The global war that no one is talking about

A combination of higher wages and lower rise in prices of consumer durables is spurring demand for white goods. As highlighted in a Crisil report, discretionary spending grew to Rs 24,000 in 2009-10 from Rs 14,000 in 2004-05. This is a growth of over 11% per year, and higher than inflation which rose about 6% per year over the same period. So clearly higher affordability has fuelled more spending. 

But is rise in wages the only factor that can be relied upon for higher growth in these regions? Indeed, not. While it is certainly an important factor, over a period of time adequacy of infrastructure will be the key point that will drive the growth of such goods. Take power for instance. Many states in the country are deprived of power and lack of electricity is not going to create demand for white goods even if incomes of people in rural areas of those states are higher. Similar is the case for automobiles. While tremendous growth potential exists, unless focus is laid on developing road network in rural regions, demand for vehicles will remain lukewarm at best. So we are back to square one. This means that  ramping up infrastructure will have to be the government's key priority if India's growth has to reach the next level.

Garnering and harnessing talent has always been a major issue for corporates. But now it seems that labor imbalance is likely to further exacerbate this situation. By labor imbalance we mean differences in the ratio of skilled and non-skilled labourers. In early 80s when industrialization erupted, many unskilled nonfarm jobs were created. Along with that many high wage jobs were also created. True that the ratio of skilled to unskilled workers was not in unison then. But it provided enough opportunities for both sets of workers. 

However, as per the new study of Mckinsey Global Institute (MGI), the world might witness a huge labor imbalance in the future. It says that by 2020, developing economies will face shortfall of 45 m workers with secondary school educations. On the other hand, in developed economies about 95 m people will lack the necessary skills for employment. 

As far as India is concerned, it is believed that it will have very limited opportunities for low skilled workers. While labor markets may adjust to these gaps it could have serious repercussions in the near term. It could lead to higher levels of unemployment. Income inequality could also gain prominence. Perhaps the policy makers should provide a framework to avert such talent tensions in future. 

How Does Google Make Its Money?

How does Google (Nasdaq:GOOG) make money? No less an authority than the company's CEO posed the question, hopefully rhetorically, in a recent letter to shareholders. 

Or as the company's annual report succinctly puts it, "We generate revenue primarily by delivering relevant, cost-effective online advertising." 

There was a time, not that long ago, when Northern Light and Ask Jeeves were the default search engines of choice for many people. But within a couple years of its 1998 incorporation, Google went from a burgeoning upstart company to verb status - almost a genericized trademark. How did this happen? 

In a word, AdWords. In some respects Google is essentially the world's largest bus shelter, deriving 96% of its revenues from ads. That's what separated a nascent early-2000s Google, known primarily as a search engine, from its competitors. Google's founders realized that if people were going to visit the site and enter a term in the search box, they wouldn't be landing on the subsequent page by accident. Thus they'd be motivated to buy a product from any advertiser sharp enough to place an ad there. 

How Google Profits Off YouSay you run a small company - a bakery located in Topeka, Kansas, for instance. It's safe to say that people who would Google the words "Topeka" + "bakery" would likely patronize your business. Buy an ad on a page that'd be visited only by people who are looking for a Topeka bakery, and you're targeting about as accurately as it's possible to target a potential clientele. 

From a Google customer's perspective (defining a customer in the traditional sense, as someone who gives the company money in exchange for its service), this is a proposition with little risk. AdWords typically operates on a cost per click basis, meaning that an advertiser can place an ad with zero obligation. If no one clicks on the ad, the customer doesn't pay a dime. 

A Revolutionary Business Model
The traditional advertising media - radio, television, newspapers et al. - were and are incapable of drawing a distinction between patrons looking to generate traffic, and those looking to make the public aware of their brand. A static general-purpose ad can't tell who's actively in the market for whatever product it's selling, and who's just passively sitting there. To accommodate the latter - people who aren't ready to buy, but who might otherwise keep your competitors top-of-mind - Google lets you pay per impression. That means that the moment a Google user accesses a page on which an ad appears, Google charges the company that placed the ad. Which also literally doesn't cost a dime, but that's a function of the small amounts involved. A typical such agreement allows several views of your ad for less than a penny. 

From the perspective of Google's shareholders, it gets even better. This is all based via auction. Would-be buyers of AdWords bid for the right to use a particular ad, or phrase. Overpay, and Google enjoys a high markup. Underbid, and you risk losing the auction to a more motivated seller. 

But Wait, There's More
But AdWords is only one prong of Google's dual revenue strategy. A related and similarly named but different service is AdSense. 

Rather than having ads appear on search pages accessed upon visiting Google.com, AdSense allows owners of other websites to join Google's network and run Google-branded ads. Google's algorithms do all the work, too. Sign up for the network and your website devoted to Bikram yoga might end up running ads for mats, props, etc. Companies that pay Google to run those ads indirectly benefit site owners who use AdSense.

