What would happen when the US starts tapering off its Quantitative Easing (QE) program?

What would happen when the US starts tapering off its Quantitative Easing (QE) program? The flood of money that has entered the emerging markets would start to pull back. And when that happens, prices of all asset classes are expected to fall. We have already seen this happening when the US Fed announced a possibility of a taper. Therefore it is indeed a scary thing to imagine what would happen when the actual tapering off starts. This is something that is worrying nearly all the emerging markets and India is no exception. To all these countries, the International Monetary Fund (IMF) has a simple advice. It is encouraging these countries to give the flexibility to domestic investors to invest abroad . The funds so invested could be repatriated when times take a turn for the worse. This would help support the country's currency and capital markets especially during events that lead to an exodus of foreign capital.

On the face of it, this sounds like a simple and easy to follow advice. But the technicalities are complicated. For India to do so, it would have to open up its capital account. This is something that has been discussed in the past but has not been implemented so far. The problem for India is the pitfall related to freeing the capital account. For although it allows for free inflow of funds, it also allows for a free outflow of funds. And it is the latter that has been more worrisome for India. With the economy in the condition that it is, and the investor confidence sinking on a daily basis, policy makers would be worried about an immediate outflow of funds if they open up the capital account. However, for long term stability, this is a pre-requisite. Therefore policy makers would do well to enact policy reforms and implementation to strengthen the economy from within.

Penetration of ATMs in India remains low

Offering adequate financial services to an economy like India is no mean task. One reason for this is high illiteracy. Then again, even amongst those literate, there is very little knowledge about financial services and products. It is the metros and Tier 1 cities which typically tend to have adequate financial services, with the rural regions lagging far behind. That is why Indian banks have no choice but to bear the burden of reaching out to the hinterlands. One of the parameters for gauging the development of financial services in the country is the number of automated teller machines (ATMs) set up. As today's chart of the day shows, these were quite poor in India in 2012 when compared to its peers in the BRIC region.

Penetration of ATMs in India remains low

Data Source: The Economist

What would happen if the Indian govt. shuts down?

For the first time in 17 years, the US government has faced a shutdown. This has been on account of an impasse between the Democrats and the Republicans on the broader fiscal policy. The key issue of the funding bill has been the healthcare law otherwise known as Obamacare. Because of the government's relentless bailouts, overall government debt has risen to unsustainable levels. The healthcare law is expected to pile on the pressure on finances. This law in particular has largely been  unpopular with the Republicans. The latter has been gunning for a cut in government spending and are pushing the Democrats to affect a cut. But they are in no mood to relent. And so the shutdown is expected to continue until such time an agreement between the two parties is reached. 

As far as the impact goes, as per an article on Firstpost, as many as 1 m government employees could face unpaid leaves or missed paydays as part of the spending cuts. Overall, the credibility of the US government will be called into question. As reported in Bloomberg, a partial shutdown of the federal government would cost the U.S. at least US$ 300 m a day in lost economic output. The impact is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers. This does not bode well for an economy which is already reeling under recession and stagnant growth. 

Now what would happen if a similar scenario was to play out in India? After all, a political impasse in India is nothing new. It is something which the country is witnessing even now. So what will happen if the Indian government shuts down? Considering the current sorry state of affairs, it may not be such a bad thing we believe. The government at present has failed to do anything concrete or meaningful for the economy. For most of its tenure, it failed to move on the reforms front. Later some measures were announced, but the implementation of the same remains largely hazy. Scams and large scale corruption, blatant bureaucracy, stained finances and perpetual bickering with the Opposition has rendered the government largely ineffective. So if it is not going to do anything, then maybe a shutdown is not such a bad idea. What is more, if this results in bureaucratic government staff going on unpaid leaves, it is actually a boon. It may do quite a bit in lowering the government's overall unproductive expenditure. On a more positive note, who knows, but such an experience might just kick it into action. 

Do you think that the Indian government shutting down might be a good thing for India?

