Direct Benefit Transfer

The Direct Benefit Transfer (DBT) also known as the Direct Cash Transfer Scheme (DCT) is the recent ambitious national level policy of the UPA government. The direct cash transfer is an anti poverty program launched by the central government on January 1 2013. This program transfers the subsidies directly to the people living below the poverty line. This is one of the landmark programs of the congress that has received warm welcome by the country.  Cash transfers or direct transfer payment of money to the eligible people is the primary objective of the newly launched scheme. The congress, caught in a web of scams and scandal, this one comes along the way as an opportunity to get away from political opposition and criticism. The scheme with a genuine and helpful objective is bound to serve the nation greatly. Let us now see the overall structure of the policy and how it has been functioning since its inception.

Generally, cash transfer programmes in developing countries like India are constrained by three factors viz. financial resources, institutional capacity and ideology. These factors affect in targeting the people who are entitled to the scheme. This is because governments in developing countries tend to have restricted financial resources and are therefore limited in the amount they can invest both directly in cash transfers and in measures to ensure that such programmes are effective. However, this is a notable initiative taken by the government to directly serve the people in a more efficient manner. In many countries it is considered as a poverty reduction measure because government subsidies and other benefits are given directly to the beneficiaries in the form cash rather than subsidies. Several countries like Jamaica, Turkey, Chile, Mexico, Indonesia, South Africa and Morocco have adopted this system earlier in the form Conditional Cash Transfer (CCT). Under such programs direct cash is provided to poor families on condition that it is used for proper investments or attaining basic nutritional health care. But so far this is unconditional in the Indian case.

The Direct Cash Transfer in India is implemented by Aadhar program launched a few months back. According to which the residents of our country are provided with aadhar card which is a unique identity card by which all the benefits and subsidies amount is directly credited to the beneficiaries bank account using the Aadhar numbers. Such a transaction would result in transparency, fewer leakages and less chance to corruption. It would also develop the financial infrastructure of the country. The DBT scheme was first rolled out in the capital city, Delhi and soon covered other districts. The Direct cash Transfer scheme was initially rolled out in 51 districts. It was then later extended to 18 districts. In December 2012 UPA Chairperson Sonia Gandhi launched a similar cash transfer scheme in Delhi for a beneficiary scheme which provides Rs.600 per month to around six lakh families from economically weaker sections of the society. The launch was later dropped for certain reasons. One serious concern is that how is the amount determined under the DCT. The difference between the market price and the subsidized price is calculated and transferred in proportion to the quantity uplifted from the market. Presently 34 schemes have been identified in 43 districts to implement the DCT scheme.

The DCT policy would help poor access basic goods by reducing demand constraints. The transaction is a carried out by the guidance of a task force and hence is reliable. The commodity purchase and then the transfer of the cash subsidy to the target account will be based on authentication of the beneficiary through aadhar at a point of sale.  Currently, the government subsidizes certain products and services like food grains, fertilizers, education and healthcare by providing them at below the market price.  The scheme though a significant and welcoming one has its own pros and cons. The aadhar enabled direct cash transfer is transacted to only those people who have an UID bank account. This makes the process easier and excludes people who don’t have aadhar numbers but claim to get the subsidies. An aadhar enabled bank account can be used by the beneficiary to receive multiple welfare payments. The scheme eliminates the chances of rent seeking middlemen and also fake identities. It will reduce leakages and diversion of the intended subsidies. This would reduce the burden on the government revenue and cost structure thereby reducing the high fiscal deficit. The cash transferred to the target account will make them buy the goods and services  directly in the open market. This would make people to buy the goods and services at the market price thereby creating a healthy competitive environment. The DCT scheme through the aadhar system will also transfer the cash immediately avoiding delays that is usually an issue in India.  The scheme overall is said to increase the efficiency of the welfare programs. On the other hand the few disadvantages are there is a lack of clarity on whether the aadhar is mandatory. Targeting and identification of the right beneficiaries for the right subsidies is also a problem. The scheme as meant to transfer cash is also likely to lack privacy. India consist a huge number of adult illiterates as a consequence of which many people are unaware about the scheme and how to access it. Most of the BPL families in India don’t even have a bank account and several villages in India presently don’t have any bank branches. Finally, unlike in other countries, India has rolled out the cash transfer scheme in an unconditional way which allows people to wean away from the intended purpose and spend lavishly in an unhealthy way.

                                                                                    

An analysis of the scheme since its first roll out suggests that the DCT has helped the people in more than one way. The congress has also stated an election slogan to the scheme with ‘ Aapka paise aapke haath’ (your money in your hand). People regard it as one of the landmark and prestigious schemes of the government recently. The scheme has said to promote savings habit of many wise consumers. The DCT has provided many benefits to students and children by providing vocational training and scholarships. It is said that those villages in the remote areas where there are no bank branches are likely to get the cash by business correspondents. The scheme is also intended to promote flexible pricing system in the market. As of now it is said that only some small subsidies such as scholarships and pension funds have been given as promised. Other big welfare subsidies such as LPG, fuel and others are likely to come later by this year. The government is still working on to make the DCT scheme a more reliable and efficient scheme to remove the constraints in the administrative side and is also planning to set an authority to overlook the distribution system. The scheme so far is only in the nascent stage and has been partially functioning only in certain districts. Access to aadhar card is still working in many states and the scheme is to serve fully on a large scale when the process of creating UID bank account in all the states is complete. Meanwhile, the central government which is backing on the DBT being a gamechanger with an eye on the upcoming general election is bent on rolling out the scheme all over the country as soon as possible. At the end of the day the political dividends of implementing the scheme are much less important than the real dividends.

Food Security Bill

The National Food Security Bill (NFSB) is one of the flagship programs of the UPA government. It is the election promise made by the congress while taking office in 2009.  The idea of implementing the scheme as desired on the national level started in 2010 following the recommendations of Sonia Gandhi, chairperson of the National Advisory Council (NAC). The government soon on her request started to look into the implications of the program under an expert committee lead by Dr. C. Rangarajan as suggested by the Prime Minister Dr. Manmohan Singh. The Food Security Bill was then finally introduced in the Lok Saba on December 2011.The main objective of the bill is to provide food and basic nutritional security to the deserving by ensuring adequate quantity and quality food at affordable prices to people to live life with dignity.

