Wednesday, November 28, 2007

Iran, Venzuela, Warren Buffet, Taj Mahal & supermodels - and US$

Of course, anyone following the global financial news will know that the 50-year old global romance with US$ is coming to an end... The signs were there since quite some time...

What has changed is that what could be earlier explained as a geo-political or high-end financial investor pheonomenon, is now trickling down to mundane affairs.

The snap-shots of this worn-out/wearing-out romance look like this:

1. Earlier, it was the Communists/"Axis of Terror" countries, who started terminating the relationship

  • In Nov 2000, Iraq - with world's 2nd largest oil reserves - switched from US$ to Euro in its oil trade (and consequently, got liberated/invaded!)

  • In Nov 2004, Cuba banned trasactions in US$ and switched to Euro

  • In May 2006, the Russian Finance Minister, Alexei Kudrin, described US$ as an "unreliable as a reserve currency". Russia has been selling oil in Euros since last 4-5 years.

  • In Nov 2007, in the OPEC meeing Iran's President Mahmoud Ahmadinejad said that US$ has become a "worthless piece of paper"... Since 2003, in any case, Iran had started demanding to be paid in Euro for oil - and had thus became a part of "axis of evil" country>...

  • and of course Venezuela... along with Sudan, South Korea, China, etc.
    etc., etc..

    2. Then, the financially-savvy investors started moving away
  • Two years back, in the World Economic Forum, Microsoft Chairman Bill Gates publicly dumped the US$: "I'm short the dollar... The ol' dollar, its gonna go down."

  • Warren Buffet echoed Bill Gates sentiments then, and again noted this year: "We still are negative on the dollar relative to most major currencies, so we bought stocks in companies that earn their money in other currencies".

  • Peter Schiff, president of Euro Pacific Capital described: "The dollaris a basket case"

  • Investor Jim Rogers, a former partner of George Soros, of Rogers Holdings (formerly Beeland Interests Inc.) advised people to get out of dollar: "If you have dollars, I urge you to get out... That's not a currency to own." In fact, he is following his own advise by selling his property in dollars to buy Yuan, and expects that he will be able to get rid of all his dollar assets by next summer
    etc. etc...

    3. The friendly countries/allies start bidding farewells
    One can dismiss the above since countries like Cuba, Iran or Venezuela have a political point to make against US. And investors, at best, would be following their self-interest - they would move away from a weak dollar and come back once the dollar picks up.

    But more recently, even the friendly countries are getting disenchanted with US$
  • In May this year, Kuwait stopped pegging its currency, the dinar, to the US$. This was not out of any animosity against US; it was just two expensive for Kuwait to keep the dinar linked to the dollar.

  • In August, US Treasury showed outflows of $163bn from all forms of US investments. This was the first time since 1998 that on balance the foreigners sold the US Treasuries. Japan and China led a record withdrawl of foreign funds - followed by Taiwan.

  • In October this year, the Qatari and Vietnamese governments announced that they are rapidly divesting in dollar denominated securities. Qatari Prime Minister mentioned that the government-backed $50bn Qatari Investment Authority (QIA) now had less than 40 per cent of its investments in dollars, down from a high two years ago of 99 per cent.

  • In the recently concluded meeting of OPEC heads, a closed door meeting "accidentally" got telecasted to journalists. In response to pressure by Venezuela and Iran to replace US$ by a basket of currency for oil trade, Saud al-Faisal, foreign minister of U.S. ally Saudi Arabia said: "...the mere mention that the OPEC countries are studying the issue of the dollar is itself going to have an impact that endangers the interests of the countries..."... That's why, while the issue was discussed and debated, it did not find mention on the draft declaration.

  • More recently, last week, People's Bank of China vice-director Xu Jian declared the dollar was "losing its status as the world currency." With a dollar-denominted forex of more than a $trillion, this statement may have wider implications.

    4. And now these minor reverberations!
    Nearer home in India, two developments took place during last couple of months.

  • Five-star Hotels such as the Le Meridien, the Taj group and ITC Maurya have switched over to a rupee-tariff regime. The foreign guests are required to pay in INR, and not in US$. Accoriding to the COO of Le Meridien: "The dollar was falling every day for the last couple of months ... decision was taken to charge a single tariff from October"

  • Foreign tourists to about 120 of India's famous historical landmarks (including 27 World Heritage sites, Taj Mahal being one of them) will need to pay the entrance fee in Indian Rupee, and not in US dollar.

    And last but not the least, a news from Brazil:

  • Not that one needs to learn about currency markets from supermodels, but when the 27-year old Gisele Bundchen, the Brazilian supermodel, insisted that she wants to be paid in any other currency, but not US dollars for P&G's Pantene hair product ads, I guess the domino's effect is taking place...

