Is this article for you?
Is there a proven strategy for personal investments? How can I use it for my personal investments? How do I align all my future goals and formulate a simple investment strategy? How much should I invest and where?... if these are questions bothering you, read on. The article starts with a data illustrated introduction to how a planned, steady investment strategy can take you towards financial goals. One can use the this calculator to meticulously plan investments by following this strategy. If you are looking for advice to make quick money, this article is not for you. This write-up is based on data and not on opinion or personal philosophy. At end of this article, you will be able to formulate a personal investment strategy and arrive at how much investment is required. Read on if interested…
Investment strategy – is there learning from historical market data?
Index levels should not be a real determinant of an investing decision. Here is the reason. Let’s say Mr.X started investing in 1991. If X managed the feat of investing at the lowest level every year since 1991, annual returns would have been 15.88% CAGR as of June 1, 2009 at 13500+ levels. On the other hand, if X invested at the highest level every year, returns would have been 11.78% CAGR. Now, if X had invested on a fixed date every year, let’s say, January 1, then returns would have been a surprisingly 15.77%. The difference between a fixed date and the lowest date is just 0.11% p.a!
Since 1991, the CAGR as on March 9, 2009, for annual investments made at the highest Sensex levels was 8.21%, while it was 12.18% when the investments were made at the lowest levels. For investments made on January 1 every year, it was 12.08%. Now pause for a moment to think. Does the paltry difference in returns between the lowest levels and regular investments really matter to you? The key learning is that one must not worry too much about index levels being high or low. Invest in a systematic manner on a periodic basis. Investing one-time big money when market is low could be fraught with risks. In fact, returns in monthly investments on a fixed date are almost similar to the ones given by one-time investments done at the lowest level every year!
There is further substantiation by data – Even after several scams, crashes and fluctuations in FII investments that the Indian markets have witnessed in the past 30 years, the market has delivered 16.91% p.a. (at 18000 Sensex levels)! It’s not important to see green on your investments every day, week, month and even a year. It’s about long term planning to give your investments time to mature and grow. Sensex has multiplied six times every 10 years at 19% CAGR and if the same continues, then in 2018, the Sensex will be at 129600 points.
A suitable periodicity for salaried individuals is to invest every month (If you are a businessman, you can decide suitable frequency). Having arrived at this investment strategy, there are only 2 other main questions:
1. Where do I put my money?
2. How much should I invest every month?
Where do I put my money?
Market investments can give good returns with less-risk only if it stays invested over long term. In general consensus, definition of long term is period more than 5 years; the longer the better. Popular long-term investment options are bank FD, NSC, PPF, stocks and mutual funds. Investment in debt based schemes gives returns ~8%p.a. Returns from equity schemes vary significantly depending on risk profile of financial instrument. Depending upon risk–taking ability, one can choose combination of different investment vehicles (debt or equity). Considering that sensex index has given 19%p.a CAGR returns for past 20 years, it is safe to assume a more moderate number of 12%p.a returns on your investments for next 25 years (By smart investing, one can easily beat market by long way). This is assuming that Indian markets have lot more potential to develop in next 25 years where domestic demands increases, local consumption increases, goods gets developed locally and self sufficiency leads to organic development of GDP. In general, this is going by India shining story of BJP. Parking aside question of where exactly to invest, assuming 12%p.a CAGR aggregate returns on investments in long term is conservative assumption. The calculator assumes 12%p.a CAGR returns based on this reasoning. If you want to understand various investment vehicles where you can invest to get 12%p.a returns over long term, call a personal investment advisor. This involves deep market study and personal judgment which is beyond scope of this article.
How much to invest?
It is important to assume an annual rate of return rather than choice of your investment vehicle. For this reason, the calculator does not depend on choice of your investment vehicle.