A country can be healthy only if its people are healthy and productive. India as an emerging nation needs to address the health issue seriously to move on to the development path. This has taken a view by seeing the poor health status of her people. India’s high economic growth rate in the past decade has not been fully reflected in the health status of its people, with 22 percent of people undernourished. According to the National Family Health Survey 2005-06, 40.4 per cent of children under the age of three are underweight, 33 per cent of women in the age group of 15-49 have a body mass index below normal and 78.9 per cent of children in the age group of 6-35 months are anaemic. These are disturbing statistics which point to the nutritional deficiencies. The NAC proposal for a National Food Security Bill is perhaps the most important national effort yet to address these deficiencies in India.

The food security mission is said to increase the production and productivity of wheat, rice and pulses on a sustainable basis so as to ensure food security of the country. The food security bill gives two categories of people the right to get food grains at affordable prices namely the priority households and general households. The problem is with identifying a priority household. Priority household will be entitled to 7Kg food grains per person and general household not less than 3Kg. The priority household will also get access to coarse grain for one rupee, wheat for Rs. 2 and rice for Rs. 3 per kg. The basic structure of the bill is to provide subsidized food grains to at least 75% of the country’s population, 90% in rural area and 50% in urban area. The bill has promised that in the first phase food entitlement will be extended to 72 percent of the population and in the final phase to be completed before March 31 2014; full coverage of food entitlement to 75 percent of the population will be ensured. The bill is said to provide legal entitlements for children, destitute and other vulnerable groups. The National Food Security Bill is to be implemented through the Public Distribution System (PDS).

So now that the basic objective of the NFSB is said and cleared let us analyze whether the proposed bill by the UPA government is feasible and bound to achieve its desired results. A country with a huge population, any policy that concerns the public and one that is of public interest needs attention as it is mostly seen as a just another election game played by the politicians to get votes. First, we all know that India presently faces a tough political uncertainty that may call off the general election anytime soon maybe even by this year. No wonder the congress is in a hurry to implement the scheme hastily before the election as promised. Will a policy that is said to address the poor and mass of the population implemented among such criticism and chaos reach and achieve its full objective? The answer is no because many of the policies implemented earlier on such occasions has been a failure.

Given the fact that the bill is proposed to reach on the national level, the first question arises is that is it not extravagant to subsidize food for such a large part of the population when the poor constitute only 30 percent of the population? India is already running a high fiscal deficit and current account deficit. Not only that, India also faces many other serious macroeconomic challenges, sluggish growth and weakening rupee. So in such a scenario isn’t wise for the congress do something to improve the economy rather than running madly to pass the bill successfully? The proposed food security bill would cost the government $23 billion a year and take a third of the annual grain production. Official projections are that it would cost close to 1.5% of the GDP. But even in the most pessimistic case our GDP is expected to grow only by 5% in the near future. This would hurt the already swollen budget deficit of India next year increasing the risk of the rating agencies to downgrade its investment status. If the bill is passed, India needs as much as 1.3 trillion next year, adding to a total subsidy burden that already eats upto 2.4% of GDP. The international oil and coal prices are likely to rise and don’t seem to come down in the short run. The domestic coal production is also weak and coal India is struggling to meet the growing demand. This has already proved costly for the fuel and fertilizer subsidy. The higher imports results in higher prices and will eventually affect the agricultural sector and farmers who is dependent on fertilizers to enhance his production and is the primary supplier to achieve the objectives of the NFSB. The extra cost would be further translated by spending cuts and higher taxes which is not a healthy way of achieving a sustainable development.

In a bid to reduce the fiscal deficit to 4.8 percent of the GDP in the current fiscal, the finance minister has laid out a budget targeting an efficient allocation by the plan and non plan expenditure. The food subsidy has hence been postponed curbing the financial cost. Another important aspect is the distribution system, India already has 54.7 million tonnes of rice and wheat as stocks with the centre and states. Due to the poor storage facilities the piled up stock will get rot and wasted. By piling up huge volumes of grain stock, the government reduces the supply in the open market, putting upward pressures on the prices. Since the scheme is to be passed through the PDS there will exist leakages and corruption as the government holds the control over the grain trade. Another problem is the exclusion, some people do not have access to ration card and hence subsidized food, from which arouse horrifying reports of starvation. The primary problem is also with identifying the beneficiaries. The government often talks about the poor as if it is well defined group but that is hardly the case. The official poverty threshold is low and many people above the poverty line are also poor and look like people below the poverty line. As a result, there is no reliable way in which subsidies can be targeted to people only below the official threshold.

The government among much criticism and argument is still sticking up with the bill and has now taken an ordinance route to pass the bill in the next parliament session. One point to be noted here is that many Indian states like Tamil Nadu, Andhra Pradesh, Karnataka, west Bengal, Chhattisgarh and Madhya Pradesh are already providing subsidized grain. Feeding its poor is a matter of urgency for India, home to 25 percent of the world’s hungry poor. Also india ranks 65 among 79 nations on the global hunger index. Ofcourse, the bill is one of the landmark schemes of the congress but how far is the bill ready to achieve the results in the present situation is a matter of concern. The FSB is not the best way to reach the poor and hungry, who are dispersed across the country. The best way to go about it is through UID linked bank accounts through which states will be encouraged to switch to cash transfers. The extra cost of government storage and distribution will then be saved and the problems caused by the distortion of grain trade will be mitigated. Many worries from the identification of the food bill with the PDS will disappear. The FSB instead through PDS, if implemented by cash transfers will serve as an income transfer. The effect of the subsidy is that households save money that would have otherwise been used to buy food at market price. The objective of serving the people subsidized foodgrain can be achieved only if the agricultural sector is healthy. But India since the beginning of the 21^st century has been continuously ignoring the sector resulting in weak production and disappointment among the Indian farmers. One of the main reasons of slow economic growth is also because of supply constraints and bottlenecks which the government has to seriously look into before implementing such a massive scheme on a large scale. The promise of near universal coverage is nowhere in sight and the UPA’s seemingly fretful efforts to get the measure through do not appear to be convincing. The policy is noteworthy and the objectives of the bill is highly helpful to the Indian poor but before going ahead with the scheme its wise to clear the present problems, revise the bill to the needs of the poorest of the poor and plan to truly serve the people on the long run rather than sticking to short term political pay off. The country is waiting but for a most reliable FSB. However it is wise to go by the saying:

“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a whole lifetime.”