    Related Posts:
  • April 17th, 2003: Gulf War-II: Saving the US$ against Euro
  • December 9th,2004: The Collapseof Dollar Economy??
  • February 3rd, 2005: US$ vs. Bill Gates, Warren Buffet, George Soros, China
  • January 5th, 2007: The Collapse of U$D Economy?? - Part II
  • October 4th, 2007: Tipping Point for US$?

  • Saturday, November 10, 2007

    High-Price of the Low-Cost Cars

    Indian automobile industry is buzzing with the low-cost (read Rs.100,000/-) car. The Tatas announced this Rs.1lac car for the aspiring Indian middle-class. Other automobile makers (M&M, Maruti, TVS, etc.) have also hinted but are keeping their plans secret.

    So how low-cost is the low-cost car?

    Except for the small car project in Singur, the other ventures are still in the offing, and the details are not available in public space. So perhaps the Singur small car project provides the indication of the economics involved in the other small-car projects yet to come up.

    According to a LiveMint article:

    "At the recent Geneva Motor Show, Mr Ratan Tata admitted that the price of Rs 100,000 would be ex-factory, excluding taxes and that models with air-conditioning and other features would cost more."

    So how much are these "excluded" taxes - and who gets it?

    The same article informs that the additional taxes will be:

  • 16% in terms of excise duty
  • 40% in terms of MODVAT
  • 12% in terms of local sales tax levied by the states

    In real terms, this means that the much hyped Rs.1lac (Rs.100,000) car will actually cost Rs.1.68lac (Rs.168,000/-) car to the consumer (unless you want it "with air-conditioning and other features" - which will cost more).

    At an intial capacity of 250,000 units/annum of the proposed Singur plan, this translates into about Rs. 170 crores as taxes to the govt.

    In addition, the Singur plant will also provide a rent for the Rs.855 crores for the 1000 acres of leased land.

    If I were a "Socialist" (as I am often categorised by some... even though personally, between/beyond the socialist/capitalist continuum, I prefer to remain a non-ideoligical realist/pragmatist), I would say that that this 68% tax + rent (more than Rs.1000 crores) would help the govt. to do all the good things it is supposed to do for the common citizen, e.g., invest in public infrastructure and provide basic services (healthcare, education, sanitation, land-rights, etc.).

    Unfortunately, that is not the case...

    So who gets the benfits of these taxes?

    Somehow in this economic paradigm of growth, the benefits do not "trickle down".

    As the table below (The Telegraph, March 16, 2007), shows:

  • There is no requirement for upfront payment for the land by the promoters

  • The Singur plant promoters get a soft loan of Rs200 crores (at 1% interest) from the state govt. Rationale (as explained by the industry minister: "“Unless we give these concessions to the Tatas, other states will wean them away and that would be a big jolt to our efforts to effect a turnaround for Bengal."

  • VAT to be refunded as loan at 0.1% interest to the promoters

  • The rent for leased land will be paid at 1% (i.e., Rs9.5crores) over next 90 years!!

    ...And, in terms of social cost-and benefits, how many people get benefitted from this venture?

    7,500!!... and 11,000 families get displaced

    ....overall cost to society?

    Commenting on the above, Ashok Mitra wrote in an op-ed:

    "To persuade this fabulously rich group to start a modest-sized car factory here, the state government has already spent something around Rs 150 crore to acquire close to 1,000 acres of land... this entire tract of land on a ninety-year lease without any down payment at all. For the first five years of the lease, they will pay only one crore rupees; for the next twenty-five years, the payment will increase by 25 per cent at five-year intervals; for the next thirty years payment will be raised at five-year intervals by 33 per cent; for the final twenty years, the rent will be only Rs 20 crore per year.

    The discounted present value of what the Tatas have agreed to pay, any respectable accountant will vouchsafe, will hardly exceed Rs 50 crore. Equally necessary to take into account here are the historical trends in the rate of inflation and the likely explosion of real estate values through the decades...

    ... The state government is, in addition, offering... a loan worth Rs 200 crore carrying a nominal interest of only 1 per cent (as against the rate currently charged by the banks of at least 10 per cent); the principal, one suspects, is never intended to be returned. Finally, in terms of the lease agreement, the entire proceeds for the first ten years of the value-added tax on the sale of this precious car in West Bengal are proposed to be handed back to the Tatas, again at a nominal interest of only 1 per cent. If 40,000 cars are sold every year in West Bengal — not an unreconcilable assumption — with a value-added tax at 12.5 cent, this particular act of magnanimity on the part of the state would ensure an extra bonanza of more than Rs 500 core for the Tatas.

    All told, therefore, the group is being offered the allure of around Rs 850 crore by the state government, apart from their being spared the bother of acquiring the land through their own efforts."