According to Google's income statement, about 70% of its advertising revenues come from AdWords, the rest from AdSense. 

What makes Google's success so remarkable is that so much of this is accomplished without contracts. The company derives almost all of its revenue on at at-will basis. As Google's own annual report states, "Our advertisers can generally terminate their contracts with us at any time."

While 96% of Google's revenue comes from advertising, the company is so big that that still leaves $1.5 billion unaccounted for. Again, quoting Google's annual report, "[Google] derive[s] most of [its] additional revenues from [its] enterprise products, as well as [its] display advertising management services to advertisers, ad agencies and publishers." Google might have started off (and be primarily identified) as exclusively about search, but its size has allowed it to aggressively buy up companies that stray from the advertising-heavy business model. Google's largest purchase was its 2011 purchase of Motorola Mobility, maker of phones and holder of various valuable patents. Products Motorola Mobility manufactures include the Droid RAZR, Droid Z and various other phones and tablets. 

The Bottom Line
Every other service Google offers - from Maps to Earth to Gmail to Docs to Drive - exists to further the primary business. Those services were expensive to create and require great resources to maintain, but for the result - having users spend more time on Google and thus perpetuate reading and clicking on Google ads - it's money well spent. 

At the time of writing, Greg McFarlane did not own any shares in any company mentioned in this article.

Read more: http://www.investopedia.com/stock-analysis/2012/what-does-google-actually-make-money-from-goog1121.aspx#ixzz2DAjIs65G

5 Economic Concepts Consumers Need To Know

An understanding of economics isn't seen to be as vital as, say, balancing a household budget or learning to drive a car. However, economics has an impact on every moment of our lives because, at its heart, it is a study of choices and why and how we make them. In this article, we'll look at some basic economic concepts that everyone should understand. (The concept of elasticity of demand is part of every purchase you make. Find out how it works. Check out Why We Splurge When Times Are Good.)

TUTORIAL: Microeconomics 101

Scarcity
You implicitly understand scarcity, whether you are aware of it or not. It is the most basic concept in economics, and is more of a solid fact than any abstraction. Simply put, the world has limited means to meet unlimited wants, so there is always a choice to be made. For example, there is only so much wheat grown every year. Some people want bread; some people want cereal; some people want beer, and so on. Only so much of any one product can made because of the scarcity of wheat. How do we decide how much flour should be made for bread? Or, more importantly, how much beer to make? One answer is a market system. 
 

Supply and DemandThe market system is driven by supply and demand. Take beer again. Let's say people want more beer, meaning the demand for beer is high. This demand means you can charge more for beer, so you can make more money on average by changing wheat into beer than grounding that same wheat into flour. More people start making beer and, after a few production cycles, there is so much beer on the market that prices plummet. Meanwhile, the price of flour has been increasing as the supply shrinks, so more producers buy up wheat for the purpose of making flour - and on, and on.

This extreme and simplified example does encapsulate the wonderful balancing act that is supply and demand. The market is generally much more responsive in real life, and true supply shocks are rare – at least ones caused by the market are rare. On a basic level, supply and demand helps explain why last year's hit product is half the price the following year. 

Costs and Benefit
The concept of costs and benefits encompass a large area of economics that has to do with rational expectations and rational choices. In any situation, people are likely to make the choice that has the most benefit to them, with the least cost, or, put another way, the choice that provides more in benefits than it costs. Going back to beer, the breweries of the world will hire more employees to make more beer, only if the price of beer and the sales volume justifies the additional costs to the payroll and the materials needed to brew more. Similarly, the consumer will buy the best beer he or she can afford, not, perhaps, the best tasting beer in the store. 

This extends far beyond financial transactions. University students perform cost benefit analysis on a daily basis, by focusing on certain courses that they believe will be more important for them, while cutting the time spent studying or even attending courses that they see as less necessary. 

Of course, everyone knows someone who has seemingly made a poor life choice. Although people are generally rational, there are many, many factors that can throw our internal accountant out the window. Advertising is one that everyone is familiar with. Commercials tweak emotional centers of our brain and do other clever tricks to fool us into overestimating the benefits of a given item. Some of these same techniques are used quite adeptly by the lottery, showing a couple sailing a yacht and enjoying a carefree life. This image and its emotional message ("this could be you") overwhelm the rational part of your brain that can run the very, very long odds of actually winning. Cost and benefits may not rule your mind all the time, but they are in charge more than you think - especially when it comes to the next concept. (This free thinker promoted free trade at a time when governments controlled most commercial interests. Check out Adam Smith: The Father Of Economics.)

Everything Is in the IncentivesIncentives are part of costs and benefits and rational expectations, but they are so important that they are worth further examination. Incentives make the world go round, and sometimes go wrong. If you are a parent, a boss, a teacher or anyone with the responsibility of oversight, and things are going horribly awry, the chances are very good that your incentives are out of alignment with what you want to achieve. 

