ECONOMICS - ITS OMNIPRESENCE REVEALED

ECONOMICS ,as with the passage of time,has become the world's "modus vivendi" –prescribing the way the colossal world economy valued at $60 trillion is supposed to function. One particular aspect differentiating economics from the other fields like bio-tech,etc.isthat it is not esoteric (intended for or understood by only an initiated few ) in nature but is a vast ,open treasure of knowledge which everyone has access to.

Rather than patenting a new theory ,there is a greater urge to publish it ,reveal ONES PIECE OF WORK - magnum opus (The finest work produced by one artist or author ) -to the rest of the world and to see the results fructify.

 

     
  That is the reason as to why economics as a subject is a very rewarding one. No-matter where you are worldwide ,you can develop as much understanding about the latest developments occurring in this field as any other fellow. 


This idiosyncratic ( distinctive ) property makes economics a permeable domain .

The accessibility of economics played a major role in enabling the developing world to adopt a proven framework for growth.
 

The EXPANSE of economics is tremendous , but more importantly , the ability and the capability to capitalize on this immense treasure has become global - whether one is operating from Moscow or DALIAN (IN CHINA)  hardly matters.  

- To cite a small example of the importance of economics - 

In the realm of reality , the Indian stock market capitalization adds up to only a two percent share of the aggregate world financial markets turnover. The daily turnover of the congregation of all the stock markets is ,in turn ,only 50 percent of the currency markets

(turnover daily =$3.98trillion).

The sheer magnanimosity of the financial sector leaves one spellbound – and ruminating ( Mulling Over ) over the question of who participates and operates in these sectors having a daily turnover of roughly three times the size of the Indian economy.


Answer –

US $ 1.848 trillion – these are the total assets of Citigroup , US$884.57 – THE TOTAL ASSETS OF GOLDMAN SACHS--These are only a few of the many large institutions which are active participants in these markets. 

These markets, in turn , are based to a great extent on economics – both directly and indirectly. The various theories of economics – be it future predictions of business cycles of a boom or a bust , the predictions of bubbles in real estates and finance markets etc. - all build up "expectations" in the markets.

Also, periodical statistics like the labour employment figures, inventory data figures, inflation targeting stats , the purchasing managers index ,the consumers confidence index – which are instantaneous (and those like the quarterly GDP figures, the IPP numbers which come with a time lag )– they literally command the stock market quotations and fluctuations.

Through globalization and through the all - pervasiveness of economic standards , each country publishes these results , and ,with the world becoming a global village , all the economies are in fact now coupled with each other – and each one of these statistical figures is closely correlated throughout the world .That is the reason as to why if china's market has a lopsided opening , the ramifications are felt throughout all the indices. The recent apprehensions regarding an asset bubble formation in china – of near- empty sky scrapers in china being active "time bombs" and the fact that Chinese banks issued more long term loans during the first half of the year than the whole of the previous year are sending shivers down the world community and the dampening effects can be seen in the world markets.

 

A person having an immaculate knowledge of economics , technicals and accounts - just imagine his intrinsic worth - for he is exactly one of those involved in appropriating funds to the tune of billions of  dollars daily in collaboration with the aforementioned groups. I am passionate about asset allocation , currency hedging et al  precisely because of the vast potential showcased by these domains. 



Economics is MULTI-FACETED 

While learning economics, (and if I talk specifically of understanding "Indian economic development" ) one has to delve ( Dig ) into many social aspects and one consequentially adopts in effect ,a more value oriented approach towards life .

Till Recently, I was a staunch believer of markets , having been familiarized to CNBC since maybe sixth grade onwards.

But now , when acquainted with facts such as over half of the child-bearing women suffer from anemia , and that 75% of India's population is deprived of the capability to have adequate calorie intake , I feel inconvenient when trying to see the same channel  with the same vigor anymore. 

 That is the reason as to why economics is "PRO BONO REPUBLICO" –for the greater good of the public.
One factor which always undermined economics was the Political aspect involved in the decision making. Things , thus ,sometimes took a turn for the worse when political interests overpowered the "vox populi"-the greater good for the public.
 But with increased interdependence amongst the economies ,things are getting better , with rationality and greater sense prevailing.

The resolve shown by the G-20 nations in restraining from pursuing serious protectionist measures in the wake of the credit freeze is a testament of our evolution into a more interwoven global society, adopting a more level playing field . Because of the restraint shown in succumbing to the populist measure of raising protectionist walls , the world trade declined only by 10% as compared to a more than 50% reduction witnessed during the great depression.  




THE INCREASING PREVALENCE OF STANDARD ECONOMIC POLICIES GLOBALLY and their mixed impacts:


The International adoption of proven norms or new theories (which have brought stability and have increased efficacy ) has been even more pronounced and resounding after the fall of the iron curtain in Europe with the fall of RODINA (soviet union motherland) .

