China's Economic Woe

China has been the most preferred destination for Foreign Direct Investments (FDIs) from last few decades, has seen enormous amount of investment in Real Estate. Since late 90s China has built hundreds of cities out of nowhere.

“It is important to maintain a proper balance between savings and investments to beat the business cycle”.

China advanced a step further and made massive investments in infrastructure especially in housing and highways which leads to over infrastructure.

Series of major events which lead to Chinese economic woes:

• Huge Investment in Infrastructure (Highways and Housing) over the period of few decades.
• People deferred their investment decisions as Real Estate prices were on nosedive because of over supply (especially Housing) which had hurt the investment cycle.           
• People anticipated stock exchanges as alternative investment and their decision were backed by PBOC when it gave green signal to government agencies in direction to increase their exposure in Capital Market, particularly Secondary Market
• Even though, economy’s fundamentals were not good, stock market doubled in last one year till June because of lot of buying activity by retail investor most of who didn’t even had the knowledge of stock markets.
• During this period, millions of new Demat account were opened. It has been observed that in month of May 15 around 30 million new accounts became active.
• By the end of May, more than 80% trading activity was done through these accounts of retail investors. In US, 53% of trades execute using retail investor’s account and for India this number is only ~2%.
• Due to huge demand in stock market, indexes reached new high despite bad indicators and fundamentals. This made stocks overvalued.
• Crash begin from 12th June in Chinese market is mainly because of two reasons: First, PBOC put increase restriction in order to curb grey market. Second, already overvalued market started correcting to its market value.
• To boost investments PBOC artificially cut interest rate 5 times in last nine months, which continuously pressurizing Yuan even more of every cut(demand / Supply).
• To ease down the continuously growing pressure on Yuan along with the intention of boost exports, PBOC on 12th August devalued its currency by ~4%. And this move triggered the fear amongst investor community.

Open to discussion, Feel free to shoot queries :)

Source for Image: http://www.bloomberg.com/quote/SHCOMP:IND

Samuhik Nished (Collateral Damage)

In last few days you might have observe huge volatility not only in Indian Stock Exchanges but across the globe and agitation amongst investor community. Sensex crashed more than 1600 points in last week on 24th August, its biggest fall since 2008 crisis, not because of domestic factors but acknowledging the global rout triggered by Chinese policy maker’s effort of intentionally devaluing its currency by about 4 percent and worst Purchase Managerial Index (PMI) of around 47 since financial crisis of 2008. PMI is economic health indicator of manufacturing sector of any economy, if greater than 50 signify the expansionary phase in economy while less than 50 signify contractionary economy.    

Impact on Indian Economy:

1. Indian has trade deficit (imports are greater than exports) and policy makers are pushing hard to turn the table from a deficit to a surplus economy by providing various kind of incentives to exporters. China is export oriented country with a market share of around 14% in global export. As we know China is in trouble (For various reason which are out of the context of this blog) and in order to give boost to its derailed export oriented industry Chinese central bank devalued its currency, making its product/services even more competitive in global market, in turn raise trouble for Indian exporters.
2. On other hand, devaluation of Yuan make Chinese product more competitive in India as well. And if internal policy maker don’t intervene and save domestic manufacturers (electronics, machines, iron, steel etc.), may kill Indian domestic industry.
3. China is one of the biggest trading partner of India only second to UAE with total trade of ~ $80 billion at a deficit of ~63 billion dollars. Of the total export of India to china constitute ~ 53% of raw iron. And slowdown in China because of its falling internal demand will impact our iron industry and indirectly will have its repercussion on other industries as well.

Even though our fundamentals are strong, have enough reserves along with the impetus provided by “Make in India” campaign, we are in much better health than most of other emerging nations still feel the heat if dragon falls (China is second largest economy in world).

DETERMINED INDIAN GOVERNMENT: NSA TALK

There was a post on Facebook from one of my friend, pointing fingers on Government of India and its diplomatic strategies for making Pakistan to call off NSAs level talk which was supposed to hold on 23^rd and 24^th of August in New Delhi.

He posted: “India WTF you are doing with NSA level talk!!! NSA not present at press conference and external affairs minister says I am going to Germany!!! Every blood a solider shed depends upon you!!! Making mockery of it !!!”

For readers, let me give you a brief about these kinds of meeting. These are nothing but engagement of members two Governments (could be at Foreign secretary level, NSA level or at PM level) to discuss the long unsettled affairs and put in efforts to reach out an understanding. These kinds of dialogue between Government of India  and their Pakistan counterpart has been in place for decades since early 1990s or even before with almost same agenda revolving around sensitive issues like Kashmir, Terrorism, disputed territory and many more.

Now back to point, Pakistan called off NSA talk few hours before it get started. Well, this is not the first time nor is the last when media hyped dialogues between neighboring countries has collapsed hours before it begun.  But this time many people criticizing Indian Government for its adamant stand including one of my friend.