Rupee Depriciation - The Falling Indian Rupee

The rupee is the common currency of India and its neighboring country Pakistan. Each country has its own currency that facilitates transaction both within domestic and global market. Europe is an exception to this where a group of countries in the euro zone area follow a single common currency. Ever since the globalization of world economies the value of each currency changes or fluctuates rapidly due to increasing transaction of goods and services. But this is not the only factor for the change in the value of currencies around the world. There are various factors for the currency of each country to appreciate and depreciate. In this article we will look at one of the macroeconomic concern India is facing recently, the depreciation of rupee.

The US dollar is considered to be the global currency and forerunner of the world currencies. The value of each currency around the world is compared against the US dollar to know the real value of the respective currency in a particular period of time. The interesting thing about currencies is that it changes every day with respect to the behavior of the markets. However, one has to know that each currency is traded with other currencies all over the world and in that aspect the value of a particular currency varies with the value of each currency of the countries across the world. Have you ever wondered what rupee has got to do outside our country? Does it hold any significance in the foreign market? Why is it important to know the value of our rupee? Why is it necessary to keep our rupee value high?  If you have given a thought about it, am sure you have an interest in knowing the economic condition of our country and if you haven’t let us try to seek answers to understand what is really happening around the world in terms of our monetary value because it plays a significant role in the economy.

First, we will get the basics right. Now and then almost every day we hear that the rupee is weakening against the dollar. We see in newspapers that the rupee falls to an all time low on a daily basis. So what is it actually means? The rupee or any currency is said to appreciate or depreciate over a period of time. Generally, it is good if the value of rupee appreciates i.e the value of Indian rupee against the dollar strengthens. But the Indian rupee in the recent years is undergoing continuous depreciation i.e its real value is weakening against the US dollar which is really bad to our economy. It not only affects the economy but it also influences our spending on goods and services. Example, at a point of time let us say the rupee value is Rs.55/$ which means that we have to shed out Rs.55 for each dollar we consume. Later, the value is Rs.52/$ which means that the rupee value has appreciated or strengthened against the dollar that will make us spend less against the dollar. On the economy side it affects the cash inflows and outflows, capital inflows and outflows, foreign reserves and foreign trade. On our expenditure side the imported goods becomes expensive when the rupee depreciates. In this globalized world most of the products that we buy are mostly imported as we look for superior quality and better choices.

The Indian rupee can be converted into any other currency. The rate at which we convert one currency into the other currency is known as the conversion rate. This rate changes on the daily basis based on the demand and supply of the currencies. The Indian rupee can be converted into dollar based on the prevailing rate on that day and this is usually done in a foreign exchange market or a commercialized bank. The Indian rupee appreciates and depreciates for various reasons and there is no straight cut answer as to explain why the currency value changes on a daily basis. But there are few common reasons as to understand why the Indian rupee changes against other currencies. Generally, economic conditions of other countries say US influence the Indian rupee. If the US economy is performing well there will be a huge demand for dollar and people tend to sell rupee and buy dollar. This strengthens the US dollar against the Indian rupee and the value of rupee is said to depreciate against dollar. The value of Indian rupee is determined through various factors such as forex reserves, FDI & FII inflows, rate of interest, exchange rate and so on. With the change in the indicators, the value of rupee as per the dollar changes. So now you know that just like any other commodity the rupee also has a price, the value you pay to exchange a rupee.

The rupee value mostly fluctuates with changes in the behavior of the market. The spot and share market greatly affects the rupee value and is influenced by the changes in the value of rupee. Each currency value depends on the domestic macroeconomic condition of the country. The rupee value changes if we expect any changes in the fiscal and monetary policies. The rupee value also tends to move along with the speculation of the markets and its agents. The trading market opens and closes on the value of rupee against the US dollar thus equity investors and corporate tend to track the values of the currencies. In the last few months demand for dollar by oil companies and increasing selling pressure in domestic equities precipitated the fall of rupee. The major reason for the fall in rupee is the immense strength of the dollar index which reached its three year high of 84.30. The record setting performance of the US equities and improvement in the labour market has made Americans and global rating agencies more optimistic of the outlook for US economy, thereby spurring greater hopes. And also the strengthening of dollar against major currencies globally aided the fall. The increasing demand for oil and gold imports has also affected the rupee. This continuous depreciation of the rupee makes our struggling economy further vulnerable as imports become costlier, inflation risk higher, growth plummets as a result of low aggregate demand and record high Current Account Deficit worsens. Negative capital inflows in the recent months also impacted the currency value to slide. Political and domestic market uncertainity has also added to the woes.

The changes in the value of rupee either appreciating or depreciating influence a whole lot of economic agents mainly the exporters and importers. The fluctuation has both positive and negative aspects. Rupee depreciation brings cheers to exporters on the long run as they will get more money against other currencies when they sell their goods. Indian companies borrowing money from other countries will benefit big time as they get more rupees for the dollars they bring in. Similarly, families of NRIs remitting money from abroad get more rupees. If a foreign MNC is planning to invest in Indian business for lesser dollars they will get more value in India. Broadly, for those who receive dollars it is happy time. On the other hand a falling rupee brings rib tickling experience to importers. Indian importers have to shed out more rupees for the goods they buy against dollars. Overseas travel will become expensive as you need to allocate more rupees to get the same amount of dollars. The budget of parents whose children staying abroad will feel the pinch of a depreciating rupee.  If you look at the trade data of India over the years you will see that Indian imports exceed the exports. At the end a depreciating rupee is just bad for the majority of us. If you see weakening of all currencies against the dollar, the rupee is also not unaffected in that sense. But this is panic in the market which is unwarranted. Experts are already forecasting the rupee to sink further to near 60 levels against the dollar. It is also expected that the Indian rupee may depreciate 10% versus the US dollar by the end of December. According to Nomura, a Japanese financial services company, a 10% depreciation in rupee value cause the CAD to rise by 0.4%. In the last few months there were no visible signs of RBI intervention to check rupee slide. Unless RBI takes some kind of steps to stabilize the currency the rupee may touch alarming levels. As the rupee is depreciating at a faster rate RBI is highly expected to intervene to check the volatility of the market as a result of a falling rupee and control it from falling further to improve the market sentiment and meet the various other macroeconomic challenges. The present value of rupee against the US dollar as on June 20th is 59.57 a great fall in the last ten month following US Fed chief Ben Bernanke's revelation on plans to withdraw on quantitative easing stimulas this year as US economy has started to grow. The following graph shows the rupee movement against the US dollar since 2000.

