• JUNE 6, 2008

Global banks, food supply & more

Banks get 'capital punishment'
Until the subprime crisis, banks had little problem raising capital to meet their growing needs. However, in the aftermath of the crisis, globally banks are queuing up to raise capital at higher costs to help cushion the blow of the housing market downturn and weakness in the broader economy. Global investment banking firm, Lehman Brothers is considering raising as much as US$ 4 bn through equity dilution. What has driven this appetite for cash, in part, is the rigidity in provisioning norms from regulators. Regulators like the Reserve Bank of India and the Central Bank of China have increasingly enhanced the stipulated limits of reserve capital to offer security to deposit holders as well as make the banks risk averse. However, that also meant that most of the extra capital was sitting in the banks' books without earning returns for shareholders.

So far, banks have largely relied on the cheapest options available to raise money, either by way of raising capital abroad or perpetual debt. However, with the rating agencies getting tightfisted in their credit appraisals, these options are drying up. The only option left for banks now is to raise additional equity capital and thereby dilute shareholder returns. In fact, whether the entities will be able to sustain their earlier growth rates even at the cost of such expensive incremental capital is yet to be seen.

  • Indian versus global banks 

    India offers the world food
    At a time when economies all over the world are reeling under food scarcity, India has harvested a record wheat grain production of 76.8 m tonnes (MT), which has dramatically cooled off the spectre of food riots painted by several global agencies. Instead, the Food and Agriculture Organisation (FAO) now expects a sharp spike in food grain production in key producing nations. Also, global wheat prices have subsided and might continue to remain weak as production could rise across the world and reach an all-time high of 658 MT in 2008, higher by 8.7 MT over last year. The reason why prices have subsided is also because India, the world's second largest wheat grower, is expected to be virtually absent from the import market after two years.

  • Global food crisis

    ...and clothing
    With Indian cotton cultivators being allowed to use modified seeds for the first time since 2002, India's average per-hectare yield has almost doubled to 560 kgs in FY08. A record harvest may boost India's exports to countries including China, the world's biggest user of the fibre, and increase competition for suppliers from the US. Higher production may also weigh on cotton prices, which gained nearly 46% in 2007 as the US farmers reduced planting cotton in favor of wheat and soybeans.

    ...but continues to starve for fuel
    The US consumes nearly 25% of the world's crude oil output, which is 9% for China, one of the biggest commodity consumers in the world. India is far from being a major consumer accounting for no more than 5% for any major commodity and just 3% of world's oil demand. However, the burden of crude shortage is biting hard on the economy's fiscal health.

    Despite the government taking measures to reduce the subsidy burden, if oil prices stay at current levels, the oil subsidy and fiscal deficit burden will rise further. With the government having increased domestic fuel prices by only 26% for petrol and 34% for diesel (average for the country) over the last four years during the period in which international crude oil prices have shot up about 225%, the subsidy burden continues to spike. Even as the fiscal deficit ratio is pegged at 2.9% for FY09 after being 3.1% in FY08, the understatement of fiscal deficit (as % of GDP) is expected to rise to 1.8% in FY09 from 0.5% in FY08 (Source: CRISIL).

    US alarmed by slow innovation
    The US has long been a global powerhouse of innovation, breeding thousands of firms with technological and service innovations. However, some economists now fear that the country is now in danger of losing its lead in commercial innovation to India, China and other upstarts unless the US government gets more involved in sponsoring innovation. Statistics show that the USí share of worldwide R&D spending fell from 46% in 1986 to 37% in 2003. Another factor that they are bemoaning is that in the last ten years, the percentage of US corporate R&D sites within America fell from 59% to 52%, while the number in China and India rose from 8% to 18%. Yet by many traditional measures, such as the number of patents registered and levels of venture-capital funding, America remains ahead of the global pack.

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