Friday, March 9, 2012

Parrikar: New Goa Chief Minister

Manohar Parrikar, under whose leadership BJP secured emphatic win in assembly polls with majority of its own for the first time, on Friday took oath as Chief Minister.
Goa Governor, K. Sankaranarayanan, administered the oath.
Parrikar had earlier been the chief minister twice at the head of coalitions but could never complete his five-year tenure.

RBI cuts CRR by 75 bps

RBI cuts CRR by 75 bps, which will result in Rs 48K cr liquidity in to the system.As the liquidity in the system is drained every stakeholders were requesting for a CRR cut. The liquidity crunch is effecting the growth rate as the growth slows. Now the CRR standa at 4.75%. 

Cloud computing jobs in India

It is a common perception that high end technology reduces human intervention. And this leads to the loss of jobs. The same is the perception associated with cloud computing. Therefore, it would come as a surprise to you that Microsoft and IDC (International Data Corporation) have stated that cloud computing will actually create 2 m jobs in India by 2015. They expect these jobs to be created in the areas of communication, media and manufacturing. They estimate another 1.8 m jobs in the banking sector. All thanks to cloud computing. The way this will work is that cloud computing would allow companies to free up resources which are otherwise being spent on the legacy work and systems. These freed up resources would in turn be used for business innovation and creating new jobs. We believe that cloud computing would definitely be the next growth driver for Indian IT. To that extent, it would help in job creation for the sector. However, assuming that migration to cloud from legacy would help to create new jobs in other sectors, appears to be a bit farfetched as of now.

Financial inclusion

Financial inclusion is one of the main aims of the government. A large portion of India's population remains unbanked and without access to credit. In light of this, domestic banks have to lend at least 40% of their loan book to the priority sector. This includes sectors like agriculture, small scale industries, microfinance etc. If banks are unable to meet these steep targets, they have to invest in low yielding Rural Infrastructure Development Fund (RIDF) bonds. Or they can try and meet their targets by investing in securitized assets of their NBFC peers. But rather than just meeting targets, our hope is that banks will work harder on actually uplifting the weaker sections of our country. This will be more beneficial for the country in the long run.

Will this solve India's food problems?

One of the reasons why inflation has been so high in India in recent times is firmer food prices. While there is no doubt that rising demand was one of the factors that fuelled this rise, there were many issues on the supply side as well which stoked prices. For starters, inadequate warehousing and storage facilities meant that vast quantity of foodgrains was wasted. Unpredictable weather patterns also disturbed food production leading to shortages. Not just that, volatility in the global food market has also made the country vulnerable to price shocks given that some food grains such as pulses are imported. And in a scenario where India's population is expected to only increase going forward, ensuring food security has become an important issue for the government. 

Thus, one of the ways it proposes to do so is to make private purchases of farmland overseas. In this regard, the agriculture ministry has sought views from other ministries on an institutional mechanism to extend sovereign support to India Inc's acquisition of farm land abroad that could include guaranteed buyback of harvest from the cultivation overseas. And Africa is one such region that the government has set its sight on for cultivating land for the production of pulses and wheat. 

Whether this move is enough to ensure food security in India in the longer run remains to be seen. For starters, cultivating land in Africa may not be as easy as it seems on paper. The region is rife with corruption and civil war and buying land could be a process steeped in hurdles. Which is why what the government also needs to do is invest more in agriculture in India so as to improve the productivity of land. Investments in storage facilities and some much needed reforms in agriculture will also go a long way in bolstering agricultural productivity in the longer run.

What is stagflation?

India is suffering from low growth rate at the same time that inflation is rocking its economic boat. And the irony is that it can't take enough strong measures to slow down inflation as it will end up hurting economic growth further. In economic parlance, such a situation is called as stagflation. The Wall Street Journal believes that India is certainly going through one of its own stagflationary phase. To be fair though, India's Reserve Bank of India (RBI) did try hard enough to take the air out of inflation. It raised rates for as many as 13 times between 2010 and 2011 but to no avail. The spending spree of the Government meant that most of RBI's efforts counted for nothing. Thus, while growth did improve, there was a significant drop in the quality of the same, reflected in higher inflation numbers. 

So, where do we go from here? We believe that the onus rests firmly with the Government of India. It will have to slow down its fiscal excesses if it were to get Indian economy out of this vicious stagflationary circle. As mentioned earlier, the state election results would have dealt a big blow to this plan.

Now that the state assembly polls are over, the economy is back to business as usual. Yesterday the Indian Railways withdrew the 4% exemption on fertiliser and food grain loading rates. At the same time, it has also hiked freight rates of other commodities by about 10-15%. It goes without saying that this will put an upward price pressure on goods ranging from coal to fertilisers. This move was undertaken in a bid to save the state-run transporter from a financial turmoil. The Railways is expected to report freight earnings of about Rs 700 bn in the fiscal year 2011-12. The freight hike could raise its earnings by up to Rs 180 bn. 

The Railways claim that the freight hike will not pinch the common man. This is because the additional freight burden would be absorbed by agencies like the Food Corporation of India (FCI) which are primary customers of the Railways. The Railways may deny it. But we believe that the freight hike will certainly put some inflationary pressure in some form or the other.

Cotton export ban

The government of India recently banned cotton exports on grounds that declining production in the current crop season may increase prices. Banning exports is expected to assure supplies to the domestic factories. However, it may also have repercussions in the Chinese cotton markets. China, over the years, has been steadily accumulating cotton. Be it from India or rest of the world. In fact, right now China's cotton reserve is so huge that it can easily accommodate 15% of the global demand.

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