IPL Betting - Sports or Business?

Cricket is the game that is been celebrated and followed greatly in India with a lot of passion and enthusiasm. The sport has always been the favorite both to watch and play. Cricket has a great fan following around the world compared to all other sports and thus continues to dominate the sports world. Cricket is called the gentleman’s game which is deeply celebrated with abundant passion and love for the game by the Indians particularly. No matter the age, in this country, both young children and the old are so fond of this particular game. It is also so surprising that even the grandparents and parents go crazy by the game. You could very well see every streets and empty grounds in India occupied with people of all age passionately playing cricket even during the scorching summer heat. The players are celebrated and treated godly in this land and the cricketers are seen as the one by all when the game is on. This has given the players popularity and fame but at the same time open to criticism and comments. Unlike other sport, cricket has always gained attention and is thus open to continuous change and welcome to new game formats. The one that has gained popularity recently is the 20-20 format which gave way to the concept of Indian Premier League.

The IPL was first introduced in 2008 with warm welcome and enthusiasm among the cricket fraternity. The young generation of India was looking forward to more excitement from the new league. Ever since its first edition the IPL has believed that roping in actors and celebrities from the film world would gain the attention of a larger audience which would help in generating more revenue. This trick of involving actors and other big business magnets made the IPL and particularly the game commercialized with a big dose of entertainment than the spirits of the game and sportsmanship. I don’t have to say and there is no need to introduce the rules of this great league but I would like to mention the formation of teams and its ownership. There are totally nine teams in the IPL each of which is either owned by a Bollywood celebrity or bureaucrats. The players of the teams are formed based on an auction prior to the beginning of the league. So the very formation and ownership of the teams brings in the practices of business. The players and the teams are valued based on the highest bid and their performance in the league every year. So you happen to see no big shuffle in the teams as the owners try to retain their old players. Here let me mention the owners of the nine teams, Chennai super kings owned by Gurnath Meyiapaan who is the grandson of Meyiappan and is the owner of AVM a big production house in south. Rajasthan Royals owned by Bollywood actress Shilpa Shetty, Mumbai Indians by Reliance owner Mukesh Ambani and his wife, Kolkata Knight riders by Badshah of bollywood Sharukh khan, Delhi Daredevils by GMR group, Bangalore Royal Challengers by Kingfisher owner Vijay Mallya, Kings XI Punjab by Bollywood actress Preity Zinta, Sunrisers Hyderabad by Kalanidhi Maran and Pune warriors by Sahara India Pariwar.

The concept of IPL is interesting as it gives the viewers a T-20 game format which makes the audience adrenaline rush as the matches are mostly edge of the seat thriller where anything can happen in the last minute which can turn the whole fate of the game. Apart from this the IPL encourages the concept of integrating foreign players. This is one of the facts that I personally like most, where the mixing of foreign players is a sign of good sportsmanship that allow players to share their ideas and strategy with their fellow players. When I first heard about the IPL I was really thrilled and curious for the tournament to begin because I am generally not that cricket enthuse. But I really love the T-20 format as it makes us glued to the game rather than the usual ODI and test cricket. Ever since the IPL begun I eagerly await the summer holidays during which the IPL season take off. I have been regularly watching the IPL in the last five years with the same excitement and this year too its no exception. But this time towards the end when the dark side of the sport revealed and the story of spot fixing made flash on the news channels I seriously started thinking what this whole thing of IPL is all about. For a die hard cricket fan the drama of spot fixing surrounding the IPL in this season may not be a matter of concern or excuse to wean away from watching the great league. As an amateur viewer of the game, I really started to ponder over the issue and what the league gives its loyal consumers at the end.

As usual, this year too the IPL season 6 started with the same celebrations and fanfare but this year apart from the game it gave us the story of betting and spot fixing. IPL is born in the land where cricket is treated as the god of sports and where cricketers are seen as super heroes sent to the ground to fight the battle. So in such a land you can imagine how crazy and loving the people will be when a great cricket tournament like IPL takes place.  Does the IPL brand live up to the expectations of these people? Does it continue to provide good sport? The question needs to be answered. The cricket world in India is managed by a separate official body called BCCI. This year when the match fixing and betting threw light on the other side of the sport world it makes clear that the official body has not managed the sport effectively making the people of this country a victim to false game and match fixing. However the BCCI cannot take the whole blame as the IPL involves other intermediaries and franchises who are big boss in the corporate world who have the right to rule the league as they happen to be the sponsors and owners of the teams. But now that the dirty picture got revealed the BCCI has to take moral responsibilities to avoid such scams further in the coming years in order to make the IPL survive.

