in others as well. For e.g. if us government did not provide any rescue package for general motors its worldwide operations, including business that it outsources in India, would be affected.

Therefore the it mite be the case that in era of global supply chains in international trade , this rescue plan of America mite turn out to be another problem for them.

Perspective of Fiscal Multiplier

Though we are in amidst of a severe financial turmoil, but this gives us opportunity to learn the working of various concepts of macroeconomics in reality , which we have always studied in books. One of such interesting concept which strikes my mind recently was how is fiscal multiplier working when governments of all countries are resorting to massive bailouts.

Let’s first have a brief look on concept of fiscal multipliers:
According to Wikipedia Fiscal Policy Multiplier refers to the idea that the initial amount of money spent by government leads to an even greater increase in national income. In other words an initial change in aggregate demand causes a change in aggregate output for the output that is multiple of the initial change.

In view of government bailouts, where government is trying hard to provide stimulus to their respective economies in order to increase aggregate demand, we need to analyze role of these fiscal multipliers.

As we know major fiscal policy instruments are government spending and taxation, which impact aggregate demand, resource allocation and income distribution. In current slowdown when worldwide governments are resorting to excessive government spending in order to raise demand, multiplier effects of spending on economic output turns out to be small.

First lets analyze the case where fiscal multiplier is 1, what does this imply- this simply means that an increase of one unit in government spending will lead to an increase by one unit in real gross domestic products (GDP) .Therefore , added public goods are provided free of cost to the society. This outcome is no magic but optimal utilization of resources like labor and capital, which add to production of more good and services.

If multiplier is greater than 1 , ( multipliers via government spending range usually between 1.5 to 2 ) in this gross domestic product rises more than government expenditure. Thus we have additional goods and services which give the room for to raise private consumption and investment.

Historic view
We all know about the great depression of 1930’s, it was the time when the Keynesian tonic was applied to the much damaged US economy. It is much evident from past experience that government spending is linked to overall business fluctuations in the economy. In times of World War II enormous fiscal expansion was done in terms of increased defense expenditure, which led to freedom of global economy from grip of great depression. This in turn proves the existence of large multipliers.

But going by studies of economists some flaws of Keynesian theory come to highlight. According to them the increase of US defense expenditure led to a large multiplier of 0.8.However if we analyze it the other way round, it gives us a very practical and real picture. Accordingly, the increase in war expenditure led to erosion in other components which comprises the GDP. There was massive down surge witnessed in private investment, nonmilitary government expenditure, and net exports. This resulted in a depressive effect rather than a multiplier effect. However in times of peace increase in government expenditure had led to large multipliers. All growth from 1941 to 1945 cannot be attributed to military outlays, many economists believe that multiplier during peace time was significantly different from zero.

Current scenario
The major question comes back to the current crisis, with global economy facing a severe downtrend; will government stimulus lead to large multipliers?

If we compare American economy of 2001 with today we will get a much clearer picture. In 2001 though economy was in recession but at that time there was room for households to use their tax cuts as down payment for car or cover their costs of mortgage refinance.

In current phase credit markets are bruised badly, therefore financial institutions won’t be able to take advantage of income generated by increased government spending to the same extent leading to much smaller multipliers.

Fight of words: R Vs D

We all are familiar with ongoing financial crisis, but most of us don’t know whether to call it a financial recession or depression. I have seen many articles, papers where there is confusion between with what to quote current crisis with “recession or depression”.

Before finding an answer to this, let’s find out difference between the two:
On searching on various search engines the basic difference which, I got is as follows:
Recession: an extended decline in general business activity, typically three consecutive quarters of falling real gross national product.
Depression: a decline in real GDP that exceeds 10%, or one that lasts more than three years.

Therefore the above definitions indicate that the basic criteria of indentifying depression or recession are to measure extent of economic decline. A depression is simply a magnified version of recession. The last two depressions in the U.S. were both in the 1930s. From August of 1929 to March 1933, real GDP declined by approximately 33%. There was a period of recovery following this depression, but in 1937-38 the economy dipped again in a less severe depression. All other economic downturns since that time have been recessions or just plain old tough time.