We'll take a safe example, however, of – you guessed it – a brewery. This particular brewery has two sizes of bottle: one 500ml bottle and a 1L bottle for couples. The owner wants to increase production, so he offers a bonus to the shift that produces the most bottles of beer in a day. Within a couple days, he sees production numbers shoot up from 10,000 bottles a day to 15,000. However, he is soon deluged with calls from suppliers wondering when the shipments of the 1L bottles are going to come. The problem, of course, is that his incentive focused on the wrong thing – the number of the bottles rather than the volume of beer – and made it "beneficial" for the competing shifts to cheat by only using the smaller bottles. 

When incentives are aligned with organizational goals, however, the benefits can be exceptional. Some incentives have been proven so effective that they are common practice at many firms, such as profit sharing, performance bonuses and employee shareholding. However, even these incentives can turn disastrous if the criteria for the incentives falls out of alignment with the original goal. Poorly structured performance bonuses, for example, have driven many a CEO to take temporary measures to juice the financial results enough to get the bonus – measures that often turn out to be detrimental in the longer term. 

Putting It All Together
Scarcity is the overarching theme of all economics. It sounds negative, and it is one of the reasons economics is referred to as the dismal science, but it simply means that choices have to be made. These choices are decided by the costs and benefits that impact the choice, leading to a dynamic market system where choices are played out through supply and demand. On a personal level, scarcity means that we have to make choices based on the incentives we are given and the cost and benefits of different courses of action. This is a very broad look at what is, believe it or not, a very compelling subject. These concepts feed into others, like comparative advantage, entrepreneurial spirit, marginal benefit and so on. The world is wide with choices, so the field of economics is wide with theories, laws and concepts that explore those choices. 

Conclusion
These concepts aren't powerful laws that force human interactions into preset patterns. Rather, they are a recognition of the patterns that emerge from hundreds, thousands, millions and billions of individuals making choices with the information they are given. While knowing these concepts may not allow you to fundamentally change the world, it will help explain a lot. (Discover the theories that shaped the way we've come to understand economics. Refer to The History Of Economic Thought.)

Read more: http://www.investopedia.com/articles/economics/11/five-economic-concepts-need-to-know.asp#ixzz2DAi0p2vT

Now Moody's downgrades France

It doesn't feel very good when your teacher gives you a lower grade in school than what you got previously. This is exactly what a certain European nation must be feeling right now. France is the latest nation to face the humiliation of a debt downgrade. Credit rating agency, Moody's recently downgraded France's credit rating from Aaa to Aa1. The agency cited three main reasons. These include a weak long-term economic growth outlook, uncertain fiscal outlook and inability to withstand further shocks within the zone. The nation has seen a sustained loss in economic competitiveness and structural rigidities don't help matters much. France also doesn't have access to a national central bank for debt financing in the event of a market disruption. Given the current negative outlook on the nation's sovereign rating, an upgrade is unlikely over the medium term. However if France successfully implements reforms and fiscal measures, this may strengthen growth prospects. The protracted Euro debt crisis needs a resolution. Soon.

Why private sector investments stay away from power

Shortage of funds, uncertainty about fuel supplies and limited scope for tariff revisions. All these bottlenecks have ensured that critical private sector investments stay away from power sector. The result being that not just power generators but also power equipment makers like BHEL suffer. Bharat Heavy Electricals Ltd (BHEL) has an order book of nearly 55,000 MW. But according to the PSU, commissioning of new projects is a problem. As reported by Business Line, the chief of BHEL believes that lack of private sector investments in the power sector is a huge problem. Number of pro jects that were in the pipeline earlier are now getting stalled. Problems of NPAs from state electricity boards (SEBs) have also made banks wary of lending to the sector. During 2008-2010, tenders for more than 30,000-40,000 MW were floated. The same shrunk to just 4,000 MW in 2011. The sector has thus become a black box for suppliers, vendors, consumers and investors alike. Without any clarity in reforms, the deterioration in the sector's prospects could deal a heavy blow to the economy.

European Commission cuts growth forecast

The crisis in Europe does not appear to be easing off any time soon. As a result, the European Commission has cut its 2013 growth forecast for the zone. The Commission now expects the Euro zone to grow at a meager rate of 0.1% as opposed to the May 2012 estimate of 1%. Several things have triggered this downward revision. The worsening conditions in countries like Spain and Greece. Deficit triggered slowdown in the comparatively developed France. Even the performance of Germany has come under the clouds. It should be noted that Germany is largely dependent on exports to drive its economic growth. As the crisis has continued to bite away into the Euro zone, Germany has become less resistant to the troubles of the southern parts of Europe. Consequently the growth estimate of the zone's largest economy was revised down from 1.7% to 0.8%. The Euro zone's troubles stem from the huge mountains of debt that its countries have amassed. Though the region has undertaken numerous bailouts, things have not really improved. Germany has come to realize that bailouts are more of a short term fix. Euro zone needs a long term solution. Otherwise even the 0.1% growth estimate may be a little too optimistic.