The picture of spot fixing got reveled days before the quarterfinals and when fans of the four teams that qualified for quarterfinals were curiously waiting for the climax of the tournament. It started with Sreesanth a player of Rajasthan Royals involved in fixing. Subsequently the police probed the issue and provided more evidence of Sreesanth involved in spot fixing and finally confirmed that his firm owned betting houses. Within a day other two players of the same team were accused and arrested on match fixing. The Rajasthan Royals was then on a fix and the police started to investigate whether other teams were linked to spot fixing. And within days other big heads of the IPL betting scam came into the spotlight. It was then Gurunath Meiyappan the team principal of CSK and son in law of the president of BCCI Mr. Srinivasan. Further investigation by the Mumbai and Delhi police officials found other big names who was allegedly involved in the betting scam. Bollywood actor Vinod singh was one of the main accused who was in frequent touch with Ramesh Vyas a bookie. Soon it came to know that Meiyappan, Vinod singh and few other suspects placed heavy bets not only in the T-20 matches in the IPL but also on Indian Cricket League (ICL) and Bangladesh Premier League (BPL). Further investigation by the police officials on the case revealed that there were more bookies involved in the betting scandal and some of them had been earlier arrested on charges of betting. The investigation and court case is still on and many more insights and evidences are yet to pop out once the case is taken to the jurisdiction. So far the Delhi police say the betting operation exactly follows a well planned hierarchy. The big bosses of the game provide protection since the entire betting operation is illegal. The CEOs seem to initiate the bets and manage a network of sub bookies. These sub bookies fix matches through mediators.  The whole betting scandal involved big cats like Meiyappan and Vinod singh, Chief bookies from the Indian metros, sub bookies and also some international heads.

The Indian Premier League is now rotten to the core but this rot did not set in yesterday. In the previous years also we saw the former chairman of the IPL, Lalit Modi accused of corruption and fixing, its now just the turn of his successor. Whoever thought these two gentlemen were fit to head IPL ought to be hauled up for all its present ills. Let us at least hope for a new successor who is really capable of handling the league for what it actually meant to serve the nation. The Indian Cricket is now in ferment and its credibility is lost in a crisis caused by the dirty game played by the body that controls it. The great golden IPL trophy seems to lose all its prestige and shine now because of the greedy nature of its administrators. The IPL has become a brand of its own in this country that glorifies the sport. A well established brand is bound to generate crores of money and IPL is no exception to this since its inception. The payment made to players for a twenty 20 match seem to be Rs. 2 Lakh. A rough expenditure for cricketing activities in India seem to be around Rs. 340 Crore and for associations Rs. 275 Crore out of which the share to players come around Rs. 47.49 Crore and coaching around 6.58 Crore. The gross income from the IPL turns out to be Rs. 265.14 Crore. So in a place where money seems to play a vital role few stringent regulations are mandatory for a clean sport. On this regard there were some strong recommendations and few of them are the Anti Corruption and Security Unit (ACSU) of the BCCI has said that from the next IPL edition every franchise will have to appoint an ACSU officer who would monitor access to the players. The process of educating the players on the perils of spot and match fixing have to be further strengthened. The ministry of law and sports together has said a bill to effectively tackle spot fixing and match fixing would hopefully be introduced in the next parliament session. There is a strong support for making the betting process legal which would help in creating a legal environment and avoid such illegal dirty fixing process in the future. It is said that Cricket is a game that is played by eleven idiots and watched by eleven thousand fools, this year the IPL and the ongoing betting scandal makes it true. However, just because some of the players were involved in spot fixing it doesn’t mean that the entire IPL is wrong, there are still legends playing the game passionately being true to their inner self. A country where millions of fans watch the game seriously and prayers are on air for their respective teams to win, it is the duty of the IPL to give a fair game to its audience. But this time the matches were predictable and it was obvious that CSK will lose in the final which by no means provide a good sport and justice to their fans and people watching the tournament. The controversies surrounding the IPL seem to have not affected the audiences viewing the sport which is a good sign but its now in the hands of the BCCI and IPL administrators to make the league survive in the future. However, the IPL betting and spot fixing scandal has put India’s cricket establishment in the dock and left people wondering whether the sport will ever regain its lost image as a gentleman’s game.

Current Account Deficit - A Real Danger

Current Account Deficit (CAD) is one of the primary components of balance of payments the other being the capital account. The current account deficit is referred to when a country’s total imports is higher than the total exports. Current Account Surplus (CAS) is just the opposite where the exports are higher than the imports. The former of the balance of payment make a country a debtor to the nations which it has trade relationship and the latter a creditor to other nations. Obviously, now you know that a surplus in current account is good and a deficit being really bad for a country. This is one of the important macroeconomic indicators that describe the state of a nation’s Balance of payments (BOP) and foreign exchange reserves. In the age of globalization where each country has a significant and potential role in international trade and finance, this indicator is crucial in understanding a nation’s foreign exchange reserve and trade account.

India entered into the globalized world in 1991 with the effect of New Economic Policy. The new economic reform was initiated by the then finance minister Dr. Manmohan Singh which helped India to come out of a serious Balance of Payment (BOP) crisis. The policy was and is still considered as a milestone in the history of Indian economic reform. The reform not only saved India from a severe bop that was threatening but also paved way to a new world of globalization. The important concept under the new economic policy was liberalization, privatization and globalization what came to be shortly known as LPG. hat came to be shortly known as LPG.economic policy was liberalization, privitization n indian economic reformme out a serious Before 1991 India had many restrictive trade barriers and did not support much trade related activities. The policy introduced liberalization which freed those trade barriers and encouraged world trade and practices. India by signing General Agreement on Trade and Tariff (GATT) soon became an emerging global hub of international trade. Privatization is encouraging private players. Many public sector companies were changed partially to private sector and India started encouraging many private sectors entering into the playing field. Globalization is the result of liberalization and privatization. India opened its hands to the global world encouraging international trade and foreign investment like Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).