Transpose of Recession to Depression
Recessions gets transformed into depression, when government applies wrong measures in controlling it.
According to James Pethokoukis, "4 Ways to Turn a Recession into a Depression (U. S. News 11/4/08), there are ways that good and bad policy can effect an economic downturn.
· Bank closures
Although the American taxpayer may well have to provide what is being called, "the mother of all bailouts" the Federal Reserve has already committed $7 billion to prevent the collapse and run on the banks. It has also raised the federal deposit insurance (FDIC) from $100,000 to $250,000 to discourage shaking depositors from withdrawing their cash.
· Increasing of taxes
During the period of great depression, according to the revenue act tax rate was raised from 25% to 63%. Economists regard this as one of the most inaccurate steps taken.
· Hawley –Smoot Tariff
As businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation.

New distinction between Recession & Depression
However there are economists who differ from above definitions of recession and depression. in present times they believe that difference between a recession and a depression is more than simply one of size or duration. In making distinction between the 2, cause of the downturn should also be taken into account. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level.
If we go back in past, economic downturns that followed the collapse of the Soviet Union and those during the Asian crisis were not really depressions according to this criterion. Another significant aspect of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy and one tends fall into what is called as a “ liquidity trap”.
Present day situation
After all this discussion, the only question dwindle in our minds is “where we are today’? Well if we go by all definitions, America’s GDP may have fallen by an annualized 6% in the fourth quarter of 2008, and cause of this downturn is the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. So this means we are back to 1930’s?
Well many economists tend to deny this notion of 1930’s depression, because policymakers are unlikely to repeat the mistakes of the past. Though we are far off from situation of great depression, and policymakers won’t make same mistakes. But you never know they commit some new one’s as these are same policymakers who predicted that nationwide housing bubble burst is impossible, but today nothing is hidden, we all know the truth and truth is always bitter…..

Unhealthy Report Card of Corporate India

With the outburst of satyam saga, New Year also started with quarter 3 results of corporate India for FY 2008-09. With global meltdown riding on peaks, doleful results of major companies all over the world were predicted and result of Indian companies are no exception.

Global financial markets from past few quarters have been posting unhealthy performance. Despite of various fiscal bailout packages announced by economies, there impact on combating this ongoing recession is yet to be seen.

Coming back to India, the 3 quarter earning season was gloomy for the economy, as all major companies showed losses in their balance sheets. On the basis of sectoral performance, the major hit sectors are the export oriented, gems and jewellery and textiles. Battling with low demand, slowdown hitted real estate and infrastructure have passed on their negative fortunes to also cement and steel industry. These two segments have shown dejected performance on account falls in prices of finished goods and low demand from key user segments.

Also interest rate sensitive sectors like automobile are facing bad times. A leading two-wheeler company has not only posted a decline of 17% in net sales but also a whopping 25% decline in net profit for the Q3 FY09. Major commercial vehicles players have also shown dismal performance for the quarter. Moreover, the numbers released Society of Indian Automobile Manufacturers , on production and sales gives a gloomy picture of this sector.

Though IT companies have posted good results in Q3 FY09, it can be partly attributed to the rupee depreciation. Going ahead, the weak guidance given by IT companies indicates a rough ride in global markets. Though banking sector have posted positive results but surging NPA’s can prove out to be trouble in coming quarters.

Oil marketing companies benefited through artificially propped up petro product prices, while pharma and FMCG companies continued with their standard 5%–15% growth pattern.
Despite of the measures taken via monetary and fiscal policy, slowdown is evident in all the sectors, and deteriorating job scenario in 2009 is painting a picture of slowdown in quarters to come.

Plague of US sub –prime crisis

Nowadays common topic of discussion among employees, students & all is subprime crisis, fall of Lehman brother, US economy & impact on India. I also had this question surrounded by my mind what exactly happened which led to such financial crisis in world’s strongest and powerful country.
I have seen many posts on this and from searching materials from various places, I have tried to explain, how this whole cycle of sub prime began and made whole world dancing on its tunes.

