Fiscal stimulus package

In order to elevate the various sectors of Indian economy from global turmoil, government has finally uncovered its fiscal stimulus package, which gives 4% cut in CENVAT , in order to bring down prices of cars, cement textiles and other products.

The package which sought to lower down the impact of global slowdown on various sectors, with entailing a loss of Rs 8700 crore , in the remaining four months of 2008-09 , aims to revive sectors like housing, exports, automobile, textiles and small and medium enterprises (SMEs).
The key highlights of the package are as follows:
· Package includes, the CENVAT on all products – except non petroleum goods – have been reduced from 14, 12, and 8 % to 10, 8 and 4% for various categories.
Full exemption from basic customs duty has been effected on naphtha to provide relief to the power sector.
· With the implementation of the package the export duty on iron ore fines has been withdrawn, the levy on export of iron lumps has been cut from 15 to 5 per cent.
· Government seeks to provide relief to the dooming housing sector with public sector banks will shortly announce a package for borrowers of home loans in two categories: up to 500,000 rupees and 500,000 rupees to 2 million rupees.
· For small and micro enterprises, the limits under the credit guarantee scheme have been doubled to 10 million rupees. The lock-in period for loans covered under the existing credit guarantee scheme is also being reduced from 24 to 18 months to encourage banks to extend more loans under the scheme.
· In an incentive for the automobile sector, government departments are also being allowed to replace older vehicles within the allowed budget, in relaxation of extant economy instructions.
The Planning Commission deputy chairman, Montek Singh Ahluwalia, said the package will “minimise the impact of weak global economy on the Indian economy” and help achieve a seven per cent growth rate.
Announcement of package turned out to be a sigh of relief for realty sector majors like DLF and UNITECH, particularly in the non-metros by way of a demand-boost for houses, but felt that the package for home loans by banks should have been for borrowings up to Rs 50 lakh instead of the prescribed limit of Rs 20 lakh.
However some reactions were anticipating a fiscal package of Rs 70,000 crore, how ever now how will this package will lead to bounce back of growth of Indian economy on previous high trajectory path? For that we need to wait and watch!!!!!!!!!!!!!! Please put your valuable opinion on what do you think of this package, how this will impact Indian economy.

IIP NUMBERS: INDIA INC IN TROUBLE

Well here is a breaking news…..as given by all news channel………I don’t know how much you follow this number…..but INDEX OF INDUSTRIAL PRODUCTION IS OUT and its 1.3% for august 2008 in comparison to 10.9% in same period last year.

In India, the Central Statistical Organization (CSO) is responsible for compilation and release of the Index of Industrial Production (IIP). This is a monthly index and is intended to measure changes over time in the volume of industrial production. The base year of the current series of IIP in India is 1993-94 which being revised to 1999-2000 is. The current series of IIP with base 1993-94 is based on 538individual items clubbed into 283 groups of items. The distribution of these items (item groups) and weights (100) among the three sectors covered by the index is as under

Sector NO.Of items (item group) Weight
Mining 64(1) 10.47
Manufacturing 473 ( 281 ) 79.36
Electricity 1 (1) 10.17
TOTAL 538 (283) 100.00

The index is a simple weighted arithmetic mean of production relatives calculated by using Laspeyre’s formula
I=Σ(Wi*Ri)/ΣWi,

Where I is the Index, Ri is the production relative of the i-th item for the month in question and Wi is the weight allotted to it based on Gross Output. The item-wise indices are vertically aggregated at 2-digit of industrial classification based on weighted average, weights are proportionate to Gross Value Added.

The August 2008 Index of Industrial Production (IIP) stood at 1.3% as against 10.9% in same period of last year.
· Capital Goods growth was at 2.3% versus 30.8%.
· Mining growth declined at 4% from 14.7%.
· manufacturing growth declined at 1.1% versus 10.7%
· Consumer Durables growth declined at 5.1% from 6.2%.
The market which opened weak with all stocks in red, with this news tumbled more with sensex at 10,257 falling by 1070 points and the Nifty fell 298 points to 3,215, at 12:38 pm. BSE Midcap and Small Cap indices lost 7-9%. The two exchanges will halt trading if the Sensex falls 1275 points or the Nifty loses 390 points, which is 10% circuit.
With coming of these numbers lot of uncertainty about GDP growth rate has been generated. Many economists including MOF have said this to be an “industrial recession”. And have revised their estimates for GDP growth rate 6%.
It’s a bad time for world economies. But even with this finance minister quoting 7-8% growth rate for India and with this IIP numbers sounds doubtful.
This is a major concern for our economy and if you read this I would like to know from you what your expected growth rate for Indian economy is. Where India is headed.
Please post your valuable comments