    What this comment does not elucidate is that even though it the state government who is paying this Rs.850 crore, in reality this money ultimately comes from the taxes paid by the citizens.

    In additionthere are the costs, which are not calculated in the economics of growth of the "low-cost" car industry, e.g.,:

    - the cost of roads - and their maintenance - on which these "low-cost"(!!) cars will move

    - the cost of air pollution (and the healthcare costs)... though that will add to GDP - naturally!!

    - the cost of livelihoods which depend on the land they subsist on... etc.

    Pl do watch Aabad Bhumi:

    Other Related Posts can be accessed here

  • Tuesday, November 06, 2007

    India's National Income: Camel, Pigs, Betel Leaves, Kutcha Houses and all...

    I had blogged about the shifting basis of calculation of national income sometime last year. But frankly, I was ignorant about what all can go into making "India Shining" for the "Aam Aadmi"

    In that context, this piece by Ashok V Desai in today's Telegraph is just too good - and surreal - not to quote from (though I would recommend that one should read the full op-ed):

    "An event occurred unnoticed on January 31, 2006.... It is the change in the base year of national income estimates from the financial year 1993-94 to 1999-2000... (till) 1999-2000, our national income did not include the value of goat’s milk or camel milk, betel leaves produced in West Bengal and Assam, duck eggs, or salt made by evaporating seawater. Furthermore, it ignored the fact that like animals, trees also grow, and became more valuable as they grow.

    Gold and jewellery have been amongst our prize possessions for millennia; but it was only in 1999-2000 that their purchases were included... a special new rubric was created for them; they will be found under capital formation...

    If an enterprise made a loss, I would have thought that this was negative value added and should be subtracted from national income. But then,... the CSO now treats all losses of public enterprises as imputed subsidies. Would it equally treat losses of private companies as subsidies? I doubt it...

    We have developed a large industry to make software. It is of such recent origin that it was ignored in previous compilations. But by 1999-2000 its output was significant, and it had to be taken into account. Is software a consumer good or an investment good?... After due deliberation, the CSO classified it as investment... The CSO’s practice of treating all software as equipment leads to an overestimate of national income; but the alternative is perhaps too complex for a government organization.

    ...Foreign companies have subsidiaries in India. If they save their profits and reinvest them in the business, that increases the value of the business and adds to the foreign companies’ assets — which are, so to say, India’s liabilities to foreign investors. Those reinvested profits somehow went unnoticed all these years; now they are included in foreign inward investment.

    ...On the insistence of the Assam DES, the CSO included Rs 13.55 billion’s worth of betel leaves. The Andhra DES insisted on the inclusion of toddy, but had no clue about its value. So the CSO studied consumption data from the National Sample Survey and came to the figure of Rs 5.44 billion...

    ...The Socio-economic Research Centre had said that a camel gave 700 grams of hair a year if it had one hump, and 3 kilograms if it had two... However, the NRCC (National Research Centre on Camel in Bikaner) disowned these figures, and said that a single-humped camel gave 800 grams of hair. Just why a double-humped camel gives almost four times as much hair as one with a single hump is not known; but then, the NRCC is the expert on camels, and must be trusted. There is no National Research Centre on Pigs... So the CSO went to the Bhongaon Pig Fair in Mainpuri district and gave a haircut to a number of pigs. The average pig yielded 155 grams. Camels and pigs together accounted for Rs 180 million of hair.

    ... kutcha houses; the resources that go into their construction should be included in investment. This category has turned out to be very convenient for the CSO. It found that as tea shrubs, coffee creepers and rubber trees grew, they became more valuable. Not knowing where to put this value added, the CSO classified it as kutcha construction. This habit of treating trees as kutcha houses became an addiction; the CSO went on to define as kutcha value added by growing plants of seven kinds — mango, grape, coconut, arecanut, cashewnut, sapota, and citrus fruit. Then recently it found that many tall, sophisticated windmills had gone up in the country. Not knowing what to do with them, the CSO classified them too as kutcha houses...

    Even after including everything possible in kutcha houses, a number of services remained. These include sewage and refuse disposal, social work, unorganized hairdressing and beauty treatment, and funeral services. One could question whether the output of extraterritorial organizations such as embassies is a part of a country’s income at all. The CSO thinks it is; they too are dumped into other services together with rubbish dumps and cemeteries.

    If an animal gives milk, is hitched to a cart or plough or gives babies, it is treated as a capital asset. The change in the number of animals is termed investment, and the capital stock is depreciated. But pigs and chicken are not considered durable assets; change in their numbers is treated as a change in stocks, not as investment."

    Desai concludes:

    "...While the CSO has included the value of camels’ hair and pigs’ bristles, I am not sure it has included the value of the services of the artists who cut their hair. That exclusion leaves the figures for beauty treatment severely underestimated...."