Let’s begin with
What are Sub Prime loans?
The sub-prime loans are loans which are given to borrowers with low credit scores. These are the loans which are granted at interest rates above the prime lending rate. These borrowers are subject to sub prime lending on their defaults in credit card payments or any other type of credit default or delays.
According to US standards these are people who have FICO score < 620.
Now you might be wondering what is this FICO score, what I get to know of this was:
A FICO score is a credit score developed by Fao Isaac & Co. credit scoring method of determining the likelihood that credit users will pay the bills.
Credit scores analyze a borrower’s credit history considering number of factors such as:
· Late payments
· The amount of time credit has been established.
· The amount of credit used Vs amount of credit available.
· Length of time at present residence.
· Nature of credit information such as bankrupts, charge offs etc.

There are 3 FICO scores to be computed by data provided by each of the 3 bureaus- explain, Trans union and Equifax. Some lenders use one of these 3 scores, while other lenders may use middle score.

How this sub –prime loans came into being?
If we rewind ourselves to period of 2000, it is to be noticed that after the tech bubble burst and fears of 9/11 attack in 2001 , federal reserve began to cut rates drastically and federal funds rate reached at 1% in 2003 , which in central banking idiom is essentially zero. The overall idea of federal behind these rates cut was to prevent economy going into depression and to increase money supply to encourage borrowing, which would spur investment and spending. This led to aggressive lending by banking and financial institutions. However there was a good proportion of demand was from sub prime borrowers, so naturally when banks lend to them, it was with the pleasing knowledge that interest rates would be higher for this class of loans.
Every individual aspires a dream of having his own house. Americans were no exception to this. These low interest rates and increased liquidity increased demand for housing, which led to continuous growth in the market value of these assets (i.e. Real Estate), which was the collateral for the debt. Another angle is that the average American is highly debt-oriented, and resultantly, refinance is fairly commonplace in the US. In order to capture the market, banks began to value these assets higher and higher, as a higher valuation meant a higher loan amount which could enable them to win a deal over competition. This higher valuation also had an impact on the real money-value of the asset.
What was the role of investment banks?
First let me here clarify here what is investment banking & how it is different from commercial banking:

Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Now let’s see how this whole cycle worked:
Our story begins with an American, who like evrybody else has a dream to own a house. Now in order to fulfill his dream he seeks for a home loan. However his credit history is poor. But things become easy for this American with the advent of subprine loans (explained above).

· A subprime borrower (in our story American) takes a mortgage from institution like Well Fargo Home mortgage at 2/28 ARM terms.
· As soon as deal is signed these instructions package these mortgages into MBS (mortgage backed securities) and sell them off to other financial institutions like investment banks (Lehman brother, Morgan Stanley, etc).
· The banks then proceed to securitize these loans, chop them up, and package them into products called CDOs or Collateralized Debt Obligations which entitle the holders to the cash flows from the underlying mortgages.
· These CDOs are then sold to other market participants like hedge funds, pension funds, other banks and insurance companies based all over the world.
· The CDOs may then be traded like any financial security and thus ended up being held by banks and other market participants all over the world.

The question revolving in your mind now would be why financial institutions would buy loans of sub-prime borrowers here comes the role of rating agencies:
A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to different rating agencies. However the flip side is that it’s hard to sell a security if it’s not rated.

How this situation led to financial fiasco?
With the coming of these sub-prime loans for few years things went pretty well, as with low interest rates, economy started to surge upwards, with value of real estates assets touching the sky. This situation made it easy for borrowers to make payments, in case they did run into troubled waters they could top-up their loans, or re-finance their loans at more favorable terms. So this was kind of happy –go lucky times for financial institutions.
However as in case of every bollyood movies good times are snatched away by villains, something like this happened in US financial markets. The slowdown began in late 2006 and early 2007. With fast growing economy, money started to flow in to equities and money supply reduced. Following such a scenario FED started to increase interest rates. This situation made re-financing of loans by borrowers difficult. As loans became more expensive, the demand for housing reduced, leading to a reduction in the value of the asset. Now this led to a chaotic situation, where borrowers began to default on their loans at an alarming rate. The investing institutions who held the securities backed by this debt stood to loose.