China's gold demand

We know that China is the largest consumer for a range of industrial commodities like iron, copper, coal etc. However, its love for the yellow metal is unknown. Fathom this. In this year, China's gold demand is expected to grow 1% to 860 tonnes. This would effectively mean that China will overtake India as the world's biggest consumer of gold. As per consultancy firm Thomson-Reuters, China's jewellery demand will be at 520 tons while investment demand is expected to be at 270 tons for the year. The balance 70 tons will come from industrial consumption. It may be noted that in 2011, China's mine output was just 371 tons. So, effectively, China imports a lot of gold to satisfy its domestic demand. And increasing demand from China this year means that the gold prices are likely to stay firm. While the record high of $1,920 per ounce is still far away, the China factor may well see the same being breached soon

Why do Japanese stocks trade at such a huge discount?

For the investing community as a whole, Japanese equities have indeed been a conundrum. Here we have one of the most developed markets in the world. But with valuations that are nearly half of a typical developed country. A recent article in The Economist would perhaps help throw some light. Apparently, the President of a leading Japanese firm was sacked last year. And if you thought he might have committed some fraud, you can't be more wrong. His only fault was that he helped uncover an accounting fraud to the tune of US$ 1.7 bn. But when the truth came out, the board kept their jobs and the whistleblower lost his. Such hand-in-glove relationship of the institutional shareholders with the board of companies is the rule rather than exception in Japan. What more, even the proposal of having independent directors on the board is fiercely opposed every time it crops up. With so much bureaucracy, it is certainly not surprising that attention to shareholder wealth creation gets thrown out the window. It would be an understatement to say corporate governance in Japan needs some serious overhaul. Till then, its equities may continue to be more of a value trap than value buying opportunity we believe.

Will FDI help sinking airlines sector?

One look at the Indian stock market and you will know how relieved investors are with the government's baby steps in ushering reforms. Even ones like FDI in aviation, which is unlikely to bring in economic benefits for a very long time to come. For one, aviation turbine duel (ATF) in India is expensive. This means there is no cost advantage for even a well-funded global airline which might want to operate in the domestic sector. That apart, most Indian airline companies, particularly the listed ones, are in a bad shape financially. To top that, the sector faces numerous structural challenges. Not that every foreign airline is a welcome suitor. But ones that can compete effectively in Indian market have very few choices amongst incumbent players. So it will be quite a while before the FDI policy in aviation endows the sector with any riches. Meanwhile the ailments of the sector are yet to find some cure.   

Is India the next Greece?

Since the dawn of the financial crisis in Europe, there is one name that has been talked about over and over again. It is that of Greece. The Mediterranean country has become an example of how spending beyond your means can lead to just one thing. Financial disaster. A disaster that has sunk the entire Euro zone into recession. Unfortunately unless India mends its ways, it is headed in the same direction. The country has a ballooning fiscal deficit. In the absence of policy reforms, this is all  set to keep increasing. And eventually lead to India's downfall. 

This is the opinion of the head of HDFC Bank, Mr Aditya Puri. He opines that India's government inaction is going to lead it on the path of a financial disaster. In his opinion all that the government is doing is playing the blame game. Each political party is blaming the other for inaction and corruption. Unfortunately this has taken away their focus on the core issue of running the country. Mr Puri feels that if each and every government official just did his job, then India is well poised to be a shining star in Asia. 

And there seems to be quite a bit of logic in this statement. If we look at the other countries in the region things are not so bright. China is going through a slowdown. Korea is not doing too well either.  As a result, India has a great opportunity to emerge as a star. But the government inaction and lethargy is pulling it back. In Mr Puri's opinion there are some crucial areas that the government needs to work on. These are addressing the fiscal deficit, solving the coal issue, transparent and clear policies on land acquisition, mining and environment. And improving accountability and governance in government and public sector undertakings. Once action is taken in these areas, things are expected to improve in all likelihood. 

Though it is important to note that India's high domestic savings and consumption rate makes the economy far less vulnerable than Greece. Hence, investors should not be alarmed by Mr Puri's observations. However, there is no doubt that the government must act fast to respond to the economic crises. This means that they need to stop humiliating the nation by stalling parliament sessions and taking a jab at each other in the media. Instead doing their work like Mr Puri suggests would be a better idea. But are they willing to do this? We hope they do

Is this how the global debt problem will end?

A fundamental question to begin with. Is the concept of debt a good concept at all? Well, since it is in existence for thousands of years, it does sound like a concept that has stood the test of time. However, what has happened is that time and again, it has been carried too far. And any idea, no matter how good, can cause problems when carried too far.

Something similar seems to be happening to most developed nations around the world. Initially, most of them did use debt intelligently, thus enabling their economies to grow faster than what could have been possible without debt. But as Warren Buffett points out, leverage or the use of debt is highly addictive. And once someone profits from it, going back to more conservative practices becomes very difficult for that person.

