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In this issue:
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Japan’s biggest bank Mitsubishi UFJ is buying up to 20% of Morgan Stanley. Also, the country’s largest brokerage Nomura Holdings is snapping up bankrupt Lehman Brothers’ operations in Asia, Europe and the Middle East. And Sumitomo Mitsui (Japan’s third largest bank) is expected to invest ‘several hundred billion yen’ in Goldman Sachs. However, as reported in the business daily Mint, “The difficult thing will be the execution. Japanese companies have had a tendency to overpay for overseas acquisitions. Cultural issues will also be a factor. Japanese organisations are run in a very different way from Western banks. Quite how both sides learn to live with each other will be interesting.” Interestingly, the number of casualties on Wall Street (those that have lost their jobs) stands at nearly 200,000, which is about the same as the number of casualties in the 1945 nuclear bombings on Hiroshima and Nagasaki!
As if the rising crude prices were not enough, India’s dependence on crude oil imports for meeting its energy requirements is expected to increase from 78% currently to 90% by 2030. Stagnation in production is expected to be the reason for the same. Fathom this – as per reports in a leading business daily, India had estimated reserves of 725 m metric tonnes (MMT) of oil at the beginning of FY08, as compared to 739 MMT in FY91 and 703 MMT in FY01.
This amply demonstrates the fact that no progress has been made. Further, domestic crude production has been stagnant at around 33 MMT per annum for the last 10 years. India’s appetite for crude in the meanwhile has been rising steadily and highly subsidised prices at the retail level have further worsened the situation (as it has led to inefficient utilisation of this precious resource). As a matter of fact, the demand for petroleum products is expected to grow at 3% per annum in the next 25 year to 270 MMT in FY31 (129 MMT in FY08). However, there is light at the end of the tunnel. Natural gas production is not likely to meet with a similar fate as crude production. In fact, production of natural gas is on the rise and output is expected to double from 32.4 bn cubic metres in the last fiscal year. More importantly, the differentiating factor between crude and natural gas production will be new discoveries in case of the latter especially from FY09 onwards. But all is not hunky dory and the disconcerting fact is that India started becoming an importer of natural gas from FY05, before which it never had to go in for gas imports. All this could only mean that India’s trade balance, which is already into a deficit is not likely to get any respite soon. A depreciating rupee will only worsen matters further.
While the world makes a mockery of the US that is struggling with debt levels estimated to cross US$ 11 trillion, we are ignoring the fact that back home the government borrowing levels are not looking too pleasant either. The RBI has been regularly making funds available to banks in the past two weeks to boost the availability of funds. However, as capital flows to emerging markets shrink amid a global credit crunch, the same is expected to unwind.
The rupee fell to its lowest (46.3 to a dollar) in a week today as month-end dollar demand from importers and oil companies weighed on it. The US markets are expected to continue witnessing the jitters over the fate of the government's US$ 700 bn financial sector bailout plan. The European markets are trading in the positive currently.
Real estate companies are waking up to deal with the slowdown. Hit by falling fund-raising avenues and demand from customers, construction companies are in the process of increasing the variable pay packages for a large chunk of their employees, as a measure to counter a prolonged slowdown. This is expected to help them keep their fixed costs under control. While most companies of this genre are yet shying away from downsizing their employee base, they are certainly wary of controlling the employee costs.
However, the former Delhi Metro Rail Corporation (DMRC) managing director’s comments on the Hyderabad Metro Rail project has not gone well with the Planning Commission. Stung by Sreedharan's charges in a letter to Planning Commission Deputy Chairman Montek Singh Ahluwalia, the Congress government has sought an unconditional apology failing which it has threatened to sue him. Sreedharan's letter, in which he expressed reservations over the way the government awarded the Hyderabad Metro contract to Maytas-led consortium, is likely to provide ammunition to the opposition's attack on the government as they gear up for next year's elections. Sreedharan, who served as a consultant for Hyderabad Metro project has remarked that making available 296 acres of prime land to a BOT (build, operate and transfer) developer for commercial exploitation could lead to a political scandal. He believes that the BOT operator has a hidden agenda to extend the metro network to a large tract of its private land holdings so as to reap a windfall profit of four to five times the land price.
Following the US and Europe, many Asian countries have also pulled down China’s dairy products amid escalating international concern about chemical contamination that has killed four infants and sickened 53,000 in the dragon nation. Over 20 countries and markets in Asia, Africa and Europe have either banned or recalled dairy products or goods made using milk from China, the latest in the leagues being South Korea and France. While it would certainly be harder for China to continue exporting to the West as the lawmakers call for tougher controls, the same may result in cascading effect with many other countries putting a ban on Chinese products.
Buffett was his usual self, wit and simplicity personified. He commented that the economy is like a bathtub in which hot and cold water cannot be separated, and had the bailout not been planned, Wall Street would have immersed in that bathtub very quickly. When prodded on his Goldman investment going against his well-publicised hatred of Wall Street firms and why this was a right deal at the right time, he replied, “I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet on them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.” The master also heaped a lot of praise on the treasury secretary Henry Paulson and warned that if his proposal of the US$ 700 bn does not get a go-ahead from the Congress then what happened in the last week in the financial markets would look like a ‘Nirvana’ in front of what will eventually unfold. He was further of the opinion that the US economy, like in all previous crises, would also pass through the current one and would eventually do well in the long run. Comforting words indeed from someone who has lived through many a recessions himself.
Despite being the world's fourth largest military force, India's armed forces are facing a severe manpower shortage being unable to compete with private sector jobs offering salaries as much as 5 times higher. The army has 11,371 fewer officers than it needs. The navy has 1,461 unfilled slots. The air force has enough planes for 300 more pilots than it has. To counter the lure of private business, the military is carrying out a publicity campaign to entice young people. It is also planning to increase the defense spending by as much as 10% this fiscal. To retain officers, the army this year has also proposed paying Rs 1 m for completing 10 years of service and an extra Rs 0.2 m a year after that.
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