These financial crises plagued like anything all over the economy. In this hue and cry banks stopped lending to each other. Most investment banks and hedge funds had to write down the value of their holdings or liquidate other investments to meet redemptions. With CDO prices at rock bottom levels, market players were forced to borrow heavily.

This led to a huge liquidity crunch in the global markets and subsequently runs on and the collapse of a few banks in Europe. With nobody ready to lend money, overnight rates in the money markets skyrocketed setting the stage for further runs on banks and even the freezing or possible collapse of the entire banking system.
Coming to Indian scenario, how all this is impacting India, will be covered in my next post……..till then enjoy reading!
References:
www.economictimes.com
www.investopedia.com
Financial blogs

GREAT DEPRESSION 1929 Vs CURRENT CRISIS

1929-33 was a period when universal banks were ruptured into separate commercial and investment banks, which led to ascension of big giants like Goldman Sachs, Morgan Stanley and more. However current global turmoil has taken a reverse gear where many of these investment banks are again turned into large commercial banks.
This article intends to seek out differences and similarities between great depression of 1928 and current global fiasco.
But before going in to details let’s go back and brush ourselves on what exactly was great depression.

Great depression
The great depression which originated in 1929 in US and spread world over by 1930’s was characterized by barren business and huge unemployment. The main cause of this depression which took all the nations in its web was crashing of the stock markets in 1929. Thousands of investors lost their money in stock markets, leading to a longest recession which comprised huge lay offs, unemployment , wiping out of business activities , which left million of people to depend on government or charity for food.
By 1930’s this depression became a worldwide phenomenon, taking all countries into its grip. This lead to vast downfall in global trade as each country tried to protect its own industries by imposing high tariffs on imported goods.

Causes of great depression
· Stock market crash: As mentioned above one of the factors which triggered off this depression was failure of stock markets on October 29, 1929, which led to loss of about 40 billion dollars to stakeholders. Though stock markets after that started to regain on the path of recovery, by end of 1930, but some other factors at work impelled America to do into deep recession.
· Bank failures: During the period of 1930’s 9000 banks filed for bankcruptcy.Bank deposits were not insured and thus as banks failed people lost their savings. The banks which survived in this turmoil, due to gloomy economic conditions and to survive in these conditions stopped creating new loans, which in turn led to slowdown in business activities and less expenditure.
· Cut-back in purchasing power: with the failure of stock markets and fears of further financial fiasco, led to cut – back in purchasing of items from all individual classes. This in turn led to piling up of inventories, which stimulated a cut down in production, leading to layoff of employees. Unemployment reached to a level of 25%, leading to lowering the purchasing power of individuals.
· Hawley –Smoot Tariff: as businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation

Current scenario
Before doing comparisons lets see what current global turmoil looks like: As it’s said truth is bitter, the fact is we are going through a most severe global turmoil since the days of great depression. The similarity between both the crises is that they both originated from USA and now worldwide nations are facing its spillover effects. This financial global turmoil is a combined result of some intermingled financial mistakes. There are some fundamental causes at roots of this depression.
· Firstly are the conceited norms in USA. USA has always been relishing sustainable economic development, buffered with low inflation rates in last two decades. This led to complete ignorance of business cycle of economy. The signs of this were reflected 20 months ago, when America was combating excess liquidity in the market. That was the plenteous sign of coming of real estate bubble and asset price inflation.
· Secondly is the protection enjoyed by these private and investment banks. Booming economic conditions craved these banks to take higher risks, among which most of the deals of these banks were highly leveraged transactions. However these risks turn out to be evil for these high flying banks as they didn’t get enough capital in support of their high risk investments.
· Last but not the least reason which I think would be failure of top tier management to provide guidance to their deal makers. Greed took over and rest is history.