In order to understand his position and justifying my stand, let me take you through flashback. All this begin last year, when India called off foreign secretary level talks with Pakistan in response to its envoy meeting Kashmir separatist on the eve of the dialogue (of course, there shouldn’t be third party) and exhibited the non-compromising position of Government Of India on terrorism. Since then Prime Ministers of both countries have had crossed each other several times but never to engage except UFA summit held in Russia last month and was believed to be ice breaker, a genuine effort to revive diplomacy talks between the neighboring nations to tranquilize the escalated in tension in the region. In my knowledge, at UFA, Prime Ministers of both countries agreed on the agenda of NSAs talk restricted to terrorism only.

Then why everyone started criticizing our Government, when everything was discussed a month back. Was it because of government’s firm stand on not allowing the inclusion of K – word in agenda for deliberation and for not granting permission to Pakistan envoy to meet separatist leader.

My view point is different from those against government. I believe, when everything was finalized in advance, then why beating around the bush, why not stay focused and deal with one issue that supposed to be discussed and require urgent attention. When Pakistan can’t discuss terrorism, then I don’t understand the point in blaming our own government. I saw people saying, Kashmir and meeting with Hurriyat Leaders was always used to be the part of agenda. I agree!!! So what? What have we achieved of those talks? I my intellect, I don’t see any major fruitful outcome of those deliberations. Kashmir was diplomatic affair in 1950s, Kashmir is diplomatic unresolved affair now. So what is wrong in keeping such long impending affair aside for some time and sort out urgent issues like terrorism and I am sure, that would be in favor of both the countries (Win-Win Situation).

 Though I understand, if this meeting could have convened, had provided the opportunity to leaders of both the countries to share the table and tackle the issues need grave attention. I am very much in line with thoughts that, if this meeting have had convened could have ease the tension on border. 

But I don’t see any point for blaming Government of India for this whole episode. It’s just that this government at Centre unlike the previous government use different approach in dealing with this type of affair, use different methodology for strategizing, different way to grasp problems and proposing solutions. This government is doing something, our previous governments has not done (trying new course to tackle the issues). For these many reasons, I don’t believe, government should be blame.

Wo Kehte hai na “Jab sidhi ungli se ghee na nikale to, ghee nikalne k liye unlgi tedi krni pdti hai”   

 

 

OPEN FOR DISCUSSION J

Payment Banking: Road toward Financial Inclusion

Prime Minister Narendra Modi during his maiden speech from Red Fort, Delhi on the occasion of 67th Independence Day expressed his deep concern on various issues which are deteriorating the image of India on globe.  One of the issues he raised was related to inefficient Indian Banking system. Inefficient not because of its functioning, rather, because of its inability in widen its reach. 

India is home to 1.25 billion people, of which only 35 percent are registered with banks. During his speech, he spoke about opening of bank accounts for remaining 65 percent people (mainly weaker section of society). To achieve this, he launched ‘Pradhan Mantri Jan Dhan Yojna’ to support poor open bank account which are embodied with a debit facility and an insurance cover of Rs. 1 lakh which provide support to the families during tough time. Earlier Finance Minister Arun Jaitely also talks on the same tone for opening at least two bank accounts per family during his maiden Union Budget. On the other hand, Reserve Bank of India also undertaking various measures to reach out with bank account to very last family of society and to assist this it has granted licences to IDFC and Bandhan Financial Services to set up full fledge banking operation in month of April. This exhibit both Central Government and Central Bank are on same page when it comes to opening bank accounts for weaker section of this country.

I see ‘PAYMENT BANKING’ as a silver line in cloudy sky, which has the capability, if implemented properly, of bringing most of the unbanked families, if not all, under the ambit of Banking System.  And to achieve this goal, RBI has drafted guideline for ‘Payment banks’, a step toward strengthening and widening the reach of Indian Banking System.

Payment Banks are the banking entities allowed to accept deposit maximum of Rs 50,000. They function in same fashion as a normal bank except the lending part. These banks are not allowed to extend loans which eliminate the risk of Non Performing Assets or any other kind of default, hence securing the interest of depositor. So the question arises, how these payment banks will make money if they are not allowed to lend? Actually, these banks can invest in Government securities and high rated corporate bonds which provide them risk free returns, hence, securing the interest of payment banks as well. Basically, target audience for “Payment banks” would be the poor people and small businessmen in semi urban and rural area. And to reach out to these areas, RBI is planning to grant licence to telecom companies, Micro finance institutes (MFIs), Non Banking Finance Companies (NBFCs) etc because of their already existing infrastructure and wide reach.

There are telecom companies like Airtel and Vodafone India, already offer payment instruments like Airtel Money and M-Pesa. However, these companies cannot allow cash out transactions, charge certain amount on every transaction you make and cannot even provide any interest on the deposited amount and that is the reason these instruments have limited reach. While payment banking will caters all the flaws of payment instrument by telecom companies.

Government’s move of opening bank is fuelled by payment banking concept from RBI which will provide thrust to financial inclusion. Though draft from RBI doesn’t allow the licence entity to set up bank to lend but these banks have to maintain SLR, CRR and will enable customer to withdraw from any location.

Indeed, payment bank concept once become functional would be a great step toward financial inclusion and weed out the money lenders who charge very high interest rate to unbanked section of society. Additionally, it will bring unbanked 65 percent of population under the ambit of financial system which in turn strengthen the system and aided in achieving the goal set by government.