The highlights of the policy were noteworthy and significant in the development of India in many aspects. Prime Minister Manmohan Singh being an economist exactly knew where the economy was heading and the dangers in the long run and thus with much thought would have introduced the new economic policy. The policy was applauded by many industrialists and people from both within and opposite party. But the same man now has no idea of what is happening to our economy, maybe, he knows but sitting ideally with no option than listen to what Sonia Gandhi has got to say. Though this may sound rude to some who are in favor of politics but this is the case in the past few years. For those who have a high regard of the Indian political and administration system, the so called “Indian patriotism” I would like to tell that its not the defensive trait you have within you that supports the system but it’s the feeling of what others think about India, which is not nationalism but narcissism. Then why a man with such great caliber was able to save the economy from a crisis in 1991 but not now? The point to be noted here is he saved our country when he was a finance minister but now being a prime minister which means he has more power and experience couldn’t do anything much to save the economy from a brink of a crisis. Of course, I understand that our economy has undergone several structural changes and India now is not the same India when it was in 1991. And thus the same old tonic cannot be offered now to save the economy. Moreover now its even more difficult as we are exposed to global shocks and crisis. But there must sure be a way to solve the present problems whatever may be the situation but the only thing I am concerned and trying to reiterate here is that every day we have been seeing new problems but the existing old problems being untouched or even ignored. One of the serious problem India is facing today is the ballooning CAD. Though our economy has grown leaps and bounds since 1991 it is the same problem we face today that we faced in 1991. The high CAD is of a big concern and finance minister and other government officials have been making statements to reduce it  if not at least control it. What are the steps they have taken in this regard? Do they seem to be efficient and produce the desired results?

The Current Account Deficit (CAD) touched a record high of 6.7 percent of Gross Domestic Product (GDP) in the third quarter of the last fiscal (October-December).  This created panic among some individuals but the policymakers seem to be not surprised by the figure because in the past few months all economic indicators have pointed to rise continuously, though the magnitude have been beyond imagination. Holding this upward trend there have also been poor policy responses to meet the problems. The finance minister said and promised to bring the CAD to 4.8 percent of GDP by the end of this fiscal which is still high but not alarming. The CAD has been funded through capital inflows and not through the foreign reserves which is a good sign. Infact in last few months there have also been increase in the reserves. Though this is good to hear the CAD is still high which is really unacceptable and much beyond actual RBI forecast of 3 percent of GDP. No wonder this high CAD has seldom caused so much concern. Another way to calculate the CAD is the merchandise trade deficit plus or minus invisibles from net earnings from services. The primary reason for the widening CAD is the large merchandise trade deficit. The large imports of oil, gold and silver have been the main contributor. Since the global crisis the exports have been constant or sometimes declining but the merchandise imports continue to increase sharply. The lackluster performance of the net receipts and net invisibles has helped the balance of payments but has added to the pressures. The dependence on short term capital flows to bridge the gap and finance the CAD is dangerous. According to RBI, the pickup in capital inflows was mainly due to foreign portfolio investments. Foreign direct investment, by far the most desirable investment flows declined in the third quarter of previous fiscal. The government has been taking several strategy based policy decisions that could help the environment conducive for short term capital flows. The finance minister in the last few months has asked the people of India to control their passion for gold. He raised the import duty of gold in the last budget to reduce the demand of the yellow metal which has been the main component in widening the CAD. The fall in gold and commodity prices will reduce the current account deficit but they are not the real solution. He has planned to introduce Inflation Indexed Bond (IIB) in this fiscal year to curb the demand for gold and encourage investments that could well be used as a hedge against inflation.  He also encouraged investors to invest in mutual funds by raising the limit through Rajiv Gandhi Equity Savings Scheme. The following graph shows the CAD, export and import as a percentage of GDP in the last thirteen years.

Anyway it is the job of the finance minister to hold out hope. The marginal propensity to import by borrowing money in India is small. People borrow more money when the interest rates are low and they then spend. Some of the extra spending gets translated into imports. Without imports, the extra demand would get translated into higher prices. India being India, we have both inflation and higher imports. And add to lower exports and what we have is something very worrying, a looming balance of payments crisis. Government should control fiscal deficit no matter what the goals are, to achieve long term sustainability. The big bang reforms of 1991 happened because the government then was much more tempted by short term political pay offs rather than long term sustainability. The current set of reforms is also happening because a crisis is looming. A revival in exports depends on the economic conditions in USA and Europe. There is not much India can do about it. But financial incentives for export promotion can help in a long way to reverse and improve the scenario. In the 22 years since the last major crisis, the economy is right back where it started. One should know that two decades ago, Manmohan Singh started off by getting the economy out of a very deep trouble. Now he seems to end his career by landing it right back into it. 

Gold - The shining yellow metal

Gold in India apart from being seen as a traditional and luxurious good has always been considered as one of the best investment option. This yellow metal particularly has gained attention and interest in recent times since the global recession. As our country is facing high inflation and people are constantly fighting the inflationary pressure, gold seems to be the best investment option that stands as a hedge against inflation. Over the years, particularly in the last five years people in India have become increasingly obsessed with the yellow metal. India is the largest consumer of gold. Gold has always been considered as a significant commodity since early age. Before money came into existence, people those days had gold as their reserve for all the transactions. The evolution of money came from the barter system and the gold standard system. The barter system is where people exchanged goods for transaction. With its limitations, then came the gold standard where gold coins and paper were minted and used for all the transactions. With its limitations came the currency paper system that we use today. Many kings valued gold both in terms of monetary and investment. Thus gold holds a significant importance in history. Today, gold is a long term store of value for governments and individuals. One cannot forget gold when talking about the evolution of money.

Gold of all the other precious metals is the most popular investment choice of the retail investors. What is there in this metal that lures people? Generally people follow an option that attracts everyone. In this case the demand for gold has always been high and that is why many are enticed to invest in this precious metal. The demand for gold is always on the rise making it more valuable and attractive. This is one of the primary reasons for the soaring price of the metal. The other is the demand supply mismatch that causes the price to fluctuate rapidly. The supply of gold in general is limited as the cost of production is very high and globally gold bullions are limited resources. Like all the other markets, gold market is also subjected to speculation and fluctuation. There is a plethora of various investment platforms and this raises the uncertainty and speculative nature of each investment option. A good investment should give high return or at least expected return so that we don’t go in losing our money. The risk associated with each of these investment options out there varies according to the market in which they are traded. Out of all these the stock markets namely the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India is more volatile. The stock market is a place where equity shares of companies are bought and sold by buyers and sellers. In an inflationary situation or the economy facing a crisis this is the first market that is bound to get affected greatly because of slower economic growth and capital investment. During recession bank deposits also don’t give you high returns but moderate assured returns.  In a situation like this gold investment is better as it yields good profit and value for your money. So a careful analysis of the market condition and macroeconomic indicators should be carried out in order to choose and invest in the most rewarding investment platform. The factors surrounding gold as a best investment option against a falling economy is not clear for many first time gold buyers.