Though today symptoms of current events are similar to that of great depression, but according many economists making their comparison is misleading. Though current time hold similarities with great depression of 1929-33, but outshined by certain differences.
For instance in 1930, Hawley Smoot act came along in decade of restrictive tariffs and international disharmony. However today global turmoil is characterized by prominent degree of free trade and global cooperation. The era of 1929-33 was the one saw the absence of shock absorbers like such as social security and deposit insurance which could safeguard people from economic crises.

In the 1930s, some of the world's largest economies—Germany, the Soviet Union, Japan, and Italy—were run by leaders hostile to the very notion of market capitalism. Today, U.S.-style market capitalism is under assault from self-inflicted wounds, and Germany, Italy, and Japan (Russia, not so much) are working with the United States to cope with a common problem.
Apart from this the policies of Federal Reserve differ in both the periods. 1930’s policy was “downturn as a force for good”. Liquididate labor, stocks, farmers, so that people will work harder and live more moral lives. However in today’s crisis Federal Reserve is making full efforts to increase liquidity in stocks, to farmers and real estate.

It’s true that current crisis are nowhere in comparison to great depression, but still we need to put a full stop over these ongoing crises, which is hard-hitting the nations worldwide. The another difference which can be drawn over these two crisis is that in present day we have president Barack Obama who promises to solve the crisis . The methods which he plans to initiate are to follow policy of creation of jobs and more spending by American people. Apart from this we have seen bailout packages already becoming the breaking news. Therefore it can be said roots of current crisis are same but nature is totally different. We can hope to see a better future in near term.

As economies continue to struggle with global financial turmoil, a question which has gained heap among investors is “will current crisis halt the growth of emerging markets”?
Decoupling has been one of the most common and optimistic words used since the onset of the current recession. But before going into further discussions, lets look on to what exactly decoupling theory means;

Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession

This however does not conclude that global economic slowdown will have no impact on developing economies. Emerging markets have become more integrated with world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). However the effect of American downturn on GDP Growth of emerging markets will be less in comparison to previous downturns.
Decoupling has been one of the hottest issues of debate among economists. If we look at the growth rates of India and China over the last year gives us enough reason to believe that Asian economies will decouple from world economy. Impressive improvement in its macro foundations of growth – especially in saving, infrastructure, and foreign direct investment. Chinese industrial output growth reaccelerated to an 18.5% over the Jan-Feb period – up from 15% in final period of 2006. India, not as brisk as China, has a 10% y-o-y pace in early 2007 which was well above 7.25% in late 2005 and early 2006 when there was no recession in US. There is a 5.5% of annualized increase in Japanese economy.

Decoupling is also evident from fact that though exports to America have lurched, but to other emerging economies have surged. For instance China’s growth in exports to America slowed to only 5% (in dollar terms) in 2007. However this slowdown was offset by increase in exports to countries like India, Brazil & Russia by 60% and to oil exporters by 45%.Likewise, South Korea's exports to the United States tumbled by 20% in the year to February, but its total exports rose by 20%, thanks to trade with other developing nations.
Reasons for Decoupling

A study by IMF shows that decoupling and globalization can go hand in hand. According to IMF methodology they divide 106 countries into 3 groups – developed, emerging and low income developing countries. And then measure how the correlation between economies has changed over time as cross border flows have expanded.

Outcome of their study shows that growth has become contemporize in both developed and emerging economies. But economic activity in emerging economies has surprisingly decoupled from that of developed economies in past two decades, since technology bubble burst. Exports of consumer goods to United States declined to 6% of total Asian exports in 2006 from 8% in 2001. Emerging economies have now started trading with each other, which accounts for half of their total exports.

Another reason that can be attributed for decoupling and globalization going together is that opening up of economies have not only boosted poor countries trade, but also has stimulated their productivity growth and in turn boosted domestic income and spending. In 2007 emerging economies' real domestic demand grew by an average of 8%, almost four times as fast as in the developed world.