As is often the case, Buffett was bang on. No sooner did the western Governments profit from the wonders of debt; it became extremely difficult for them to turn conservative. And the end result is for all of us to see. So mired is the developed world in debt that there has perhaps never been a more uncertain period in the history of the global economy than now.

However, a lady who answers to the name of Philippa Malmgren and who's also worked for the White House as an economist has made an attempt to lift the fog of uncertainty that has enveloped the global economy. Her prediction though is not for the faint hearted. She has argued that the vast majority of debt in today's world is almost impossible to be repaid. As per her, there seems no other choice than to default. However, what even she is unclear about is the manner in which the default will take place.

Will the Governments just wake up one day and say that we will not be able to pay back all our debts? Or will it say that we will pay you back but you may have to take a bit of a haircut? Then there is default by way of inflation which the Governments can deny all along until it becomes too obvious to be denied anymore.

Well, even if we don't know which of these routes the Governments will eventually take, a couple of things cannot be denied. First, the fact that until the debt problems are sorted out, Government bonds and currencies will be a bad place to park one's hard earned savings. And secondly, since fiat currencies will be in great risk of losing their value, it may not be a bad idea to make gold a decent part of one's portfolio. Agreed that it has had a strong run up, but as long as the policymakers continue to grapple with the problems of debt, gold may continue to inch steadily upwards.   

European Union (EU) is submerged in a severe debt crisis

The entire European Union (EU) is submerged in a severe debt crisis. Many steps, including the current unlimited bond buying program, have been taken by the European Central Bank (ECB) to come out of the debt trap. But the results are far from satisfactory. In such a scenario, where survival is difficult can EU attract new member nations to its territory and save the Euro? 

For that, first we need to understand the benefits of joining EU. Becoming EU member would attract investment from other member nations. It can also stabilise the banking industry as support from ECB is at hand. By joining euro zone the small economies would tend to become more stable and would be eligible for lower interest rates. However, becoming a EU member also has its drawbacks. Once a country enters Euro zone capital becomes cheap so there is a tendency to accumulate debt. And that's where the problem begins. Portugal and Spain are prime examples to that. However, some like Poland and Czech Republic which are part of EU but have flexible currencies are in a sweet spot. They get all the benefits of being a EU member but are saved from the massacre of Euro. Also, notable is their low debt compared to other member nations. Thus, curtailing debt and flexi currency is the mantra for survival in this environment. 

Will the regulator bend rules for this ailing airline?

Financial health of a company is important when it comes to stock investing. But it is equally important when it comes to doing business with a company as well. However the question here is that is the financial health of a company important when it comes to using its services? And what if the services being offered are flying you to your destination? In our opinion, it is of utmost importance. Because if a company's financials are terrible or it is down in the dumps, then how would they ensure the safety standards? Well as per a leading daily, the regulators do not seem to think so. The airlines regulator is of the opinion that there is no reason to suspend the license ofKingfisher Airlines. The company is deep in red. It has reportedly not paid its pilots. Its problems are printed in every other newspaper. But as per the regulator the company is maintaining the minimum number of flights and is adhering to the safety standards as well. The thing is that there is a set of standards called civil aviation requirement or CAR. And financial health of the airlines is an important part of this. However, either the regulator is ignorant of this standard. Or it is bending the rules for Kingfisher Airlines. Why? Well only the regulator can answer this question. 

Poor governance costs India its competitiveness

"India shining". This used to be the title of most presentations made by business houses and financial institutions. Everyone used the phrase to showcase the positives of investing and doing business in India. And we are not referring to something that is ancient history. This phrase signified India just a few years ago. In the year 2009, India was ranked at 49th place by the World Economic Forum in its Global Competitiveness Report. 

But just 3 years on, things have changed. India has now slipped to the 59th position. The reason - poor governance and policy paralysis. The hoards of scams and negative reports have hurt the global picture of the country. At the same time the policy paralysis that seems to have a firm hold on the economy, has hurt the business sentiments. To add to this is the 'business cost of terrorism' due to the security risk. The only thing that seems to have come to India's saving is its sophisticated financial markets. If not for that, India's ranking would have been even lower. 

Ignore economists. Ignore the central bank. Ignore rating agencies. But how long will the Indian government manage to ignore every finger being pointed at the messy state of affairs? Steep inflation, current account deficit, fiscal deficit are just a few of the macro economic factors haunting India for long. But there are some grave ones like the debt to GDP ratio in India exceeding 90%. 

Undoubtedly with policy logjam and shortage of critical resources, it is rather difficult to buy into 'India story'. Especially if someone is hoping for a quick turnaround in the situation. We are therefore least surprised by the comments of Jim Rogers. In an interview to Business Standard, the well known investor has said that he is no longer "a fan of India". In fact that he is also short on India. 

We do not blame him for the pessimistic view as anyone looking for short term gains from India is bound to be disappointed. All that we hope for is that the government should not spoil India's long term prospects completely. 

Are you betting on the end of the China's growth miracle?