Gold is more commercial than stocks as gold is easy to buy and sell. Many countries across the world have gold as reserve as its easily convertible into cash. Gold investments have become easy now with wide avenues open to trade the metal. Thanks to internet now buyers and sellers can bargain and negotiate on gold prices and use it as a platform to promote gold stock. In the present economic situation with weaker economic growth, persistent high inflation and financial uncertainty gold is easy to liquidate as well. Even during recession, gold by many is considered as a fashion statement and thus increasing the demand and the jewelry business. But once if you consider investing in gold have the patience and be prepared to wait for good returns that are viable only in the long run. The more years you hold gold the better returns you get. Gold can be easily sold in times of emergency. Since gold is an asset class it is considered as wealth insurance. So unlike other investments like stocks and real estate, investment in gold does not value timing. Before deciding on to invest in gold one should know which form of gold to buy to make it for a better investment because gold can be bought in many ways. Indians mostly buy gold as jewelry and ornaments but this is not the right choice for gold as a investment since jewelry  is just a personal belonging for adornment  and does not guarantee you assured returns when sold. So gold like bars and biscuits is a better form of investment than jewelry as they are in the purest form. Of all, the one that is gaining popular in recent times is the gold Exchange Traded Funds (ETFs). These are just like mutual funds held in paper form in your demat account. This form of gold investment offers better option as it is easy to transact.

The recent drop in the gold prices signaled caution and speculation across the world shaking investor confidence. Does this signal the lust for gold is coming to an end? Does gold started losing its shine? What caused the international gold price to fall suddenly? First, it is not the demand for gold jewelry but gold investment that spurred the prices of gold to escalate since 2000. Historically, gold has been the safest investment. The demand for gold biscuits and ETFs doubled between 2005 and 2012. The main reason for this increase in demand for gold as an investment is because of the globalization of world economies. Since the 21^st millennium many emerging nations across the world due to globalization entered into the growth phase that caused inflation to move higher making investors to buy gold as a hedge against financial instability. Since 2003 the dollar value has been on decline helping the gold price to sky rocket. This sharp increase in gold prices attracted investment funds in search of high yielding assets, fuelling the price increase. So many investment and hedge fund companies started taking a leveraged bet on prices through futures trading. Commodity trading seems to be risky but the most rewardable of all the other investment options. A classic example was the rise in the crude oil prices in 2008. Data suggests that there is a strong correlation between prices of gold and crude oil.  The continuous surge in the international gold prices peaked since 2003. However, the international gold prices started declining gradually since the financial crisis of 2008. Many investment fund managers and small investors started losing interest in the asset that is declining or trending sideways. The decrease in the gold price internationally made investors to doubt the returns of the asset. Evidently, this decrease delivered very low return of just 5 to 10 percent in 2011 and 2012 compared to high returns since 2001. Thus many investors and fund managers are parting with the gold holdings. World gold council data reflects that the investment in gold has been declining in the past two years. The sudden plunge in the gold prices is also because of the gloomy situation prevailing in the Eurozone. Cyprus is the latest to join the league of default in the euro crisis. The banks in Cyprus were shut down because it went bankrupt of inadequate liquidity. Cyprus started to pay its debt through its gold reserve that made the gold price to fall dramatically.

The fall in the prices of gold came as a rude shock to some of the investors who thought they were playing with the safest bet. The question that ponders many investors is that whether this fall is permanent? No, because nothing in the business and investment world can be permanent. And there are many factors that are still supportive of gold prices. The gold jewelry business is bound to see profits as the demand for gold jewelry is to rise with the price decline. Many jewelers say that the fall in the gold price is just seasonal and temporary and expected to see the value of gold to increase again by later this year. Inflation continues to be a concern in most emerging economies like India and the depreciating value of rupee will make many investors park at least part of their money in gold or gold backed assets. The government and central banks will also have to continue increase in their gold holdings against the risk from a weaker dollar and euro. Investors can still look on gold for investment as it still seems to be an alluring investment option. Any asset that has trended in only one direction for years is bound to decline. Seen in this context, the recent decline in the gold price may be healthy. The banking sector and the stock market globally have become weaker and are prone to uncertainty prevailing around the global economy. In such a situation the demand for gold is expected to be strong. Keynes has acknowledged that “gold has become part of the apparatus of conservatism and is one of the matters which we cannot expect to see handled without prejudice.” The gold purchase will be high this month during the Akshaya Tritya as it is believed that investment made on this day tend to appreciate and continue to grow.  

The aftermath of the global crisis

The financial crisis and the European Union sovereign debt crisis is the greatest economic crisis in recent times. Ordinary people still don’t seem to understand the nuances of the ongoing economic crisis but all the people around the world are affected by the crisis. No wonder even some great economists and policymakers are as perplexed as us about the crisis. They are scratching their head with ideas to bring the global economy on track. The crisis has serious consequences and implications across the globe but the degree to which each country is affected varies considering their respective domestic and geopolitical factors. In the age of globalization no nation can keep aloof from the world economic volatility. In this article I would like to tell how some key economies in the world are performing post the global financial crisis.

Now we know that the global financial crisis started in the USA and reached across various countries and the sovereign debt crisis is because of the huge amount of debt created by the European Union countries. Both USA and countries in Europe are highly developed countries and hold the tag of developed nations for a very long time now. Over the years both the United States of America and some countries in Europe were developing robustly losing track on their debt levels. Data shows that both the USA and Europe’s debt level is always on the rise and the countries got well acquainted with the industrial revolution. The capitalistic nature of these developed countries is the main reason for the crisis to take place. The capitalism system of an economy was carefully analyzed by three great economists who are pioneers in introducing economic theories that stand out to be important in their own way. The ideas proposed by these economists are unique in their own way and are still relevant in present day.  The three economists I am talking about here are Adam Smith, Karl Marx and John Maynard Keynes. Economics is a field that gives freedom of thought and expression to its practitioners and so does there exists two groups namely conservative and non-conservative group. Adam smith in his book ‘The wealth of nations’ (1766) explained about capitalism and its functions. He introduced the concept of division of labor which means specialization of individuals in performing specific tasks and roles for efficient production. He viewed that the capitalistic economy works on invisible hand i.e free market which means that the market is able to achieve equilibrium on its own through demand and supply forces. Karl Marx denied some of the views expressed by Adam smith and gave importance to the concept of laissez faire which strongly opposed government intervention. Keynes is the pioneer in bringing a whole new view to the capitalistic nature of an economy. The great depression of 1930 that affected the US economy was saved from the theories introduced by Keynes in his masterpiece book ‘The general theory of employment, interest and money’ (1936). Since then the world has been following his theories and most of the present economists are post Keynesians. Thus John Maynard Keynes came to be known as the “Father of modern macroeconomics”.