There are 2 popular schools when you start planning for future:
1. Don’t plan much for future – cant predict what is in store
2. Plan for all future possibilities.
A mid-path strategy is to plan for most likely events so that one is prepared to face likely eventualities. Our previous generations invested whatever they could save from their earnings. There was tendency to squeeze domestic spending and save rest in bank FD/post office/the likes. There was really not much need for detailed planning (there was not much scope since income levels were limited). Contrast to today’s earning levels, when salaries have risen well above previous generations; there is often lesser need to squeeze on domestic spending. Rather a well planned, systematic investment regime in long term can give corpus required for future needs. If future needs are well planned, one can enjoy excess without guilt of splurging on luxuries.
A balance between spending and saving is possible through planning. Here is how: (refer to this calculator alongside).
1. List down all your future financial goals.
2. For every financial goal, write down the year when it needs to be realized and corpus required in today’s money value.
E.g. Mr. X wants to build a house in next 20 years. The value of a similar house today is Rs.50 lakhs. The same house will cost X significantly higher money 20 years later due to general inflation or steep inflation specifically in real estate segment. To make matters simple, put aside inflation worries and write down its current value of Rs.50 lakhs.
For simplicity, the calculator assumes 9% inflation (safe to assume this number given history of growth of Indian economy over past 25 years). One could change this value if there is a good reason; the calculator allows you to change this number.
3. The calculator calculates future value of this money after so many years (20 years from the above example). Assuming that you invest monthly, the calculator calculates value of money which you need invest per month.
The calculator assumes a safe 12% p.a CAGR returns on investments. If you want to change this value based on your risk preference, feel free to change and see how other values change. It is an important input to the calculator and depends fully on your risk preference.
4. To make matter simpler, calculator sums up monthly investments required from all financial goals. One can understand what amount of money needs to be invested totally per month.
Once this plan is made comprehensively for all future financial goals, one can understand where he stands today. There can be 2 possibilities:
1. Current income and expenditure do not permit luxury of planned investment - It is a signal to tone down on needs/expenses. It will force you to prioritize financial goals. You could also think of alternate sources of income to supplement investment need.
2. You have surplus income than investment needs – It is a signal that you can afford daily luxuries more than today. You could also think of early retirement.
In either of the 2 cases, one can fully understand implications of savings, expenditure and make prudent personal decisions for future. A lot of financial institutions offer this as comprehensive financial planning package. With bit of time and application of mind, one can do this all by oneself without fear of being influenced. One might need expert advice to decide on investment vehicles but no longer on planning procedure itself.
Click here to open the calculator.
Friday, November 12, 2010
Sunday, August 15, 2010
Hind Swaraj and its context today
Is this article for you? Recently India celebrated centenary of “Hind Swaraj”. Often we wonder if we know enough of Indian history dating back to times of Independence. I have also often heard lot of open criticism about Gandhiji for his deeds, however many a time without adequate background information. This piece of writing tries to sew together pieces of history with contextual thoughts of Gandhiji in context of Hind Swaraj. If you are interested to know more, read on. Else this article can be dry and boring.
It was 1909. Forty-year-old Mahatma Gandhi wrote continuously for 10 days aboard the ship Kildonan Castle. He wrote since he could no longer “suppress himself.” At the end of this uneasy period he made a claim, “I have written an original book in Gujarati.” This book was Hind Swaraj (or Hind Swarajya, as originally titled), which got published in his journal Indian Opinion. In the last lines of Hind Swaraj Gandhi made a claim, “My conscience testifies that my life henceforth is dedicated to its attainment.”
This book was thought of as “a very dangerous thought” by the British, not because it encouraged revolt but for its open advocacy of Satyagraha to overthrow British supremacy. As expected, this book was banned by colonial government. Gandhiji translated the book into English and published it as Indian Home Rule. This simple book baffled its readers and continues to do so even today. Gandhiji dream was to make it so simple that it could be placed in the hands of a child. And yet, it continues to elude its readers.
