Indy Telecom & Industrial Media

The Economist has an excellent article on inflation in emerging economies, and how they may be making the same mistakes that developed economies once did.

For instance, the graph below shows the CPI comparison between today and a year ago, and the difference is simply staggering. This is made made worse by the fact that food is one of the biggest component of the consumer price buckets.

Also interesting is the comparison of GDP vs. interest rates, and the currency supply between developed and emerging economies.

An interesting take away could be that the increasing price of exports from emerging nations could be because of a weakened Dollar, rather than faster inflation. But as someone who has relatives in Asia (who complain a lot about the price increases), I’d like to point out that the current rate of inflation increase in emerging economies (at least in Asia) is among the fastest, historically speaking.

Either way, increased inflation in the developed economies translates to less discretionary spending. Increased inflation in emerging economies usually translates into less food on the table, which is something to think about.

Turns out that fears of a possible recession in the US has wreaked havoc to Asian stocks, India and China in particular.

The worst hit was the Indian BSE, which fell by 1408.35 points — a fall of 7.41%. This resulted in trading being halted amid some disastrous speculations (which, of course, begs the question on BSE’s ability to run a stock exchange after such a drama).

This leads us to question the fundamentals of the Indian economy — while China has reasonably good infrastructure and manufacturing to back up its economy, the Indian economy seems to be increasingly modelled after Western styled economies, without the basic infrastructure and economic  fundamentals to back it up.

It would certainly be interesting to see how the next few days play out.

While it looks like the oil prices may not hit the $100 mark after all, I did read a rather bizarre article on the New York Times on a proposed Indian solution to help contain the rising oil prices.

M.S. Srinivasan, who is India’s Petroleum Secretary, is as worried as anyone else about the rising oil prices, despite steady demand and steady supply (we’ll ignore the temporary jumps due to oil rigs being closed in some parts of the world due to unfriendly weather in the seas).

His solution?

Why, taking the crude oil off the commodity exchanges, of course. The way he sees it, the speculators are driving up the prices of oil, fueled (pardon the pun) by investors from hedge funds, banks and other financial institutions that have poured a lot of capital into the oil market.

Not that it’s a bad idea, per se, but it does sound a lot like an Indian idea — when something does not work, regulate it until it does.

A weird Telugu PSA on why you should use condoms. And oh, it gets particularly interesting ~5:42.

In its time, the Indian finance ministry has done a lot of good things. Agreed, most of them were fortunate mistakes (sorry, too much Taleb on my brain), but they still did a reasonable job of opening up the economy, especially after the 1991 economic crisis.

In fact, you would think that with the current Prime Minister being a former RBI Governor and being the former Finance Minister with a PhD from Oxford, and with the current Finance Minister being a Harvard educated economist/lawyer, India’s economic and fiscal policies would be a little more sound.

Currently, the US economy is in a downturn. To top it off, the federal rate cut has created liquidity in the market that’s been driving the FIIs to invest some place. So, all the FIIs have taken to investing a lot in India. This is further helped by the fact that a lot of capital account control measures are being relaxed to help these chaps. While the RBI did make a good call on trying to control the rise of the Rupee against the US Dollar, it does not seem to be enough.

If anything, FII investment has shot up to an all-time high of USD 11 bn this year. Wow. Yay. Way to go. Kudos. Etc etc.

Now, India also happens to be one of the worst borrowers from the World Bank. In fact, India moved into the list of the top 10 borrowers at World Bank sometime back. Well, it is a developing nation and there are some problems (you know, corrupt politicians, poverty, disease, politicians whose kids probably really need that luxury car etc). Well, that’s fair enough and understandable, too.

But do they really need to be stupid enough to try and pay off these debts using money that the FIIs have invested in the economy? Just what do they think is going to happen the moment the US economy recovers? That’s right, they are just going to go back to investing in the US.

One of the things that hit the SE Asian economic crisis of the late 90s was the absolute lack of capital control that these countries demonstrated, that led to their economies crashing. India was fortunate enough to have a fairly strict and tightly controlled (oh, sorry, regulated) market economy then.

Today, the story is slightly different. What would happen when the FIIs pull back and all the money that’s in the economy goes out of it? While I wouldn’t go as far as some people to say that the economy is at a financial risk, it is still a scary thought.

At least in the case of China, they have tangible assets (i.e. manufacturing industries). India has a very weak manufacturing infrastructure and very little in the name of tangible assets. Unless we create new assets, the continued rise will shoot the price of existing assets through the roof. Secondly, in the event of a market crash, there would have been some tangible benefit derived out of the investments that would go back into the system, e.g. infrastructure and industries.

It is indeed a policy dilemma for India. I do not know what the solution is — but what I do know is that we’d better find a good way of absorbing all this investment into the system. Otherwise, when the investors pull out and the stock market starts going down (and oh yes it will, at some point or the other), it could leave the Indian economy in a bad shape.

(Today’s pessimistic armchair economic forecast inspired by Blues from around the world and an over-dose of RSS feeds.)

Sometimes, I just amaze myself — as a follow up to my previous blog post, my Dad just sent me this article that talks about how the RBI has eased the currency outflow norms to contain the rise of the Rupee against the US Dollar.

From the article –

In a bid to neutralise the impact of huge capital inflows and check the sustained rise in the rupee’s value against the dollar, the Reserve Bank of India (RBI) has further liberalised the foreign exchange norms to boost the outflow of funds from India. The RBI has now allowed resident Indians to transfer up to $2 lakh (around Rs 80 lakh) a year abroad without its approval under the Liberalised Remittance Scheme (LRS). The earlier limit was $1 lakh (Rs 40 lakh) a year. Now Indians can transfer $2 lakh to acquire and hold immovable property, make investments in financial instruments or purchase any other asset abroad without any prior approval.

Worried muchly about what FIIs might do, me hearties? And of course, there are those exporters who will be taking a hard hit otherwise, too.