U-Turn of Decoupling
In the year of 2008, India and China have shown the signs of overheating due to current global meltdown. Many economist are of view that boom in emerging economies was largely driven by exports to American consumers, easy access to cheap capital and high commodity prices. All these tools have now dried up. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates. However dependence on exports to American markets is always exaggerated. No doubt that emerging economies won’t be able to record higher growth rates of 2007. But at the same time it is wrong to presume that emerging markets will not recover until America rebounds.
There are enough reasons to believe that emerging markets share of world growth will continue to surge.

Economists argue that most emerging economies are not victims of America’s obscure structural problem, such as of swelling debt, which could pinch growth for several years. Though 2009 will be a painful year for poor countries, but those with high savings and modest debt could recover quickly. On account of measures such as government and external balances emerging economies are sounder than developed ones.
Let’s have a brief overview of these emerging economies:
· Russia: has been badly hit by current crisis, by outflow of capital and credit squeeze, despite of running current account surpluses for many years. It has become excessively difficult for banks and companies to pay off their foreign debts; due to this it has lost its shareholders trust. Official reserves have fallen by $160 billion or 25% since August. As a result of lower oil prices, Russia is likely to run its current -account and budget deficits in a decade and its economy may well contract in 2009.
· China: 2009 will prove out to be more severe to China than 2008, with GDP growth rate slowing down to 7%. According to many economists China will follow a “007 pattern”; 0% world financial growth; 0% interest rate world wide and 7% growth in China. In China property and export sectors are ones which are in enormous trouble, the government might introduce another round of interest rate cuts on a large scale in the first half of 2009. In the summer, the one-year deposit interest rate might drop to as low as 1 percent from its current 2.25 percent. Apart from this China has the fiscal room to expand spending and cut taxes, which should be an effective stimulus. It may take a few months for the package to have a big effect, and that is why the first part of 2009 looks particularly difficult. But the infrastructure projects in the package will stimulate demand for steel, cement and construction. That in turn should have a positive spillover effect on the rest of the economy.
· India: is not an export driven economy, therefore it is not as susceptible to global meltdown as China is. World Bank forecasts India’s growth rate at 5.6% in 2009, followed by a bounce back of 7.7% in 2010. The reasons for such a slow growth can be accounted to the fact that main drivers behind explicit growth had been overseas borrowings and new equity issuance. Both of which have dried up now. Therefore picture for 2009 is gloomy. India will need capital for growth while global capital will remain in short supply. Corporate India, which has led the investment boom from the front in the last four years, will also be shy of putting more capacities into place due to falling demand. Even those who want to precede with their capex plans may find it difficult to raise money even from the domestic markets.
· Latin America: Global financial turmoil is ending a half-decade of more than 5 percent growth in Latin America, as prices for its commodity exports sink and foreign investors sell off assets to cover losses at home. The global downturn has slashed demand for oil, copper, iron ore, grains and other regional exports, narrowing trade surpluses, while credit for farmers and small businessmen has tightened amid the global crunch, boosting unemployment and poverty. Economic growth could slow to 2 percent across the region in 2009, its lowest level in years. Latin America's two largest economies, Brazil and Mexico, have seen growth forecasts more than halved, while analysts worry that Argentina, one of the world's top-five exporters of wheat, corn, soy and beef won't be able to service payments on $20 billion in debt next year as income from export taxes stalls.
In past five years emerging economies have boomed, but not completely busted. In order to safeguard themselves from this ongoing recession these economies need to be high savers and able to stimulate their own economies. These economies are likely to face major headwinds in 2009 and negative earnings revisions for emerging market companies are likely to increase in the next six months.
However if we analyze MSCI EM index (An index created by Morgan Stanley Capital International that is designed to measure equity market performance in global emerging markets.The Emerging Markets Index is a float-adjusted market capitalization index. As of May 2005, it consisted of indices in 26 emerging economies: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela) , which have fallen by 57% in the first 11 months of 2008 , have outperformed the MSCI World IndexSM (A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets)by 10.3% per annum for the seven years ending 30/11/2008. In fact, over very long time periods, the performance of emerging market equities has tended to confirm the widely-held view that high rates of economic growth in emerging markets offer the potential for returns superior to developed markets. Thus, for the 18 years ending 9/30/2008, the MSCI EM Index has outperformed the S&P 500® by more than 76 basis points per annum.