What was ‘it’ that he referred himself to? And what fate awaited the text? Gandhiji’s dedication was towards essence of Hind Swaraj, which is neither ahimsa nor Satyagraha. It is the concept of civilization. Civilization for Gandhiji is that mode of conduct that points us to the path of duty, where the performance of duty is the same as morality. Gandhiji says that a ‘real’ civilization creates the possibility for us to know ourselves. This in essence was Swaraj for Gandhiji. Swaraj, for him was not self-rule but rule over oneself. All that happens around us which excludes this possibility is the ‘reverse of civilization’. Modern civilization shifts the focus of human worth to tangible objects. This is where machines become the measure of man. Gandhiji’s Hind Swaraj advocates against modern civilization.
It is this critic of modernity and belief that baffled its readers. Gopala Krishna Gokhale, otherwise a sympathetic elder to Gandhi, was perturbed by this pamphlet. He felt that it was “crude and hastily conceived” and he said Gandhi was certain to destroy it after spending a year in India. Not strangely, Gandhiji’s faith in the vision of Hind Swaraj sweetened as he came to inhabit India and this faith deepened with the weaver and the farmer. By 1919 he became a leader of the national movement, the printing and sale of Hind Swaraj became the symbol of defiance during the non-cooperation movement. Curiously, there was not much discussion on the text itself, not in English or Gujarati! The Congress ignored this document, prompting Gandhi to declare in 1921 that he was the only one to follow the ideals of Hind Swaraj, while the rest of the country had accepted only non-violence, that too as a strategy and not as an ideal.
Interesting that the grand debate on meaning of Swaraj that Gandhi and Tagore engaged themselves with great philosophical depth did not invoke Hind Swaraj. India seemed to have forgotten Hind Swaraj; Gandhi kept reminding interlocutors and critics to read the text in order to understand his actions more. The only troupe which was sensitive and alive to Hind Swaraj were the Theosophists. It was the Aryan Path, which opened up the debate on Hind Swaraj in 1938. Editor Sophia Wadia had invited comments on this book. None of those invitees asked to respond to the text had anything to do with politics or the national movement in India. Significantly, nobody from Indian origin was invited to respond to the text. This was a clear indication of the marginal space that Hind Swaraj had occupied in Indian political and intellectual scene.
It was Gandhiji again who took an initiative step and opened the debate on the future of India and concept of Hind Swaraj. The war in Europe had ended and Indian independence seemed imminent. It was at this crucial juncture that Gandhi opened the debate with his chosen political heir, Pandit Nehru, and through him with the people of the country. In October 1945 Gandhiji wrote a letter to Nehru in Hindustani (perhaps what he wanted to convey could only have been said in Hindustani). Gandhiji affirmed his faith in the ideals of Hind Swaraj as also the place of politics and governance as envisaged in it. He asserted that in fact his belief had only grown since the time he wrote Hind Swaraj. Gandhi knew that he was alone and hence wrote; “Therefore if I am left alone in it I shall not mind, for I can only bear witness to the truth as I see it.” Gandhiji knew that Nehru and the millions of Indians who held him in great reverence had little faith in Hind Swaraj. Nehru’s response to Gandhiji’s letter conceded that he had a dim recollection of Hind Swaraj from another reading about twenty years earlier. Even at that point it had seemed to Nehru “completely unreal.” But Nehru was certain that its argument signified not much more than the “romantic mythology of backwardness.” Nehru reminded Gandhiji that the Congress had never considered – much less adopted - the picture of India envisaged in Hind Swaraj. He told Gandhiji that it was not given to the Congress as a political body to consider “fundamental questions, involving varying philosophies of life.”
Nehru advanced a similar argument in a meeting that took place at Sewagram, Wardha; after Gandhi’s assassination. In March of 1948 Nehru made an impassioned plea for the political role of the Congress. In post-independent India, perhaps the only political leader to engage fundamentally with Hind Swaraj was Ram Manohar Lohiya. His essay, ‘Economics After Marx’, is the only serious engagement with Hind Swaraj after that period.