Affinity between stock markets & GDP

Sensex reached a peak of 20,000 and felled like a pack of cards to 10,000. What do these numbers suggest about macroeconomic growth of a country? Whenever there is news regarding some inflation numbers, IIP numbers markets react, but does this really matter, is there any evidence to it? Let’s find out:

Keynesian thesis states that “stock market is a casino”. However he also agnize that stock markets enable people with money to invest together with people who can put that investment to productive use.

This is one of the ongoing debates, on relationship between stock markets and macroeconomic growth, which has led to many studies done by various economist, analyst and financial policymakers but still not much is concluded.
I can’t mention various studies done on this issue but ill be here putting up a brief summary, on core theme of this debate.

If we trace the period between 1995 -2004, the CAGR (compounded annual growth rate) of real GDP and the BSE sensex shows a high degree of correlation, while real GDP has grown at 6.1%, sensex has also posted similar gains. However if we analyze the data more deeply, year on year examination gives a different picture. The outcome of this examination shows that, though Real GDP has shown a steady growth under the period of study, BSE sensex has been very volatile during the entire period. On year –on- year basis there seems to be no sync between the 2 factors.

However if one tends to consider growth in nominal GDP and corporate performance at the top-level, there it seems to be high degree of correlation. This is on account of the fact that GDP is aggregate of output of agriculture, industrial and services sector.

If we look at the trend stock markets are not always guided by fundamentals but also by sentiments. For instance, lowering of interest rates by the RBI (like until 2004) typically has an impact on the economy with a lag. But the signal that the RBI is reducing interest rates may prop up stock markets immediately and stock prices may react much faster.

However in present period there is a bit change in the trend, this due to the fact that Indian Economy is now more integrated with global world than before. At worldwide level capital markets evince attributes of perfect market with no or acceptable entry barriers, large number of buyers and sellers, absence of, or very low, transaction costs, tax parity, and free trading.
To attract international investments, countries compete with each other and promote their capital markets with savvy sops and policy announcements. It is in fact a reality that no modern economy can exist without an efficient capital market. This is what have attracted international investors and in recent years have made India their favorite destination. Since our markets globally integrated if we look in recent time trends, for instance when November IIP numbers came positive, were unable to pick up the markets, however most of the times we get to hear that markets are beaten due to weak global cues , or any uncertain event at international level have an effect on our markets.

The crux of the issue is that economy goes through business cycles of recovery, boom, slowdown and recession. Stock market also moves on the similar pattern. For instance if India GDP grows at 10% in one year, the sensex may not gain similar percentage during the same year. However, the relationship may hold true over the longer-term. It may be stated that the state of the economy has a bearing on the share prices but the health of the stock market in the sense of a rising share price index is not reflective of an improvement in the health of the economy.
In summing up the basic purpose of all studies done is to find out relation between economic growth and stock markets. Though it can’t be neglected that stock market directions are based on fundamentals in long term, however these assumption may turn out to be dangerous for investors in short term. Therefore all analyst advice to go for investment in stocks with a long term view.

WPI vs CPI

Now as we have seen how inflation is calcualated with WPI , its now time to analyze wthether WPI is a good measure of inflation or not.

Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation. But our country, India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

The main difference between WPI and CPI is that wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at final stage of production.

In last post we discussed about WPI, now let’s have a better understanding of CPI and how it’s better from WPI:

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

In use of WPI there are certain problems which have been encountered.
· Economists say that main problem with WPI is that more than 100 out of 435 commodities included in the index have abstained to be important from consumption point of view. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
· WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. Therefore we see here that WPI does give the true picture of inflation.
· In present day service sector plays a key role in indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI.
· Moreover the inflation figures that we get on Friday hardly makes a differnce to consumers, as the commodites on which inflation is calculated are not part individual consumers budget. Therefore in order to know what exact number of inflation is affecting your budget , it is advisible you should do your own calculation. You can compare your expenditure for previous years and with present scenario required to maitain your lifestyle and you ill come to know that increase in expenditure would be a few times higher than the official inflation figure.