Why you should use a credit card

Why you should use credit cards 
Credit cards provide us with the privilege of responsible short-term borrowing. Yes, they can be abused, but when used wisely and responsibly, credit cards provide valuable benefits, including:

• Convenience. With plastic, there's no need to carry wads of cash with you everywhere you go.
• Peace of mind. Unlike credit cards, if you lose your wallet, the cash in it is gone forever. Worse, those seen with large sums of cash are more vulnerable to being robbed. I hate being robbed. In fact, it's happened to me twice.
• Expense tracking. Credit card companies send monthly statements of all your purchases that make it very easy to track your expenses.
• Consumer protection. How many times have you bought something on the Internet and never received it? Or didn't get what was advertised and the merchant refused to give you your money back? A simple call to your credit card issuer is usually all that's required to fix the problem.
• Insurance benefits. Often, credit card companies offer product insurance if an item is stolen, and many offer free rental car insurance.
• Extended warranties. Some credit card companies will offer extended warranties on certain items.
• Credit history. When they're used responsibly, credit cards help establish your credit history and build your FICO scores,  which is especially valuable if you need longer-term credit extended to you. Those with high FICO scores get the most favorable interest rates, which can mean savings of tens or hundreds of thousands of dollars over the life of a loan.
• Rewards. Whether it's cash back, airline miles, free gasoline or other incentives, plenty of credit cards offer rewards. I've received thousands of dollars in cash and other perks over the years by simply using my credit card to make purchases

Indian farmers lost money in bubble burst

Another bubble burst. No this time it's not about asset classes such as real estate or gold or else. It's the farming business. The breeding of an Australian bird-Emu has met its end. Now, "Emu" is a large flightless bird resembling an ostrich and tasting like beef. Farmers across the world including India made some quick and high bucks with Emu farming. Emu raising for its meat, eggs and oil was a lucrative business opportunity some 5 years ago.

However, today the picture is grim. The herd mentality instinct led to mad rush of farmers in this business. Therefore, the feed costs tripled in a period of 3 years. And with the exploding emu population, the price of emu meat fell almost 25% in the same period. Buyers diminished. And farmers lost their money. Hence, killing the birds was the only option left to the farmers in order to reduce their losses. Not just that. The economics pertaining to this business also failed. Few entrepreneurs accepted deposits from the investors to capitalize on emu farming. Almost as high as 75% returns were promised. People were taken on a ride with tall assurances of investments doubling in 3 to 6 months. But the emu scandal plagued by auctioning of emus at fire-sale prices played spoilsport. Payments stopped and investors' concerns surmounted. Thus, oversupply, increased costs and greed led to the fall of the emu farming business. With more than half of India's emu farmers leaving the business and the investors losing money, the emu business is in a state of limbo.    

RBI asks temples to declare gold holdings

The Indian Government, saddled with twin deficits, has now turned to the Gods for help. It is perhaps with this intention that the Reserve Bank of India has sent notices to richest Indian temples to disclose their gold holdings. It is important to note here that gold is the second biggest imported item in the country after oil. Hence, high gold imports are a key culprit behind the record trade deficit. Now most of this gold is either hoarded or some part is donated to temples. As per the World Gold council report, the gold that lies with Indian temples is estimated at US$ 84 bn. Just to give you an idea, this is 56% higher than annual value of gold imports in FY13. 

While the central bank is calling it a data collection exercise, the Hindu temples are in no mood to entertain. One may argue that the gold lying with the temples is unproductive and it will do the nation some good to bring it back into circulation. However, one must not forget that the Government has no right on this gold, unless the religious institutions volunteer. The mess that the economy is in these days is because of the rampant corruption and mismanagement of public funds by the Government. There is no guarantee that the temple gold will not be subject to the same kind of corruption and mismanagement. Instead of eyeing the temple's gold, the Government should perhaps put in efforts to bring back the black money that has been stashed abroad.

Washington's impending shut down

You would think that political deadlock and playing the blame game is something that is prevalent in only India. But that appears to not be the case. Indeed, the US is facing a political crisis too as both the parties are not able to come to an agreement over the country's broader fiscal policy. And that is why there is the possibility of Washington facing a shut down from today. This means that due to the automatic spending cuts, many government agencies are expected to close down. And the non essential government staff will be forced to go on an unpaid leave. The spending cuts also seem to have impacted anti-poverty programmes and early childhood education among others. On top of that, the healthcare law 'Obamacare' has also been the subject of dispute between the parties. US has been plagued with the problems of recession, massive debt burden and unemployment for quite some time now. Relentless money printing by the US Fed has done almost nothing to jump start the economy. The only thing it has done is to take government debt to unsustainable levels. So spending cuts will have to be the norm if there is any hope of bringing the debt down. Anything else will only delay the issue further before it blows up on the US economy.    

