Slipping faster than Great Depression - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Slipping faster than Great Depression 

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In this issue:
» Economy slipping faster than Great Depression, says Paul Volcker
» Slumdog sweeps the Oscars, Rahman bags 2
» Foreign banks have to wait
» On your own, says Tata
» ...and more!

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world", says former US Fed Chief Paul Volcker on the current economic crisis. Mr. Volcker is the man credited with breaking the back of inflation in the US in the early 80s and currently advises President Obama. He believes that the ATM machine was a more useful invention than the 'financial innovation' that set off the present crisis. He adds that, "There is little correlation between sophistication of a banking system and productivity growth." While India's productivity growth is nowhere where it should be, India's policy makers have at least got it right when it comes to 'financial innovation'.

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Slumdog Millionaire's dream run has culminated with a haul of 8 Oscar awards. A R Rahman bagged the best score and the best song awards. Resul Pokutty won for best sound mixing. Besides, 'Smile Pinki' won the Oscar in the best documentary (short) category.

Is this an isolated case of an India based story and talent catching the fancy of the West? Or is it the sign of greater things to come for the India's entertainment sector? The entry of corporate producers, the interest of global media companies in Indian media houses and the spate of innovative movies targeted for multiplexes are certainly laying the ground work for a boom in the sector. Recognition of Indian talent is the icing on the cake. Of course, the bedrock of this story is the sheer size of the Indian media market, both domestic and overseas. In fact, in our last websummit, Mr. Ramesh Damani identified the media sector as perhaps the leader of the next bull run. Click here to listen to the entire interview.

Meanwhile, the desire of foreign banks to set their feet firmly on Indian shores will have to take a back seat. At least for the time being. During the first phase of RBI's roadmap for reforms in the Indian banking sector (March 2005 to March 2009), foreign banks were permitted to establish a presence in India by way of setting up a wholly-owned banking subsidiary or converting branches into such subsidiaries. The second phase of the roadmap (April 2009 onwards) was expected to address areas like allowing foreign banks to take larger ownership stakes in Indian entities. This would have meant that the foreign banks would be treated at par with their Indian counterparts as per the World Trade Organisation (WTO) agreement. However, the Prime Minister's Economic Advisory Council seems to be against passing such reforms at the current stage because of uncertainties surrounding the current global financial crisis.

"Politicians are like diapers. They both need changing regularly and for the same reason," said someone. From, dirty politics to dirty handling of taxpayers' money, they've done it all, year after year. Now, The Economic Times cites a report released by the Comptroller and Auditor General (CAG) that the UPA government had been overstating the expenditure all these years. The article states that over Rs 510 bn were allocated for the flagship schemes in 2007-08 but these ultimately got transferred to the bank accounts of NGOs, autonomous bodies and district authorities.

The CAG has further added that money often remained unspent in the accounts of these implementing agencies. Further, given that these accounts were outside the direct purview of the government, the Central government did not keep any checks on the same.

One glaring instance of taxpayers' money getting wasted is the Social and Infrastructure Development Fund (SIDF), which was created in 2006 for funding initiatives such as the employment of physically challenged and insurance cover for rural poor. Money from this was actually diverted to programmes like celebration of 150th year of the first war of independence and towards grants to various cultural organisations!

Now this is arm-twisting of a different kind. Hillary Clinton, the US Secretary of State on her visit to China, has asked the Chinese government to keep buying US Treasury bonds to help finance Obama's stimulus plan. She said, "We are truly going to rise or fall together. By continuing to support American treasury instruments, the Chinese are recognising that interconnection." China is already the largest holder of US government debt. In fact, it purchased almost US$ 700 bn of the same in 2008, which was higher by 46% as compared to 2007.