But it is not easy for country like india to adopt to CPI , as in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are:
· CPI Industrial Workers;
· CPI Urban Non-Manual Employees;
· CPI Agricultural labourers; and
· CPI Rural labour.
Apart from this official staements say that there is too much of lag in reporting of CPI numbers, which makes it difficult for india to calcualte inflation based on CPI figures.
India calcualtes inflation on weekly basis , whereas CPI figures are available on monthly basis. So all this give little ground for indian government to adopt CPI in calculating inflation.

How Inflation is measured

Thursday has become one of the most important days of our lives (at least for me). Well inflation figures come out and these numbers decide how every individual household budget would be like. But for many concept of inflation is just till the word “manghai badh gayi hai”. So I thought why not to discuss this interesting concept of manghai today:

What is inflation?
Inflation is the increase in prices of baskets of goods and services that represents economy as a whole. It is measured as an annual percentage increase. For e.g. We all love to watch movies; there was a time when movie ticket was for Rs 50 and now its cost Rs 100, the prices have doubled, this is how inflation affects us. Take another e.g. suppose with Rs 100 you can buy only 6kg of groceries , the same amount of money can only buy 6/ ( 1+I) kg of groceries next year , where I refers to rate of inflation beyond today. Thus if the rate of inflation is 5%, other things being equal you can buy only 6/1.05 worth of groceries.
Well all of us know what is inflation and what are its causes……..so I won’t be going much in to it….

Measurement scale of inflation
Inflation can be measured by the following 2 ways:
· Inflation based on changes in consumer prices for specific baskets of goods known as consumer price index (CPI).
· Inflation based on changes in average prices of goods traded in wholesale market called as wholesale price index (WPI)
In India inflation is calculated on the basis of WPI. WPI is calculated on weekly basis unlikely CPI that is calculated on monthly basis.
WPI in India includes a total of 435 commodities and tracks the change of prices in these commodities.
These goods can be classified as under:
· Primary articles ( food articles non-food articles and minerals)
· Fuel ,power ,light ,lubricants and manufactured products like food products , beverages , tobacco , textiles ,leather and leather products).
Now with one eg ill show how WPI is calculated
WPI is calculated on base year and WPI base year is assumed to be 100
Let’s calculate the WPI for year 2007: assume that price of kilogram wheat in 2007 is Rs 7 and for 1993-94 kilogram wheat costs Rs 5
Therefore the WPI of year 2007 is:
Price of wheat in 2007 – price of wheat in 1994 / price of wheat in 1994 *100
7-5 /5*100 = 40
Since WPI for base year is assumed to be 100, WPI for 2007 will become 100+40 =140.

Calculation of rate of inflation
If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be:

(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100)
For e.g. WPI on 1st January 2007 are 141.2 and on January 2008 are 144.4, then inflation rate for year 2008 is,

144.4-141.2 / 141.2 *100 = 2.26 %, therefore we can conclude inflation rate for the year 2008 is 2.26% (I know this number seems to be unbelievable but it’s just an e.g.)

There is an on going argument that CPI is better than WPI and government should measure inflation with use of CPI…….for this wait for my next post……

Reference books
Macroeconomics by Campbell R McConnell and Stanley L Brue

Appreciation and depreciation of currency

As per my post on basics of appreciation and depreciation of rupee, we saw what appreciation and depreciation of rupee means. Now this post will help us to understand what causes appreciation and depreciation of a currency and its effects.

As from our previous example, we assume that there are 2 countries India and USA, and there is flexible exchange rate regime. Therefore value of currency of each country in terms of the other depends on the demand and supply of their currencies. It is in the foreign exchange market that exchange rate among different countries is determined. It is a market in which currencies of various countries are converted into each other or exchanged for each other. In our case, Indians sell rupees to buy US dollar and the Americans will sell dollars in exchange for rupees.