(The concept of the Iron Curtain symbolized the ideological and physical boundary dividing Europe into two separate areas from the end of World War II in 1945 until the end of the Cold War in 1991. On either side of the Iron Curtain, states developed their own international economic and military alliances:

• the Council for Mutual Economic Assistance and Warsaw Pact on the east side, with the Soviet Union as most important member of each
  
• the European Community and the North Atlantic Treaty Organization on the west and south, with the United States of America as the area's military powerhouse
  

The Iron Curtain took the shape of border defenses between the countries of Western and Eastern Europe, most notably the Berlin Wall, which served as a longtime symbol of the Curtain as a whole).

Capitalism had emerged as the clear winner in this battle , and has still survived the horrendous economic fiasco , although the role of the state in monitoring and regulating has been recognised as crucial.


But it was this same capitalism which had created the dot com bubble of 2000-01 .One of the crucial factors for the bubble burst was the total incoherence between the anticipated surge in Internet usage demand and the actual realization. There was so much belief in the INFINITE Potential of Internet demand and consequential DIGITIZATION that there was over investment in this domain -- optical cables and supporting infrastructure to the tune of $ One Trillion were laid down in a span of four years preceding 2000 .This was much more than the actual requirement leading to aggressive competition and Commoditization of optical cable business i.e. selling the optical cable data transmission services at dirt-cheap prices –eg. call charges fell from $2 to 10cents per minute because of the idle infrastructure. 
     Demand for the new high-speed infrastructure never materialized, and it became dark fiber, affecting companies such as Nortel, Cisco and Corning, whose stock plunged from a high of $113 to a low of $1.


 Bill Gates commented upon the bubble burst by saying that although bubbles had to ultimately burst , but they also infuse innovation and DIRECT HUGE resources towards the rapid development of the bubble sector , the results of which are visible only in the long term as it takes time for all the sectors to converge to new technologies and integrate them in their business modules.
His wordings were so true . This excess infrastructure of underground cables was the sole reason for decrease in transnational tariffs for data transmission , which in turn made Bangalore much more competitive , the only difference now being a time delay of one second between Bangalore and new york which is more than made up by our cost competitiveness and expertise in the software industry .   

   The dot-com era was an era of "creative destruction"-wherein digitization and the internet threatened the dominance of established companies like XEROX(whose photocopying business almost became redundant) - Innovation is healthy for the economy in the long run.  

But  the fall of the investment banks was because of  "destructive creation" - a progeny of excessive greed - WHICH WAS BASED ON VERY COMPLEX MATHEMATICAL MODELS which ultimately collapsed.Economics can thus be a Double-Edged sword and we have to adopt it in a  judicious manner . In my belief , the international model we are following will become more streamlined and will incorporate steps to adopt a sustainable framework for preserving the environment as much as the world economy.


  Talking about a better world tomorrow, i would want to mention a few points in favour of the indian economy going from a resilient phase to a resounding phase , from a current $1.3 trillion economy to a $4 Trillion by 2025-30 -
Reasons for The Resilience IN the Economy

This is an   Optimistic argument and may make one feel elated, but it has an element of truth in it.

Four prime arguments -  

  The biggest argument in favour of the Economy picking up strong momentum again was related to the tremendous increase in the sale of TRUCKS!

• yes , trucks and heavy commercial vehicle sale has doubled in the past month from an average of 5% to 10%.This has two implications – the first being that there is more confidence in the economy regaining strength , and an expectation of a future increase in sales. The second causation is that lending(truck loans) has returned to a healthy level , which is an even more important emboldening factor.
  

  Rate of commissioning
(commissioning refers to being fully equipped  for service , i.e. when the project/plant  has successfully passed the trial runs and is ready to be integrated in the production process)

The Economic think-tank, Centre for Monitoring Indian Economy (CMIE) said that various projects entailing an investment of Rs 5500 billion ( $113.4 Billion ) will be commissioned in the current fiscal in India and 40% of these will come from the public sector.

``Fiscal 2009-10 is scheduled to see projects worth Rs 5500 billion  ( $113.4 Billion )  of investments getting commissioned``, said Mahesh Vyas, managing director and chief executive officer (MD& CEO), CMIE.

In the previous fiscal, Rs 2700  billion  ($55.6 Billion)  worth of projects were commissioned. It was Rs 1900 billion ( $39.17 Billion ) in 2007-08, he said.

What we are witnessing here is that although the GDP growth has slowed down considerably , the confidence of industrialists regarding the future  market growth has managed to sustain , and that too resiliently. More projects have started yielding results in 2009  than in any other preceding year. This clearly implies a huge spurt in supply and an expounding demand as well.