China is said to be the next superpower of the world after the USA. Many experts believe that china’s exports will outgrow that of the USA by 2016. The Chinese economy is the forerunner in the Asian market followed by India. China has been showing good trend post the financial crisis with GDP growth above 7 percent. This is mainly because of good policy reforms and monetary transmission. The high growth that china witnessed in 2009 was because of structural reforms. The Chinese government responded swiftly to the global crisis by introducing 4 trillion Yuan stimulus package. The country’s central bank cut interest rates deeply thus encouraging the growth of credit.  Since the crisis in 2008 the Chinese government has been faced with three major tasks which are crisis management, structural adjustments and protecting its foreign exchange reserves. The stimulus package is the result of expansionary fiscal policy where the government increased its expenditure and reduced tax rate thus raising the real disposable income of its people. Most of the money from the package was spent on infrastructure. But many private investors especially small and medium sized enterprises did not benefit much from the spending binge. Many local governments are squeezing their small enterprises to compensate for the reduction in their fiscal revenue resulting from the slowdown in economic growth. The scope of the Chinese government to implement the fiscal stimulus was very high because of the country’s strong fiscal position, vast domestic market and strong external position. One of the important feature of the china’s stimulus plan is the large amount of tax rebates for exports. In contrast to many other developing countries, china has a strong point and is sustainable to carry out a expansionary fiscal policy. This is because over the past decade china has a very low budget deficit to GDP ratio. However, such expansionary fiscal policy for a long time is dangerous and can even produce negative results. This is evident from the sluggish economic growth from the beginning of 2013. The growth in the beginning of the year was driven mainly by exports and real estate. The housing bubble of the us financial crisis did have an impact on the Chinese economy but their government encouraged domestic real estate producers by making availability of credit easier. The current trajectory can be sustained only by pumping more leverage into the system. Though china boasts of its exports, it has a weak consumption demand. Almost all the core sectors of the economy like clothes, auto and food is greatly affected. Some economists in china warn that pumping in more money into the system might help china to achieve its official growth target of 7.5 percent but only at the expense of financial risk.

Initially the global financial crisis did not adversely affect the Indian economy. But later it did take a toll on the economy. The country registered a high growth rate of above 7 percent in 2009. The Indian economy continues to grow because of ample demand. During 2008 India’s rural consumption generated enough demand to substantially insulate India from global trade shocks. Thelate india from global trade shocks.ause of ample demand.nd  India also witnessed high growth soon after the economic crisis because of its expansionary fiscal policy. India, like china introduced huge fiscal stimulus packages to revive the economy and protect the economy from the global recession. Since the global crisis caused some of the leading banks to go bankrupt, the entire financial system including India was affected no matter how strong the country’s financial market was before the crisis. However, the banks in India have managed quite well even after the financial crisis and this is because of the strict monetary policy suit of the Reserve Bank of India post the crisis. Though the stimulus package helped in creating a high growth of 8 percent eventually it resulted in an inflationary situation. The high government expenditure post the crisis resulted in a high budget deficit. The country’s monetary transmission needs to really appreciated as it has been stringent but effective. Of late the central bank of India have been taking number of monetary easing and liquidity enhancing position to facilitate flow of funds from the financial system to meet the needs of the productive sectors. One serious problem most of the banks in India have been facing after the financial crisis is the rise in Non Performing Assets (NPA) which is because of weak economic growth and low capital investment. Unfortunately it is the mismanagement in the fiscal policy that has resulted in various serious problems like persistent high inflation, slow economic growth, low consumption and investment demand and huge trade deficit and Current Account Deficit (CAD). There is a constant battle between the central government and the RBI in controlling the trade off between growth and inflation resulting in ping pong economics. From the beginning of 2012 there has been a huge mismatch between production, consumption, saving and investment which is the primary cause for the current economic instability. The impact of the financial crisis is great in portfolio equity flows and liquidity position of the country. At present India is facing difficulties in fostering its regional and global interests.  The global financial turmoil has widely affected the Indian service sector as it holds a significant position in the global economy. Since the financial meltdown has affected the country’s foreign exchange reserves due to outflow of short term capital, the rupee value has been depreciating which is of a serious concern.  RBI has decided to bring in more private players in the banking sector which would help in financial inclusion and better investment scenario.

Many other developing countries apart from India and china have been growing strongly but forecasts have been negative in the past few months. However, the world economic outlook released by the International Monetary Fund (IMF) last month has projected a positive global economic growth. The crisis is becoming severe and the magnitude of the crisis will depend on the response of USA and EU. Many developed nations is already entering into a severe recessionary phase. The financial crisis has affected the developing countries in two ways. First, there has been immense financial contagion in emerging markets. Second, pressures on trade and foreign investments. Developing countries because of the trade imbalances face huge current account deficit and are feeling the pressures on exchange rates and interest rates. The developed nations suffer serious fall in unemployment compared to developing nations. Both the developing and developed countries not only suffer economic problems but all also social problems like lower growth translating into poverty in emerging nations and social unrest in the developed world and more crime, weaker health systems and even more difficulties meeting the Millennium Development Goals. Thus the current macroeconomic and social challenges posed by the global financial crisis require a much better understanding of appropriate and effective policy responses to save the world from another serious economic collapse.

Beware the nostrums of economists

Beware the nostrums of economists - The Hindu