Demand for dollar
Now demand for dollar by Indians arises due to the following:
· The Indian individuals, firms or government who import goods from USA into India, as they need to pay for goods and services imported.
· The Indian individuals travelling and studying in USA would require to meet their travel expenses and education expenses.
· The Indians who want to invest in equity shares and bonds of the US companies and other financial instruments.
· The Indian firms who want to invest directly in building factories, sales facilities, shops in USA.

Supply of dollar
Let’s see what causes supply of dollars in exchange market:
· The individual firms and government which export Indian goods to USA will earn dollar from American residents who would buy Indian goods imported into USA and pay their price in dollar.
· Americans who travel to India and use the services of Indian transport, hotels etc .will also supply dollars to be converted into rupees for meeting these expenses.
· American firms and individuals who want to buy assests in India , such as bonds and equity shares of Indian companies or wish to make loans to Indian individual and firms will also supply dollars.
Equilibrium is establish in foreign exchange markets by simple demand and supply of currencies…..when
Demand= supply, then foreign exchange market is said to be in equilibrium. The equilibrium in the foreign exchange market will be disturbed if some changes occur in the underlying factors that determine the demand for and supply of foreign exchange.


Appreciation of rupee
For e.g., if there is in increase in incomes of American people due to boom conditions in the US economy, it will affect the equilibrium rate of exchange. The increase in incomes of the people of USA will lead to increase in demand for imported goods those of India. Now this would lead to increase in supply of dollars, which would in turn lower the price of dollars in the foreign exchange market by simple theory of demand and supply, as now there will be excess supply of dollars. This implies that increase in imports by USA from India leading to more exports from India will cause dollar to depreciate and Indian rupee to appreciate.

Depreciation of rupee
On the other hand if due to increase in incomes of Indian people causing arise in demand for American consumer goods or there is picking up of industrial activity in India requiring more imports of material, machines equipments and other capital goods from USA the Indian imports from USA will increase. The increase in imports from USA by India will have to be paid in dollars causing demand for dollars to increase. This will cause disequilibrium in the foreign exchange market, as with increase in demand for dollars, there will emerge excess demand for dollar which will push up the price of dollar and this rise in price of dollars in terms of rupees implies depreciation of value of rupee.
This how the foreign exchange market works……………..for more details you can refer to books like
· Dornbush R. and S. Fisher., Macroeconomics
· Mankiw, N.G., Macroeconomics
· Froyen R.T., Macroeconomics,

Basics of appreciation and depreciation of rupee

Nowadays it’s very important to know meanings of these 2 terms, appreciation and depreciation. If switch on cnbc or ndtv profit we hear these terms very often. So what these terms mean and what is logic behind them?

Let’s have a look
What is exchange rate?
In simple terms it is defined as rate or price at which one country’s currency is exchanged for another country’s currencies.
Suppose there are 2 currencies $ and rupee (R), now exchange rate between these 2 currencies can be expressed as $/R or R/$. These are reciprocals of each other. Thus if E is the $/R exchange rate and V is the R/$ exchange rate then E = 1/V.

For e.g. on September 15 th 2008 the following exchange rate prevailed,
E =45 which implies V= 0.022
V= 0.023 which implies E =43.47

Currency value
It is important to understand that value of one currency is always given in terms of other currency. Thus the value of Indian rupee (INR) in terms of dollar is the $/R exchange rate.

Currency appreciation: currency appreciates with respect to another, when its value rises in terms of the other. The rupee appreciates with respect to dollar when if the $/R exchange rate rises.
For e.g. value of rupee in terms of dollar is:
September 15 - 45
September 16 – 44

Using the percentage change formula: (new value – old value)/ old value
44-45/45 *100 =2.22%
Therefore rupee has actually appreciated by 2.22%. Here the value of rupee rises against dollar by 2.2%.



Currency depreciation: A currency depreciates with respect to another when its value falls in terms of another.
For e.g. Value of rupee in terms of dollar is
September 15 - 44
September 16 – 44.78

Using the same formula
44.78-44/44*100 = 1.7%

Therefore rupee has depreciated by 1.7%. Here value of rupee falls against dollar by 1.7%
This is in simple terms what is appreciation and depreciation. Who gets affected by appreciation and depreciation and how it’s impacting India will be discussed in my following post.

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.