This is the second most important resilient factor.

Gdp growth - Finance minister confident of 7.75 percent GDP growth this fiscal

• 'With latest GDP data on 2009-10 indicating 7.9 percent growth in the second quarter, the growth outlook for the next two quarters and for the whole year is expected to be in the upper bound range of more predictions for the Indian economy,' Mukherjee said at a function here Wednesday.
  
• India's GDP grew a relatively modest 6.7 percent in 2008-09, largely due to the worldwide recession that hit exports and manufacturing. Before 2008-09 India's GDP growth was above 9 percent for three successive years
  

The Planning  Commission (reportedly) went on to forecast a robust recovery in Q4, which would deliver a full year GDP growth of 6.3 per cent. Furthermore, the Commission foresaw a strong rebound in economic growth in 2010/11 to around 8 per cent. 

 

A little remarked fact about the flow of quarterly GDP estimates thus far is the astonishing resilience of aggregate investment in the economy. The rate of gross domestic investment (total or in fixed assets) as a ratio of GDP has held up surprisingly well despite the buffeting of global gales. The aggregate investment ratios of the latest quarter, 2009/10 Q1, are still in the 35-40 per cent range and only slightly lower than those of 2008/9 Q1, in spite of the severe global crisis in the intervening year.

(Gross  capital formation (GCF), which was 25.2 per cent of the GDP in 2002-03, increased to 39.1 per cent in 2007-08) . There has been an increase in the rate of investment in both the public and private sectors.



Since there is a crude relationship between GDP and  gross Capital Formation given by the formula that for every 4% increase in the gross capital investment , the GDP increases by 1%.,therefore, we  are witnessing high rates of growth in the coming decades and by 2025 , India will be a $4 trillion dollar economy. 



FDI

The rapid growth of the economy from 2003-04 to 2007-08 also made India an attractive destination for foreign capital inflows and net capital inflows that were 1.9 per cent of GDP in 2000-01 increased to 9.2 per cent in 2007-08. $10 billion was the amount of FDI during the april – june quarter 2009.

One beautiful , striking feature of this boom in FDI is that there is increased focus on improving the quality of FDI – with more and more of it going into r&d.



Also , regarding future expectations for the IT sector ,The addressable market for domestic technology and business sourcing in India is expected to expand five fold by 2020 to $90-100 Billion(capitalizing capacity seen at $50 Billion)., while exports are expected to reach $175 billion in revenues by 2020. this is a huge increase from the total it market in India presently at $50 billion.

A note has to be taken that if India needs to grow at an avg. rate of 8% ,  it will require magnanimous investments in infrastructure to the tune of $500 Billion  for the next five yrs. – which is a great challenge . But the average rate of awarding projects has been 70% of the planned rate. Moreover , a majority of the projects – close to 60 % - are plagued by time and cost overruns. If the current trend continues , India could suffer a GDP loss of $200 Billion (around 10% of it's GDP) in fiscal year 2017, implying a loss of 1.1 % points.  



  

The pmi index

(optional ishika) (The PMI is a composite index of five "sub-indicators", which are extracted through surveys to more than 400 purchasing managers from around the country, chosen for their geographic and industry diversification benefits. The five sub-indexes are given a weighting, as follows:

• Production level (.25)
  
• New orders (from customers) (.30)
  
• Supplier deliveries - (are they coming faster or slower?) (.15)
  
• Inventories (.10)
  
• Employment level (.20)
  

A diffusion process is done to the survey answers, which come in only three options; managers can either respond with "better", "same", or "worse" to the questions about the industry as they see it. The resulting PMI figure (which can be from 0 to 100) is calculated by taking the percentage of respondents that reported better conditions than the previous month and adding to that total half of the percentage of respondents that reported no change in conditions. For example, a PMI reading of 50 would indicate an equal number of respondents reporting "better conditions" and "worse conditions".
 

The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. If manufacturing is expanding, the general economy should be doing likewise. As such, it is considered a good indicator of future GDP levels. Many economists will adjust their GDP estimates after reading the PMI report. Another useful figure to remember is 42. An index level higher than 42%, over time, is considered the benchmark for economic (GDP) expansion. The different levels between 42 and 50 speak to the strength of that expansion. If the number falls below 42%, recession could be just around the corner. ) (just for knowledge) 

 



The Purchasing Managers' Index (PMI), compiled by Markit and HSBC, a seasonally adjusted headline index designed to measure the overall health of the manufacturing sector, stood at 53.2  in August down from 55.4 in July. In june 2009 , india's pmi was 55.3 , for the global economy it was  50. 



Indian manufacturers also witnessed pressure on their margins, with the input prices index rising to 57.7, the highest since September 2008 when the global meltdown hit the economy, though the out prices index remained flat at 50.