Last year India decided to celebrate the centenary of Hind Swaraj. However, it was not clear why this celebration. Was it about the text? Was it about the possibilities of Hind Swaraj in our times? We remain deeply ambiguous about Hind Swaraj with its critique of modernity, especially at a time when there is a large consensus on the desirability of nuclear energy. This ambiguity is about Gandhiji as well. He has come to occupy an increasingly fractured and narrow space in our imagination. We think of him when the country erupts in violence of the communal kind. But when violence takes the form of ‘terror’ we want a hard state, the kind of state that Hind Swaraj wanted undone. As we speak the language of law and order the possibilities of Hind Swaraj become more elusive.
A celebration of Hind Swaraj would require us to not only engage with the concept in the text, but in some measure seek to go beyond it. It would require us to re-imagine our self-rule to cast our own moral politics. It was this fact that one missed in the centenary year of Hind Swaraj, which perhaps is true meaning of Hind Swaraj.
It was 1909. Forty-year-old Mahatma Gandhi wrote continuously for 10 days aboard the ship Kildonan Castle. He wrote since he could no longer “suppress himself.” At the end of this uneasy period he made a claim, “I have written an original book in Gujarati.” This book was Hind Swaraj (or Hind Swarajya, as originally titled), which got published in his journal Indian Opinion. In the last lines of Hind Swaraj Gandhi made a claim, “My conscience testifies that my life henceforth is dedicated to its attainment.”
This book was thought of as “a very dangerous thought” by the British, not because it encouraged revolt but for its open advocacy of Satyagraha to overthrow British supremacy. As expected, this book was banned by colonial government. Gandhiji translated the book into English and published it as Indian Home Rule. This simple book baffled its readers and continues to do so even today. Gandhiji dream was to make it so simple that it could be placed in the hands of a child. And yet, it continues to elude its readers.
What was ‘it’ that he referred himself to? And what fate awaited the text? Gandhiji’s dedication was towards essence of Hind Swaraj, which is neither ahimsa nor Satyagraha. It is the concept of civilization. Civilization for Gandhiji is that mode of conduct that points us to the path of duty, where the performance of duty is the same as morality. Gandhiji says that a ‘real’ civilization creates the possibility for us to know ourselves. This in essence was Swaraj for Gandhiji. Swaraj, for him was not self-rule but rule over oneself. All that happens around us which excludes this possibility is the ‘reverse of civilization’. Modern civilization shifts the focus of human worth to tangible objects. This is where machines become the measure of man. Gandhiji’s Hind Swaraj advocates against modern civilization.
It is this critic of modernity and belief that baffled its readers. Gopala Krishna Gokhale, otherwise a sympathetic elder to Gandhi, was perturbed by this pamphlet. He felt that it was “crude and hastily conceived” and he said Gandhi was certain to destroy it after spending a year in India. Not strangely, Gandhiji’s faith in the vision of Hind Swaraj sweetened as he came to inhabit India and this faith deepened with the weaver and the farmer. By 1919 he became a leader of the national movement, the printing and sale of Hind Swaraj became the symbol of defiance during the non-cooperation movement. Curiously, there was not much discussion on the text itself, not in English or Gujarati! The Congress ignored this document, prompting Gandhi to declare in 1921 that he was the only one to follow the ideals of Hind Swaraj, while the rest of the country had accepted only non-violence, that too as a strategy and not as an ideal.
Interesting that the grand debate on meaning of Swaraj that Gandhi and Tagore engaged themselves with great philosophical depth did not invoke Hind Swaraj. India seemed to have forgotten Hind Swaraj; Gandhi kept reminding interlocutors and critics to read the text in order to understand his actions more. The only troupe which was sensitive and alive to Hind Swaraj were the Theosophists. It was the Aryan Path, which opened up the debate on Hind Swaraj in 1938. Editor Sophia Wadia had invited comments on this book. None of those invitees asked to respond to the text had anything to do with politics or the national movement in India. Significantly, nobody from Indian origin was invited to respond to the text. This was a clear indication of the marginal space that Hind Swaraj had occupied in Indian political and intellectual scene.