Are you betting on the end of the China's growth miracle? If you are, then an article in Business Week advises you against it. And it offers the age old argument to support its case. The productive capacity of a nation does not lie within its natural resources. Nor does it depend on the nation's location on the map. At its core, it is a function of nothing else but the skills and size of the workforce and also the country's accumulated intellectual and physical capital. 

And Business Week takes the support of these very arguments to present its case. It opines that the shift of Chinese labour from agriculture and into manufacturing and services could alone account for 30% of the country's continued growth. And then there are the considerable opportunities to increase labour productivity through education. Thus, by 2025, the dragon nation will have to reach levels of university enrolment similar to those of Western European nations. And this might alone add more than 6% to growth rates. 

Well, there's no arguing that the route suggested by the business magazine is certainly the right one. But theChina of today appears ill equipped to go down this path we believe. Its growth up to this point has come about mainly due to infrastructure spending and thrust on exports. But to move into a still higher orbit, it may have to completely overhaul its present way of functioning. And how the dragon nation solves this problem will ultimately decide its fate over the next few decades. 

Indian auto as well as the auto ancillary industry

Things are not looking particularly rosy for the Indian auto as well as the auto ancillary industry. As inflation has stayed firm, the central bank has not been enthused about cutting interest rates. Thus a combination of high interest rates and steep rise in fuel prices has played a hand in dampening demand. Companies have also been facing pressure on the margin front. This is due to rising raw material costs and steep rupee depreciation. Plus, the market leader Maruti Suzuki's troubles at the manufacturing plant at Manesar have only piled on the woes. 

But despite these near term headwinds, auto companies have not really cut back. They have been investing to keep up the pace of new product launches. These developments will be mirrored in the performance of auto ancillaries as well. The sector is cyclical. So, despite some near term hiccups, the long term story remains intact as the government lays emphasis on ramping up infrastructure (especially roads). What is more, the Heavy Industries Minister Praful Patel also holds a favourable view on the sector. He expects the auto as well as the auto parts industry to touch US$ 145 bn by 2016. 

ILO believes youth unemployment getting worse

As the global economy continues to slowdown, things are getting worse for nearly everyone. Irrespective of their age, religion or nationality. But the generation that seems to be bearing the maximum brunt of it is the youth. As per the International Labor Organisation (ILO), the unemployment in the age group of 15 to 24 years is getting worse. It is set to increase to 12.9% by 2017 from its current level of 12.7%. 

The problem is that even if the global economy accelerates, these youth may not find a job soon enough. As a result, unemployment rate would continue to be high. Considering that this is the generation that will spearhead future economic growth, the unemployment rise is a serious concern for all countries. As per ILO, the only way to resolve the situation is through global policy reforms. Reforms that would drive growth in every economy. That is the foundation for long term sustainability.  

Will India have to sacrifice growth for curbing inflation?

The Reserve Bank of India (RBI) has traditionally stood apart from its peers. It is therefore hardly surprising that its monetary policies should follow a contrarian route as well. Not just the US Fed, Bank of England and the ECB, but even the Chinese central bank has eased liquidity in recent months. All in the chase of higher growth rates. However, for RBI, the focus has been on curbing inflation. In the past, it did make an attempt to balance inflation and growth rates. But eventually that became impossible. Especially with the government unwilling to cooperate on the debt control front. Hence, the RBI has now decided to let the axe fall on growth rates. Governor Dr Subbarao has emphasised on the necessity to sacrifice growth to tackle inflation. What it means is that the government and the central bank are on tangential directions when it comes to steering the economy. Only time will t ell, which of them will succeed in liberating the economy's growth from inflation contagion.    

Will India have to sacrifice growth for curbing inflation?

The Reserve Bank of India (RBI) has traditionally stood apart from its peers. It is therefore hardly surprising that its monetary policies should follow a contrarian route as well. Not just the US Fed, Bank of England and the ECB, but even the Chinese central bank has eased liquidity in recent months. All in the chase of higher growth rates. However, for RBI, the focus has been on curbing inflation. In the past, it did make an attempt to balance inflation and growth rates. But eventually that became impossible. Especially with the government unwilling to cooperate on the debt control front. Hence, the RBI has now decided to let the axe fall on growth rates. Governor Dr Subbarao has emphasised on the necessity to sacrifice growth to tackle inflation. What it means is that the government and the central bank are on tangential directions when it comes to steering the economy. Only time will t ell, which of them will succeed in liberating the economy's growth from inflation contagion.    

RBI 's focus has been on curbing inflation

The Reserve Bank of India (RBI) has traditionally stood apart from its peers. It is therefore hardly surprising that its monetary policies should follow a contrarian route as well. Not just the US Fed, Bank of England and the ECB, but even the Chinese central bank has eased liquidity in recent months. All in the chase of higher growth rates. However, for RBI, the focus has been on curbing inflation. In the past, it did make an attempt to balance inflation and growth rates. But eventually that became impossible. Especially with the government unwilling to cooperate on the debt control front. Hence, the RBI has now decided to let the axe fall on growth rates. Governor Dr Subbarao has emphasised on the necessity to sacrifice growth to tackle inflation. What it means is that the government and the central bank are on tangential directions when it comes to steering the economy. Only time will t ell, which of them will succeed in liberating the economy's growth from inflation contagion. 