    Thursday, November 01, 2007

    India: Between Hopes and Despair...

    As individuals, we all go through our own internal contradictions between the reality and the aspirations - so, apparently does a country...

    The following are some of the headlines I could pick up during last one month, showing the internal struggles/ contradictions of the contemporary India:

  • India’s GDP to cross trillion dollar mark in 07-08
    Speaking at the Norwegian Nobel Institute, Oslo on ‘India’s Socio Economic Agenda: Development with Democracy’, the Finance Minister P Chidambaram said that GDP at market prices has increased from US $20 billion in 1950-51 to US $912 billion in 2006-07 and is expected to cross the trillion dollar mark in the current year.... in terms of purchasing power parity, India’s GDP at US $4 trillion in 2006-07 accounted for 6.3 per cent of global GDP.

  • Global Hunger Index 2007: India ranks 94th in global list, trails behind China...
    Despite averaging over 8.5% growth since 2000, India has achieved less than half of the United Nations Millennium Development Goal targets in hunger and is 94th on the Global Hunger Index of 118 countries, a report released by the Washington-based International Food Policy Research Institute (IFPRI) said.

  • Sensex hits 20,000
    After a three-day hiatus, FIIs became net buyers on Monday at Rs 688 crore... The Sensex surged above 20,000 for the first time on Monday in tune with other Asian markets, as traders priced in another rate cut by the US Federal Reserve this week.

  • World Toilet Summit lays down sanitation as a human right
    In 2007, 50 per cent (Indian) homes have access to a toilet.... Manual scavenging is banned in India but is still practised as large numbers of toilets, specially in semi-urban and rural areas, are not connected with sewage systems... An estimated 50,000 manual scavengers in India still clean toilets and toilet pits with their hands and carry the human excreta to dumping sites...

  • Mukesh Ambani is world's richest man
    Billionaire Mukesh Ambani today became the richest person in the world, surpassing American software czar Bill Gates, Mexican business tycoon Carlos Slim Helu and famous investment guru Warren Buffett, courtesy the bull run in the stock market.

  • Caste and faith first in companies, merit next
    Liberalisation and a free market economy have not changed traditional biases in companies.... A study conducted by American and Indian scholars... responded to 548 job advertisements in over 66 weeks and sent about 4,800 applications were sent.... The results were shocking: For every 100 upper-caste candidates who received calls for interviews, only 67 Dalit and 33 Muslim candidates were called. Upper-caste candidates who were not well qualified got better responses than Dalit applicants with higher degrees.

  • Tenth Fortune Global Forum begins in New Delhi

    Top CEOs, head of states, academics and leading thinkers are gathering here to discuss the most pressing issues facing global business at the 10th Fortune Global Forum.... This year’s Forum is centered on ‘Mastering the Global Economy,’ a theme in which leaders will discuss the market realities that companies face in the midst of global integration... Speakers at the Forum include Prime Minister Manmohan Singh; Chairman and CEO of Time Warner, Richard D. Parsons; Finance Minister P. Chidambaram; Chairman of Wipro Ltd, Azim H. Premji; Chairman and CEO of The Goldman Sachs Group, Lloyd Blankfein; Chairman and CEO of Cisco Systems, John Chambers and Henry M. Paulson, Jr., Secretary of the Treasury, U.S. Treasury Department.

  • Recovering the lost plot
    While India saw unprecedented prosperity in the last 15 years, its foodgrain intake declined — millions more of its people now live in hunger.... A major source of the trouble in the countryside is the erosion of land rights. Traditional land rights of adivasis and small farmers are denied either in the name of development or through manipulations of the land mafia. More and more people are becoming landless.

  • India's high net worth population holds $350 billion in financial wealth
    The number of 'high net worth individuals' (HNWIs) in India at the end of 2006, grew by 20.5 per cent to 100,000... HNWIs are people with net financial assets of at least $1 million, excluding their primary residence and consumables... Indian HNWIs held a combined $350 billion in financial assets at the end of 2006.

  • Farm-led growth strongest weapon against poverty
    GDP growth originating in agriculture is at least twice as effective in reducing poverty as GDP growth originating outside agriculture, according to the World Development Report 2008, which focuses on ‘Agriculture for Development’. It suggests that South Asian countries, with about 60 per cent of their labour force employed in agriculture, should place importance on agricultural growth to reduce poverty as “the transition of people out of agriculture and rural areas is not keeping pace with the restructuring of economies away from agriculture”.

    ... or as,in a different context, TS Elliot wrote (The Hollow Men):

    Between the desire
    And the spasm
    Between the potency
    And the existence
    Between the essence
    And the descent
    Falls the Shadow...