But many uncertainties still exists in emerging markets these include the magnitude and severity of the global recession, bank regulation and/or recapitalization (with many commentators suggesting that several US banks will be nationalized), credit availability, and the ability of China to avoid a "hard landing." And the recent tragic terrorist attacks in Mumbai remind investors that specific political risks in some emerging markets remain high. And now icing on the cake would be recent Sataym fraud which have raised issue on corporate governance practices, will also affect investor’s sentiments in time to come.
In summing up, long term prospects for emerging markets remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010–15, similar to that during the past decade, and more than twice as fast as in the 1990s. Though investors have lost their sense of perspective on these markets but economic fundamentals of these economies are stronger and will be able to survive the global financial meltdown. Therefore there might be some recoup ling will be there in short term, but in longer term decoupling will bounce back.

Hysteria of sub -prime crisis

We all are familiar with the word of sub-prime crisis, for instance few months back , when I was pursuing my masters , and there was placements going on , the only topic used to be discussed was global downfall, due to sub-prime crisis. But when it was asked “what are sub-prime crisis, very few had an answer, and I wasn’t among the few. Even if you search on Google you won’t get many results. So let me try and explain what this sub prime crisis is?

In simple words sub prime crisis are associated with demand and supply of houses. Housing prices started gaining upward momentum in US in early years of this decade and continued through mid 2006, with the borrowing and lending rates extremely low, which elevated the demand for and supply of new existing houses.
Result of this demand and supply was creation of sub-prime lending industry by banks.

Sub prime lending refers to lending (at higher interest rates) to people, who may not be eligible for loan in normal circumstances. May be they don’t have job or income or defaulted in the past. It means many institutions offered home loans to borrowers with poor or no credit histories, requiring higher than normal repayment levels- creating now what is known as sub prime mortgages. Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they good sell the mortgaged property.

However happy days started to end when on June 30th 2004, when Federal Reserve started with interest rates hikes that raised the cost of borrowing from the lowest levels registered since 1950’s. It increased the interest rates seventeen times and paused only in June 2006 when the borrowing cost touched 5.25 per cent. The US housing market began sliding in August 2005 and that continued through 2006. Building rates and housing prices tumbled.
The excess liquidity slowly started to evaporate. It turned into creator of problems for Americans, informs of job losses, less consumer spending and fears of slowdown if not recession. A similar situation may develop in the UK, where housing prices during last five years have risen very rapidly, creating a wealth effect just as in the US. But prices there have now started correcting. This has a contagion effect and we may see a huge write-off by banks doing business in the US and the UK.
In US more than 25 sub-prime lenders declare bankruptcy, announce significant losses or put themselves for sale.

Turmoil in India
Given the dominance of US financial markets in other developed and developing economies, the sub prime crisis affected markets and institutions all over the globe.
The Indian economy showed signs of over-heating in mid -2007, with inflation rising above 6%.
The main channels through which global credit crunch and a recession in US can affect India are:
· A decline in capital inflows and lower corporate access to credit in international markets.
· Slowdown in export of goods and services from India to the US.
· remittances
India is running a current account deficit (CAD) which is likely to increase to 2.6% of GDP in 2009 from the 1.5% in 2008, driven largely by the sharp increase in international prices of oil and food commodities. So far India’s CAD has been comfortably financed through capital inflows and FDI. In this scenario, the question whether a global credit crunch and significant slowdown in the US economy could undermine India’s growth prospects, becomes pertinent.

Recent financial tsunami
September 2008: 9/15 will now be recognized as black Monday in history of financial system with Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.
In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merrill Lynch) who in turn sold retail bonds to individuals.
Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honored, the banks could not repay these financial institutions who in turn could not repay retail investors.

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.