It was Gandhiji again who took an initiative step and opened the debate on the future of India and concept of Hind Swaraj. The war in Europe had ended and Indian independence seemed imminent. It was at this crucial juncture that Gandhi opened the debate with his chosen political heir, Pandit Nehru, and through him with the people of the country. In October 1945 Gandhiji wrote a letter to Nehru in Hindustani (perhaps what he wanted to convey could only have been said in Hindustani). Gandhiji affirmed his faith in the ideals of Hind Swaraj as also the place of politics and governance as envisaged in it. He asserted that in fact his belief had only grown since the time he wrote Hind Swaraj. Gandhi knew that he was alone and hence wrote; “Therefore if I am left alone in it I shall not mind, for I can only bear witness to the truth as I see it.” Gandhiji knew that Nehru and the millions of Indians who held him in great reverence had little faith in Hind Swaraj. Nehru’s response to Gandhiji’s letter conceded that he had a dim recollection of Hind Swaraj from another reading about twenty years earlier. Even at that point it had seemed to Nehru “completely unreal.” But Nehru was certain that its argument signified not much more than the “romantic mythology of backwardness.” Nehru reminded Gandhiji that the Congress had never considered – much less adopted - the picture of India envisaged in Hind Swaraj. He told Gandhiji that it was not given to the Congress as a political body to consider “fundamental questions, involving varying philosophies of life.”
Nehru advanced a similar argument in a meeting that took place at Sewagram, Wardha; after Gandhi’s assassination. In March of 1948 Nehru made an impassioned plea for the political role of the Congress. In post-independent India, perhaps the only political leader to engage fundamentally with Hind Swaraj was Ram Manohar Lohiya. His essay, ‘Economics After Marx’, is the only serious engagement with Hind Swaraj after that period.
Last year India decided to celebrate the centenary of Hind Swaraj. However, it was not clear why this celebration. Was it about the text? Was it about the possibilities of Hind Swaraj in our times? We remain deeply ambiguous about Hind Swaraj with its critique of modernity, especially at a time when there is a large consensus on the desirability of nuclear energy. This ambiguity is about Gandhiji as well. He has come to occupy an increasingly fractured and narrow space in our imagination. We think of him when the country erupts in violence of the communal kind. But when violence takes the form of ‘terror’ we want a hard state, the kind of state that Hind Swaraj wanted undone. As we speak the language of law and order the possibilities of Hind Swaraj become more elusive.
A celebration of Hind Swaraj would require us to not only engage with the concept in the text, but in some measure seek to go beyond it. It would require us to re-imagine our self-rule to cast our own moral politics. It was this fact that one missed in the centenary year of Hind Swaraj, which perhaps is true meaning of Hind Swaraj.
Sunday, May 16, 2010
Remembering CK Prahlad
For most people, Prahlad was a difficult to reach, almost always in demand for his ideas and views. From company chairmen to entrepreneurs to students of management, Prahalad’s popularity has transcended that of most other thinkers of his times. While his name is synonymous with the Bottom-of-Pyramid (BoP) theory in more recent years, his impact on management literature and the practice of business globally has been significant for a long time.
Consider his first big concept of core competence. It’s a term used loosely in business circles and academics but has influenced important decisions. If management gurus have been guilty of turning logical business concepts into jargon, Prahlad was equally responsible for his ideas becoming buzzwords. Even as jargons like re-engineering were being used by consultants to get corporations rid excess people, it was Prahalad who helped dispel such myths and convince business leaders to see through the clutter.