China's loss could be India's gain

What is China's loss could be India's gain. And this is in none other than rare earth minerals. At present, China accounts for about 95% of the global output of rare-earth minerals. These are used in a range of electronic equipment. However, China in recent times has restricted the export of these minerals through export quotas and taxes. This has pushed up the prices of these minerals. Further, China has set a condition that access to these minerals would be possible if manufacturing facilities are set up in the country. This is where India can step in. It is currently the world's second largest producer with large deposits of rare earth minerals. However, when compared to China, production is paltry. Indeed, in 2010, when China's production stood at 130,000 tons, India's was a measly 2,700 tons. Further, India has other problems in the form of corruption and red tape in the mining sector. In the past, even US produced these minerals but China became the undisputed le ader on account of its low cost advantage. Now with prices rising, there is incentive for other countries including India to bolster production. But whether our country will be able to do so remains to be seen. 

How do share markets function in the short to medium term?

One of Benjamin Graham's most famous quotes goes thus: "In the short run, the market is a voting machine but in the long run it is a weighing machine." That is indeed so true. In the short to medium term, share markets may witness wide irrational swings. But in the long run, share market valuations tend to reflect the true fundamentals. 

How do share markets function in the short to medium term? It is important to understand that stock prices usually reflect the future expectations of market participants from the real economy. It may so happen that a bull run commences months before earnings actually show an improvement. Similar, markets may start falling even before earnings show any deterioration. Of course, it is impossible to determine the lead and lag time in such cases. Moreover, the market expectations may not always translate into reality. On many occasions markets are prone to false anticipation. 

Do you know one crucial factor that plays an instrumental role in all market rallies and collapses? The answer is financial liquidity. When there's a lot of money into the financial system, bubbles can build up. The opposite is also quite true. A liquidity crunch can bring down markets even when economic fundamentals are strong. But in a globalised world, it is difficult to judge liquidity. FII (foreign institutional investors) money can pour in and flee away at the drop of a hat. A remotely unrelated event in some other part of the world could have an impact on the domestic bourses. 

With such wild swings in the share markets, what should investors do? In our view, the value investing technique followed by the likes of Benjamin Graham, Warren Buffett, Peter Lynch, etc. is the best approach to long term investing. Buy fundamentally strong stocks at a discount. Forget where markets are headed. Period! 

But it is also true that value investing may not help you in timing your investments too well. And you may also miss out several profitable opportunities in the short to medium. To remedy this, many investors prefer to complement their value investing approach with techniques that help understand market trends and time entry and exits. 

MasterCard SecureCode

How It Works: Secure Online Transactions & Payments

Shop Smarter with MasterCard SecureCodeThere are thousands of participating SecureCode online retailers, and the list continues to grow. Taking advantage of SecureCode is easy: just shop online as you normally would, then use your SecureCode at checkout following these three easy steps:

Step OneEnter your MasterCard credit or debit account number at checkout at a participating online retailer.

Step TwoA secure window from your financial institution will appear, requesting your SecureCode. Simply enter your SecureCode in the secure window. In seconds, your financial institution will authenticate the transaction and confirm that you are the individual making the purchase.

Step ThreeThat's it. Once your identity has been authenticated your secure online transaction can be completed.

Are you ready to get started?Find a financial institution offering SecureCode now!

US prefers renting houses than buying them

Say an average middle class individual wants to buy a house. Which is the one most crucial factor that will determine his decision? The answer is future job security. This is because buying a house normally means borrowing long term funds.

An unusual trend is evolving the US right now. People in the age group of 20 to 34 years are very wary of buying houses. They are more comfortable renting apartments instead. But it's not just about houses. They are wary of making any big purchases. So much so that they are even willing to rent cars and clothes!

This is very telling of a country that is bracing the deepest recession after World War II. The jobless rate has been persistently above 8% since 2009. On the other hand, another time bomb in the form of US$ 1 trillion in student-loan debt is ticking away. The bleak economic outlook and the excessive sovereign debt are likely to weigh on the future prospects of the American youth. Their attitude towards making big purchases is a clear indication of their future job and income insecurity.

Telcos may find it difficult to get loans

The troubles for Indian telecom companies are increasing day by day. First they are faced with a regulator which cares more for filling up government coffers than their business interests. Second, it is faced by hyper competition thanks to which they are unable to raise rates and are resultantly operating on wafer thin margins (if any). Third, they are already plagued by heavy debt to take care of their operational as well as capital needs, which in turn are increasing day by day. And now they would find it tough to raise more money at least if they decide to approach the banks.