"Each one will have to critically examine what they have to do and I've mandated that each of our companies come back to us with the plan." These are the words of Ratan Tata, the man at the helm of one of India's largest business groups, giving us an insight into how the group goes about conducting its business. Unlike a lot of other conglomerates where people at the top give directives to the group companies, Tata Group's bottom up approach is perhaps the right approach to have. The statement of course was in reference to a question in an interview to a leading business channel on how the various group companies are planning to tackle the current slowdown, which as per Tata's own admission is the most difficult time the group has ever faced. Besides other things, he also spoke about Tata Motors' latest acquisition, Jaguar Land Rover, and added that had it not been for the downturn, the Tata Group could have acquitted itself really well on the deal. Of course, if one talks about Tata Motors these days, the Nano cannot remain out of the equation and thus, Ratan Tata hoped that it is able to live up to the expectations that everyone has had from the car.

It is not only Ratan Tata deeming the current downturn as the worst ever in his lifetime. He has some company and an extremely high profile at that. At a discussion called the 'Big Fix', where three of Wall Street's most prominent bankers offered their views on the current crisis, the opinion was equally dire. And all the usual suspects like the ratings agencies, management, flawed compensation systems and use of exotic derivatives contracts were blamed for the mess that the world economy finds itself in currently. An interesting observation was made by one of the panelists when he said that part of the shift happened when Wall Street firms converted from private partnerships to public companies whose shareholders demanded ever higher returns on equity. The panel also discussed on what lies ahead and all three concurred that regulation was coming. However, while one of the panelists feared overregulation, the other urged the nation to do something about its abysmal savings rate and record high deficits.

The severe pressure on the East Asian currencies over the past few months has brought back the memories of Asian Financial Crisis of 1997. Eight out of ten of Asia's most-traded currencies other than the Yen have fallen against the dollar in the past year, led by a 37% tumble in the Korean Won and a 24% decline in Indonesia's Rupiah. But this time, the economies are better prepared to handle the crisis. A decade ago, Indonesia, Thailand and South Korea spent much of their foreign reserves attempting to prop up their exchange rates. The three nations were forced to turn to the IMF for more than US$ 100 bn of loans. In return, the governments had to cut spending, raise interest rates and sell state-owned companies. In the years since, Japan, China and South Korea together with the ASEAN (Association of Southeast Asian Nations) economies have amassed more than US$ 3.6 trillion of foreign-exchange reserves, about half of the global total.

The Asian nations have decided to form a US$ 120 bn pool of foreign exchange reserves that can be used by the countries to defend their currencies. Japan, China and South Korea are expected to provide about 80% of the currency pool with the 10 ASEAN economies contributing the rest. The fund will help ensure central banks have enough to shield their currencies from speculative attacks such as those that depleted their reserves in the crisis of the past decade.

In yet another sign of nationalisation of US banks, the Wall Street Journal has reported that Citigroup is in talks with US regulators about the government's plan to take a bigger ownership stake in the bank. The beleaguered banking group has approached the US government with a plan that would allow them to convert a large amount of the government's US$ 45 bn of preferred shares, currently treated as debt, into equity shares. If the proposal goes through, the US government may end up holding as much as 40% of Citigroup's equity. This transaction will prevent the bank from asking for more taxpayer money to tide over its capital constraints.

Yoga guru Baba Ramdev has long been campaigning against aerated drinks, and now has taken a big step in the direction of actually doing something about it. He plans to set up a mega food park at Haridwar with processing units for juices, herbal products and fruit pulp. The park is expected to attract investments of over Rs 5 bn and will be spread over 95 acres. It remains to be seen whether this foray will be as successful as his endeavors related to Yoga.

Asian markets traded mixed today with Hong Kong and South Korea gaining the most. Indian markets on the other hand, being closed on account of a public holiday, got the much needed break. European indices too have begun on a strong note today; with major markets trading in the positive. Crude oil rose above US$ 40 a barrel in line with the positive sentiment in equity markets and speculation about production cuts by OPEC.

04:56  Today's investing mantra
"I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it." - Warren Buffett
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