The book Core Competence of the Corporation, which he co-authored with Gary Hamel in 1990, jolted Western corporations from their inward focus and start thinking about the external forces that were shaping the future of their industries. This was the day and age of strategic business units and diversification drives by American companies, which were up against the onslaught of Japanese companies and their unique management styles. Prahalad and Hamel pushed companies to discover what’s at the core of their business. They showed that successful companies which had diversified into different streams managed to do well because they viewed them not as SBUs but a portfolio of core competencies that were unique and integral to their success and enabled them to conquer competition. If his first book was about companies rediscovering what they knew best, the next big idea in Competing For the Future, was better. Shaving costs, and employees were not the best way to create competitive advantage. This was the beginning of the Internet era and like some of his contemporary thinkers, Prahalad too understood that technology’s effects were going to be deeper and far-reaching than was imagined. In this book Hamel and Prahalad sought to explain that strategy wasn’t the lazy activity of armchair theorists but an intellectual, demanding exercise that envisions a game-changing approach to the future. Sixteen years later, strategy continues to be a debated and often mis-interpreted subject among management professionals and academicians. It took a step further by de-mystifying the ‘elitist’ view of strategy and taking an ‘activist’ approach-that frontline and middle level people were equally responsible for steering their companies’ and their own destinies.
Over the years, as the business environment began changing faster than before, Prahalad’s ideas were trying to keep pace with the new realities, saturated urban markets, and the growing irrelevance of traditional business techniques. The next line-up of books sought to address such upcoming issues. The Future of Competition: Co-Creating Unique Value with Customers (2004) with Venkat Ramaswamy, was about the new rules of engaging with consumers who were no-longer passive recipients of products and services. Co-creating value with the help of experiences was the way forward in an age of connected and informed consumers.
Then followed The Fortune at the Bottom of the Pyramid (2006). His recent book, The New Age of Innovation: Driving Co-Created Value Through Global Networks with MS Krishnan (2008) outlined the new rules for companies in the 21st century. As Prahalad’s interest in India and its potential became more intensified, he proudly showcased Indian success stories such as Aravind Eye Care and HLL’s Project Shakti as case studies to prove his hypothesis. Companies also bought his philosophy in disruptive growth through rural and urban poor. Critics of the BoP thesis argued that the apparently lucrative market of 5 billion underserved and unserved consumers was not actually as large and attractive as it seemed. However Prahalad maintained that his consumption-led model of poverty alleviation had sufficient merit.
His India@75 vision was about tackling the three issues of ‘economic strength, technological vitality and moral leadership’. And BoP theory was a cornerstone of this vision. Most of what Prahalad spoke about-inclusive growth, sustainability, good governance, entrepreneurship-led innovation, and next practices-wasn’t exactly new. Yet, it was just what a nation grappling with the twin challenges of fast-paced economic growth and sustainable social development, wanted to hear.
Consider his first big concept of core competence. It’s a term used loosely in business circles and academics but has influenced important decisions. If management gurus have been guilty of turning logical business concepts into jargon, Prahlad was equally responsible for his ideas becoming buzzwords. Even as jargons like re-engineering were being used by consultants to get corporations rid excess people, it was Prahalad who helped dispel such myths and convince business leaders to see through the clutter.
The book Core Competence of the Corporation, which he co-authored with Gary Hamel in 1990, jolted Western corporations from their inward focus and start thinking about the external forces that were shaping the future of their industries. This was the day and age of strategic business units and diversification drives by American companies, which were up against the onslaught of Japanese companies and their unique management styles. Prahalad and Hamel pushed companies to discover what’s at the core of their business. They showed that successful companies which had diversified into different streams managed to do well because they viewed them not as SBUs but a portfolio of core competencies that were unique and integral to their success and enabled them to conquer competition. If his first book was about companies rediscovering what they knew best, the next big idea in Competing For the Future, was better. Shaving costs, and employees were not the best way to create competitive advantage. This was the beginning of the Internet era and like some of his contemporary thinkers, Prahalad too understood that technology’s effects were going to be deeper and far-reaching than was imagined. In this book Hamel and Prahalad sought to explain that strategy wasn’t the lazy activity of armchair theorists but an intellectual, demanding exercise that envisions a game-changing approach to the future. Sixteen years later, strategy continues to be a debated and often mis-interpreted subject among management professionals and academicians. It took a step further by de-mystifying the ‘elitist’ view of strategy and taking an ‘activist’ approach-that frontline and middle level people were equally responsible for steering their companies’ and their own destinies.