Will Shanghai's free trade zone be a game changer?

o you know what's the best way to launch a big bang project? Especially one that has not been tried before and is a game changer of sorts? Well, the best approach in a situation like this would be to undertake a small pilot testing. In other words, the idea is to launch on a small scale first so that any glitches are taken care of before the final, large scale roll out. And it looks like China has taken this advice really to heart. As per CNN, the dragon nation has launched a new free trade zone in Shanghai over the weekend. Although no details are out yet, the new zone is expected to make it easier to do business in a small part of China. In other words, it is an attempt to move from an economic model that has so defined China over the past two decades. After years of explosive growth, the current growth model of mass manufacturing is in grave danger of burning itself out. And therefore the Government is making a desperate attempt to wean away from it and replace it with a more liberalised, free market approach. While the policymakers' heart is in the right place, its success or failure will play a significant role in shaping China's coming decades we believe.      

Writing off by Banks

The problem of banks having to write off NPAs has become so acute for India that even rating agencies have sounded alert. And it is not very difficult to figure out why. As per data from International Monetary Fund (IMF), Indian banks sport the least equity capital buffer amongst banks in Asia. This means that the Tier I (only equity) capital less net non performing assets is the least for banks in India. In the event of a deluge in NPA, the possibility of equity capital getting eroded is highest in the case of Indian banks. While the RBI is not yet calling NPAs a systemic risk for Indian banking, the problem is conspicuous in the case of few PSU banks. 

Indian banks sport least capital buffer for writing off NPAs

Source: IMF

How much you owe decides debt repayment responsibility !!

"If you owe the bank Rs 100 that's your problem. If you owe the bank Rs 100 m, that's the bank's problem". This quote has been immortalized by scores of defaulting companies in India over the past two years. Only a few like Kingfisher Airlines grabbed media attention for holding India's top banks at ransom. Even the largest bank in India, State Bank of India (SBI), has been a victim of the wayward and financially sick aviation company's inability to repay debt.

After being in the aviation business for 7 years, the company amassed Rs 70 bn in debt. Vijay Mallya, the promoter of parent company United Breweries (Holdings), made no attempt to stem the steady decline in the company's fortunes. First the jet fuel suppliers stopped giving the airline fuel credit. The unpaid fees to airport operators and other agencies deprived it of licenses. And finally, pilots and cabin crew were forced to leave the cash strapped airline for non-payment of salaries. But instead of holding the promoter responsible, the aviation ministry was at one point considering bailing out the defunct airline. Lack of bankruptcy laws left little recourse for the bankers, who until recently could not even seize the airlines' immovable properties. The promoter meanwhile used the promise of stake sale and FDI in aviation to his advantage. What was most shocking was that the company's CEO took home a salary of Rs 39.9 m in FY13! (as per annual report). Thus the bankers waiting for repayment of crores of rupees in dues were left to look like jokers.

While the government is yet to bring the promoter of Kingfisher to book, at least it has learnt some lessons. The deluge of bad loans in the corporate debt restructuring (CDR) cell has left the government convinced that many are cases of willful default by promoters. Hence the Finance Ministry is setting up a new CDR committee. One that can allow banks to enforce management change in case of willful default. The committee will also scrutinize cases of debt restructuring. In such cases banks will have to outline steps to turn around the companies.

In a country where both availability and cost of capital are constraints for entrepreneurs, wastage of the same by undeserving people is nothing short of a crime. Most importantly, willful default by entrepreneurs can lead to a systemic problem in the banking sector. The PSU banks, in particular, have become a victim of this malaise. With investor confidence shaken, the government will have to ensure that the CDR cell does not indulge more 'Mallya's for 'Kingfisher's.

Do you think the possibility of change in management in financially sick companies will act as a deterrent for willful defaulters?