The Reserve Bank of India (RBI) has laid preconditions for financing telecom companies for the upcoming 2G spectrum auction. The guidelines are meant to protect the banks against possible defaults. But at the same time they would make it difficult if not impossible for the telecom operators to get loans. Especially for the smaller operators. The banks would insist on stricter technical evaluations for projects, higher collaterals and current financial strength of the companies. The only way they would be willing to lend to the weaker companies would be if there is a possibility for tariff increase. But here again the regulator is not keen on tariffs going up too drastically. All in all the bad days for telecom operators are far from over.

A rating downgrade after 14 years?

The Indian economy is going through one of its toughest tests at the moment. Despite successive rate hikes in the past, inflation has not come down to the levels that the central bank had anticipated. Meanwhile, GDP growth has slowed down and monsoons have not really taken off leading to droughts in many parts of the country. As if that was not enough, the industrial production contracted by 1.8% in June and has taken many by surprise. This is the third time that the IIP has contracted in the last 4 months and was largely on account of the slump in the manufacturing sector. Further in this, the non-durables output growth contracted 1% meaning that high inflation has played a role in reducing consumption.

As a result, with not much happening on the reforms front and the economic woes only piling on, there is the possibility of India facing a credit downgrade. So far, international ratings agencies have not lowered India's credit rating (which is a notch above investment grade) for nearly 14 years. However, some of them had cut their ratings outlook in recent months following the decline in the country's economic indicators. Indeed, the last ratings downgrade took place after the 1998 nuclear tests.

Ratings of credit agencies could be taken with a pinch of salt. The lack of credibility displayed by major ratings agencies during the global financial crisis is ample proof of that. But that does not take away the fact that India does have a serious problem on its hands. While policy reforms and removing supply constraints would be the obvious answer, it is easier said than done since there are so many difficulties on the political front. The RBI has already done its bit. So all eyes will now be on the latest Finance Minister Mr Chidambaram and how he chooses to tackle these issues. Although it is apparent that some bold steps will be needed to be taken, it is unlikely that the current government will do anything radical that will hurt the sentiments of its voters.

Will this make Indian cities better?

Most cities in India are faced with the challenges of rapid urbanisation. As a result, town planning has become very important. Indeed, there has been a sharp rise in the influx of people in India's leading metros. But poor planning has led to shortage of space and increased congestion. And it is not that the concept of town planning is something new. This was practiced even by the ancient civilizations of Mohenjo Daro and Harappa. Thus, there is an attempt now being made by India's prominent business leaders and academicians to lay the intellectual and financial foundations of the Indian Institute of Human Settlements. Nandan Nilekani and Uday Kotak are some of the names that have already doled out donations to this institute. Of course, there are already many ills afflicting the cities. And the establishment of such an institute may not be able to completely resolve these issues. Also, it could be a while before the institute really scales up as well. But one needs t o start somewhere and this could be the solution that India is looking for from a long term perspective.

China's huge deficit in pension funding

Pension costs. This phrase is giving the Chinese government a headache. With an aging population, the costs became more of a burden for the government. As per a research carried out by Deutsche Bank which was published in the Bloomberg Businessweek, currently around 13% of the population of China is over 60. This is expected to increase to 34% by 2050. The rapidly aging population would lead to a huge deficit in the pension funding. As a result, the central government would be forced to fill up the balance. The government has stated that currently, it has sufficient funds to meet the pension related liability for a while. However, it is unknown as to how long would the funds last. 

Another problem with the entire pension system is the huge inequality. In the rural areas, people are paid as low as 55 Yuan while in the urban areas, the amount is nearly 1,500 Yuan. This means that the people who are earning well continue to earn well even after retirement while those in the lower income group sink further. This has angered the younger working population who has expressed their dissatisfaction of funding the government retirees without having sufficient funds to fund their own retirements. The one possible solution for this is participation by the local provincial governments, but they don't like handing out cash for pensions. As a result, the Chinese government's credibility over sustaining the pension system has come under fire. It would interesting to watch and see how it performs in the future.

Bank bailouts have wiped out privatization proceeds!

Financial Times, the popular financial daily, has come up with a very interest statistic. First, it has taken proceeds of the last 30 years from Government backed privatisations across the world. And then it has compared those with the amount these very same Governments have put into rescuing crisis hit banks. Do you know what the outcome has come to? Well, it so happens that the privatisation proceeds of roughly US$ 1.8 trillion get nearly wiped out by the US$ 1.7 trillion that has been pumped into various banks in order to bail them out. In other words, Governments have nationalised assets just as they have privatised them. 

You would wonder why there haven't been more privatisations despite the efficiencies that the private companies bring to the table. The answer could be had from the fact that whenever political and economic interests have clashed, it is mostly the former that has prevailed. Thus, Governments may have shown a tendency to indulge in more privatisation. But they have backed off at the very first signs of opposition. Besides, the volatility in capital markets hasn't helped either. And as things stand today, there isn't a very strong chance of privatisation edging out nationalisation over the next few years at least.