Over the years, as the business environment began changing faster than before, Prahalad’s ideas were trying to keep pace with the new realities, saturated urban markets, and the growing irrelevance of traditional business techniques. The next line-up of books sought to address such upcoming issues. The Future of Competition: Co-Creating Unique Value with Customers (2004) with Venkat Ramaswamy, was about the new rules of engaging with consumers who were no-longer passive recipients of products and services. Co-creating value with the help of experiences was the way forward in an age of connected and informed consumers.
Then followed The Fortune at the Bottom of the Pyramid (2006). His recent book, The New Age of Innovation: Driving Co-Created Value Through Global Networks with MS Krishnan (2008) outlined the new rules for companies in the 21st century. As Prahalad’s interest in India and its potential became more intensified, he proudly showcased Indian success stories such as Aravind Eye Care and HLL’s Project Shakti as case studies to prove his hypothesis. Companies also bought his philosophy in disruptive growth through rural and urban poor. Critics of the BoP thesis argued that the apparently lucrative market of 5 billion underserved and unserved consumers was not actually as large and attractive as it seemed. However Prahalad maintained that his consumption-led model of poverty alleviation had sufficient merit.
His India@75 vision was about tackling the three issues of ‘economic strength, technological vitality and moral leadership’. And BoP theory was a cornerstone of this vision. Most of what Prahalad spoke about-inclusive growth, sustainability, good governance, entrepreneurship-led innovation, and next practices-wasn’t exactly new. Yet, it was just what a nation grappling with the twin challenges of fast-paced economic growth and sustainable social development, wanted to hear.
Sunday, February 7, 2010
3G auctions… dragging on with unplanned benefits!
Preface: After government of
Dear readers - thanks to your comments via email on my previous article related to 3G topic http://bit.ly/a8t9qM. You can follow this topic on my blog to completion in next months…
The 3G auctions is dragging on endlessly. keeping all of us on our toes. It is already late for finance minster to realize any revenue during this financial year to bridge country’s fiscal deficit. 3G auctions were announced first in 2007 and auction dates have been missed on several occasions. Any further delay is likely to impact credibility of government. The auction that will follow is unlikely to raise as much money as was initially anticipated. An auction held in shadow of financial compulsion is likely to yield sub-optimal result. The newer service providers got new 2G licenses in 2008 (thanks to largesse of Raja) at lower prices and this delay of auctions is helping them stabilize operations and gain momentum. The older players aren’t getting new 2G spectrum and are facing severe voice quality issues trying to serve additional subscribers within existing spectrum. While government doesn’t want to be seen as helping newer players, there is an unplanned argument in favor of this postponement. The ever heating competition in service provider space is bringing question marks over commercial viability of to-be-auctioned spectrum. First-time mobile users are buying SIM cards from new players who offer better voice quality with their yet-unclogged networks. at cheaper price! Telecom and defense ministries are now fighting over a simple question – who owns the spectrum?! Government needs to take positive steps to resolve such basic questions to be able to resolve larger issues. The new argument from defense ministry that they own the spectrum – will continue to use it until an alternative is found – will take several years, should not be forced to vacate existing spectrum is not a convincing argument. Since all spectrum allocations will be done by Wireless Planning Commission which reports to telecom ministry, it is obvious that final custodian of spectrum is telecom ministry. A new view is that telecom ministry is “custodian” of spectrum and in defense interests, will be prioritized for defense purpose. All these arguments must be brainstormed and government must resolve them transparently before taking steps towards starting the auction.
Tuesday, February 2, 2010
Worried about increasing food prices?
Is this article for you? Caution if you are not interested to know intricacies of reserve bank and monetary policies! This article contains HEAVY finance terminology and analysis of recent moves from RBI to control inflation. You many want to reconsider your decision to read this article if you are already pre-occupied at work.
RBI Monetary Policy Review – fighting inflation
In the third quarter review of monetary policy for the year 2009-10, RBI surprised the markets a tad by hiking the CRR by 0.75%. the expectation from purists was a hike of 0.5% which indicated inflation was higher than the expected normal. However it did not touch the reverse repo and repo rates at 3.25% and 4.75% respectively which was along expected lines. The hike in CRR means that banks have to place an additional Rs.36,000 crores with the central bank. RBI has tightened the monetary policy. Both the policy document and post-policy comments by the RBI Governor emphasized this point. The central bank also reiterated its intention to:
Ø Anchor expectation about inflation and keep an eye on movements in inflation so that it is prepared to act swiftly through policy adjustments as required.
Ø Manage liquidity in market to ensure that credit demands of productive industries are adequately met in line with price stability.
Ø Maintain interest rate environment in line with price and financial stability which aids process of growth.
Points to note from policy amendments
Ø RBI increased India GDP growth estimate for 2010 from 6%to 7.5%. This is mainly due to revival in export owing to improvement in global economy, improved business optimism, better financing conditions and good recovery in industrial production and services sector performance.
Ø On inflation front, RBI has upped its estimate to 8.5% by end-March 2011 in the wake of little seasonal moderation in food prices. However RBI expects inflation to moderate from July 2010 on the assumption of seasonal monsoon, stable oil prices and recent monetary measures which are taken.
Ø RBI also stressed that the opportunity to use imports to restrict food prices is quite limited due to high prices of global commodities.
Ø The central bank has reduced the non-food credit growth projection for 2009-10 from 18% to 16% on the back of increased availability of funds to corporate sector from domestic sources.
Ø RBI takes notice that fiscal deficit remains a big risk to short-term economic situation and to medium-term economic prospects.
What I make out it…
After spending months preparing markets for the exit, RBI chose to hold back on hiking rates and limited itself to absorbing liquidity. Having said that, there were some pointers to future policy decisions:
Ø The central bank reiterated that “a consolidating recovery should encourage us to clearly and explicitly shift our stance from 'managing the crisis' to 'managing the recovery'”. At the same time RBI also felt “amidst concerns about rising inflation, we must remember that the recovery is yet to fully take hold” thus reflecting a fear that “Strong anti-inflationary measures, while addressing one problem, may precipitate another by undermining the recovery, particularly by deterring private investment and consumer spending”. This could indicate that RBI does not want to send signals to slow down the growth engine.
Ø RBI recognizes that while current inflation pressures stem from the supply side, the recovery “increases the risk of these pressures spilling over into a wider inflation process”. This implies that if the recovery process manages to sustain as it has done in past 2 quarters and demand-driven inflation pressures build-up, then the RBI will not hesitate to hike policy rates.
In summary, I feel that further monetary tightening can be expected. RBI Governor pointed out in one of his post-policy interviews that he considered raising the rates as a possible policy action but refrained as he wanted to encourage creation of capacity in the economy to fight potential demand led price pressures. RBI notes that “our main policy instruments are all currently at levels that are consistent with a crisis situation than with a fast-recovering economy” thus recognizing the need to move from the current accommodative monetary stance. RBI further says that “the reversal of monetary accommodation cannot be effective unless there is a roll back of government borrowing” thus asking the government to reduce fiscal deficit in order to increase credit growth which in turn will help RBI in the tightening process.
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